CAYMAN ISLANDS Law and Practice Contributed by: Shari Seymour, Kerry Ann Phillips and Michael Lockwood, Maples Group
8.5 Conflicts of Interest See 8.1 Principal Directors’ Duties , 8.2 Special or Ad Hoc Committees and 8.3 Business Judgement Rule . While the duty of directors of a Cayman Islands com - pany to avoid a conflict of interest is a strict one, almost invariably that duty will be extensively modified in the company’s constitutional documents. The valid - ity of such a modification has generally been upheld in Cayman Islands case law. Moreover, absent unu - sual circumstances, shareholders do not owe duties to each other nor to the company itself under Cayman Islands law, so conflicts of interest qua shareholder rarely arise. However, modification of the duty to avoid a conflict typically does not modify a director’s core fiduciary duty to act in the best interests of the company. So, while the mere existence of a conflict may not of itself be actionable, it has proved to be a relevant factor in claims against directors, insofar as it may provide a director with a motive to breach this core duty. The importance of properly managing conflicts of interests is a feature that is explored in virtually all merger appraisal litigation cases in the Cayman Islands, under Section 238 of the Companies Act. For example, in Trina Solar Limited (23 September 2020, CIGC), the Grand Court discussed at length the significance of the role of the special committee in dealing with mergers where some members of the board are conflicted, emphasising the importance of the special committee having robust (and properly documented) processes and procedures in assess - ing the deal. On appeal (4 May 2023, CICA), the CICA was critical of the adequacy of the evidence presented by the company on how the special committee had managed the deal process, including in relation to the preparation of management projections, control - ling engagement between company management and the buyers, and failing to engage in a market check exercise. The CICA noted that a special committee composed of independent, experienced directors is an important indicator of reliability for the deal pro - cess, and that the existence of a conflict of interest relating to the transaction will militate against reliance on merger price. Although the JCPC overturned the
CICA’s decision on the weight to be placed on the merger process evidence in that case, it did not dep - recate the importance of an independent special com - mittee and properly managing conflicts. In FGL Holdings (20 September 2022, CIGC), Sina , 51job and 58.com (the trial was in Summer 2024, but judgment is pending), the dissenting sharehold - ers each time raised issues of alleged conflicts and inter-relationships between members of the special committee, management, the buyer group, special advisers and contractual counterparties. In each case, these allegations were explored in great detail at trial and the Grand Court ultimately concluded (save for in 58.com , which is pending), based on the facts and evidence, that the merger process was not materially negatively affected by conflicts. Hostile tender offers are generally not supported by the Cayman Islands M&A regime. A statutory merger or a scheme of arrangement could never be truly “hos - tile”, as they require the consent of the target. For public companies where the constitutional docu - ments do not require director consent to transfers of shares, it is foreseeable that a tender offer could be successful without the support of the target. How - ever, this is very rare in practice, including because where a proposed acquiror holds that level of share - holding, it would likely be able to control the board in any event (in which case, a parent-subsidiary merger process would also be available, and is likely to be more attractive). 9.2 Directors’ Use of Defensive Measures Cayman Islands law does not prohibit the use of defensive measures by directors, subject to the direc - tors complying with their fiduciary duties. 9. Defensive Measures 9.1 Hostile Tender Offers However, particular care must be exercised when using the issuance of new shares to defend against a hostile potential takeover. The Privy Council held in Tianru i [2024] UKPC 36 that, since the power to allot and issue shares is a fiduciary power, it must only be
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