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Over the past quarter, the judges of the Financial Services Division of the Grand Court of the Cayman Islands and the Cayman Islands Court of Appeal (CICA) have issued a number of significant and very detailed judgments analyzing a range of issues of importance to the local financial services industry. As discussed in more detail below, company directors and shareholders, professional trustees, liquidators and creditors, and potential litigation funders, now all have access to developing jurisprudence in their respective arenas, and further helpful guidance as to the interpretation of local laws.
A very well-known and now widely used part of local legislation, section 238(8) of the Cayman Islands Companies Law entitles a shareholder who dissents from a merger or consolidation of a Cayman company under the statutory merger provisions contained in Part XVI of the Companies law to be paid “the fair value of his shares.” Litigation centered on determining “fair value” has been a hot topic locally over the past 18 months, and the CICA has recently released a number of highly anticipated decisions concerning various interlocutory issues. The most important of the judgments, discussed in brief below, analyze the contentious issues of (1) interim payments to dissenting shareholders (referred to generally below as “dissenters”); (2) discovery of documents by dissenters; and (3) the application of a “minority discount” to the value of the dissenters’ share price:
Interim payments: In the matter of Trina Solar Limited, the Grand Court had at first instance refused an interlocutory application made by a group of dissenters for worldwide freezing orders over the assets of the company in question pending the outcome of statutory fair value appraisal proceedings. The dissenters had applied to the Grand Court because the company had agreed to transfer many of its assets in its subsidiaries to other companies in China, ostensibly to progress the company’s post-merger restructuring. The dissenters argued that these actions would have the effect of significantly reducing the assets of the company so that it would ultimately be impossible for the company to satisfy any judgment of the Grand Court following the substantive trial. The dissenters took their case on to the CICA which, while finding that the dissenters had crossed the “jurisdictional threshold” so as to be entitled to ask for the grant of an injunction on the terms they had sought, the company’s evidence had proved the transactions in question were not undertaken for less than proper consideration or on terms that were prejudicial to the company. Further, the fact that the company had made a provision for payment to the dissenters based on a realistic assessment of the company’s liability to the dissenters was enough to avoid the need for an injunction. The provision did not need to be for the full amount claimed by the dissenters with reference to their expert advice, but a “reasonable and prudent provision” made after taking advice from legal and valuation advisers and with the company “forming a balanced and cautious view of the risks of the litigation.” No injunction was granted.
Minority discount: In its decision in the matter of Shanda Games Limited, the CICA has gone a step further and altered the landscape against which fair value of the Dissenters shares is to be properly assessed in the future. At first instance in Shanda, the Grand Court had determined that a minority discount should not apply in assessing the fair value of the shares of dissenters: a decision consistent with the position taken by the Courts in Delaware and Canada, where the equivalent merger appraisal regimes operate, and indeed with prior local authority such as the decision of Jones J in the matter of Integra Group. However, reversing the decision of the trial judge in Shanda, the CICA held that certain English authorities (which permit a minority discount to be applied in other contexts) should be applied in the context of a section 238 appraisal action. In essence, the CICA held that the legislative intent in enacting section 238 was that it should be construed alongside and according to the same principles as the provisions already contained in sections 86, 87 and 88 of the Companies Law (dealing with takeovers and squeeze-outs), because they are simply three ways of achieving the same commercial objective. As there are English authorities which hold that a minority discount could be applied in a takeover scheme of arrangement and in a statutory squeeze-out, it follows that when enacting section 238, the legislature cannot have intended that the situation should be different from that which already existed. The judgment therefore confirms that a minority discount should now apply here in Cayman too.
Dissenter discovery: In the matter of Qunar Cayman Islands Limited the CICA considered, among other issues, the disputed question of whether the dissenters should give disclosure of their documents to the company in the course of the statutory fair value appraisal process. The Grand Court had decided in favor of the dissenters, who had resisted discovery on the basis that the dissenters’ internal analyses of share price were not relevant and it was therefore not appropriate for dissenters to provide discovery of their documents. However, noting that the question of fair value is closely related to the question of what a willing buyer and a willing seller would exchange for the shares of the company, the CICA found that valuations conducted within the market generally are relevant. It followed that the analyses and valuations conducted by the dissenters were considered by the CICIA to be of utmost importance: the dissenters were not merely potential investors, but actual investors and therefore “active members of the market who are willing to put their money where their analysis is.” The CICA confirmed that discovery is a mutual obligation, requiring equality and fairness, and section 238 litigation is not a “unique field in which one-sided disclosure” ought to be practiced. Discovery by the dissenters was therefore ordered.
This article was first published in Cayman Financial Review.