EVIC v Greater Europe

• Jurisdiction: Jersey
• Court: Royal Court
• Judge: J. A. Clyde-Smith,Jurats Le Breton,Crill
• Judgment Date: 01 August 2012
• Neutral Citation: [2012] JRC 146
• Date: 01 August 2012

[2012] JRC 146

ROYAL COURT

(Samedi)

Before:

J. A. Clyde-Smith, Esq., Commissioner, andJurats Le BretonandCrill.

Between

Euro Value Investment Company I

Plaintiff

and

Greater Europe Deep Value Fund II Limited

Defendant

Advocate N. M. Sanders for the Plaintiff.

Advocate M. H. D. Taylor for the Defendant.

Authorities

Companies (Jersey) Law 1991 (as amended).

In re FIA Leveraged Fund (Grand Court of the Cayman Islands) unreported 18/4/12.

Allen -v- Gold Reefs of West Africa [1900] 1 Ch 656 .

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Culross Global SPC Limited -v- Strategic Turnaround Master Partnership Limited [2010] UKPC 33 .

Grove -v- Baker [2005] JLR 348 .

Sibley (née Pavey) -v- Berry (née du Feu) [1992] JLR N-4 .

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Chartbrook -v- Persimmon Homes [2009] 1 AC 1101 .

Re Stewardship Credit Arbitrage Fund Limited [2008] 73 WIR 136 .

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Re Haven Gold Mining Company [1881] 20 Ch D 151 .

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Re Belmont Asset Based Lending Ltd (FSD 15/2009, unreported, 21 January 2010) .

Citco Global Custody NV -v- Y2K Finance Inc BVIHCV 2009/0020A (25 November 2009) .

Aris Multi-Strategy Lending Fund Ltd -v- Quantek Opportunity Fund Ltd BVIHCOM 2010/0129 (15 December 2010).

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Companies — application to have the defendant wound up under Article 155 of the Companies (Jersey) Law 1991.

THE COMMISSIONER:

1 This is an application by the plaintiff (“EVIC”) to have the defendant (“the Fund”) wound up under Article 155 of the Companies (Jersey) Law 1991 (as amended) (“the Companies Law”) or for alternative remedies under Articles 141 and 143 (unfair prejudice) of the Companies Law. The key issue in this case is whether a Redemption in Kind proposal put forward by the Fund and approved by a majority of the shareholders at an EGM held on the 26 ^th July 2011 is in breach of the terms of the Articles of Association of the Fund (“the Articles”) and the Prospectus.

2 The Fund is a Jersey incorporated closed end investment fund regulated by the Jersey Financial Services Commission. It is administered by Kleinwort Benson (Channel Islands) Corporate Services Limited and its directors currently comprise Mr Andrew John Pitter, a director of Kleinwort Benson (Channel Islands) Corporate Services Limited, Mr Allan Andersen, a Danish citizen with extensive experience in real estate investment, Miss Natalie Sullivan, an advocate of the Royal Court of Jersey and sole practitioner at Noirmont Consulting and Mr Andrew Wignall, a chartered accountant with extensive experience in investment funds specifically in real estate.

3 The investment manager is Greater Europe Funds Management Limited (“the Manager”) and the investment adviser is Wermuth Asset Management GmbH (“WAM”) a company incorporated in Germany, the principal person behind which is Mr Jochen Wermuth, a banker and economist with extensive experience in investment in Russia.

4 Apart from a nominal number of ordinary shares held by the Manager, the share capital of the Fund comprises participating shares of which 27% are held by EVIC and 12.28% by or on behalf of Mr Wermuth and staff at WAM. The participating shares are not redeemable at the option of the holders. We will refer to the holders of the participating shares as “the shareholders”.

5 EVIC is a special purpose company formed to enable wealthy clients of the Nomura Group in Japan to invest in the Fund through a structure that it is not necessary to detail. EVIC's investment is monitored by Nomura Funds Research and Technologies America Inc which we will refer to as “Nomura”.

6 The Fund was launched on 29 ^th June, 2007, for the purpose of investing primarily in Russia and the former Soviet Union related countries. It is an “Expert Fund” suitable only for those who are “Expert Investors” as defined by the Jersey Financial Services Commission.

7 The Prospectus provides for a life of the Fund of five years (unless extended) which is divided into two periods, the first, defined as the “Investment Period”, meaning the first three years and the second, defined as the “Wind-Down Period”, meaning the two years immediately following. The definitions are as follows:-

““Investment Period” means the initial 3 year period following the Initial Offer Date during which assets of the Fund will be invested and reinvested at the discretion of the Manager, or such shorter period as (a) the Manager shall determine on not less than 5 Business Days' notice to Shareholders or (b) Shareholders shall determine by way of Ordinary Resolution in the event of Mr Jochen Wermuth ceasing to be the managing partner of the Investment Adviser.

“Wind-Down Period” means the 2 year period (or such other period as the Directors may determine subject to the approval of the holders of Participating Shares representing not less than 75% of all Participating shares in issue at such time) immediately following the Investment Period during which investments will be realised and distributions made to the holders of Participating Shares.”

8 When setting out the principal features of the Fund, the Prospectus says this in relation to the Wind-Down Period:-

“After the Investment Period during which no Participating Share may be redeemed (save where compulsorily redeemed by the Fund as described below), the Manager shall over the Wind-Down Period look to realise the underlying investments of the Fund on the most favourable terms and effect distributions to Shareholders prior to formally winding up the Fund.”

“No Participating Shares may be redeemed during the Investment Period, save where compulsorily redeemed by the Fund as described below. Following the Investment Period, the Manager expects to redeem Participating Shares in the Fund on a monthly basis as and when investments are realised during the Wind-Down Period.”

9 The Prospectus provides that no income or gains or other distributions by way of dividend were to be expected. Under the heading “Redemptions”, the Prospectus provides that:-

“Participating shares are not redeemable at the option of Shareholders. During the Investment Period, the Manager intends to reinvest all of the fund's income and gains. During the Wind-Down Period the Manager shall endeavour to realise underlying investments at times and upon terms most favourable to the Fund and shall at the discretion of the Manager effect the redemption of Participating Shares at such times as the Manager considers appropriate so as to effect distributions to Shareholders of the proceeds of the realisation of such investments.”

“The Fund expects to pay redemption proceeds in cash and not in kind. However, redemptions in kind are permitted with the approval by [sic] an Ordinary resolution”.

10 The Articles contain the following relevant provisions in relation to redemption of Participating Shares:-

• “15.04 Amounts payable to a Redeeming Member in connection with the redemption of Participating Shares will be paid in cash unless the Directors determine to pay the proceeds of redemption (or any amount thereof) by way of delivery of assets in specie as described below.

• 15.05 Upon the redemption of any Participating Shares being effected pursuant to these articles, the Directors shall have the power to divide in specie the whole or any part of the assets of the Company and appropriate such assets in satisfaction or part satisfaction of the proceeds of redemption to one or more redeeming Member either pro rata or non pro rata.”

11 In terms of fees, the Prospectus provides that the Manager is entitled to a management fee at the rate of 2% of the aggregate subscription proceeds received by the Fund on the offer date, payable quarterly in advance, but during the Wind-Down Period, the management fee is the lower of the aggregate subscription proceeds and the net asset value, so that as redemptions are made out of realised investments, the management fee is reduced. Of that management fee, the majority is paid to WAM and to Mr Wermuth, the latter having, we are told, a sponsorship agreement with the Manager and WAM.

12 The Manager does not feature in the history of this matter and it would seem that the role of the Manager under the Prospectus as set out above was in practice undertaken by the Fund. No issue was taken in relation to this.

Background

13 The Court received detailed affidavits from Mr Masashi Kuwashima, Atsushi Ota and Mr Yosuke Aoyama on behalf of EVIC and Mr Pitter on behalf of the Fund and very extensive copy documentation. There was no application for any of the witnesses to be cross-examined. Much time was taken in dealing with the events that led up to the EGM on 26 ^th July, 2011, but for the purposes of this judgment it suffices to set out the key events, taken in the main from the affidavit of Mr Pitter.

14 The Fund was initially successful, but was hit by what was described as the dramatic sell-off in global markets and the Russian market in 2008. Prior to the commencement of the Wind-Down Period (the 30 ^th June,2010,), some 61% of the Fund was invested in illiquid private equity and real estate assets in Russia, which on the advice of WAM needed longer than the two year Wind-Down Period to...