Medley Opportunity v Fintan

• Jurisdiction: Cayman Islands
• Judge: (Quin, J.)
• Judgment Date: 21 June 2012
• Court: Grand Court (Cayman Islands)
• Date: 21 June 2012

Grand Court, Financial Services Division

(Quin, J.)

MEDLEY OPPORTUNITY FUND LIMITED

and

FINTAN MASTER FUND LIMITED and NAUTICAL NOMINEES LIMITED

T. Lowe, Q.C. and Ms. R. Reynolds for the plaintiff;

J.R. McDonough and Mrs. K. Houghton for the defendants.

Cases cited:

(1) Barclays Bank plc v. HHY Luxembourg SARL, [2011] 1 BCLC 336; [2010] EWCA Civ 1248, considered.

(2) Culross Global SPC Ltd. v. Strategic Turnaround Master Partnership Ltd., 2010 (2) CILR 364; [2010] All E.R. (D.) 296; [2010] UKPC 33, considered.

(3) Gan Ins. Co. Ltd. v. Tai Ping Ins. Co. Ltd. (No. 2), [2001] 2 All E.R. (Comm.) 299; [2001] CLC 1103; [2001] Lloyd”s Rep I.R. 667; [2001] EWCA Civ 1047, considered.

(4) India (Republic) v. India SS. Co. Ltd. (No. 2), ‘The Indian EnduranceELR’, [1998] A.C. 878; [1997] 3 W.L.R. 818; [1997] 4 All E.R. 380; [1998] 1 Lloyd”s Rep. 1; [1997] CLC 1581; [1998] I.L.Pr. 511, referred to.

(5) Rainy Sky SA v. Kookmin Bank, [2011] 1 W.L.R. 2900; [2012] Bus. L.R. 313; [2012] 1 All E.R. 1137; [2012] 1 All E.R. (Comm.) 1; [2012] 1 Lloyd”s Rep. 34; [2011] 2 CLC 923; [2012] B.L.R. 132; (2011), 138 Con. L.R. 1; [2011] UKSC 50, applied.

(6) Society of Lloyd”s v. Robinson, [1999] 1 W.L.R. 756; [1999] 1 All E.R. (Comm.) 545; [1999] CLC 987; [1999] Lloyd”s Rep I.R. 329, considered.

(7) Svanstrom v. Jonasson, 1997 CILR 192, considered.

Companies-shares-redemption-variation of redemption rights agreed with nominee binding on beneficial owner-if beneficial owner choses to hold shares through nominee, cannot resile from what nominee does

Companies-shares-redemption-when shares held by nominee, collateral contract with beneficial owner for enhanced redemption rights not binding unless signed by nominee-beneficial owner and nominee distinct legal entities-erroneous view that same party not sufficient to raise estoppel precluding company from relying on privity of contract

Companies-shares-redemption-variation of redemption rights in articles valid if company has authority and shareholder consents-agreement to forfeit existing rights for periodic pro-rated cash distributions in accordance with commercial sense-investor benefits from expected recovery in asset prices and company avoids liquidation

The plaintiff sought declaratory relief concerning the defendants” redemption rights in respect of its investments in the plaintiff.

The plaintiff was an investment fund incorporated as a Cayman company in 2006. The first defendant was also a Cayman company and the second defendant was a company incorporated in Bermuda. The plaintiff initially offered Class A and Class B shares. In accordance with its articles of association, Class A and Class B shareholders could-on giving at least 180 days” prior written notice-redeem all or some of their shares, on any redemption day as provided, subject to staggered redemption fees and a possible restriction on redemptions. In 2007, the plaintiff entered into an agreement with the first defendant (‘the side letter’), granting it more favourable rights than conferred under the articles; in particular, para. 4 provided that, if possible, all distributions to the first defendant upon redemption should be paid in cash. In 2007–2008, the second defendant, acting as the nominee of the first defendant, subscribed for four blocks of Class A shares in the fund, investing a total of US$45m.

In 2008, addressing liquidity problems, the plaintiff offered its members a restructuring plan to allow ‘a large portion of the existing investor base

to remain invested, and along with new subscribers fund new transactions . . .’ Shareholders could choose between (i) Option 1: to subscribe for new Class C shares, in respect of which the next available redemption date was in 2009, and agree to rescind any pending redemption requests; and (ii) Option 2: to remain in the fund and receive quarterly cash distributions, and agree to rescind any pending redemption requests. The second defendant, on behalf of the first defendant, elected Option 2 as regards US$10m. in the value of its shares, and Option 1 as regards the balance of approximately US$40m.; consequently, it held a combination of Class A and C shares. It agreed to the full terms of the options selected.

In 2009, the plaintiff offered a further restructuring plan to allow existing and new shareholders to invest ‘without the overhang of potential redemption requests.’ It would offer a new class of Class D shares, instead of Class C shares; only holders of Class C shares would be offered Class D shares, and a choice between (i) Option 1: to acquire the new Class D shares, in respect of which the next available redemption date was in 2013; and (ii) Option 2: to maintain existing Class C shares, rescind any pending redemption requests and participate in an orderly payout by agreeing to accept pro-rated quarterly distributions of excess cash by way of a partial redemption of shares, as cash was generated from the existing assets. The second defendant, on behalf of the first defendant, entered into the 2009 plan and elected Option 2 in respect of all its Class C shares. It agreed to the full terms of the option selected.

In 2011, the second defendant submitted a redemption request on behalf of the first defendant, requesting the redemption of all its shares. The plaintiff”s position was that the second defendant was bound by the terms of the 2008 and 2009 restructuring agreements to accept automatic pro-rated distributions of cash in lieu of its pre-existing redemption rights, and was therefore precluded from submitting any further redemption requests; it sought declaratory relief in the present proceedings.

The plaintiff submitted, inter alia, that (i) the side letter did not deal with redemption rights, but merely the payment of distributions in the event that there was a right of redemption; (ii) in any event, the registered shareholder-the second defendant-was not a party to it and could not therefore claim its benefit; (iii) the variation agreements replaced any pre-existing redemption rights with the right to pro-rated cash distributions-any other interpretation being inconsistent with their commercial purpose; and (iv) art. 53 of the company”s articles permitted the plaintiff to enter into bilateral agreements to alter redemption rights.

The defendants submitted, inter alia, that (i) their redemption rights were regulated by the articles of association, as modified by the terms of the side letter, such that-having given the required 180 days” notice-the plaintiff was required to pay the proceeds of redemption to the first or second defendant in cash, unless immediate payment in cash was impossible; (ii) the restructuring plans did not replace these rights, lacking clear words to that effect; (iii) in any event, in the case of a conflict between documents, the articles should prevail; and (iv) no distinction should be

drawn between the position of the first defendant and the second defendant-since the plaintiff recognized the first defendant as the shareholder and the true party in interest, and treated the defendants as being one and the same for the purposes of this dispute, it should be estopped from resiling from this position.

Held, granting the declaratory relief sought:

(1) The side letter entered into between the plaintiff and the first defendant did not enhance the second defendant”s rights as the registered shareholder. The defendants were not one and the same, nor did they have single indivisible rights: they were entirely different legal entities incorporated in different jurisdictions. Although the second defendant was the nominee of the first defendant, one main purpose of any nominee agreement was to create two distinct legal entities. The fact that some may have viewed the defendants as one entity could not raise an estoppel by convention so as to preclude the plaintiff from relying on the fact that the second defendant was not a party to the side letter (paras. 39–41; para. 60).

(2) The second defendant was bound by the terms of the restructuring agreements and accordingly was precluded from making further redemption requests. The plaintiff had the authority, pursuant to art. 53, to vary the redemption provisions contained in its articles. The second defendant, on behalf of the first defendant, voluntarily agreed to all the terms of the options offered as part of the 2008 and 2009 plans. The plain commercial purpose of Option 2 in both agreements was to require the second defendant to exchange its existing redemption rights for periodic cash distributions effected pro rata with all other investors accepting this option-this allowed the plaintiff to minimize a liquidity squeeze and avoid a fire sale of assets, and the second defendant to benefit from the expected recovery in asset prices, avoid a disorderly scramble for assets under liquidation and be treated equally and fairly with the other members. The court held that the plaintiff and the second defendant intended this construction, in accordance with business common sense (para. 43; para. 45; paras. 53–54; paras. 59–60).

(3) The first defendant was also bound by the terms of the restructuring agreements. If commercial business were to be conducted with the required degree of certainty, by entering into these agreements, the second defendant must be taken to have bound the first defendant as ultimate beneficiary, otherwise, nominee members could enter into restructuring agreements only to then try and enforce a redemption right by a different route. As the first defendant chose to hold its investment through a nominee, it could not resile from what its nominee had done (paras. 55–56; para. 60).

1 QUIN, J.:

Introduction

By an originating summons issued on February 17th, 2012, the plaintiff, Medley Opportunity Fund Ltd. (‘the fund’), seeks the following relief:

(i) A declaration that the rights of the second defendant, as...