A Cayman Islands company can be dissolved by the appointment of a liquidator or it can be dissolved without such appointment if the company is struck off the register as a result of an application to the Registrar of Companies for the purpose.

Voluntary liquidation

In circumstances where the company has been active and has substantial assets and liabilities, it is normal and recommended for the company to be liquidated.

If a liquidation is pursued the company would normally agree the liquidation fee with the liquidator and will often be requested to provide the liquidators with an indemnity. Voluntary winding-up (liquidation) pursuant to the Companies Law (as Revised) (the “Law”) involves the following procedures:

Directors meeting

The Directors commence a voluntary winding-up by holding a meeting of the Board of Directors to give notice to the shareholders that an Extraordinary General Meeting of Shareholders is to be held to consider the passing of a Special Resolution that the company be placed in voluntary liquidation.

Shareholders’ meeting

The Directors, or if one is appointed, the secretary of the company should circulate the appropriate notice convening the meeting. The appropriate period of notice will be determined by reference to the company’s Articles of Association and the Companies Law as the period for a special resolution. The shareholders of the company pass a special resolution that the company be voluntarily wound up and a liquidator appointed. Alternatively, if the Articles of Association permit it, a written resolution may be signed by all the members of the company.

A special resolution is one which is passed by a two thirds majority of the shareholders present at a meeting duly convened by notice specifying the time and place of the meeting and the resolution to be passed. Alternatively, and if so provided for in the Articles of Association of the company, the special resolution may take the form of a circular resolution. However, this type of resolution has to be approved in writing by all of the members entitled to vote at a general meeting of the company.

A copy of the special resolution is then filed with the Registrar of Companies and the liquidation commences.

Public notice

Notice of the special resolution winding up the company and appointing the joint liquidators is published in the Cayman Islands Gazette advising of the liquidation and advertising for creditors to come forward. The Liquidator then proceeds to collect the assets and discharge the liabilities of the company.

If the date of the final meeting of shareholders can be established at this stage (i.e. the company has no assets or liabilities) notice of the date of the final meeting can be placed in the Gazette at this time.

As soon as the affairs of the company are fully wound up, the liquidators advertise by public notice or otherwise as the Registrar o f C o m p a n i e s may direct, the time, place and object of the final general meeting of the company, which is to be held not less than one month after the date the notice is published, for the purposes of explaining the final accounts of the liquidation. If the company has no assets or liabilities and the date of the final meeting has already been set at the time that the notice of liquidation was published, the liquidator may proceed to hold the final meeting.

Liquidators’ reports

In the terms of the statutory insolvency provisions, the liquidators must report back to the shareholders of the company periodically through the liquidation process so as to keep them informed of the collection and realisation of assets and the settlement of liabilities. All such meetings will be convened at the instance of the joint liquidators.

An interim report by the liquidators will provide detail of the assets identified and the liabilities claimed and accepted as being due and owing. The report may also indicate what, if any, dividend is to be paid on liabilities including any distribution that is anticipated for the benefit of the shareholders.

The liquidation itself is concluded after the liquidators have provided their final report to the shareholders. The liquidators will, once again, convene the appropriate meeting and present their final report. After the conclusion of that final meeting, the liquidators must file a notice confirming that the meeting has been held and the appropriate resolutions approved to conclude liquidation.

Consequences of Voluntary winding-up

The following consequences shall ensue upon the voluntary winding-up of the company:

Voluntary winding-up and dissolution is taken to have commenced on the date of the special resolution referred to above.

The company from the date of commencement of winding up ceases to carry on its business, except in so far as may be required for the beneficial winding up thereof. However all of the company’s corporate powers shall continue until the affairs of the company are wound up.

The property of the company shall be applied in satisfaction of its liabilities pari passu and subject thereto, shall, unless it be otherwise provided by regulations of the company, be distributed amongst the members according to their rights and interests in the company.

Upon appointment of the liquidators all the powers of the directors shall cease, except insofar as the company, by resolution of its shareholders or the liquidators, may sanction the continuation of such powers. All transfers of shares and any alteration to the status of the shareholders of the company requires the sanction of the liquidator.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and general guidance only. For more specific advice on voluntary winding-up of Cayman Islands companies, please contact:

Gary Smith

E gary.smith@loebsmith.com

Yun Sheng

E yun.sheng@loebsmith.com

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Why segregated portfolio companies are thriving in Cayman? Loeb Smith’s corporate Partner Gary Smith talks to HFM Week about SPCs.

HFMWeek (HFM): How versatile are SPCs? What makes them this way?

Gary Smith (GS): Under Cayman Companies Law, a segregated portfolio company (SPC) is an exempted company which has been registered as a segregated portfolio company. It has full capacity to undertake any object or purpose, subject to any restrictions imposed on the SPC in its Memorandum of Association. The Memorandum of Association of an SPC usually gives the SPC full capacity to pursue very broad objects. Once registered under the Cayman Islands Companies Law, an SPC can operate segregated portfolios (SPs) with the benefit of statutory segregation of assets and liabilities between portfolios.

The appeal of SPCs extends beyond investment funds and is often used in capital markets and securitisation transactions. In the investment funds context, SPCs greatly enhance the versatility and efficiency of Cayman Islands fund structures. It allows investors to access different trading strategies or investments, different markets or different managers through a single corporate vehicle whilst simultaneously providing the segregation of assets and liabilities through each SP. This feature is unlike, for example, a ‘multi-class’ fund where there is typically a single legal entity offering various classes of shares designated according to the portfolio investment. The statutory ring-fence of assets and liabilities of an SP affords the SPC structure the ability to avoid cross class liability issues which could arise with ‘multi-class’ funds.

Cayman Islands Companies Law permits an SPC to create one or more SPs in order to segregate the assets and liabilities of the SPC held within one SP from the assets and liabilities of the SPC held within another SP of the SPC. The general assets and general liabilities of the SPC (i.e. assets and liabilities which cannot be properly attributed to a particular SP) are held within a separate general account rather than in any of the SP accounts. Each SP should have, as appropriate, its own bank account, brokerage account, and other accounts to hold its assets to avoid co-mingling with the assets of other SPs.

The Companies Law requires that segregated portfolio assets must only be available and used to meet liabilities to the creditors of the SPC who are creditors in respect of that SP, and who will, as a consequence, be entitled to have recourse to the segregated portfolio assets attributable to that SP for such purposes. Segregated portfolio assets of an SP should not be available or used to meet liabilities to, and shall be absolutely protected from, the creditors of the SPC who are not creditors in respect of that SP, and who accordingly will not be entitled to have recourse to the segregated portfolio assets attributable to that SP.

Accordingly, a creditor will only have recourse to assets from SPs with which it has contracted and creditors will have no recourse to the assets of other SPs of the SPC which are protected under the Companies Law. This statutory protection afforded under the Companies Law to the assets of each SP is one of the key feature and benefit of the SPC structure.

HFM: Why are SPCs flourishing in the Cayman Islands?

GS: The SPC corporate structure allows a fund manager to employ different trading strategies, and/or establish different investment platforms, and/or provide access to different markets, and/or different trading advisers through a single corporate vehicle while simultaneously providing the segregation of assets and liabilities through each SP. Fund managers are able to market an SPC fund to potential investors as being able to provide a statutory ‘ring-fence’ to protect against cross liability issues relating to the assets and liabilities of the various SPs within the SPC.

The SPC structure is increasingly being used as an investment platform on which investors can use different SPs to hold varying asset classes (e.g. real estate, intellectual property, stocks and shares, and distressed assets) and have their investments managed separately from other investments held by other SPs on the same SPC platform. We have seen an increase in the use of SPCs by fund managers as investment platforms for pursuing different strategies for the same pool of investors, managing investments in different geographical regions (e.g. China and emerging markets in Asia and Africa) and investing in different sectors (clean technology and offshore oil drilling). The SPC will have a board of directors. In addition, each SP can have its own segregated portfolio directorate or investment or management committee which effectively controls and manages the operations of the relevant SP. The segregated portfolio directorate, investment or management committee would obtain its powers through powers delegated to it by the board of directors of the SPC.

The liabilities to a person arising from a matter imposed on, or attributable to, a particular SP, only entitle that person to have recourse to that particular SP in the first instance and then to the general assets of the SPC, unless the Articles of Association of the SPC prohibits payments from the general assets of the SPC, in which case there is no recourse to the general assets.

HFM: Are there any misconceptions about SPCs? What are they?

GS:

Can assets be transferred between SPs? The Companies Law requires the directors of the SPC to ensure that assets and liabilities are transferred between SPs at full value.

Does an SP have separate legal personality? While the SPC is a company and therefore a corporate entity with separate legal personality, an SP does not have separate legal personality. Accordingly, the Companies Law requires that when contracting on behalf of a particular SP, it should be made clear which SP of the SPC is contracting on behalf. Each SP can have its own investment manager, trading advisor, and other service providers but it should be made clear in the agreements which SP of the SPC has engaged them for their services.

Can an SP be liquidated without liquidating the entire SPC? An application can be made to the Cayman Court for a receivership order where a particular SP of the SPC is insolvent and other SPs within the SPC are operating on a solvent basis.

Gary Smith is a partner in Loeb Smith’s corporate team advising principally on offshore investment funds, IPOs and M&A. Gary has given expert evidence in the United States Bankruptcy Courts relating to Cayman Islands investment funds and has also authored various publications on issues pertaining to Cayman Islands funds. For more information please contact:

Gary Smith

Partner

E gary.smith@loebsmith.com

W www.loebsmith.com

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Section 233 (1) of the Law provides that two or more companies limited by shares and incorporated under the Law may (subject to any express provisions to the contrary in any of their memoranda or articles of association) merge or consolidate in accordance with the statutory procedures set out in the Law. As is typical, in Integra the transaction which gave rise to the proceedings is perhaps better described commercially as a management buy-out (“MBO”) but was structured as a statutory merger under Part XVI of the Law between two companies incorporated in the Cayman Islands namely; Integra Group (the “Company”) and a newly incorporated special purpose vehicle owned and controlled by the MBO participants. A plan of merger complying with the statutory requirements was approved by a special resolution of the Company’s shareholders passed at an extraordinary general meeting (“EGM”). The merger was duly completed and the Company’s shares delisted from the London Stock Exchange.

Dissenting shareholders are not required to accept a merger or consolidation agreement which has been approved by the requisite majority. Instead, they are entitled to dissent and to demand payment for the fair value of their shares. Section 238(1) of the Law provides that:

“A member of a constituent company incorporated under this Law shall be entitled to payment of the fair value of his shares upon dissenting from a merger or consolidation.”

Section 238(2) provides that a shareholder of a constituent company who intends to dissent from a merger or consolidation must give written notice of objection to the company before the vote is taken, stating his intention to demand payment for his or her shares if the merger is authorised. Where the merger or consolidation is authorised in the EGM the dissenting shareholder’s company must notify the shareholder of this fact within the next 20 days. By section 238(5), a dissenting shareholder is then required, within 20 days of receiving that notice, to give the company a written notice of his or her decision to dissent and a demand for payment of the fair value of his shares. Section 238(8) then provides that either the shareholder’s company or the merged or consolidated company must make a written offer to the shareholder to purchase his or her shares for a specified price which it has determined to be the fair value (which could be more or less than the merger consideration). The legislation contemplates that the parties will then negotiate and attempt to agree upon the price to be paid. If no agreement is reached within a 30 day period, section 238(9) requires that the company must (and the dissenting shareholder may) present a petition to the Court for a judicial determination of the fair value of the shares. Section 238(11) provides that:

“At the hearing of a petition, the Court shall determine the fair value of the shares of such dissenting members as it finds are involved, together with a fair rate of interest, if any, to be paid by the company upon the amount determined to be fair value”

Until Integra all such arguments arising under section 238(1) about fair value have been compromised, with the parties’ respective counsel arguing about the legal principles involved and in particular, whether such a valuation should be based on English law principles or the laws of the State of Delaware in the US and Canada from which the legislation appears to have gained its inspiration. In Integra Jones, J., held that the correct approach was one which followed the practice in Canada and Delaware. Citing the dicta of Lambert J.A., in Cyprus Anvil Mining Corp v Dickson (1986) 8 B.C.L.R. 145, Jones J. noted that “every appraisal case turns on its own facts and that there is a need to consider all the evidence that might be helpful to the Court.” The Judge accepted the propositions set out in The M & A Lawyer (2014) entitled “Dissenting Shareholders’ Appraisal Rights in Cayman Islands Mergers and Consolidations.” This argued that the drafting of what is now Part XVI of the Law was heavily influence by Delaware and Canadian law and suggested that, having regard to the principles established in those jurisdictions, the Grand Court should have little difficulty in accepting the following propositions:

“1. Fair Value is the value to the shareholder of his proportionate share of the business as a going concern, save where it is worth less on a net assets (i.e. liquidated) basis as at the merger date: ex hypothesis the shareholder has bought into the company as a going concern, not in anticipation of participating in a liquidation, and it follows that, when he elects to dissent from a merger or a consolidation brought about at the behest of the majority, he is thereafter deprived of his proportionate share of an active enterprise and is entitled to be compensated for it. In determining the measure of such compensation, the Court should be guided by the following considerations:

1.1 Fair value does not include any premium for forcible taking (i.e. expropriation of the shares).
1.2 It is neither appropriate nor permissible to apply a minority discount when making the determination.”

These propositions were accepted by the Judge. In addition Jones J. cited the dicta of Anderson J., in Brant Investment Ltd et al v KeepRite Inc et al (1987) 60 OR (2d) 737 at p. 772 (Ontario High Court of Justice) that shareholders “should have no enhancement in the value of their investment attributable to the transaction which gave rise to their dissent.” Jones, J., stated that he agreed “with this proposition and its converse, namely that the dissenting shareholders should not bear any dilution or diminution in the value of their investment resulting from the merger.”

The Law does not specify the date at which the determination of fair value is to be made. However, having regard to both Canadian and Delaware statute, Jones, J., found that the appropriate date was the point immediately before the merger was approved at the EGM.

There was also some argument as to the appropriate interest to be awarded to dissenting shareholders, who had not yet received any payment in respect of their (now former) shareholding in the Company. Again, the Grand Court held that it should have regard to authority relating to a similar Delaware provision and made reference to Cede & Co., Inc v Medpoint Healthcare, Inc 2004 Del. Ch, Lexis 124 at page 21. Jones J., found that the Delaware Courts have interpreted their legislation “in a way which involves balancing the rate which the surviving corporation would have had to pay to borrow funds and the rate which a prudent investor could have earned on cash or cash equivalents during the relevant period. In Integra, the Grand Court held that the mid-rate between the Company’s assumed return on cash and the Company’s assumed US$ borrowing rate was the “fair rate of interest.”

For more information, please contact:-

David Harby 

Head of Commercial Disputes and Litigation