The Companies Law (2009 Revision) Plaintiffs v and Laurus Master Fund Ltd (in Official Liquidation) Defendants
| Jurisdiction | Cayman Islands |
| Judge | Hon. Mr. Justice Angus Foster |
| Judgment Date | 18 August 2010 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | FSD 65/2009 (AJEF) |
| Date | 18 August 2010 |
The Han. Mr. Justice Angus Foster
This Ruling concerns two interrelated issues namely: (1) whether the shareholders of a company in official liquidation can, with the consent of the official liquidator(s), amend the company's articles of association to allow for the issue of further shares in the company and (2) whether the official liquidator(s) of the company can then take the necessary steps to allot and issue such further shares. There is apparently no Cayman Islands or English authority on these questions.
The Applicants are the Joint Official Liquidators (‘the JOLs’) of Laurus Master Fund Ltd. (In Official Liquidation) (‘the Master Fund’). The Master Fund wasincorporated in the Cayman Islands as an exempted company on 11th December 2000 and carries on business as a mutual fund. The JOLs were first appointed as Joint Voluntary Liquidators of the Master Fund in September 2008 but on 18th December 2008 it was ordered that the liquidation be continued subject to the supervision of the Court.
The Master Fund has two shareholders: Laurus Offshore Fund Ltd. (In Official Liquidation) (‘the Offshore Fund’), which is a Cayman Islands exempted company, and Laurus US Fund LP (‘the Onshore Fund’) which is a Delaware limited partnership. I shall refer to the Offshore Fund and the Onshore Fund together as the ‘Feeder Funds’. The Offshore Fund, which has by far the largest investment in the Master Fund, was also originally put into voluntary liquidation but that too came under the supervision of the Court pursuant to an order made on 19th November 2009. The JOLs are not the liquidators of the Offshore Fund, which has different liquidators. The Onshore Fund continues to be managed by its general partner, Laurus Financial LLC, a Delaware limited liability company.
The Master Fund is the master fund in a typical master-feeder investment fund structure. The investment manager is Laurus Capital Management LLC (‘the Investment Manager’), which is based in New York. The underlying assets of the Master Fund comprise a portfolio of approximately 100 debt and private equity investments covering a range of industries, the investments in which are mostly illiquid. As at 31st August 2009 the Net Asset Value of the Master Fund was calculated by it administrator to be US$670,403,831.
The Master Fund has only one known potential third-party creditor, an entity in the Dominican Republic. The alleged debt relates to land in that country which is the subject of complicated litigation there. The JOLs are considering the possible compromise of the alleged debt but in the meantime full provision for the potential debt, which may amount to US$15.5m, has been made by the JOLs and is being held by them in cash.
In accordance with the supervision order made on 18th December 2008, the Liquidation Committee (‘the Committee’) of the Master Fund comprises 6 representatives, namely the Offshore Fund (acting through its joint official liquidators), the Onshore Fund (acting through its general partner), the Investment Manager and 3 other entities which are investors in the Offshore Fund.
With the approval of the Committee the JOLs have continued to utilize the services of the Investment Manager to assist with the realization of the Master Fund's assets. Prior to the supervision orders in respect of both the Master Fund and the Offshore Fund the Investment Manager was remunerated on the basis of an amended Investment Management Agreement under which significant remuneration payable by the Offshore Fund has been deferred. Pursuant to an order of the Court in the liquidation proceedings relating to the Offshore Fund, the Investment Manager is now to be paid in respect of such historic deferred compensation as a percentage of realizations to be distributed by the Offshore Fund to its investors so that distributions to investors will now be net of all Master Fund and Offshore Fund liquidation costs. As far as ongoing management fees are concerned, pursuant to arecently executed further amendment to the Investment Management Agreement, the Investment Manager is to be paid in respect of such fees on the basis of a decreasing scale of fixed fees ending in March 2012 and also by way of incentive fees if distributions by the Master Fund to the Feeder Funds' investors are greater than certain agreed thresholds. The Investment Manager has requested and the Committee, and the JOLs, subject to the approval of the Court, have agreed that these incentive fees should be effectively substituted and represented by the issue of a new class of shares in the Master Fund to the Investment Manager. The evidence is that as a result of a relatively recent change in the United States Federal Income Tax treatment of such incentive fees, US based fund managers are usually now seeking to have incentive fees paid by way of an allocation of profits equating to equity distributions from such a master fund, which results in more favourable tax treatment of the fund managers. More recent fund structures are apparently set up that way.
Since the articles of association of the Master Fund do not currently permit a new share class to be issued, the Feeder Funds, as shareholders of the Master Fund, would require to pass a special resolution to effect the necessary amendment of the articles to enable the company to issue such shares. However, the question arises as to whether the shareholders may do that, given the official liquidation of the Master Fund, even with the consent of the JOLs.
As at 30lh June 2010 receipts in the Master Fund liquidation totaled US$73.lm. Due to the illiquid nature of most of the Master Fund's investments the JOLs latest realization plan does not predict, in most cases, by what date individual investments will be realized, save that it anticipates realization of the entire portfolio by 31st March 2012 The JOLs believe that the Investment Manager is very important to the successful implementation of the realization plan and particularly in relation to one of the start-up industries which represents a major investment of the Master Fund. The principal of the Investment Manager has a long term involvement with that particular business, is very knowledgeable about it and has a close working relationship with its senior management. He has also been involved in seeking to obtain financing of that business through a possible IPO. The JOLs consider that if the Investment Manager were to be replaced, with the consequence that its principal would no longer be directly involved, there is a real risk that this business, which is a potentially very profitable investment of the Master Fund, is considerably less likely to succeed.
The Committee has also informed the JOLs that it wishes to maintain the status quo with respect to the involvement of the Investment Manager, being of the view that retention of the Investment Manager will be the most likely way for the Master Fund to make a significant return on that investment. They also consider that the Investment Manager is best placed to realize the other investments in the Master Fund's portfolio most profitably. The JOLs also accept that.
Accordingly the applications which the JOLs now make have the full support of the Committee, including the Offshore Fund as the major stakeholder in the Master Fund. The JOLs therefore consider it desirable for the Investment Manager tocontinue providing investment management services to the Master Fund and they have accordingly re-negotiated the Investment Manager's remuneration on a basis which the JOLs consider to be more favourable to the Master Fund than the previous remuneration basis as well as being sufficiently attractive, particularly for US tax reasons, to the Investment Manager. The re-amended Investment Management Agreement, which is expressed to be subject to the approval of the Court as far as the proposed issue of the special shares to the Investment Manager is concerned, has now been signed. It makes alternative provision for the manner of payment of incentive fees to the Investment Manager if the Court should determine that the proposed special shares may not be issued, although that is a considerably less attractive option to the parties.
As well as taking various steps to restrict the ongoing costs of the Investment Manager's continuing role, the JOLs have also taken steps to enable them to monitor the Investment Manager's management and realization of the Master Fund's portfolio. These steps have enabled and will continue to enable the JOLs to maintain the necessary knowledge of the assets under management and the status of the realization plan with respect to individual assets in the interests of the stakeholders in the Master Fund winding-up.
In the circumstances the JOLs consider that providing the Investment Manager with incentive based remuneration by way of the issue to the Investment Manager of the proposed special class of shares in the Master Fund is both appropriate and desirable, not only for the Investment Manager in relation to management of its own tax affairsbut also for the Master Fund, as clearly recognized, indeed supported, by the Committee. In taking such shares, which would be non-voting, by way of incentive payment the Investment Manager would of course be subordinating itself in respect of such remuneration to creditors of the Master Fund (although the only known creditor of the Master Fund is anyway fully provided for as explained in paragraph 5 above) as well as being directly incentivized to maximize realization returns through its participation as a shareholder.
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