In a recent article I had the pleasure of co-authoring for International Corporate Rescue (Volume 16, Issue 4), it is noted that many commentators have queried the relevance and necessity of the headcount test for schemes of arrangement in the context of modern restructurings.
With adequate protections already built into the statutory Cayman scheme process, and given the current approach is inconsistent with modern company law (e.g. voting procedures and how interests in shares and debt instruments are frequently held in today's world that is, the legal and beneficial interests divided and held via custodians, trustees and/or numerous intermediaries etc.), it seems that the headcount test in the Cayman Islands is ripe for reform.
This is particularly the case where an increasing number of jurisdictions such as Hong Kong, Singapore, Australia, New Zealand (which, like the Cayman Islands, imported the scheme of arrangement from English legislation) have adopted a modified approach to the headcount test (notably for some jurisdictions, the relevant court's ability to dispense with the headcount test in certain circumstances).
A practical compromise for the jurisdiction would be to remove the headcount test in the context of shareholder schemes of arrangement and include a statutory provision for the Grand Court of the Cayman Islands to have a discretion as to whether to dispense with the headcount test.
Notwithstanding the continued application of the headcount test (noting that the Cayman Court has the unique ability to 'look through the register' in determining whether the relevant statutory majorities have been met), the Cayman Islands scheme of arrangement remains a powerful and flexible tool that frequently delivers successful cross-border restructurings.
One aspect of the Cayman Islands’ scheme of arrangement – the headcount test – which is 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 meeting(s) before the Cayman Court has jurisdiction to sanction such scheme – has however been the subject of much debate. Many commentators query its relevance in the context of modern restructurings. 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.