The Grand Court of the Cayman Islands last week handed down judgment in the closely followed case of Medley Opportunity Fund Ltd v Fintan Master Fund Ltd and Nautical Nominees Limited, says Peter Cockhill and Rachael Reynolds of Ogier.
Medley Opportunity Fund Ltd is a Cayman hedge fund, which, along with numerous other hedge funds in 2008 and 2009, restructured its affairs in response to the liquidity squeeze caused by the global economic crisis and a tide of redemption requests.
The shareholders agreed to a restructuring arrangement under which redemption rights were limited to quarterly pro rata payments during the course of an orderly run off of the fund's assets, by way of partial redemption of shares.
A dispute arose earlier this year when one of the fund's investors, Fintan Master Fund Ltd, which held shares in Medley through a nominee entity, Nautical Nominees Limited, sought to submit a redemption request for the entirety of its interest in the fund, and sought a cash payment in priority to all other investors, notwithstanding Nautical's agreement to be bound by the restructuring.
The fund, faced with Fintan's demand for cash, and mindful of its obligations to its other shareholders who had, like Nautical, agreed to the pro rata payment, sought declaratory relief from the Cayman court as to the proper construction of the restructuring agreement and the effect of Nautical's redemption request, and Fintan's side letter.
A few days after the Cayman proceedings were commenced, Fintan also commenced proceedings in New York on substantially the same issues. Following a successful application by the fund for an anti-suit injunction, Fintan was restrained by the Cayman court from continuing or prosecuting its claim in New York until the Cayman proceedings had been resolved.
The Court held that no redemption requests could be entertained from Nautical or any other member who signed up to the restructuring agreements.
Fintan and Nautical sought to argue that the fund had effectively treated them as one and the same entity and had communicated with Fintan as though it were the shareholder in the fund.
Mr Justice Quin firmly rejected that contention, and held that Fintan and Nautical as separate legal entities, having chosen to structure the shareholding in the way they had, had indivisible rights. He observed that the main purpose of any nominee agreement is to create two distinct and separate legal entities, and even though the fund may have treated the two defendants as one entity, this was not sufficient to create an estoppel by convention.
Ogier’s Cockhill and Reynolds say that even though the case turned on its own facts, it is a good example of the Cayman court ensuring that shareholders are treated justly and equitably when it comes to construing a restructuring arrangement. Such agreements, by necessity, require some waiver of rights by shareholders as a means to avoid having to resort to the more extreme options of suspending redemptions or an expensive liquidation. This case shows that the Cayman courts will be disinclined to allow a single shareholder to steal a march on everyone else.