Discovery of Overseas Documents in Cayman s238 Litigation

The requirement to provide wide-ranging discovery relevant to the matters in dispute is a common and attractive feature of Cayman litigation.

That is never more true than in the context of merger appraisal disputes brought under s238 of the Companies Act, pursuant to which dissenting shareholders can seek a determination of the fair value of their shares in a Cayman company upon its merger or consolidation. The Cayman courts have emphasised the need for wide-ranging discovery to be provided by the relevant company for the purposes of assessing fair value.

But what happens when relevant documents are held in a foreign jurisdiction and are subject to restrictions which prevent the disclosure of that material?

This issue recently arose for determination in Re New Frontier Health Corporation (FSD 72 and 74 of 2022), where the Grand Court considered the relevant principles which should apply in these instances.

Re New Frontier Health Corporation involved a typical situation in Cayman s238 litigation. The relevant company was incorporated in the Cayman Islands but the management and operation of its business were undertaken in the People’s Republic of China. Following its merger, proceedings were commenced under s238 requiring the assessment of the fair value of certain dissenting shareholders’ shares.

Confronted with the usual discovery order, and having already obtained a series of lengthy extensions of time to comply, the company sought “a very unusual” open-ended extension of time for its discovery. The company contended that it could not disclose relevant documentation located in the PRC without obtaining the regulatory approval of the Chinese authorities pursuant to the provisions of the Data Security Law and the Personal Information Protection Law, asserting that it would face a real risk of prosecution in the PRC if it did so.

In resolving the tension that arose between Cayman and PRC law in determining this issue, Doyle J approved and applied the principles set out by the English Court of Appeal in Bank Mellat v HM Treasury [2019] EWCA Civ 449 and in subsequent English authorities.

In short, Bank Mellat held that the Court has jurisdiction to order disclosure regardless of whether compliance would or might entail a breach of foreign criminal law. The Court therefore has a discretion as to whether to order disclosure, and it should conduct a balancing exercise taking into account the actual risk of prosecution in the foreign state along with the usual considerations of comity.

Doyle J held that the requirements of the laws and interests of the Cayman Islands should override the requirements of the laws and interests of the PRC and he declined to grant the company any more time to comply with its discovery obligations.

Doyle J helpfully set out the following factors as being relevant in conducting the required balancing exercise:

Doyle J assessed (with the benefit of expert evidence as to PRC law) that on the facts there was a low to moderate risk of prosecution in the PRC. Applying that to the required balancing exercise, Doyle J noted the following in particular:

Doyle J clearly found it unsatisfactory that the company had dragged its feet in responding to the disclosure order. The learned judge was also unimpressed with the company’s efforts to comply with its discovery obligations, holding that these were “inadequate and simply not good enough”. He was not convinced that the company had done all it reasonably could to secure alternative access to the documents and held that the company had not taken a thorough or expeditious approach in complying with the disclosure order. Further, it had “not produced an acceptable explanation and good excuse for the delay”.

Accordingly, Doyle J concluded that the justice of the case required the disclosure of the material forthwith and refused the company’s application for a further extension of time.

Doyle J’s confirmation that the principles in Bank Mellat apply in the Cayman Islands is welcome (and follows the approach taken by the Grand Court in another s238 matter, Re Sina). His careful and detailed application of the principles provides a helpful illustration of the required balancing exercise on the facts of this case.

The decision also provides a salutary reminder of the importance of discovery in s238 proceedings, and the court’s expectations as to the conduct of the company in approaching and complying with the “heavy burden” of its discovery obligations.

The company sought and obtained permission to appeal the decision, but did not ultimately pursue that appeal given the approval of the PRC authorities was subsequently provided to permit disclosure.