Capital Partners Securities Company Ltd v Sturgeon Central Asia Balanced Fund Ltd

• Jurisdiction: Bermuda
• Judge: Kawaley, C.J.
• Judgment Date: 14 July 2017
• Court: Supreme Court (Bermuda)
• Docket Number: COMMERCIAL COURT 2016: No. 345
• Date: 14 July 2017

In The Supreme Court of Bermuda

Kawaley, C.J.

COMMERCIAL COURT 2016: No. 345

In the Matter of Sturgeon Central Asia Balanced Fund Ltd And In The Matter Of The Companies Act 1981

Between:

Capital Partners Securities Co Ltd

Petitioner

and

Sturgeon Central Asia Balanced Fund Ltd

Respondent

Mr Mark Diel and Ms Katie Tornari, Marshall Diel & Myers Limited, for the Petitioner

Mr Stephen Atherton QC of counsel and Mr Steven White and Mr Samuel Riihiluoma, Cox

Hallett Wilkinson Limited, for the Respondent

Cases mentioned:

Arnold v. Britton [2016] 1 All E.R. 1 – Ennismore Fund Management Limited v. Fenmore Consulting Limited [2016] U.K.P.C. 9 – Bratton Seymour Service Co Ltd v. Oxborough [1992] BCLC 693 – HSBC Bank Middle East and others v. Paul Clarke (as liquidator of the Oracle Fund Limited) and others [2006] U.K.P.C. 31 – McKillen v. Misland Cyprus Investments Limited [2011] E.W.H.C. 3466 – Aircare Ltd. v. Wyatt Sellyeh [2015] Bda L.R. 32 – Antaios Compania Naviera SA v. Salen Rederierna AB [1985] A.C. 191 – Culross Global SPC v. Strategic Turnaround Master Partnership Ltd. [2010] U.K.P.C. 33 – Loch v. John Blackwood Ltd. [1924] A.C. 783 – Re The Washington Special Opportunity Fund, FSD No. 151 of 2015, Judgment dated March 1, 2016 (unreported)

Petition seeking to wind-up company on just and equitable grounds-fund-rights of ‘Participating Shareholders’-construction of bye-laws-whether just and equitable grounds made out

Company Law - Winding Up — Construction of bye-laws — Whether the Petitioner has failed to make out a case for a just and equitable winding-up where the Capital Partners Securities Co. Ltd. has failed to prove that any conduct capable of giving rise to a justifiable lack of confidence in the conduct and management of the Company's affairs and the Fund's management's conduct did not cross the forbidden line so as to constitute a visible departure from the standards of fair dealing and the conditions of fair play which a shareholder was entitled to expect — Reasonable expectations of the petitioner as to what the core documents mean — Finding that the petitioner had failed to make out a case for a just and equitable winding-up as the Court rejected its central these that the Fund was acting in bad faith appropriated the rights of the participating shareholders to vote

(in Court) 1

Introductory

1 The Defendant (“the Fund”) was initially incorporated as a Bermuda exempted company on March 20, 2007 under the name of Kazakh Compass Fund, Ltd. The Fund is described as both a “closed-ended investment fund” (for Japanese regulatory purposes) but also as an open-ended fund (for Irish Stock Exchange purposes) with no automatic redemption rights. The Fund has primarily invested in natural resources in Kazakhstan. It is listed on the Irish Stock Exchange but its Participating Shares are not traded there. The shares were initially marketed in Japan.

2 The Petitioner (“CPS”) was the sole distributor of the Fund and involved in its establishment. CPS is the registered holder of 7,561,000 of the Fund's issued 7,600,000 Participating Shares. This shareholding is comprised of 7,242,000 Shares held on behalf of its clients (the underlying beneficial owners or “UBOs”) and 319,000 Shares held its own right. Prior to January 14, 2016, when 7,561,000 Participating Shares were transferred to CPS, Citivic Nominees held most of the shares. On June 27, 2016 2, this Court ruled that the Fund was required to rectify the register to give effect to that transfer.

3 On September 12, 2016, the Petition herein was presented seeking to wind up the Fund because:

• • the Fund's Core Documents were reasonably understood by the Participating Shareholders (including the Petitioner) to mean that the Fund would be wound up on December 31, 2015 or, at the latest December 31, 2017;

• • on May 8, 2014 the Board of Directors recommended adoption of the 2014 Amended Bye-laws which were adopted at the Annual General Meeting (“AGM”) by the Management Shareholder with Participating Shareholders excluded from the right to vote;

• • the Amended 2014 Bye-Laws removed the Participating Shareholders' right to vote for a winding up altogether and granted a right to redeem 5% of their shares every two years which represented replacing the right to exit the Fund by December 31, 2017 at the latest with a 40 year term investment;

• • these changes “amounted to a breach of the fundamental terms and/or underlying basis and/or understanding on which the Participating Shareholders invested in the Fund” (paragraph 54);

• • “the shareholders with the ultimate economic interest in the Fund wish the Fund to be wound up…” (paragraph 66).

4 The Fund's case in a nutshell was that (1) it was established from the outset as an unlimited term investment with the Management Shareholder (Sturgeon Holdings Limited-initially Compass Asset Management Ltd.) alone being entitled to exercise voting rights, and that (2) CPS as an insider could not claim ignorance of these facts and seek to impose a contrary interpretation on the Core Documents.

The Bye-Laws (original version)

Winding Up

5 The merits of the present Petition largely depend on the interpretation of Bye-Law 78 (“ WINDING-UP/DISTRIBUTION BY LIQUIDA TOR”):

• “ 78.1 The Shareholders may resolve by Special Resolution proposed at the Annual General Meeting held in the year 2014 to wind up and dissolve the Company with effect from 31 December 2015 subject to the right to extend the effective date of the winding up for a further two consecutive years but in no event shall such a period extend beyond 31 December 2017.

• 78.2 If no Special Resolution is approved at the Annual General Meeting pursuant to Bye-Law 78.1, the Company may hold a Special General Meeting to determine the date, if any, on which the winding up and liquidation of the Company shall occur.

• 78.3 If the Company is wound up, the liquidator may, with the sanction of a Resolution of the Shareholders and any other sanction required by the Act, divide among the Shareholders in cash or kind the whole or any part of the assets of the of the Company (whether shall consist of property of the same kind or not) and may for such purposes set such values as he deems fair upon any property to be divided as aforesaid and may determine how such division shall be carried out as between the Shareholders or different classes of Shareholders. The liquidator may, with the like sanction, vest the whole or any part of such assets in trustees upon such trust for the benefit of the contributories as the liquidator, with the like sanction, shall think fit, but so that no Shareholder shall be compelled to accept any shares or other assets upon which there is any liability.”

6 The pivotal points of construction are:

• (1) the meaning of “Shareholders” in Bye-Law 78.1 and whether or not Management Shareholders or Participating Shareholders are conferred the right to vote at an AGM or Special General meeting (“SGM”); and

• (2) whether Bye-Law 78 in its original formulation provides that a winding up shall in any event occur no later than year-end 2017.

7 The term “Shareholder” is given a broad generic meaning with a definition probably reflecting that found in most Bermudian bye-laws with no distinction between participating and non-participating shareholders. On CPS's construction, Bye-Law 78 conferred a right on all “Shareholders” to decide at an AGM or SGM whether or not the Fund should be wound up. The 2014 Amended Bye-Laws, which purportedly removed this voting right, wrongfully varied the share rights of Participating Shareholders without their consent, CPS contends. The Fund counters that the voting rights conferred by Bye-Law 78 can only be understood by reference to the general provisions defining the rights attaching to the two main classes of shares.

8 The draftsman of the Bye-Laws could have denied counsel and this Court the intriguing challenge of having to unravel this most difficult first limb of the construction conundrum by explicitly providing either (a) that the winding up vote would be approved by a ‘Special Resolution of the Management Shareholders’, or (b) by not using the term “Special Resolution” at all. CPS nevertheless submitted that this term required a super-majority of both Management and Participating Shareholders. Cloudiness rather than clarity as to meaning arises because:

• • “Shareholder” potentially includes both classes of shareholder;

• • “ ‘Special Resolution’ means a resolution requiring the consent of not less than three-fourths of the Shareholders passed in general meeting or, where required, of a separate class or separate classes of shareholders passed in a separate general meeting or in either case adopted by resolution in writing, in accordance with these Bye-Laws”;

• • although it is straightforward to infer that “Shareholder” in relation to general meetings ordinarily means the Management Shareholder entitled to vote at general meetings, the use of the term “Special Resolution” is bedevilling since the Bye-Laws appear to contemplate a single Management Shareholder (the Investment Manager) which makes the need for a three-quarters majority vote (the same threshold required to vary share rights) otiose. The only other requirement for a “Special Resolution” is found in Bye-Law 83, which explicitly refers to “Participating Shareholders”;

• • a decision on winding up is in general terms a matter in relation to which one would expect Participating Shareholders to be interested in.

Classes of Shares and Share Rights

9 Bye-Law 1.1 contains the following definitions which are relevant in this regard:

“ ‘Management Shares’ means ordinary voting, non-participating, non-redeemable shares of the Company entitling the holder(s) thereof to the rights and being subject to the restrictions set out in these Bye-Laws…

“‘Participating Shares’ means...