Guidance From Cayman On Validation Orders: Facilitating The Transfer Of Shares On The Hong Kong Stock Exchange And Variation Of Orders Entered By Consent

A recent judgment of the Grand Court of the Cayman Islands (the “Court“) in China Shanshui1 has considered validation orders to allow for the trading of shares on the Hong Kong Stock Exchange whilst a winding up petition is pending. It also considered the basis upon which a validation order previously agreed by consent of the parties could be varied.

China Shanshui Cement Group Limited ("the Company") was incorporated in the Cayman Islands in 2006. It is the parent company of a group of companies engaged in the production of cement in mainland China and its shares are listed on the Hong Kong Stock Exchange ("the SEHK"). Towards the end of last year, Tianrui (International) Holding Company Limited ("Tianrui") presented a petition to the Court to wind up the Company on the just and equitable ground. Tianrui is a substantial shareholder in the Company and also a competitor in the cement industry. The petition has not yet been heard.

Section 99 of the Cayman Islands Companies Law (2018 Revision) - The Fundamentals

Section 99 provides that "when a winding up order has been made, any disposition of the company's property and any transfer of shares or alteration in the status of the company's members made after the commencement of the winding up is, unless the Court otherwise orders, void." The winding up of a company is deemed to commence at the time of presentation of the winding up petition. The common issue is the validity of transactions between the date of presentation and the date any winding up order is ultimately made. This period of time can be substantial. In order to make sure that transactions are not avoided, validation orders are often sought from the Grand Court and frequently granted, provided the shares in question are fully paid. Validation Order - The Hong Kong Stock Exchange

Shareholders of SEHK-listed companies can deposit their shares into CCASS (an electronic system which facilitates the clearing and settling of trades on the SEHK) by transferring the legal title to their shares to HKSCC (which acts as the common nominee for shares held in CCASS) and delivering their physical share certificates to CCASS. Thereafter, CCASS will permit the beneficial interest in such shares to be bought and sold through its computerized order matching system, which matches the prices of buying and selling orders, with CCASS acting as the central clearing counterparty.

In order to surmount the difficulties that section 99 of the Companies Law...