Key Takeaways
- The BVI and the Cayman Islands both have regimes in place to address unfair prejudice suffered by shareholders, although each jurisdiction approaches the issue differently.
- The threshold for successfully bringing an unfair prejudice claim is high. It is important to first consider if there are no alternative remedies available to address the prejudice suffered.
- Careful analysis of the company's contractual and governing documents needs to be undertaken as they may preclude shareholders from bringing unfair prejudice claims.
Ordinarily, the rights that shareholders enjoy in respect of the company are governed by the terms of the company's articles of association. However, where the controlling majority shareholders act in a way that is prejudicial to the rights of minority shareholders, the Courts of both the BVI and Cayman Islands have the power to address such prejudice. Below, we set out the approach taken in each jurisdiction to the issue of minority shareholder rights and unfair prejudice.
BVI
The BVI has a dedicated statutory regime which allows shareholders to apply to the Court for relief in circumstances where the affairs of the company have been, are being or are likely to be, conducted in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to them in their capacity as a shareholder.
The BVI Courts apply an objective test when considering the conduct that the aggrieved shareholder claims has caused them unfair prejudice. This is necessarily a fact-dependent exercise and requires the Court to consider the constitutional documents of the company, any shareholders' agreement and/ or the terms of any other relevant agreement as between the shareholders, and the circumstances surrounding the unfairly prejudicial conduct. There is a wealth of BVI case law considering the application of the relevant test which provide, in summary, the following guidance:
- a technical or trivial breach of the company's Memorandum and Articles will not necessarily amount to unfair prejudicial conduct. Conversely, there are circumstances where rigidly adhering to strict legal rights can amount to unfair prejudice;
- a claimant does not need to show that a person acted in bad faith or with the intention of causing unfair prejudice to have a valid claim; and
- where the company is a parent, its affairs can include an act, or failure to act, of a subsidiary controlled by it, especially if the directors of the parent and subsidiary are the same.
Once the Court is satisfied that unfairly prejudicial conduct has occurred, it has a very broad discretion as to the relief it can grant to address and rectify the prejudice suffered by a shareholder, including orders that:
- require the company or any other person to acquire the aggrieved shareholder's shares or pay them compensation;
- regulate the future conduct of the company's affairs;
- appoint a receiver or liquidator over the company;
- rectify the records of the company; and
- set aside any decision made or action taken by the company.
Although a wide range of remedies are available, most claimants will seek a buy-out of their shares, or, in the alternative, liquidation of the company. In circumstances where the Claimant is successful in establishing an unfair prejudice claim, the Court will commonly order that the company, or another shareholder, purchase the claimant's shares at fair value. If an offer is made to buy the claimant's shares at fair value and the claimant rejects the offer, the claimant's unfair prejudice claim will necessarily fail, because such offer would reflect the remedy likely to be awarded by the Court and so to continue the claim would be an abuse of process. The appointment of a liquidator on the just and equitable ground is a remedy of last resort, but it is for the defendant to show that an alternative remedy is available - it is not the duty of the Court to investigate and consider any potential alternative remedy.
Cayman
The Cayman Islands does not have a statutory unfair prejudice regime. Accordingly, the just and equitable winding up petition is often utilised to address the prejudice suffered by shareholders of Cayman Islands companies, particularly where no other means of enforcing their rights or addressing their concerns exists. By presenting a just and equitable winding up petition, a petitioner argues that as a consequence of the acts and/or omissions of the subject companies, it is just and equitable that: (i) the entity be wound up and placed into official liquidation; or (ii) the Court grant some form of other alternative relief.
The meaning of "just and equitable" is not defined in statute. The circumstances in which it will be deemed just and equitable to wind up a solvent company are derived from case law, and tend to fall within certain well-defined categories, including:
- Lack of probity / mismanagement on the part of the directors: In circumstances where a significant economic interest is held by the petitioner, the mismanagement of a company's affairs is a powerful basis for seeking the winding up of a company.
- The need for an independent investigation of a company's affairs: The need for an independent investigation is often argued where the books and records of the company have been either withheld in contravention of the rights of shareholders or where they reveal that serious mismanagement or fraud appears to have occurred.
- Deadlock: Where a company's shareholders and its directors have divided into two opposing and uncooperative factions, preventing any decision being made on matters crucial to the company's success, the Court may consider it just and equitable to wind the company up as a means of breaking that deadlock.
- Oppressive conduct on the part of the directors: The Court may consider it just and equitable to make a winding up order (or grant alternative relief) where the conduct of the directors is such that it would be unjust to require the petitioner to remain a shareholder. In such cases, the petitioner must have no other practical option or alternative remedy available to them.
- Loss of substratum: In circumstances where: (i) the purpose for which a company was formed can no longer be carried out; (ii) the company has practically ceased to carry on business because it has become impractical to do so; or (iii) a company was established to pursue a particular opportunity which no longer exists, it may be considered just and equitable to wind up that company on the grounds that it has lost its substratum.
When a just and equitable winding up petition is presented in respect of a Cayman Islands company, the Court has a wide discretion to make a number of alternative orders to winding up the company. Such alternative orders may include:
- an order regulating the company's affairs in the future;
- an order restricting the actions of the company or compelling the company to do something;
- an order authorising civil proceedings to be brought in the name of and on behalf of the company by the petitioner; and
- an order providing for the purchase of shares by another member or by the company itself (which is generally the most appealing outcome for an investor).
It is important to note that the just and equitable jurisdiction must be engaged in order for the Court to be able to invoke its jurisdiction to award alternative relief. That is to say, the Court must be satisfied that it is just and equitable to make a winding up order, however, notwithstanding that finding, that some form of alternative relief is more appropriate in the circumstances.
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