Cayman Islands Schemes of Arrangement: sanction hearings are not simply a "rubber stamp"
11 February 2021
A Cayman Islands ("Cayman") Scheme of Arrangement ("Scheme") is a statutory process which enables a company to reach an agreement with a majority of shareholders and/or creditors ("Stakeholders") to alter their legal rights. A recent United Kingdom ("UK") High Court ("UKHC") decision in Re Sunbird Business Services Ltd  EWHC 2493 (Ch) ("Sunbird") (full judgment available here), which would be persuasive authority in Cayman, offers a reminder that the Court will check very carefully that a company's compliance with legal and procedural requirements "has been scrupulously fair and accurate".
Here we consider ways in which Stakeholders who object to a Scheme can organise themselves during the process, and how the decision in Sunbird may help them.
How does a Cayman Scheme work?
Under the Cayman Companies Act, 2021 Revision, (the "Act") a company can apply to the Cayman Grand Court (the "Court") and present a Scheme to compromise the legal rights of Stakeholders. Stakeholders are put into groups with similar legal rights ("Class(es)") and asked to vote on the Scheme at meetings. If a specified majority of a Class of Stakeholders vote for the Scheme, it is then put to the Court for approval ("Sanction"). If the Court Sanctions the Scheme, it is then registered and at that point it becomes enforceable against the company and all Stakeholders, including those who did not vote for the Scheme. For more information see our briefing on "Cayman Islands Scheme of Arrangement: what affected creditors and/or shareholders should know".
What can objectors do when they receive notice of a Scheme?
When Stakeholders receive notice that a company has applied to the Court with a Scheme and an invitation to a meeting, there are some preliminary steps which they should consider, ideally with Cayman legal advice:
- write to the company proposing the Scheme and object directly;
- where there are Classes of Stakeholders, write to the company requesting that the company write to all the other members of the Class letting them know your concerns and proposing that they co-ordinate for proxy voting;
- try to identify other Class members and form a blocking group;
- apply to the Court before the meetings to attack the Class composition or documents sufficiency (see below); or
- attend the Class meeting and try to persuade people in relation to votes.
What objections can be raised?
Objectors and their advisors should check that the company has complied with the requirements of both the Act and Court directions. For example, if the answer to the following questions is negative, there may be grounds for a challenge:
- Did the company send all the necessary documents to the Stakeholders, in time, and were they in the right form to comply with the Act and with Court directions?
- Did the explanatory statement give enough information, sufficiently clearly expressed for the Stakeholders to make an informed decision?
- Were there material changes in circumstances post meeting?
- Was the majority approval of the Scheme at the meeting "reasonable"? (The test here is whether an honest, intelligent and experienced person of business who is familiar with the Scheme would have voted for it.)
- Does the Scheme achieve certainty?
- At any meeting of a Class of Stakeholders, was each Class of Stakeholders properly composed and fairly represented at the meeting? A Class will not be properly composed if the extent and nature of the differences in the legal rights and interests of the Stakeholders in it means it is impossible for the Stakeholders to consult together on a 'reasonable and rational person' basis and debate the question of what is good or bad for the common good.
How could Sunbird help?
The Cayman Scheme process is based on that of the UK so the Sunbird decision would be considered persuasive authority in Cayman. In Sunbird, the UKHC made it clear that the Court is not involved in the process "simply to rubber-stamp the wishes of the majority" but to ensure that the wishes of the majority "cannot be used to force a compromise upon dissenting creditors unless there has been scrupulously fair and accurate compliance with the requirements…". The judge rejected the Scheme for various shortcomings in information provided to creditors, commenting "I cannot be satisfied that a reasonable creditor could take an informed decision as to whether the Scheme was in its interests on the basis of the very limited, and in one respect misleading, material in the Scheme Document and Addendum." In particular, company directors had held "side" and "informal" discussions with creditors to guarantee their support for the Scheme ahead of the meetings. From the information available to him, the judge in Sunbird did not consider he could assess whether the creditors whose agreement had been obtained ahead of the meeting had been properly informed as to the Scheme and dependent transactions.
What does the Court look for at a sanction hearing?
Before sanctioning any Scheme, the Court will consider:
- Class composition. Whether there is sufficient common interest amongst the members of the Class for them to consult to decide on any compromise of their legal rights.
- Deadlines. Whether the company complied with all relevant notice periods. If it cannot meet the required periods it needs to go back to the Court to apply for a new timetable.
- Details. The nature of the deal offered and how clearly the terms were explained. For example, whether the rights being given up by Stakeholders are reflected in any new rights offered by the company and whether any complex arrangements are fully and clearly explained.
- Professional assessments. Whether the company presented Stakeholders with a named, independent professional assessment of the alternatives to accepting the Scheme, including, for example, the amount Stakeholders might achieve on a liquidation.
- Good faith. Whether Stakeholders who make up the majority voting at a meeting acted in good faith. For example, where there might be a conflict of interest between members of a Class of Stakeholders, the majority voted in the interests of the Class as a whole and not in their own specific interest. Similarly whether connected Stakeholders are involved in artificially bulking the number of voters in order to meet the 50% in number criterion by "vote splitting", for example where a large shareholder gifts shares to individuals who then each have a vote.
- Representative. Whether the vote represented the Class as a whole.
- Valuation. Whether the Scheme values assets properly, checking the values ascribed to Stakeholders or omitting smaller "out of the money" Stakeholders.
- Achievable outcome. Whether the Scheme makes proposals which cannot be made effective in a legal agreement.
- Outcome versus insolvency. The Court (and the Stakeholders voting at meetings) need to be satisfied that all creditors are being offered a realistic prospect of receiving a greater or faster return under the Scheme than they are likely to receive in the alternative if the scheme is not sanctioned, for example were the company to go into liquidation. The Court will also consider whether it is in an objecting Stakeholder's interest to accept the Scheme and have a share of a larger overall pot compared to the share of assets available to them if the company were to go into liquidation.
If you have been served with notice that a company where you are one of the Stakeholders has applied to the Cayman Court to present a Scheme you do not support, contact us for advice on the best way to respond.
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