Monday 20 November Ritz-Carlton, Grand Cayman
Welcome Hugh Dickson Chair, RISA
Introduction Felicity Toube QC South Square
Programme Panel 1: Redemption Claims in the winding up of funds -Coffee Break- Panel 2: Merger fair value appraisals: recent development Panel 3: Fund Structures: what can and should be expected from fund service providers -Summing up and closing remarks- -Drinks reception-
Redemption Claims Matthew Goucke, Walkers Michael Pearson, FFP Peter Hayden, Mourant Ozannes Gordon MacRae, Kalo Tom Smith QC
“ The path to redemption is not always smooth ” • Issues surrounding the timing and effectiveness of redemptions are often critical • At what point and how does a redemption take effect? • And what is the position and status of a “redemption creditor”? • Priority of claims in a winding up and “scooping the pool”
Background • Why had s.37(7) never been critically examined by Appellate Courts? • Procedure adopted by the Additional Liquidator • First instance and CICA decisions o Priorities, emergence of the “Late Redeemer” and “Later Redeemer” classes, etc.
Section 37(7) • Section 37(7)(a) –where a company is being wound up, and there are shares which are or are liable to be redeemed, then the terms of redemption can be enforced against the company • BUT – does not apply if the terms of redemption provided for the redemption to take place after commencement of winding up • Or if the company is insolvent so that it could not lawfully have made a distribution equal to the amount of the redemption in the period between the intended date of redemption and commencement of the winding up
The Issues Issue in Herald was whether s.37(7) applied to the claims of the December and KYC Redeemers AL’s case was: o Accepted that the relevant shares had been “redeemed” within the meaning of the Articles (Redemption Date had passed prior to Suspension) o This did not mean the Shares had been “redeemed” within the meaning of s.37(7) o December and KYC Redeemers’ claims were subject to s.37(7) o Those claims unenforceable due to the proviso in s.37(7)(a)(i)
The Issues (cont.) • Primeo’s position was that: o s.37(7) had no application to the December Redeemers o it was entitled to prove in Herald’s liquidation as a contingent creditor, ranking ahead of unredeemed equity • Matters were complicated by the intervention of: o Reichmuth as representative of the Late Redeemers; and o Natixis as representative of the Later Redeemers
Lack of jurisprudence • Strategic Turnaround dealt with when redemption occurred under the relevant Articles, not the Statute o Did not consider s.37(7) o Related to issues of locus , rather than ranking of claims o Those Articles did not permit a separate suspension of payments • Re Founding Partners Global Partners Ltd (In Liquidation) o Unreported, Foster J, 21 September, 2010 o It was agreed that the wording of section 37(7) "…is not as clear as it might be but that the words …'have not been redeemed' must mean ‘the redemption proceeds due have not been paid’.”
Lack of jurisprudence (cont.) • Most fund articles provide Directors with broad defensive powers to protect liquidity o Lock ups, suspensions, gating provisions etc. • Usually, a fund, properly advised, will be able to implement an appropriate suspension of redemptions o Stops conversion to deferred creditor • Herald’s position (as well as that of the other Madoff feeder funds quite unusual): o Bi-monthly redemption dates o History of high liquidity (even in the context of $100m+ redemptions)
– History and practice of permitting short-notice redemptions – 100% invested into a sole asset, BLMIS – Accordingly, no real possibility of suspending prior to discovery of Madoff Ponzi Scheme in mid-December 2008 – Not a case of multiple assets, where only a small proportion affected by a fraudulent or otherwise incorrect valuation – In Madoff, all NAVs were misstated from day 1 and cash commingled at BLMIS – On the facts of this case, a number of important and high- value class issues arose
Procedure adopted by the AL • AL obtained advice (including from Leading Counsel) as to enforceability of claims of December and KYC Redeemers • Shared advice with all members of the LC pursuant to NDAs / common interest privilege agreements • Took a position • Agreed with Primeo that the Court should be invited to make “representative” orders pursuant to the CWR • Close and ongoing consultation with non-conflicted members of the LC
The Grand Court • Pearson v Primeo Fund [2015 (1) CILR 482] • December and KYC Redeemers had redeemed on or prior to 1 December 2008 and fell outside s.37(7) • Had provable claims ranking pari passu with the claims of ordinary unsecured creditors • Significant departure from prior common law position • See also In re Palm Beach Offshore Ltd FSD 38 of 2009 (unreported, 25 November 2014, Jones J)
The CICA • Affirmed the Grand Court’s decision that the December and KYC Redeemers did not fall within s.37(7) • Held that “redemption creditors” ranked after outside creditors: • Contingent creditors with provable claims under s.139(1) • Claims founded on the statutory contract of membership and subordinated by s.49(g) • An “accrued right of redemption”?
Privy Council: the Cast of Parties • The AL of Herald • The December and KYC Redeemers (represented by Primeo) • The Late Redeemers (represented by Reichmuth) • The Later Redeemers (represented by Natixis)
The AL’s arguments • Redemption has a specific meaning in the context of section 37(7) • Primeo falls within section 37(7) • Any other redeemers also fall within section 37(7) • Claims fall foul of both provisos, such that they cannot be enforced in the liquidation, and redeemers rank alongside the remaining investors
The Suspension • Took effect from 12 or 24 December 2008 • Validity not disputed • Issue as to when terms of redemption provided for redemption to take place and whether terms were varied by suspension
Section 37(7) • Does not apply to shares which have been redeemed • Whether shares have been redeemed is determined by the Fund’s constitutional documents • Freedom of contract and commercial certainty
Purpose of section 37(7) • Allows a redeeming investor, whose redemption has not taken place, to enforce the terms of that redemption in certain circumstances • Circumstances are set out in the provisos – timing and solvency requirements
Priority • Ordinary creditors e.g. leverage providers etc • Redemption creditors – section 49(g) • Creditors claiming under section 37(7)(a) • Remaining investors
Key Takeaways • Redemption is the moment when the investor turns from shareholder to creditor • Depends on what the Articles say • Does not depend on the fund paying the redemption proceeds (unless Articles say so) • Unpaid redemption creditor will rank behind leverage and third party creditors but ahead of remaining investors • Potential to scoop the pool
Key Takeaways • Incentive to make early redemption requests • Gating and suspension provisions in the Articles therefore key • Effect of suspension of redemptions will typically be to prevent a section 37(7) claim from arising • Difficult to see section 37(7) claims arising in practice
Questions/Comments?
Contact details Peter Hayden Peter.Hayden@mourantozannes.com T +(345) 814 9108 Gordon MacRae GMacrae@kaloadvisors.com T+(345) 814 4007 Tom Smith QC tomsmith@southsquare.com T+44 (0)20 7696 9900 Matthew Goucke Matthew.goucke@walkersglobal.com T +(345) 914 6332 Michael Pearson Michael.pearson@ffp.ky +(345) 640 5860
Coffee break
Merger fair value appraisals: recent developments Barry Isaacs QC, South Square Nick Hoffman, Harneys Andrew Jackson, Appleby Rupert Bell, Walkers
Why has there been an increase in Cayman dissenter actions? • Since Q4, 2010 – major increase in China-based, US-listed companies going private – most are Cayman incorporated. Returning to the PRC having raised capital they needed through the US listing. • Loser pays jurisdiction – covers significant portion of costs • High interest rate payable on awards • Interim payment – immediate access to merger price - reduces risk of getting nothing • Range of interim remedies available – injunctions, provisional liquidator appointments
Cayman Islands Fair Value Proceedings – What to Know Section 238, Companies Law (introduced 2009): s.238(1) “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” s.238(11) “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 the fair value.”
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