Off with his head! An offshore perspective – Is the “headcount test” heading for the guillotine?

A Cayman Islands scheme of arrangement is a powerful and flexible tool frequently used to implement debt restructurings, corporate reorganisations and takeovers in circumstances where it is not possible or practical to obtain consent from all affected stakeholders. The relevance of the headcount test – the statutory requirement that a Cayman Islands scheme of arrangement has to be approved by a majority in number in addition to being approved by at least 75% in value of those voting at the scheme meetings before the Grand Court of the Cayman Islands (the “Cayman Court”) has jurisdiction to sanction such scheme – in the context of modern restructurings has become subject to increased debate as to whether it should be abolished. 

Whilst originally implemented as a minority protection mechanism aimed at protecting smaller shareholders from decisions pushed through by larger shareholders with more significant stakes (and more significant financial resources), there is an argument that in today’s world, the headcount test is no longer fit for purpose. This article examines the concerns with respect to the continued application of the headcount test and considers whether, in comparing the approaches taken in certain other jurisdictions, it is now time for reform in the Cayman Islands.

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This article first appeared in the International Insolvency & Restructuring Report 2019/20.

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