The Cayman Islands Court of Appeal ("CICA") in Adamas Global Alternative Investment Management Inc v The Public Institution for Social Security for the State of Kuwait has provided important guidance on how a holder of management shares1 must exercise their voting rights in circumstances where the fund is contemplating the cessation of business and a voluntary winding up.
In essence, the CICA concluded that:
(a) the exclusive power conferred on the manager to resolve to wind-up the company is conferred not for the manager's benefit but for the benefit of the participating shareholders who have the predominant economic interest in the proposed winding up; and
(b) therefore, where the majority of the participating shareholders nominate a fit and proper voluntary liquidator, that liquidator should ordinarily be appointed.
The CICA rejected the argument that the participating shareholder (this case involved a sole participating shareholder) had abdicated any right to select the liquidator by signing up to a deal which gave the manager the exclusive right to put the fund into voluntary liquidation and to choose the liquidator. There was no real dispute that the articles gave the management shareholder a discretion to select the liquidator. The question was, how they should exercise that discretion. The CICA's answer was: as directed by the sole economic stakeholder.
The CICA was also clear that where an application is made by a participating shareholder to bring a voluntary liquidation under the supervision of the Court, the management shareholder's participation (if any) should be measured and neutral and designed to assist the Court. This is because the management shareholder has no 'skin in the game'. Naturally, if the bona fides or the business judgment of the manager are being questioned, the manager will be entitled to file evidence in response to those allegations.
The decision is significant as being a rare analysis by the Cayman Islands courts of the way in which voting rights attaching to non-economic management shares should be exercised, with the decision coming down heavily on the side of the economic stakeholders.
There are, though, a few points to note:
(a) This case involved somewhat extreme facts – in particular, a fund with a single participating shareholder holding 100% of the economic interest (whose express wishes were being ignored by the manager). While the CICA refers to the importance of the wishes of the 'majority' or those with the 'predominant financial interest', that would appear to be obiter in light of the facts.
(b) On its face the CICA's decision does strongly suggest that where, in a wind-down context, a majority of economic stakeholders requests that the management shareholder place the fund into voluntary liquidation and nominate a specific voluntary liquidator, the starting position is that they should accede to that request. That may be fact-sensitive, though – and the position may be different if, for example, that majority itself had ulterior motives and / or the nominated liquidator had a conflict of interest.
(c) The CICA draws a distinction between the position before a decision to wind up the fund, and afterwards. It is not entirely clear, though, why that distinction is so important in this context. Whether this reasoning could effectively be employed by majority shareholders to, for example, pressure a management shareholder to remove and / or appoint new directors remains to be seen.
(d) Finally, the decision is also unlikely to affect 'administrative' voluntary liquidations of Cayman Islands funds, typically done only after all the participating shareholders are redeemed.
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1 It is common in Cayman Islands mutual fund structures for the fund's manager (or another party) to hold the voting shares (which confer the right to vote at general meetings of the fund, but which have no economic rights) and for the fund's investors to hold participating shares (which, conversely, hold all the economic rights, but no voting rights).