A scheme of arrangement is a flexible form of corporate restructuring. Since early 2002 the Cayman Court has considered an unprecedented number of schemes, and has recognized and reflected the versatility, flexibility and utility of Cayman schemes in the changes to its rules, its approach to their management and in its recent decisions. It is clear that the Cayman Court understands the commercial necessity of implementing schemes in a timely and practical fashion. Recent developments underline this.
A scheme is a court-approved compromise, arrangement, reconstruction or amalgamation entered into between a company and its creditors or shareholders (or any class of them) in accordance with Section 86 (and, for amalgamations, Section 87) of the Companies Law. At the heart of every scheme there must be some element of give and take between the company and its shareholders and/or its creditors, on whom the proposal is binding. The origin of Sections 86 and 87 are what are now sections 425 and 427 of the UK Companies Act. There are substantially similar provisions in most Commonwealth jurisdictions. The Cayman Court has shown a ready willingness to ensure that Cayman law keeps abreast of the developments in the UK and Commonwealth courts and maintains a modern approach to procedure.
Creditor schemes are the only formal means of imposing corporate rescue of a distressed or insolvent company. Cayman corporate rescue schemes are often, but not always, used in conjunction with the appointment of provisional liquidators. This enables the company to take advantage of the statutory moratorium on the enforcement of claims against the company while the provisional liquidators and principal creditor(s) put together a restructuring proposal.
The application of schemes is very broad: shareholder schemes include mergers; privatizations/de-listings and other friendly takeovers; demergers; share exchanges; so-called top-hattings; and simplification of entitlements in liquidations of funds.
Shareholder schemes may be used to give effect to demutualizations and spin-offs, although the Cayman Court has not considered such schemes recently.
Creditor schemes include debt-for-debt, debt-for-equity, and debt-for-assets swaps; distribution of assets and payment of debts without liquidation; realization of listing status of listed shell; and simplification of entitlements in liquidations.
Creditor schemes may be used to give effect to debt moratoriums; insurance run-offs; and the compromise of class action or group litigation.
It is not uncommon for a scheme to include more than one of these purposes. A number of Cayman creditor schemes have resulted in the successful rehabilitation of distressed and insolvent companies, and many of them have been financially and/or legally complex. A large proportion of them have concerned publicly traded shares or securities.
Schemes have been used in connection with a wide range of businesses including retail banks, trust companies, publicly listed investment holdings companies, a variety of different investment fund structures, and debt issuing special purpose vehicles.
A scheme is a collective procedure. So the principal benefit of a scheme is that, if all the necessary hurdles are cleared and the Court approves the scheme, then the terms of the scheme become binding on all members of the relevant class of shareholders or creditors whether or not they: (a) received notice of the scheme; (b) voted at the meeting; (c) voted for or against the scheme; or (d) changed their minds afterwards.
The procedure to bring about a scheme is as follows:
- The company (or a creditor, shareholder or liquidator) applies to the Cayman Court to convene a meeting of the appropriate class of creditors or shareholders.
- The proposed terms of the scheme are submitted to the Court, with a full explanation of its terms and effect, the expected timetable, and draft proxies.
- At this first hearing the Court, among other things, will determine the constitution of the relevant class for voting purposes, consider whether the explanatory statement/memorandum contains sufficient information to enable to shareholders/creditors to take an informed decision on the proposals.
- If a majority in number of the class representing 75% in value present and voting at the meeting vote in favour of the scheme, the Court will be asked at a second hearing to approve the scheme.
- Dissenting shareholders or creditors are entitled to attend and be heard at this second hearing.
- If the Court approves the scheme it becomes binding on all members of the class.
There have been three notable developments in the Cayman Islands concerning the law relating to schemes over the past 18 months. The first was a change to the court rules and guidance in the form of a practice direction in 2002, and this was followed by two landmark decisions in 2003.
The change and new practice direction concern some of the practical issues arising out of the meeting and they reflect the Court's pragmatic approach to these issues. In effect, the rules and practice direction, in addition to simplifying and clarifying the procedure, now:
- enable the Court to convene appropriate meetings where, as is often the case with Cayman companies, the securities are listed and are held under a single global instrument;
- require the Court to make a preliminary determination as to the constitution of the relevant class. This requirement seeks to ensure that no proposed Cayman scheme unravels at the second hearing in the way recently highlighted in the UK;
- expressly allow the meeting(s) to take place overseas;
- ensure that the Court's directions are compatible with any relevant listing rules and/or takeover codes;
- provide that the entire Court timetable is established up front. This has had the effect of reducing the overall time taken to implement a scheme by several weeks. This is particularly important in takeover and merger schemes. Recent practice suggests that the overall time from the commencement of proceedings to final approval has been reduced to approximately 10 to 12 weeks for listed securities, less if not listed.
Re Euro Bank Corp
In this case the Court was asked to order the convening of meetings of shareholders and of creditors to consider replacing the depositors' entitlement to interest in this solvent liquidation with a much simplified entitlement. The principal question that the Court was asked to address was the test for constituting classes of depositors. The Cayman Court set out a modern, practical, commonsense and easily understood test, and its approach is consistent with that adopted, or expected to be adopted, throughout the UK and the Commonwealth.
The Court will constitute separate meetings when the persons' rights are so dissimilar that they cannot sensibly consult together with a view to their common interest. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting. The test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interests not derived from such legal rights. The fact that individuals may hold divergent views based upon their private interests not derived from their legal rights against the company is not a ground for calling separate meetings. The test is whether the rights that are to be released or varied under the scheme or the new rights that the scheme gives in their place are so different that the scheme must be treated as a compromise or arrangement with more than one class.
Re SIIC Medical Science Ltd
The Court was asked to order the convening of a meeting of shareholders of this Hong Kong-listed company to consider a takeover offer. The Court was faced with a number of unusual aspects with this scheme. The Court found that:
- a person other than the company and its shareholders may be party to the scheme; and
- the use of a scheme was not an improper means of avoiding a tender offer, which requires an acceptance by 90% of the affected shareholders before the company may compulsorily acquire the minority shares under Section 88.
The Court gave a wide construction to the statute and observed that the Court should not impose restrictions on the ambit of schemes where the legislature had not.
Schemes are versatile and flexible, and can give effect to a wide range of proposals that could not otherwise be implemented in a timely, practical and cost-effective fashion. In the same spirit, the Cayman Court recognizes the commercial need to ensure that the Court facilitates these needs at a procedural and substantive level, whilst ensuring that Cayman law remains consistent with and, in some respects, ahead of the developments in this area in the UK and elsewhere.