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

• Jurisdiction: Bermuda
• Judgment Date: 14 July 2017
• Date: 14 July 2017
• Docket Number: Commercial Jurisdiction 2016 No 345
• Court: Supreme Court (Bermuda)

[2017] Bda LR 78

In The Supreme Court of Bermuda

Commercial Jurisdiction 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 M Diel and Ms K Tornari for the Petitioner

Mr S Atherton QC and Mr S White and Mr S Riihiluoma for the Respondent

The following cases were referred to in the judgment:

Arnold v Britton [2016] 1 All ER 1

Ennismore Fund Management Ltd v Fenmore Consulting Ltd [2016] UKPC 9

Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693

HSBC Bank Middle East and ors v Paul Clarke (as liquidator of the Oracle Fund Ltd) and ors [2006] UKPC 31

McKillen v Misland Cyprus Investments Ltd [2011] EWHC 3466

Aircare Ltd v Sellyeh [2015] Bda LR 32

Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191

Culross Global SPC v Strategv Turnaround Master Partnership Ltd [2010] UKPC 33

Loch v John Blackwood Ltd [1924] AC 783

Re The Washington Special Opportunity Fund (unreported, 1 March 2016) Cayman Islands Grand Court

Winding-up petitioner — Just and equitable grounds — Fund — Rights of participating shareholders — Construction of bye-laws

JUDGMENT of Kawaley CJ

Introductory

1. The Defendant (“the Fund”) was initially incorporated as a Bermuda exempted company on 20 March 2017 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 14 January 2016, when 7,561,000 Participating Shares were transferred to CPS, Citivic Nominees held most of the shares. On 27 June 20161, this Court ruled that the Fund was required to rectify the register to give effect to that transfer.

3. On 12 September 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 31 December 2015 or, at the latest 31 December 2017;

• • on 8 May 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 31 December 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 LIQUIDATOR”):

“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:

• i. 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

• ii. 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 non-voting participating shares in the capital of the Company entitling the holder(s) thereof to the rights and being subject to the restrictions set out in these Bye-Laws and where the context so permits includes Classes, Series of Classes and fractions of Participating Shares…”

10. Bye-Law 3 (“RIGHTS OF SHARES”) provides, so far as is relevant for present purposes, as follows:

“3.1 Management Shares

The holders of Management Shares

3.1.1 shall be entitled to receive notice of, and attend and vote at, general meetings of the Company;

3.1.2 shall not be entitled to any dividend or other distribution;

3.1.3 shall, in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for a re-organisation or otherwise or upon distribution of capital, be entitled to receive the amount of capital paid up on their Management Shares after payment of the capital paid up on the Participating Shares to the holders thereof, but, shall not be entitled to participate further in the surplus assets of the Company; and

3.1.4 shall not be entitled to redeem their Management Shares nor shall their...