In re GFP Dunas Partners Holdings, Inc - Judgment

¶ Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 1 of 15 IN THE GRAND COURT OF THE CAYMAN ISLANDS 1 HOLDEN AT GEORGE TOWN, GRAND CAYMAN 2 3 Cause No: FSD 218 of 2010 4 5 6 IN THE MATTER OF SECTION 94 OF THE COMPANIES LAW 7 (2010 REVISION) 8 9 AND IN THE MATTER OF GFP DUNAS PARTNERS HOLDINGS, 10 INC 11 12 13 Appearances: Mr. James Corbett, Q.C., instructed by 14 Mr. Graeme Halkerston and Mr. Rupert Coe of 15 Appleby for the Petitioner 16 17 Mr. James Thom, Q.C., instructed by 18 Mr. Michael Makridakis of Ogier for the 19 Respondent 20 21 Before: Hon. Justice Henderson 22 23 Heard: December 15 – 17, 2010 24 25 26 JUDGMENT 27 28

¶ [1] The petitioner, GFP Dunas Holdings, Inc (“GFP Dunas”) is a voting shareholder 29 and director of GFP Dunas Partners Holdings, Inc. (“the Company”). The 30 Petitioner has on 1st October 2010 presented a petition to wind up the Company 31 pursuant to s.92(e) of the Companies Law (2010 Revision) on the ground that it is 32 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 2 of 15 just and equitable that it should be wound up. The Company was incorporated in 1 the Cayman Islands in 2007. The petition is opposed by the other principle 2 shareholder and director of the company, Nexstar ESM Holdings (Cayman) Ltd. 3 (“Nexstar”). 4 5

¶ [2] Nexstar has on 7th December 2010 presented a cross-petition to wind up the 6 Company pursuant to Part V of the Companies Law (2010 Revision) and as an 7 alternative seeks relief under s. 95(3) of the Companies Law (2010 Revision). 8 9 Background 10 11

¶ [3] The Company is a joint venture vehicle for a quasi-partnership between Nexstar 12 and GFP Dunas, both of which are Cayman Islands companies. Nexstar is the 13 Class A shareholder and holds a majority shareholding of approximately 66% of 14 the Company. GFP Dunas is the Class B shareholder and holds approximately 15 34% of the Company. Nexstar and GFP Dunas both have representatives on the 16 board of directors of the Company. The ultimate underlying asset of the Company 17 is a power company in Peru. It is common ground that the investment strategy at 18 the outset was to enhance the underlying asset with a view to its sale for a profit 19 in early 2010. 20 21

¶ [4] Under Article 10.b of the Articles of the Company Nexstar and GFP Dunas each 22 have 50% of the vote at meetings of the Company’s shareholders. At all material 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 3 of 15 times, Nexstar was represented on the Company’s board of directors by Mr. Peter 1 Getsinger and Mr. Pieter Wernink (until Mr. Wernink’s resignation on 28th July 2 2010) (the “A Directors”). GFP Dunas was represented by Mr. Rob Venerus and 3 Mr. Tom Tribone (the “B Directors”). The Company is able to act only where 4 there is a consensus between the A and the B Directors. 5 6

¶ [5] The Company owns 99% of the Peruvian company Dunas Energia S.R.L. 7 (“Energia”). Energia, in turn, owns over 99% of the shares of Electro Dunas 8 S.A.A (formerly Electro Sur Medico S.A.A.) (“ESM)”, a publicly listed Peruvian 9 power company. Under a technical assistance agreement dated 14th December 10 2007 (the “ESM Agreement”) ESM receives business, financial, technical and 11 commercial advice from Guggenheim Franklin Park Management LLC 12 (“Guggenheim FP”), a company related to GFP Dunas. Since 2007 the 13 management team of ESM has consisted of Ismael Rodriguez (“Mr. Rodriguez”), 14 the President of the board of directors, and 4 other members (together the “ESM 15 Management Team”). 16 17 Breakdown of Trust and Confidence: Complaints of GFP Dunas 18 19

¶ [6] GFP Dunas says that there has been an irreparable breakdown in trust and 20 confidence between the quasi-partners. A number of actions by Nexstar have 21 caused or contributed to the breakdown. 22 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 4 of 15

¶ [7] Nexstar sought to appoint new directors to ESM in August 2010, two of whom 1 would be Nexstar representatives, notwithstanding the agreement of the partners 2 that one director would be appointed by each. In effect, Nexstar was requesting a 3 rearrangement of the Board which would give it a much greater degree of 4 influence than its partner. 5 6

¶ [8] GFP Dunas says that Nexstar has contributed to the breakdown of trust and 7 confidence between the joint venture parties through a series of unwarranted 8 complaints. GFP Dunas says the complaints were financially insignificant, 9 unjustified and provocative. These complaints (expressed in a letter dated 18 10 February 2010) were used as a basis for issuing a deadlock notice to GFP Dunas 11 under Article 63 of the Company Articles. The deadlock notice was admittedly 12 deficient because no prior directors’ meeting had been held to discuss the issues 13 identified in it, contrary to a requirement in the Company Articles. 14 15

¶ [9] It is also alleged that Nexstar exploited and misrepresented the deadlock in the 16 Company in aid of certain unauthorized legal actions it took in Peru, without 17 consultation with the board of the Company, arising from concerns it had about 18 transactions entered into by the ESM Management Team. Without any prior 19 notice to or authorization from GFP Dunas or the B Directors, around 22 April 20 2010 Nexstar applied to the Court in Pisco, Peru (the “Pisco Court”) for an 21 injunction which would suspend provisionally all powers of the ESM 22 Management Team and secure the appointment of a Judicial Administrator of 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 5 of 15 ESM. On 10th May 2010 the Pisco Court refused Nexstar’s application. 1 2

¶ [10] Around 18th May 2010, again without any prior notice to or authorization from 3 GFP Dunas or the B Directors, Nexstar applied to the Fifth Transitory Civil Court 4 in Ica, Peru (the “Ica Court”) for the same relief. An injunction was granted 5 initially by the Ica Court but, following an unsuccessful application to the Court 6 in Lima, Peru (the “Lima Court”) for enforcement orders, the Ica Court reversed 7 its order and dismissed the application. ESM is currently seeking compensation of 8 US$7 million in damages caused by the installation of the Judicial Administrator 9 under the Ica injunction. 10 11

¶ [11] GFP Dunas says that following its unsuccessful efforts in the Peruvian courts 12 Nexstar resorted to trial by media. As a result ESM was mired in a controversy 13 which was inimical to its planned sale. 14 15

¶ [12] Without consultation with Nexstar’s joint venture partner (i.e., GFP Dunas) or 16 authorization from the board of the Company, Mr. Getsinger met with Peruvian 17 government officials including the regulator of ESM (in the Ministry of Energy 18 and Mines) and rehearsed some of the complaints in the Nexstar petition. He also 19 engaged in discussion with Banco Internacional del Peru S.A. A. (“InterBank”). 20 GFP Dunas says that the discussion led to InterBank’s refusal to provide Electro 21 Dunas S.A.A. with a new letter of credit in favour of the Peruvian Ministry of 22 Energy and Mines, an allegation which has been denied by the Chief Executive 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 6 of 15 Officer of InterBank. GFP Dunas says that Nexstar’s complaints are over-blown 1 and part of a strategy to de-stabilise the joint venture investment with a view to 2 acquiring the underlying asset at a discounted price for its own benefit. 3 4 Breakdown of Trust and Confidence: Complaints of Nexstar 5 6

¶ [13] In its cross-petition Nexstar submits that as a majority shareholder with equal 7 voting rights it has been excluded from many significant management decisions 8 of the Company. 9 10

¶ [14] Nexstar says that by a letter of credit issued on 12th August 2009 Mr. Rodriguez 11 had ESM assume liability for a certain US $6.4 million guarantee provided by 12 Hidroelctrica Marañon SLR (Marañon). That sum was to be payable if certain 13 construction had not started by March 2010. Energia, an ESM affiliate, 14 eventually acquired an equity interest in Marañon but that did not occur until 30th 15 May 2010. For a period of some seven months, ESM guaranteed Marañon’s 16 performance without deriving any commercial benefit from its exposure. 17 18

¶ [15] On the 1st July 2009, Mr. Tribone had turned down the opportunity for a 19 Guggenheim FP affiliate to invest in Marañon. On 7th July 2009, Mr. Rodriguez 20 pitched Marañon to Mr. Getsinger and on 14th December 2009 he pitched it to Mr. 21 Wernink. Both presentations failed to arouse any interest in them. On 18th 22 December 2009, within 4 days of Mr. Rodriguez’s pitch to Mr. Wernink, QV 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 7 of 15 Americas Inc., a Panamanian company of which Mr. Rodriguez was (since 2008) 1 both a director and secretary, acquired 100% of Marañon. Its acquisition was not 2 registered until 11th May 2010. Energia acquired its equity interest in Marañon 3 from QV Americas Inc. Mr. Rodriguez was appointed General Manager of 4 Marañon. Nexstar alleges that this was an obvious case of self-dealing and says 5 that Mr. Rodriguez caused Energia to purchase an investment which had been 6 rejected by all four directors of the Company. 7 8

¶ [16] Nexstar also alleges that Mr. Rodriguez’s relationship with GFP Dunas is much 9 closer than it had been led to believe. He was paid US$150,000 per annum plus 10 expenses by Guggenheim FP but no contract for services has been disclosed. The 11 complaint is that Mr. Rodriguez cannot, because of his close relationship with the 12 owners of GFP Dunas, carry out his executive duties without favouring its 13 interests (and his own) over those of Nexstar. 14 15

¶ [17] A review by Ernst & Young of ESM’s records has identified a number of 16 questionable transactions, including the following: 17 18

¶ [1] An agreement dated 15th December 2009 by which ESM assigned to a company 19 called SIGCOM its billing software. There was no evidence of consideration for 20 the assignment. The agreement was signed by Mr. Rodriguez on behalf of 21 SIGCOM. 22

¶ [2] the payment of over US $900,000 to an interior decorating business called Studio 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 8 of 15 Gaia, the proprietor of which is described (by Mr. Santivañez of the Peru law firm 1 Santivañez Abogados) as Mr. Rodriguez’s “domestic partner”. 2

¶ [3] the payment of at least US $155,000 to MWH Peru SA on behalf of Marañon 3 several days before the latter’s purchase by Energia. 4

¶ [4] payments to Guggenheim FP for the period 1st June 2009 to 10th June 2010 well in 5 excess of the annual fee set by the ESM Agreement of US $736,000. 6 7 Issues 8 9

¶ [18] GFP Dunas says that there has been a loss of mutual trust and confidence between 10 the two quasi-partners owing to the secretive and unilateral actions of Nexstar and 11 Mr. Getsinger. They have acted contrary to the legitimate expectation that the 12 Company would be managed on a joint basis and that significant decisions would 13 not be taken without the agreement of both quasi-partners. The result is a 14 deadlock without any chance of reconciliation. It says there are three issues: 15 (1) Was this a quasi-partnership? 16 (2) If so, has the relationship between parties broken down irretrievably? 17 (3) If so, is Nexstar at least partly responsible for the breakdown? 18 19

¶ [19] Nexstar’s cross-petition is based on the contention that, given the common ground 20 that the Company’s indirect interest in ESM should be sold, the real dividing issue 21 is how that should be approached. Nexstar seeks the removal of Mr. Rodriguez 22 and directions intended to effect the sale in a manner which protects its own 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 9 of 15 position, thus accomplishing the intended goal of the partnership. 1 2 Analysis 3 4 The Companies Law S. 92 (e) provides; 5 A company may be wound up by the Court if – 6 ….. 7 (e) the Court is of the opinion that it is just and equitable that the company 8 should be wound up. 9 10 A quasi-partnership is likely to be characterized by one or more of the following 11 three features; 12 (i) an association formed or continued on the basis of a personal 13 relationship involving mutual confidence… ; 14 15 (ii) an agreement or understanding , that all, or some (for there may be 16 ‘sleeping’ members) of the shareholders shall participate in the 17 conduct of the business; 18 19 20 (iii) restriction upon the transfer of the members’ interest in the 21 company… . (Ebrahimi v Westbourne Galleries Limited [1973] AC 22 360, Lord Wilberforce at 379F-G.) 23 24

¶ [20] Lord Millett has provided this succinct definition: 25 Companies where the parties possess rights, expectations and obligations which 26 are not submerged in the company structure are commonly described as ‘quasi- 27 partnerships’. Their essential feature is that the legal, corporate and employment 28 relationships do not tell the whole story, and that behind them there is a 29 relationship of trust and confidence similar to that obtaining between partners 30 which makes it unjust or inequitable for the majority to insist on its strict legal 31 rights. (Re CVC/Opportunity Equity Partners Ltd [2002] CILR 77, at para 36.) 32 33 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 10 of 15 It is not necessary that the members have equal shareholdings to satisfy the 1 requirement of a quasi-partnership: Re Modular Furniture Pty Ltd (1981) 5 2 ACLR 463. 3 4

¶ [21] The evidence before me shows clearly that the parties were engaged in a joint 5 venture with all of the salient characteristics of a quasi-partnership. That is not 6 contested by Nexstar. 7 8

¶ [22] A Court will wind up a quasi-partnership company just as it would dissolve a 9 partnership where the relationship of mutual trust and confidence has irretrievably 10 broken down: Ebrahimi v Westbourne Galleries Limited, supra, Lord Cross at 11 383H-384A. The following five principles emerge from the judgment. 12  First, the remedy of a winding up should not be confined to any pre- 13 determined, finite list of factual situations. 14 Illustrations may be used, but general words should remain general and not 15 be reduced to the sum of particular instances: Lord Wilberforce, at 374H. 16  Second, the petitioner may rely upon any circumstances of justice or equity 17 which affect it in its relations with the company or the other shareholders: 18 Lord Wilberforce, at 375A-B. 19  Third, it is not a condition precedent to the making of an order….that the 20 conduct of those who oppose its making should have been unjust or 21 inequitable: Lord Cross, at 383F. 22  Fourth, a winding up order may be made; (i) regardless of any available 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 11 of 15 contractual mechanism for dispute resolution and (ii) regardless of whether 1 the company is economically successful: Lord Cross, at 383G-H. 2  Fifth, in order to resist a winding up order successfully the respondent must 3 show that the petitioner has been solely responsible for the situation which 4 has arisen: Lord Cross, at 383H-384A. 5 6

¶ [23] Loss of confidence may be unilateral. It is sufficient that a petitioner has lost 7 confidence in the respondent regardless of whether the respondent has lost 8 confidence in the petitioner provided the court is satisfied that the petitioner’s 9 view is justified: Spence J in Belman v Belman (1995)26 OR (3d) 56. 10 11

¶ [24] It is obvious that the trust and confidence necessary to the success of the business 12 relationship between the parties was extinguished some time ago. The mutual 13 complaints described in brief above are sufficient to demonstrate that. The 14 relationship cannot be restored to a state of harmony at this juncture. 15 Consequently GFP Dunas is entitled to the order sought unless either of the two 16 aspects to which I will refer below satisfy me that my discretion should not be 17 exercised in its favour. 18 19 Clean hands 20 21

¶ [25] The first is the doctrine of clean hands. The relief sought is an equitable remedy. 22 Nexstar says that GFP Dunas does not come to the court with clean hands and 23 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 12 of 15 should, therefore, be denied the assistance it seeks. The basis for this submission 1 is a remark by Lord Cross: 2 3 A petitioner who relies on the ‘just and equitable’ clause must come to court with 4 clean hands, and if the breakdown in confidence between him and the other 5 parties to the dispute appears to have been due to his misconduct he cannot insist 6 on the company being wound up if they wish it to continue. (Lord Cross in 7 Westbourne Galleries, supra, at 387F.) 8 9

¶ [26] Mr. Thom (for Nexstar) accepts that he must show that the breakdown in trust and 10 confidence was caused solely by the acts of GFP Dunas itself. If the acts of each 11 party contributed in some measure to the breakdown then, even if their respective 12 contributions were disproportionate and even if GFP Dunas was largely to blame, 13 the partnership should be dissolved. 14 15

¶ [27] Mr. Thom's mandate was an onerous one. He has said all that can be said on 16 behalf of Nexstar but he has failed to satisfy me on the balance of probabilities 17 that the acts of this petitioner were the sole cause of the breakdown of trust and 18 confidence. Mr. Getsinger also contributed to that breakdown by: 19

¶ [1] proposing that the board of ESM be reformed with unequal representation of the 20 two partners; 21

¶ [2] issuing a deadlock notice which was not preceded by the requisite board meeting; 22 and 23

¶ [3] initiating a court application in Peru in April 2010 which sought the appointment 24 of a Judicial Administrator for ESM without consulting GFP Dunas. 25 26 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 13 of 15 These acts were material contributing factors to the difficulties between the 1 parties. 2 3 O'Neill v Phillips 4 5

¶ [28] I turn to the second question. If an offer to purchase the petitioner's shares in 6 accordance with the procedure described in O'Neill v Phillips has been made and 7 rejected, the court would be justified in dismissing or staying the petition. That 8 remains so even though Nexstar has the larger of the two investments. The 9 justification arises from a recognition 10 …..that there will be cases in which equitable considerations make it unfair for 11 those conducting the affairs of the company to rely upon their strict legal powers. 12 Thus unfairness may consist in a breach of the rules or in using the rules in a 13 manner which equity would regard as contrary to good faith. … Parties ought to 14 be encouraged, where at all possible, to avoid the expense of money and spirit 15 inevitably involved in such litigation by making an offer to purchase at an early 16 stage. (Re a company (No 00709 of 1992 O’Neill and another v Phillips and 17 others [1999] 2 ALL ER 961, per Lord Hoffmann) 18 19 20 So that litigants might know what counts as a reasonable offer the judgment laid 21 down the following five criteria: 22  In the first place, the offer must be to purchase the shares at a fair value. 23  Secondly, the value, if not agreed, should be determined by a competent expert. 24  Thirdly, the offer should be to have the value determined by the expert as an 25 expert. 26 27  Fourthly, the offer should … provide for equality of arms between the parties. 28  Fifthly, there is the question of costs. … the majority shareholder should have a 29 reasonable time to make the offer before his conduct is treated as unfair. The 30 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 14 of 15 mere fact that the petitioner has presented his petition before the offer does not 1 mean that the respondent must offer to pay the costs if he was not given a 2 reasonable time. 3 4 5

¶ [29] In a letter dated 2nd December 2010, some two months after the presentation of 6 the Petition and less than two weeks before the hearing, Nexstar offered to GFP 7 Dunas an ad hoc restructuring and liquidation process which would take place 8 over approximately two years. Although that Nexstar said that its offer “was 9 made pursuant to the principles laid down in O’Neill v Phillips”, it required the 10 following: 11 1) that the management and board of both ESM and Energia be removed and 12 replaced; 13 14 2) that ESM operate for a period of not less than 6 months under the new board in 15 order to ‘normalise’ and only after a period of ‘normalisation’ would an 16 investment banker be retained to prepare the Company, Energia and ESM for 17 sale; 18 19 3) that only if the investment banker could not sell the assets of the Company 20 would a valuation process begin to determine the price at which Nexstar 21 would purchase GFP Dunas’ shareholding. No time limit for delivery of the 22 valuation was specified. 23 24

¶ [30] Nexstar's proposal, whatever else may be said of it, is not an O'Neill v Phillips' 25 offer. It is hedged with conditions, would provide no immediate relief to GFP 26 Dunas, and contemplates the deadlocked partners agreeing upon questions which 27 are unlikely to be resolved amicably. There is also no evidence that Nexstar can 28 finance the purchase of GFP Dunas’ shareholding. A prospective buyer must 29 provide sufficient evidence to support a conclusion that it will be able to pay the 30 likely valuation price: West v Blanceht [2000] 1 BCLC 795. 31 32 Judgment – In the Matter of GFP Dunas Partners Holdings, Inc. Cause No. FSD 218 of 2010 31.05.11 Page 15 of 15 Conclusion 1 2

¶ [31] I conclude that GFP Dunas is entitled to a winding up order. As to its wording, I 3 prefer the form submitted by Nexstar in its draft order. The power of the JOLs to 4 replace the boards of Energia and ESM should be set out expressly in the order. 5 6

¶ [32] Nexstar has asked for a mandatory direction to the JOLs that Mr. Rodriguez be 7 removed from office. The evidence before me does suggest that Mr. Rodriguez 8 played no small role in the deteriorating relationship between these parties. In 9 addition, Ernst & Young have identified some transactions entered into by 10 Mr. Rodriguez which seem to require investigation. The JOLs should, as a high 11 priority, consider whether Mr. Rodriguez must be removed. I am content to leave 12 that decision to them. In considering the question, the JOLs should take into 13 account the views of each of the parties. 14 15

¶ [33] It follows that the petition is allowed and the cross-petition is dismissed. The 16 JOLs are of course at liberty to apply. 17 18 Dated this 31st day of May, 2011 19 20 21 Henderson, J. 22 Judge of the Grand Court 23