In Cayman Islands Section 238 litigation – disputes as to the fair value of shares held by shareholders of a company that has been privatised – dissenting shareholders are turning to foreign courts to obtain parallel discovery in support of their claims. In two recent decisions, dissenters have relied on US Section 1782 discovery and letters of request to the Hong Kong Court to seek additional documents in those proceedings.
Section 1782 of Title 28 of the United States Code allows parties to litigation outside the United States to obtain evidence, in the form of documents or a deposition, from a person in the US for use in the non-US proceedings. The relevance of Section 1782 to Cayman Islands litigation was established in 2009 in the (non-section 238) case of Phoenix Meridian Equity Ltd.v. Lyxor Asset Management SA [2009 CILR 553], in which the Court of Appeal gave permission for Section 1782 depositions to take place in New York of two officers of a US company affiliated to the defendant.
However, Justice Ian Kawaley was critical of the dissenting shareholders’ use of Section 1782 in a Section 238 context in the matter of Nord Anglia Education Inc (FSD 235 of 2017 – IKJ, unreported, 21 December 2018). He commented that they had “embarked on a frolic of their own by seeking relief from foreign courts, purportedly in aid of the present proceedings, without any involvement on the part of this court” and went on to state that the foreign application ought to have been incorporated into the directions timetable. It may accordingly be advisable for parties contemplating Section 1872 relief to seek directions from the Court first as to the timing of the application and the uploading of any documents received to the discovery data room.
Letters of request, also known in some jurisdictions as letters rogatory, are a common law mechanism whereby a common law judge formally writes to a judge in another common law jurisdiction to ask for discovery assistance in relation to a person located in the latter jurisdiction. Letters of request can be used to obtain evidence either by oral examination of a witness or through the production of documents, albeit the latter is likely to be more relevant for the purposes of Section 238 proceedings.
In the Section 238 case In the matter of Xiaodu Life Technology Ltd (FSD 227 of 2017 – IKJ, 28 April 2021), Justice Kawaley granted the dissenters’ application for the issuance of a Letter of Request to the Hong Kong Court for the discovery of documents held by a Hong Kong-incorporated affiliate of the company, including emails and documents stored on servers that were outside the company’s control. The principles applied by Justice Kawaley in granting the application included that the request must not be a fishing expedition and that the documents sought must be directly material to matters in issue in the proceedings.
It is clear that dissenting shareholders do not lack the confidence to pursue innovative and novel methods for obtaining documents. Future applications for parallel discovery may, however, face increasing resistance on the part of companies on grounds such as relevance and proportionality. There may also be scope for companies to seek foreign assistance themselves against dissenting shareholders, where there are concerns over the adequacy of dissenter discovery.