Cayman Islands Scheme of Arrangement: What Affected Creditors and/or Shareholders should know
20 November 2020
The Cayman Islands ("Cayman") represents an attractive jurisdiction for companies looking for cross-border restructuring. This piece is intended as a start point for those unfamiliar with the Cayman process taken from the point of view of a shareholder or creditor in a company which is proposing to restructure in Cayman.
What is a Cayman Scheme of Arrangement?
In Cayman, there is a statutory process under the Companies Law, 2020, as amended, ("Law") where any company which can be wound-up in Cayman, or its liquidator, applies to the Cayman Grand Court ("Court") to sanction a compromise or an arrangement ("Scheme") with the company’s shareholders or creditors, or a group of them with similar rights (a "Class") (collectively "Stakeholders"). The Scheme will ask Stakeholders to give up or vary some of their rights and so the Court will order a meeting of Stakeholders to ensure that a majority approve the Scheme. If the required majority approve it, then the Court will issue an order to sanction the Scheme, which will become binding on the company, any liquidator or contributories of the company, and all the Class, including those who did not vote for the Scheme.
How does it work?
The process usually breaks down into three steps: an application to the Court for approval ("Application"); the Court ordered meeting to get Stakeholder approval for the Scheme ("Meeting"); and a hearing to consider whether to sanction the Scheme ("Sanction Hearing").
The company or its liquidator will apply to the Court by way of petition for the Court to approve the Scheme. The Court will hold a preliminary hearing at which it will set a date for the petition be heard. The company will also apply by way of summons for the Court to order a meeting of the Stakeholders or Class or Classes, to vote on the Scheme. The summons will be supported by affidavit evidence explaining the scheme and the information to be sent to Stakeholders. The Court will make sure that any meetings are of Classes which have similar rights and interests and that the information to be sent to Stakeholders will be sufficient to allow them to reach a decision.
If the Court orders a meeting the company will send Stakeholders notice of the meeting with details of the Scheme, any supporting information and a form allowing the Stakeholders to vote at the meeting by proxy. At each meeting ordered to be held the Scheme has to be approved by a simple majority in number (minimum 50%) of those present at the meeting and voting either in person or by proxy, provided they represent 75% of the value of the Class. Both requirements must be met, so a Scheme will not be approved if the simple majority controls less than 75% of the value or if those voting for the Scheme have more than 75% of the value, but represent less than 50% of the number of Stakeholders attending and voting at the meeting. Within seven days of holding the meetings, the company must file an affidavit sworn by the various meeting chairs confirming that the requirements of the Law and any directions ordered by the Court in connection with notices, information and procedure were complied with and setting out details of the votes at the meeting.
Provided the Scheme was approved by the required majority of each Class at the meetings, then the Court will hear the company’s petition for an order to sanction the Scheme. The Court will check that the meetings were held and conducted in accordance with the Law and the Court’s order, that the majority of Stakeholders voting acted in good faith, were a fair representation of the relevant Class, that the Scheme is better than the result would be if the company were wound up, and that an intelligent and honest member of the Class would agree that the Scheme should be approved. Once the sanctioning order is registered with the Cayman Registrar of Companies it becomes binding on the company, any liquidator or contributories of the company, and all the Class, including those who did not vote for the Scheme.
How long does it take?
If you receive Notice of a Cayman Scheme you may find you have as little as 21 days between the Application and the Sanction hearing, so it is important to act quickly. The Application hearing sets the date for the Meeting and for the subsequent Sanction Hearing so this information should be included in any documentation you receive. If you do not agree with the Scheme as presented in the documentation you have been sent, you should consider immediately whether you need Cayman legal advice on what options are available to you to challenge the proposals being made. There are both technical requirements a Scheme needs to meet as well as satisfying points of principle all of which may found the basis for objections to the Scheme itself and/or the voting arrangements.
How can I object?
All Stakeholders can attend and be represented at the Sanction hearing. Objections can be based on claims that the company did not meet requirements in the Law or Court directions. The most common challenges are that the company has not followed established principles when constituting Classes of Stakeholder. For example, that the Class should be limited to Stakeholders whose legal rights are sufficiently similar that they can consult and work with each other to identify their common interest.
What will the Court consider at the Sanction Hearing?
At the Sanction Hearing the Court will consider the company’s Scheme, the procedural and legal requirements, the legal rights of Stakeholders, the wider "interests" of Stakeholders, and any representations from Stakeholders who object to the Scheme. It will also consider the deal the company is offering to those who are giving up their legal rights or exchanging them for new rights and compare whether the benefit to Stakeholders under the Scheme is better than any benefit the Stakeholders might receive were the Scheme rejected and the company went into liquidation as a result.
If you would like Cayman legal advice on a Scheme proposal you have received, or if you would like local representation at a Meeting, contact Partners Kai McGriele and Laura Hatfield.