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Common Reporting Standards Regulations are now in force in the Cayman Islands

The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations 2015 have now been passed by the Legislative Assembly and come into immediate effect.

 

A signatory to the Multilateral Convention of Mutual Administrative Assistance in Tax Matters, the Cayman Islands is a participating country which permits the jurisdiction to enter into agreements with other countries for the automatic exchange of certain tax information. As a result, local legislation was required to implement common reporting standards.

 

Cayman Islands' financial institutions that are affected by the Regulations will need to be proactive in adopting relevant procedures for 1st January 2016.

 

The regulatory framework will be further enhanced over coming months.

 

For further information, click here >

 

Companies (Amendment) Law 2015

The Ministry of Financial Services advises that The Companies (Amendment) Law 2015 will commence on Monday, 2nd November 2015.

 

This amendment law, which was passed in the Legislative Assembly on 12 August, requires companies to notify the Cayman Islands Registrar of Companies of changes in the information contained in the register of directors and officers, within 60 days of the change. It also establishes a CI$500 maximum penalty per company for a breach of that obligation, and an aggregate penalty of CI$2,500 where the same breach occurs in respect of five or more companies.

 

In preparation for the transition to the amendment law, the Registrar of Companies will not impose penalty fees for the late filing of changes to directors and officers of companies. This waiver period will commence on Tuesday, 1 September 2015, and end at 5pm on Friday, 30 October 2015.

 

 

Security for costs: Cayman Islands and foreign petitioners in winding up proceedings

The Cayman Islands' Court of Appeal has confirmed that there is no distinction between local and foreign corporate petitioners in terms of their ability to make applications for the payment of security for costs in winding up petitions: Re: Dyxnet Holdings v. Current Ventures Ltd & another.

 

Statutory reforms in 2009 under Part V of the Companies Law and the Companies Winding Up Rules, failed to expressly provide any power for the court to make an order for security for costs against a potentially impecunious foreign petitioner; although such a provision was available under the previous rules of court. This was in stark contrast to the position of an impecunious petitioner incorporated in the Cayman Islands which was provided for under Section 74 of the Companies Law.

 

At first instance, the Court concluded that without the express power to make such an order against a foreign company, it lacked any inherent jurisdiction to grant the application.

 

The Court of Appeal agreed that by itself, Section 74 did not extend the inherent power of the court to make an order for security for costs against a prospective impecunious foreign company. However, the court considered Article 16 of the Bill of Rights and determined that the court could not unjustifiably discriminate on any grounds such as national origin or other status.

 

Consequently, the Court of Appeal held that the only means of avoiding the discriminatory treatment between Cayman Islands and foreign companies with respect to applications for security for costs in winding up petitions, would be if the court retained an inherent jurisdiction to award security for costs against impecunious companies.

 

The High Court in the UK clarifies scope of duties owed by directors to shareholders

The High Court of England & Wales has struck out a number of claims brought by shareholders in what was, in 2008, Lloyds TSB against its directors.

 

The claims alleged that the directors owed fiduciary and tortious duties in the context of providing information to shareholders and in seeking their approval of a transaction which resulted in Lloyds TSB's takeover of HBOS in November 2008. The shareholders sought compensation for losses of upwards of £300 million.

 

The shareholders alleged that the directors had failed to disclose the true nature of HBOS's financial condition, including its receipt of funding of around £25.65 billion and $18 billion (£12 billion) from the Bank of England and a loan facility of around £10 billion from Lloyds TSB before the takeover.

 

In their particulars of claim, the shareholders submitted that as a result of the directors' "vastly superior knowledge" of the state of HBOS as compared with that of the Lloyds TSB shareholders, the directors had voluntarily assumed responsibility for:

  • the correctness of alleged advice and recommendations given to the Lloyds TSB shareholders about the merits of the proposed acquisition; and

  • the completeness and accuracy of all material information provided to the Lloyds TSB shareholders in respect of the proposed transactions.

 

The shareholders argued that in providing information on HBOS and in procuring or permitting the transactions to be put before the shareholders for approval, and in procuring completion of the transactions, the defendants owed the claimants a common law duty of care in tort and fiduciary duties. The alleged fiduciary duties included the duties:

  • to act in good faith;

  • to act in the best interests of the claimants and prevent them from suffering a loss;

  • not to mislead the claimants or conceal material information from them;

  • not to place themselves in a position where their duties to the claimants conflicted with their personal interests or their duties or obligations to any third party;

  • to act for a proper purpose; and

  • to advise and inform the Lloyds shareholders in clear, readily comprehensible terms.

 

The pleaded common law duties of care included a duty not to mislead or conceal information and a duty to ensure that information provided to the shareholders was complete and did not contain material omissions.

 

The defendants admitted that, insofar as they made any written statements or provided recommendations in the public documents provided to shareholders, they owed a duty to take reasonable care and skill. The defendants also could not dispute the duties mentioned in the third and sixth points above, and in any event suggested that these fell under a duty "in equity" as opposed to fiduciary duty. This duty was described by the judge as the "sufficient information duty" – a duty in equity to provide the shareholders with sufficient information so as to enable them to make an informed decision as to how to vote at the extraordinary general meeting in relation to the HBOS takeover.

 

The directors denied the other fiduciary duties on the grounds that company directors do not generally owe fiduciary duties to shareholders in the absence of a special relationship, and that there was no reason on the facts to conclude that the directors owed any equitable duty other than the sufficient information duty.

 

Decision

The court found for the defendants that the particular fiduciary duties as pleaded did not exists as between the Lloyds TSB directors to the shareholders.

 

It is trite law that company directors owe fiduciary duties to the company; this arises from the fact that directors are agents of the company. Directors do not generally – solely by being directors – owe fiduciary duties to shareholders, either collectively or individually. The court explained that this is supported by policy reasons; however, determining the position in each case also requires close analysis of the nature of a director's relationship with the company as compared with the shareholders.

 

Policy considerations
The court drew on the principle that only the company – not its members – can sue for wrongs done to the company, and that in those circumstances shareholders specifically cannot sue for losses that are merely derivative or reflective. Otherwise, directors would be liable to a torrent of "harassing" actions by minority shareholders. This would place an unfair burden on the directors. The court was also reminded of circumstances in which imposing a duty on directors to act in the best interests of shareholders could foreseeably place a director in a position of conflict with his or her primary duty to the company.(5)

 

Nature of relationship
The court recognised that there are circumstances in which a director could assume fiduciary duties to shareholders. However, this is dependent on establishing a 'special factual relationship'. This special relationship must be more than the usual relationship between director and shareholder, giving rise to a relationship of trust and confidence. In this case, it was not enough that the Lloyds TSB directors had "superior knowledge" of HBOS; since the directors directed and controlled Lloyds TSB's affairs, this would almost inevitably be the case.

 

To establish the range of fiduciary duties alleged by the shareholders, there would need to be some kind of personal relationship or particular dealing or transaction between the parties, such as is more commonly found in small, closely held companies. That was absent in the case of Lloyds TSB.

 

Finally, as well as considering the nature of the relationship between the directors and shareholders of Lloyds TSB, it was essential to identify the content of the accepted sufficient information duty and subsequently to analyse that duty to consider whether it should properly be characterised as fiduciary duty. In this respect, the court cited RAC Motoring Service Ltd ([2000] 1 BCLC 307): "The essence of the [sufficient information] duty is reasonableness or fairness in the circumstances having regards to the interests of the company as a whole" (emphasis added).

 

In light of this, the court explained that the wellspring of the sufficient information duty was common fairness; where directors invited shareholders to an extraordinary general meeting, fairness required the directors to explain clearly the purpose of that meeting.

There was nothing on the facts to suggest that the directors had undertaken to act for or on behalf of the shareholders in such a way as to:

  • give rise to a duty of loyalty or particular trust and confidence;

  • put the interests of shareholders first; or

  • prevent the shareholders from suffering a loss.

 

Regarding the duty to act in good faith, the court commented that 'good faith' is more often used as shorthand for the duty of a fiduciary to disclose material facts before entering into a transaction with its principal, which it is possible to breach without conscious or deliberate impropriety. However, this extended sense of a good-faith obligation was not found to form part of the sufficient information duty, which is a duty in equity rather than a fiduciary duty. As such, the first, second, fourth and fifth alleged duties set out in the particulars of claim (and above) were struck out.

 

Comment

This judgment clarifies the nature and reach of duties owed by directors. The court provided helpful guidance on circumstances in which directors can be found to have assumed fiduciary duties towards shareholders of a company. It seems, however, that those duties arise rarely – in particular, only where companies are small enough and there are personal relationships or specific transactions taking place between directors and shareholders. The general position (propped up by ongoing policy reasons) remains that directors, having a direct relationship with the company alone, will generally not have a close enough connection to the shareholders to give rise to fiduciary duties.