D.E. Shaw Oculus Portfolios L.L.C. et Al v Orient-Express Hotels Ltd et Al

• Jurisdiction: Bermuda
• Judge: Ground, C.J.
• Judgment Date: 01 June 2010
• Court: Supreme Court (Bermuda)
• Docket Number: 4 of 2009
• Date: 01 June 2010

Supreme Court

Ground, C.J.

4 of 2009

D.E. Shaw Oculus Portfolios L.L.C. et al

and

Orient-Express Hotels Limited et al

Appearances:

Robin Dicker QC and Jai Pachai for the petitioners

Terence Mowschenson QC and John Riihiluoma for the respondents

Company law - Shares and shareholders — Trial of certain preliminary issues — Voting — Whether it was lawful for a subsidiary to exercise voting rights in respect to shares in a company held by it.

Ground, C.J.

1 This matter is a Petition under section 111 of the Companies Act 1981 (‘the Act’). That section allows any member of a company who complains that the affairs of the company are being or have been conducted in a manner oppressive or prejudicial to the interests of some part of the members, including himself, to apply to the Court for relief. The Petition was issued on 20th January 2009. It comes before me now in two ways:

• (i) for the trial of certain preliminary issues directed to be heard by an order of Kawaley, J; and

• (ii) on the respondents' application to strike out the Petition or parts of it.

At the hearing, I heard the preliminary issues first, and reserved judgment. I then went on straight away to hear the application to strike-out. I now give judgment on both.

2 By way of background the first respondent (‘the Company’) owns and operates various hotels and other tourism related ventures world-wide. Its common shares are divided into Class A and Class B shares. The A shares are publicly traded. The B shares are not. For most voting purposes each A share carries one tenth of a vote, and each B share carries a full vote, but they vote together as a single class. The second respondent (‘the Subsidiary’) is a wholly owned subsidiary of the Company, but it holds 18,044,478 of the Company's B shares, which carry approximately 70% of the combined voting rights of the two classes of shares, the result being that the Subsidiary can control the general meetings of the Company and carry most votes. It appears that the sole purpose of the Subsidiary is to hold and vote the B shares, and it carries on no other business (Thus, an SEC Schedule 13D filing of 22nd July 2002 stated “OE Holdings’ principal business is to hold shares of its parent, OEH.”).

3 The petitioners are investment funds, and together they hold almost 7% of the A shares, which were acquired during the course of 2007 at a total cost of almost $315M (The value of the A shares has since fallen substantially. Thus in the petitioners’ letter of 24th July 2008 the share price was said to have fallen 47% since 18th October 2007. By March 2009 they had fallen 95% from September 2007, although by February 2010 they had crept back up to “approximately 85% below their high point”: see paragraph 24 of Mr. O'Mary's second affidavit.). The petitioners came to the existing voting structure, in the sense that they acquired their shares in the knowledge of it. However, they object to the control which they say the structure gives to the directors of the Company, and in particular to the way in which it enables the directors to resist any attempt to remove themselves. They also object to certain business decisions of the board of the Company. The petitioners raised their concerns in letters of 13th February and 2nd May 2008, and also at the AGM on 4th June 2008 (‘the 2008 AGM’). When rebuffed they requisitioned a Special General Meeting (‘the SGM’) to consider resolutions to dismantle the voting structure by (1) treating the B shares as non-voting treasury shares under section 42B of the Act, and (2) by cancelling the B shares in accordance with section 42A of the Act. At the SGM, which was held on 10th October 2008, a substantial majority of the A shares present and voting were voted in favor of the resolutions. Nonetheless both resolutions were defeated by the use of the B shares.

BACKGROUND

4 For the purpose of the issues before me I do not think it necessary to go into any great detail in respect of the way that the current structure came about, but in broad overview in early 2000

The Company, which at that time was itself wholly owned by Sea Containers Ltd. (“SCL”), undertook a restructuring. It reorganized its share capital into the A and B shares, and initially all the share in both classes continued to be held by SCL. For a period there were alternative proposals as to how the shares might be held, one involving the acquisition of the B shares by four subsidiaries, and the other involving their acquisition by the Subsidiary alone. In the event the Subsidiary was given an option to acquire the B shares, which it then exercised on 22nd July 2002, paying $180,444.78 for the B shares, which were transferred to it from SCL.

5 The money for the purchase was provided by a cheque drawn on the Company. The respondents' case is that the purchase money was provided by the Company out of an intercompany debt of $30M owed by it to the Subsidiary, thereby reducing that debt (See paragraph 21 of Mr. Hetherington's first affidavit). This is evidenced by a letter of 22nd July 2002, from the Subsidiary, which read:

“We refer to our intercompany credit balance with you in excess of $30 million. Out of this amount, we request that you issue your check in the amount of $180,444.78 payable to Sea Containers Ltd.”

However, the petitioners plead that the Company provided the money for the purchase of its own shares, and has declined to admit the respondents' explanation. To the extent that it is necessary for me to decide this point for the determination of the preliminary issues, I accept the respondents' evidence on it, there being nothing to the contrary.

6 At the time the structure was established, SCL was the sole shareholder in the Company. The respondents place great weight on that, for reasons to which I will return. Subsequently there was an Initial Public Offering (‘the IPO’), under which 11,500,000 (6,500,000 of these came from SCL, and 5,000,000 from the Company) A shares were sold to the public, and there have been several subsequent public offerings. The shares are listed on the New York Stock Exchange under the symbol OEH, and the Company makes routine filings with the United States Securities and Exchange Commission (‘the SEC’).

7 At the time of the IPO the Company issued a prospectus dated 9th August 2000. This was prior to the restructuring, but it gave notice of the proposals and of their effect. In particular it flagged the voting power of the B shares, and the fact that they would be held by subsidiaries, who would have overlapping directorships with the Company. It warned:

“Those directors, should they choose to act together, will be able to control substantially all matters affecting Orient-Express Hotels, including those listed in the preceding paragraph, and to block a number of matters relating to any potential change of control of Orient-Express Hotels.”

The matters ‘listed in the preceding paragraph’ described the matters over which SCL retained control as long as it retained the B shares, and they included, at the top of the list:

“the composition of our board of directors, and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers.”

8 There was a second public offering in August 2001, this time of 5,000,000 A Shares, and it contained similar warnings. The present structure was then put in place on 22nd July 2002, when the subsidiary exercised its option to acquire the B Shares. The first prospectus after that was filed with the SEC on 18 November 2002, and it recorded the position as follows:

“On July 22, 2002 a subsidiary of Orient-Express Hotels exercised an option entered into in connection with its initial public offering to acquire from Sea Containers 18,044,478 class B common shares of Orient-Express Hotels for an aggregate purchase price of $180,445. Accordingly, the share-owning subsidiary of Orient-Express Hotels holds common shares of Orient-Express Hotels representing about 77.3% of the voting power for most matters submitted to a vote of its shareholders, and the share-owning subsidiary, together with the directors and officers of Orient-Express Hotels, holds common shares of Orient-Express Hotels representing about 77.5% of the combined voting power for most matters submitted to a vote of our shareholders. In general holders of Orient-Express Hotels' class A common shares and holders of its class B common shares vote together as a single class, with holders of class A common shares having one-tenth of one vote per share and holders of class B common shares having one vote per share. Therefore so long as the number of outstanding class B shares exceeds one-tenth the number of outstanding class A common shares, the holders of class B common shares could control the outcome of most matters submitted to a vote of the shareholders. Under Bermuda law, common shares of Orient-Express Hotels owned by its subsidiary will be deemed to be outstanding and may be voted by that subsidiary.

The manner in which the subsidiary votes its commons shares will be determined by the six directors of the subsidiary, three of whom are also directors or officers of Orient-Express Hotels, consistently with the exercise by those directors of their fiduciary duties to the subsidiary. Those directors, should they choose to act together, will be able to control substantially all matters affecting Orient-Express Hotels, and to block a number of matters relating to any potential change of control of Orient-Express Hotels. See “Description of Common Shares — Voting Rights”.

9 After that SCL continued to dispose of its A shares, completing that process by November 2005. There continued to be prospectuses and SEC filings, all of which made full disclosure of the structure in similar terms to those quoted above. In the affidavit evidence the petitioners seem...