Re Little Sheep Group

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 20 January 2012
• Court: Grand Court (Cayman Islands)
• Date: 20 January 2012

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF LITTLE SHEEP GROUP LIMITED

Cases cited:

(1) PCCW Ltd., Re, [2009] 3 HKC 292, considered.

(2) pSivida Ltd. v. New pSivida, Inc., Re, [2008] FCA 627, considered.

(3) Schultz v. Reynolds, 1992–93 CILR 59, considered.

Legislation construed:

Grand Court Rules 1995 (Revised), O.102, r.20(6): The relevant terms of this paragraph are set out at para. 5.

Companies Law (2011 Revision), s.38: The relevant terms of this paragraph are set out at para. 10.

s.86(2): ‘If a majority in number representing seventy-five per cent in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, where a company is in the course of being wound up, on the liquidator and contributories of the company.’

Practice Direction cited:

Practice Direction No. 2/2010, Schemes of Arrangement and Compromise Under Section 86 of the Companies Law.

Companies-arrangements and reconstructions-confirmation by court-in counting majority in number of members for purposes of Companies Law (2011 Revision), s.86(2), only names on register to be counted-each member not necessarily treated as one head-GCR (Revised), O.102, r.20(6)(b) requires custodian or clearing house to be treated as multi-headed member, based on number of instructing participants

The petitioner company sought an order, under s.86 of the Companies Law (2011 Revision), sanctioning a proposed scheme of arrangement between itself and its members.

The company”s issued share capital (‘the issued shares’), listed on the Hong Kong Stock Exchange, were beneficially owned (approximately) as follows: 29.7% by Possible Way Ltd., a company owned by the company”s principal founders and others; 3.24% by the principal founders in their own right; 27% by Wandle Invs. Ltd. (‘Wandle’), an indirect wholly-owned subsidiary of Yum! Brands Inc.; and 40% by an unknown number of independent investors. Of the issued shares, 87.73% were registered in the name of HKSCC Nominees Ltd., which acted as a common nominee in respect of securities held in the Central Clearing and Settlement System of the Hong Kong Securities Clearing Co. Ltd. (‘CCASS’). The company proposed a scheme of arrangement to become a subsidiary of the Yum! Brands Group; its intention was that Wandle would acquire 97.23% of the company”s equity and the balance would continue to be owned by Possible Way Ltd. The mechanism by which this would be achieved was that the relevant shares (‘the scheme shares’) would be cancelled and the resulting credit applied to pay up and issue to Wandle the same number of new shares; Wandle would pay to the holders of the scheme shares HK$6.50 in cash for each share. It was accepted that all or substantially all of the scheme shares were registered through CCASS.

The scheme would become binding on all the company”s members under s.86(2) of the Companies Law if (a) it was approved by a majority in number representing 75% in value of the company”s members (‘the double majority’); and (b) it was sanctioned by the court. Under the Grand Court Rules 1995 (Revised), O.102, r.20(6), the court was to give directions necessary to enable the company to determine whether the

statutory majorities were achieved; further, if all or substantially all of the scheme shares were registered in the name of a custodian or clearing house, the court might have directed that (a) such custodian or clearing house could cast votes both for and against the scheme in accordance with the instructions of its clients; and (b) such custodian or clearing house should specify the number of votes cast in favour of the scheme and the number of clients on whose instructions they are cast and the number of votes cast against the proposed scheme and the number of clients or members on whose instructions they are cast. It was accepted that CCASS was a ‘custodian or clearing house’ within the meaning of r.20(6).

At the initial hearing the company sought a direction that CCASS be counted as one head for the purpose of assessing the majority in number; it submitted that the court should treat CCASS as one voter, either for or against the scheme, depending on the net position after setting off its instructing participants” positive and negative votes against each other. The court rejected the submission but agreed to re-open the hearing to allow the petitioner to make the argument that there was no jurisdiction to make an order that each instructing participant of CCASS be counted for the purpose of assessing the majority in number. The company submitted that r.20(6) was ultra vires because its effect was tantamount to treating participants of the custodian or clearing house as if they were members of the company, contrary to s.38 of the Companies Law, which provided that to become a member of a company it was necessary to have one”s name placed on the register of members.

Held, ordering that each instructing participant of CCASS be counted as one head for the purpose of assessing the majority in number:

(1) The court refused to make the direction that CCASS be counted as one head for the purpose of assessing the majority in number-it would contravene r.20(6)(b) and be inconsistent with the purpose of s.86. Treating a custodian or clearing house as one member, with one vote, without regard to the number of instructing participants, was artificial and could produce a commercially unacceptable result-it would make it easier for an opponent of a scheme, with a minimal economic interest in the company, to defeat it by having a nominal number of its shares registered in the names of the requisite number of individuals who agree to vote against it; conversely, it would make it easier for the company”s management to guarantee the majority in number by making the same kind of arrangements (paras. 7–8).

(2) The combined effect of ss. 38 and 86 was that all those, and only those, whose names were on the register must be counted for the purpose of assessing the majority in number; however, this did not mean that each member must necessarily be treated as one head. It was open to the court to give appropriate directions on the method by which the members would be counted, having regard to the circumstances of the case. If shares were registered in the name of two or more natural persons as joint owners, it was open to the court to treat them as a single head for the purpose of the

head-count. If shares were registered in the name of a custodian or clearing house, r.20(6)(b) required the court to treat it as a multi-headed member for the purpose of the head-count. Accordingly, the number of participants...