Investing in a Cayman Islands company through a nomineeDownload pdf
Investing and holding shares in a Cayman Islands company through a nominee or custodian brings with it many advantages, the most notable one being the anonymity or privacy retained by the investor. The Cayman Islands legal framework offers a high degree of commercial confidentiality; the Register of Directors and Officers and the Register of Shareholders of exempted companies, for example, are not available for inspection by members of the public. That being said, there are also shortcomings to consider when investing in such a way, from issues associated with an investor’s lack of control in the process, and limitations on the ability to issue proceedings in an appropriate case, as well as recent legislative encroachments on the confidential manner of investment in the Cayman Islands.
This article provides a refresher on the pros and cons of investing in a company in the Cayman Islands (as opposed to an exempted limited partnership, to which different considerations may apply) through a nominee, before discussing two recent decision of the Cayman Court, Chia Hsing Wang v Credit Suisse & Ors and a related case In the Matter of Principal Investing Fund Ltd 1 Ltd, Long View Ltd, and Global Fixed Income Fund 1 Ltd, which provide guidance on the relief which the Court may grant the beneficial owner of shares in a Cayman Islands company, who wishes, but does not have standing, to bring a just and equitable winding up petition against the company.
Recent inroads into privacy – Beneficial ownership regime
It is clear that one of the main attractions of investing through a nominee is the provision it affords an investor to retain anonymity. Recent Cayman Islands company beneficial ownership legislation represents a move towards greater transparency however, insofar as certain companies are now required to maintain details of their beneficial owners and relevant legal entities on a newly constituted ‘beneficial ownership’ register. While such registers are not publicly available, they can be searched in limited circumstances by the competent authority in the Cayman Islands.
Under the beneficial ownership legislation, which came into force on 1 July 2017, all companies, exempted companies, exempted segregated portfolio companies, special economic zone companies, and limited liability companies are required to maintain details of their beneficial owners and relevant legal entities on a beneficial ownership register. A ‘beneficial owner’ for the purposes of the legislation is a natural person who directly or indirectly: holds 25 per cent of more of the shares or membership interests in a company; holds 25 per cent or more of the voting rights in the company; or holds the right to appoint or remove a majority of the board of directors of a company.
The Cayman Islands government has established a secure platform through which access may be provided to information on all registers maintained on behalf of companies caught by the legislation. However, the platform is not open to the public and is only accessible by the competent authority appointed by the government to verify the accuracy of information or if a lawful request is made by a regulatory body. Whilst the identifies of beneficial owners are by no means public under this new regime, it does represent a significant departure from the level of confidentiality previously enjoyed by such investors.
Limitations on issuing proceedings
Under common law, traditionally, absent statutory intervention, a person who is not a party to a contract cannot enforce the terms of that contract – even in circumstances where the contract is made for that party’s benefit. This is the so-called ‘privity of contract’ rule and it means that investors do not have standing to bring proceedings against any third parties with which the fund (in which they invest) has entered into an agreement. These rules of privity have been diluted by the Contracts (Rights of Third Parties) Act enacted in the Cayman Islands in 2014, insofar as third-parties may enjoy benefits under contracts but only where the contractual parties agree that the third-party may specifically enforce – akin to an ‘opt in’ system which is intended to provide among other things, greater certainty as to circumstances in which third-parties can enforce contractual provisions. Where a contract provides for third parties to enjoy rights under the terms of the contract it follows that the third-party would be able to seek all available remedies in seeking to enforce their rights under the contract subject to any contractual limitations and exclusions.
An investor should also bear in mind the provisions of s94 (3) (b) of the Cayman Islands Companies Act concerning contributories’ winding up petitions. Under s94 (3) (b), a contributory is not entitled to present a winding up petition unless the shares in respect of which the person is a contributory were originally allotted to that person, or have been held by the person and registered in that person’s name for a period of at least six months immediately preceding the presentation of the winding up petition.
The effect of this section is twofold in this context: the shares must be registered in the persons’ name to issue a contributories winding up petition, that is the beneficial owner cannot on its own behalf take action; and the shares must be held for at least six months, therefore where an investor changes nominee for whatever reason, the new nominee cannot take action on the investor’s behalf until they have been registered for six months. In practical terms, this of course also precludes the investor from avoiding this consequence by procuring the transfer of the shares into its own name to protect its interests through litigation in the event an urgent need arises.
In effect, when investing through a nominee, the investor is forfeiting legal standing to take immediate action in the event that an issue arises that warrants such a response. The nominee’s attitude (usually informed by their contractual obligation to do) in bringing proceedings in the interests of the underlying investor is of key importance and issues arise when adequate protections are not built into documents such as nominee agreements. Whilst it is possible in certain circumstances for the investor to bring proceedings if the nominee has refused to do so, for example by joining the nominee as a defendant, these circumstances will not extend to conferring standing on an investor who invests through a nominee to bring winding up proceedings against the company in the Cayman Islands.
Care should be taken therefore to ensure documents confer express obligations on nominees to act, and how, upon certain specified triggers. Items such as indemnities and exculpation clauses in favour of the nominee will no doubt be robust and should also be carefully reviewed, as well as terms such as the level of discretion afforded the nominee in the actual conduct of the litigation. Having these items agreed at the outset will avoid delays caused by negotiations with the nominee when events occur which necessitate proceedings.
Other risks of investing through a nominee include the potential misappropriation of assets by the nominee; improper management practices being carried out; the ignoring of or refusal of nominees to carry out of instructions, or the potential for delays in receiving dividends or other payments owed in the event of insolvency of the nominee. Therefore, an investor should carry out careful due diligence before choosing its nominee.
Remedies available to investors
Aside from safeguards which can be built into transaction documents for the protection of investors, a key and sometimes overlooked remedy is the power of the Court to appoint a receiver under s11 of the Grand Court Act (2015), such power being exercisable when it is considered by the Court to be just and convenient and on such terms as the Court sees fit. This provision was relied on recently in the related cases of Wang v Credit Suisse and Principal Investing Fund which provide a useful reminder of steps which can be taken which would otherwise not be available to an underlying investor.
This matter concerned an investor, Mr Wang and his substantial beneficial ownership of shares in three Cayman Islands funds, as well as other interests in in a British Virgin Islands fund. Credit Suisse London Nominees Limited held the shares in these Cayman Funds ultimately for Mr Wang as beneficial owner.
The Cayman Funds and the BVI Fund (together, the Floreat Funds) were each established by Floreat Merchant Banking Services Limited and were under the control of several principals, one of whom Mr Wang had trusted implicitly, allowing him and the Floreat Funds a great deal of autonomy in the manner in which they conducted matters on his behalf and invested his money – some USD 500 million of it in total. Subsequently however there was a complete breakdown in the relationship, with Mr Wang claiming, amongst other things, that the principals: used substantial sums invested by him in one of the Cayman funds to buy and enjoy at their personal residences and offices, nearly 100 expensive art pieces valued at over USD 10 million; caused one of the other Cayman funds to invest significant sums in notes issued by a Floreat affiliate entity which generated disproportionate fees for its Floreat-owned investment manager; and caused investments in funds that benefited certain other entities that were owned by certain Floreat principals.
Mr Wang had also become concerned that directors of the Cayman Funds would be coerced into wrongly and unfairly exercising powers to sell and/or compulsorily redeem shares which Mr Wang ultimately beneficially owned in the Cayman funds with a view to undermining legal proceedings brought by or on its behalf.
Ex parte application for appointment of receivers
In September 2021, Mr Wang sought an ex parte order for the appointment of receivers over the shares he beneficially owned in the Cayman funds. and sought: an order that receivers be appointed over the relevant shares in each of the Cayman funds and for the receivers to pursue, in the name of Credit Suisse, winding-up proceedings on the just and equitable ground and applications for provisional liquidators to be appointed over each of those funds in the meantime.
The Court held that, in the circumstances, it was just and convenient that receivers be appointed over the shares to give Mr Wang a “springboard from which to launch an application for the appointment of provisional liquidators”. The appointment was made on the basis that it would give the receivers legal standing to take action to appoint provisional liquidators and to seek a winding-up order which Mr Wang, as a beneficial owner rather than a registered owner of the shares, could not do himself.
Ex parte application for appointment of provisional liquidators
Later the same month, in the Principal Investing Fund case, the Court heard three urgent ex parte summonses filed in the name of Credit Suisse seeking the appointment of provisional liquidators over the Cayman funds. It was argued that there were very real risks that if provisional liquidators were not urgently appointed: the Cayman funds’ assets would be further diminished; Mr Wang would continue to be oppressed; and there would be further misconduct and mismanagement, including a risk that records might be destroyed.
In making its determination the Court declared itself satisfied that the applicants’ case fell within the grounds prescribed under s 104 of the Companies Act for seeking the appointment of provisional liquidators pending determination of a winding up petition, namely: proper presentation of the winding up petition; standing to make the application- the Court found Credit Suisse had standing to make the application as contributory; there existed a prima facie case for making a winding up order; and the Court was satisfied that the appointment was necessary to prevent dissipation or misuse of the company’s assets and possible oppression of minority shareholders.
It is worth pointing out that the Cayman Court has very recently confirmed (see the 12 December 2021 judgment in the case of BAF Latam Credit Fund) that where a just and equitable petition is brought by a nominee shareholder, it is appropriate for the Court to look to the position of the underlying beneficial owner, rather than the position of the nominee, when considering whether there has been an objectively justified loss of trust and confidence in the management of the company’s affairs sufficient to ground the making of a winding up order.
As can be seen, whilst the benefits are obvious, investors should proceed with caution when investing in Cayman Islands companies through a nominee. When considering the principal objectives in structuring an investment in such a way, an investor should ensure they: check whether they will likely be within scope of the relevant beneficial ownership regime; check and negotiate carefully the terms of nominee agreements to ensure they build in sufficient protections affording them the ability to press for litigation in an appropriate case; and be mindful of the limitations on the ability to sue to protect their interests in case of wrongdoing in the structure in question. That said, the ability to rely on the Court’s inherent jurisdiction to appoint a receiver in an appropriate case is certainly a useful tool which should provide reassurance to an investor investing through a nominee that a certain degree of control can be preserved.
This article was first published by Commercial Dispute Resolution.