Re Santiago Pipelines

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 17 December 2012
• Court: Grand Court (Cayman Islands)
• Date: 17 December 2012

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF SANTIAGO PIPELINES COMPANY and NEW SANTIAGO PIPELINES COMPANY

A. Heaver-Wren and B.Woolf for the petitioners.

Cases cited:

(1) China.Com Inc., In re, 2009 CILR 384, referred to.

(2) ING Secs. (Japan) Ltd., In re, 2004–05 CILR 308, referred to.

(3) Ransomes Plc, Re, [1999] 2 BCLC 591; [2000] BCC 455, dicta of Robert Walker, L.J. considered.

(4) Ratners Group Plc, Re, [1988] BCLC 685; (1988), 4 BCC 293, dicta of Harman J. applied.

(5) Thorn EMI Plc, Re, [1989] BCLC 612; (1988), 4 BCC 698, dicta of Harman J. applied.

Legislation construed

Companies Law (2012 Revision), s.15(1):

‘Where a company has passed a resolution for reducing share capital, it may apply by petition to the Court for an order confirming the reduction.’

s.16(1): ‘The Court . . . may make an order confirming the reduction on such terms and conditions as it thinks fit.’

Companies-reduction of share capital-confirmation by court-purpose should be ‘discernible’ (i.e. demonstrated by evidence to court) even when resolution unanimous-applicant should show more than actual objective underlying reduction but make court aware of commercial rationale of overall transaction of which reduction is part

The petitioners sought orders under the Companies Law (2012 Revision), s.16, confirming resolutions by their shareholders to reduce the share capital of the companies by $10,000 each.

The petitioners were both investment holding companies and subsidiaries of Talisman Equion (Cayman) Inc., itself a subsidiary of Talisman Energy Inc., an upstream oil and gas company with headquarters in Canada. Each petitioner”s assets comprised, at the time of its petition, shares in a midstream oil and gas company, Oleoducto Central (valued at about $11m. and $8m.), and $10,000 (held as cash or receivables). They also held rights under a transport agreement between another member of the Talisman Group and Oleoducto, with a book value of zero, but a market value of around $18m. and $42m.

At the initial hearing, affidavit evidence was given by Mr. Boyd, an employee of Appleby, which had supplied two corporate directors for each company. The evidence concerned the present financial position of the petitioners, but the affidavits-together with the submission prepared by

the petitioners” attorneys prior to the hearing, and the clarifications sought of counsel-were not sufficient to satisfy the court that it understood the financial state of the companies, or the commercial rationale of the transactions of which the capital reductions were part.

In response to the court”s queries, additional evidence was adduced in support of the petitions. This consisted of second affidavits by Mr. Boyd; unsigned financial statements for the petitioners as at November 2nd, 2012; pro forma financial statements for the petitioners reflecting their projected financial positions after the capital reductions; an explanatory letter from Deloitte LLP; and a letter from Lewin & Wills, the Talisman Group”s Colombian tax lawyers.

The letter from Lewin & Wills explained that the sale of outstanding shares in a foreign company by a foreign seller to a foreign buyer did not attract Colombian income tax or capital gains tax, and therefore it could be advantageous to have assets held by special purpose vehicles (SPVs), and then sell shares in those SPVs rather than selling the asset itself. Further, it was possible to transfer assets between subsidiaries of the same parent company under ‘spin-off agreements’ at book value (provided that it was a positive book value), without any requirement that the assets be re-valued to the market value. Since the companies held the transportation agreement rights at zero book value, they would have remained at zero book value once they had been ‘spun off’ to the SPVs, provided the whole transfer had a positive book value overall. The proposed transactions of which the capital reductions were part were both spin-off agreements between the petitioners, an SPV and Talisman Equion (Cayman) Inc. These agreements involved the petitioners transferring their transportation agreement interests to SPVs, together with $10,000. The letter from Deloitte explained that the $10,000 was an arbitrary sum designed to give the transfers a positive book value overall, while maintaining the zero book value of the transportation agreement rights. These transfers would be made by the petitioners for nil consideration and, in lieu, the SPVs would each issue new shares of $10,000 to Talisman Equion (Cayman) Inc., while the petitioners reduced their share capital by the same amount. The sale of shares in the SPVs would then potentially allow the Talisman Group to realize tax-free gains of about $60m.

Held, confirming the reduction in share capital:

(1) Three of the criteria (equitable treatment of shareholders, proper information of shareholders and safeguarding the interests of creditors) needed for a court to exercise properly its discretion under s.16 of the Companies Law did not arise in this case. The statutory purpose of ss. 15 and 16 was creditor and shareholder protection, and the only shareholders were the parent company (who had unanimously passed the resolution) and there were no creditors (para. 12).

(2) The existence of the fourth criterion-that the court should be satisfied the capital reduction was for a ‘discernible purpose’-meant that the unanimity of the resolution and absence of creditors did not end the

court”s enquiry. Showing a discernible purpose required more than demonstrating that the company had some actual objective in mind; the court should be given a proper understanding of the commercial rationale for the overall transaction of which the capital reduction formed part. The original evidence-financial statements, and ‘opaque’ affidavits from someone who had no first-hand knowledge of the companies in question, and was only very recently formally involved with them-was not satisfactory, either in content or source, to satisfy the court the capital reductions served a discernible purpose. The supplementary evidence-further financial statements and explanatory letters provided by the group”s accountants and tax advisers-was sufficient to make the commercial rationale of the overall transactions apparent to the court (namely the tax-free transfer of economic rights). It was not for the court to take a view on the efficacy or wisdom of entering into the transactions, but merely to understand the overall exercise and accept that a legitimate business purpose was being pursued (paras. 13–15).

1 JONES, J.: Santiago Pipelines Co. (‘SP’) and New Santiago Pipelines Co. (‘New SP’) (together ‘the companies’) have petitioned the court, pursuant to ss. 15 and 16 of the Companies Law (2012 Revision), for orders confirming special resolutions passed by their parent company to reduce their share capital by $10,000 in each case. The companies are wholly-owned subsidiaries of Talisman Equion (Cayman) Inc., an intermediate holding company which is itself a wholly-owned indirect subsidiary of Talisman...