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SPhinX Scheme Lives to Fight Another Day

2013年 3月 27日

On 21 December 2012, the Chief Justice of the Cayman Islands handed down a ruling in the liquidation of the SPhinX group of companies clarifying the circumstances in which the court will allow a scheme of arrangement to proceed to sanction notwithstanding a failure to achieve the requisite statutory majorities at the first time of asking. 

Now in its seventh year, the SPhinX liquidation has raised a number of complex legal issues which, absent compromise among the investors, would require resolution by the Cayman court before any distributions could be made from the US$500m estate.  The significant depletion of assets in the liquidation to date has encouraged the investors in the 22 entities and 80 segregated portfolios making up the structure to work together to produce two schemes of arrangement since the liquidation began1, in the hope that a successful scheme would clear the path to an initial distribution.  Until recently, it seemed that any attempt to reach a compromise was doomed to failure in view of the fact that as many as 26 investors (or "blocking investors") – in most cases with responsibilities to their own shareholders – had the ability to veto any scheme because of the majorities they held in their respective scheme classes.

On 13 December 2011, only 20 of 22 court meetings achieved the statutory majorities to pass the scheme.  However, the Cayman court agreed to adjourn the sanction hearing on evidence that one of the failed votes was the result of an administrative error, and that the blocking investor in the second meeting had not been provided with sufficient information to make an informed decision, and there was a reasonable prospect that it would change its vote.

At a hearing in September 2012, the court was satisfied that it had jurisdiction to reconvene the two meetings, and it so ordered.  In October, to the disappointment of the 98% of the stakeholders who supported the scheme, the second meeting once more voted against the scheme.  In the weeks that followed, Deutsche Bank - the largest single stakeholder in the liquidation and one of the main proponents of the scheme - bought out the claim of the blocking investor and the only other investor in that class.  The scheme proponents then applied again to the court, arguing that the scheme should be allowed to proceed to sanction without the need for any further meetings, on the basis that Deutsche Bank had effectively removed the offending class.  The court had to consider, in particular, whether these events constituted a material change of circumstance such that some or all of the meetings needed to be reconvened before the scheme could proceed to sanction.

The Chief Justice held that a failure to reconvene further meetings would not create what was referred to in Re Equitable Life Assurance Society2 as a "blot on the scheme" sufficient to prevent the scheme from being sanctioned, and that no reasonable shareholder would change his decision as to how to act on the scheme if Deutsche Bank's acquisition of the shares had been disclosed to him (Re Minster Assets plc3).  He did so notwithstanding the suggestion that other investors might wish to reconsider their votes on the scheme from 2011 in the hope that they too could extract a sale of their claims to Deutsche Bank on advantageous terms.  The Chief Justice found that this would "neither be a reasonable nor a realistic view of how an investor might behave".  He was also careful to distinguish the case from Cadbury Schweppes plc v Somji4 , where a secret deal designed to induce scheme participants to vote in favour of a scheme needed to be disclosed to the other participants.

The decision is another example of the willingness of the Cayman court to adopt a strong commercial approach to the use of schemes of arrangement as a means to resolve complex areas of dispute between sophisticated investors.

1
The first scheme of arrangement failed to progress to a vote following a meeting of the blocking investors in April 2010.

2
[2002] EWCH 140 (Ch)

3
[1985] 1 BCLC 200

4
[2001] 1 WLR 615


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