From 31 August 2022, members’ schemes of arrangement pursuant to section 86 of the Companies Act of the Cayman Islands are not subject to the ‘headcount test’ being met, bringing further certainty to the process.
The amendment to section 86 of the Companies Act was gazetted on 21 October 2021 and came into effect on 31 August 2022, abolishing the ‘headcount test’ in members’ schemes of arrangement, typically used to privatise companies or as an alternative to the Cayman merger process. As a result, companies contemplating a members’ scheme of arrangement will now only require the approval of 75% in nominal value of the members, or class of members, present and voting either in person or by proxy at the requisite scheme meeting and no longer require the majority in number of members to approve the scheme. Creditors should keep in mind that the ‘headcount test’ for creditors’ schemes of arrangement has not been abolished and will need to be satisfied to implement a scheme. A new section 86(2A) of the Companies Act now provides:
“If seventy-five per cent in value of the members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court, be binding on all the members or class of members, as the case may be, and also on the company or, where a company is in the course of being wound up, on the liquidator and contributories of the company.”
Given how the register of members of listed entities are composed, including the use of central depositories and corporate nominees, the requirement for the approval of the scheme by the majority in number representing 75% in value of the members, or class of members, had resulted in minority shareholders being able to effectively veto schemes notwithstanding a vast majority of members in value were in favour of the scheme through a common nominee (which counted as one shareholder, although it represented a large number of shareholders). This difficulty created headaches for companies and M&A lawyers negotiating scheme documents and often required creative solutions such as share splits to deal with this issue, which will no longer be required.