The decision of the Grand Court of the Cayman Islands in Integra Group sets out important guidance as to how, where a shareholder has dissented to a statutory merger, the "fair value" of the dissenter's shares will be determined in accordance with the provisions of Part XVI of the Companies Law (2013 Revision) (the "Law"). This is the first time the Grand Court has considered this issue.
In essence, it was held that:
(a) "fair value" means the shareholder's proportionate share of the business as a going concern without any minority discount or any premium for the forcible taking of their shares; and
(b) fair value should be proved by any methods which are generally considered acceptable in the financial community and are otherwise admissible in court. In Integra Group, this involved an appraisal process where the company was valued by two valuers who submitted their opinions to the Court and gave expert evidence.
A group of shareholders had rejected an offer of US$10 per share and exercised their dissenting rights. The Court held that the fair value of the company at the date of the merger was in fact US$11.70 per share, and ordered payment of that amount, plus interest, to be made to the dissenters.1
Statutory Mergers under the Law
Integra Group involved a management buy-out ("MBO") to be effected by way of a "merger" pursuant to the Law. The Law creates an administrative process for completion of a merger which does not require any court sanction. A plan of merger approved by the company's directors must be authorised by each company by way of special resolution passed at an extraordinary general meeting ("EGM"), and any such other authorisations (if any) as may be required under the Articles of Incorporation of each company.
Upon such approval, the merger will take effect in accordance with its terms, provided certain filing requirements have been met and the merger is approved by the Registrar of Companies.
Typically in an MBO, the MBO investors will form a new company and merge the existing ("target") company into the newly formed company, which will be the surviving company. Shareholders of the target company are usually paid cash or other consideration in exchange for their shares on the date of the merger. The terms of the merger and the merger consideration are set out in a circular distributed in advance of the EGM. The target company will often form a special committee of independent directors, who will obtain independent advice on the fairness of the merger terms made before recommending the merger to shareholders. If sufficient shareholders approve the terms of the merger, the shares in the target company are cancelled or exchanged.
Shareholders of the target company who disagree with the merger process or the price offered have two options. The first is to try to prevent the merger from taking place by attempting to defeat the proposal at the EGM, or challenging the merger on the basis that the process of merger was not conducted properly and that the company has not met the requirements of the Law. The second is to trigger the "dissenter's rights" process. This is a mechanism whereby shareholders of the target company who dispute the fairness of the merger consideration received may ultimately seek an order of the Grand Court determining the "fair value" of the company's shares, and to recover the duly appraised fair value of their shares. This is often referred to as an appraisal process. A shareholder who intends to dissent from a merger must provide written objection before the vote on the merger is taken.
Within 20 days of a successful vote for the merger the company must notify the dissenting shareholders of the outcome of the vote, and the dissenting shareholders then have 20 days to give the company formal written notice of an intention to dissent. The formal notice of dissent must, among other things, include a demand to be paid the fair value of those shares. The notice of dissent must be in respect of all of the dissenting shareholder's shares in the target company and will have the effect of extinguishing any rights of those shares, except for the right to be paid fair value. Within seven days of the expiry of this period, or within seven days of the filing of the plan of merger, whichever is the later, the company must make a written offer to the dissenting shareholder to purchase their shares. The dissenting shareholder and the company then have 30 days in which they are required to try to negotiate a fair price to be paid for the shares. If they cannot agree, the company must (or the dissenting shareholder may) file a petition for a determination of fair value.
Integra Group concerned the dissenter's rights process and the Court's appraisal of fair value, triggered following an MBO.
Integra was a Cayman Islands incorporated company which conducted business as an independent Russian oil field services and equipment manufacturing business. In 2007 it listed on the London Stock Exchange ("LSE"), and investors could purchase Global Depository Receipts ("GDRs") on the LSE.
The listed price of Integra's GDRs on the LSE significantly diminished after mid-2012 and by December 2013 the average GDR price was about US$15.74. Integra's management proposed an MBO which was structured as a merger under the Law. Integra appointed a special committee of independent directors, and obtained a fairness opinion as to the proposed offer. In April 2014, the special committee recommended that investors accept an offer of US$20 per GDR (US$10 per share – each GDR being worth two shares) (the "Offer Price"), representing a premium of approximately 45% over the average trading price of the GDRs for the 30 trading days prior to the merger. This indicated that Integra was valued at US$89.7 million.
Following the publication of the merger offer and circular, an industry analyst who was monitoring Integra observed that the Offer Price appeared to be too low, and that if the offer was adjusted for a liquidity discount which had been reflected in the publicly traded price, a more realistic price would have been US$24 per GDR. Nevertheless, the merger was adopted by special resolution (passed by about 80% of the shareholders who voted) and the merger was approved on 21 May 2014.
Three dissenting shareholders (controlled by one fund management company and together holding a total of about 17.3% of Integra's issued GDRs) took the view that the Offer Price was too low. They converted their GDRs to shares, opposed the merger at the EGM, and triggered the dissenter's rights process. This resulted in the Court being requested to determine the fair value of Integra's shares.
The Court directed that a full valuation process be conducted, with each side appointing an independent valuer for the purpose of producing a valuation report. This involved the creation of a data room, multiple requests for information from the dissenting shareholders' expert, and two days of meetings between both experts and the MBO management team. At the conclusion of that process, each expert valuer produced a report, and thereafter produced a joint report. All of these documents were presented to the court. A trial then took place in which each expert valuer was cross-examined on the opinions they had reached as to the value of the shares.
Integra's Valuation Evidence
Integra's valuation expert concluded that the fair value of the dissenters' shares was less than the Offer Price, but declined to put a specific value on the company. Applying a market valuation approach and a control premium to the publicly traded share price which was then cross-checked against a discounted cash flow ("DCF") valuation, Integra submitted that the fair value was somewhere in the range of US$70 - US$100 million. Importantly, the Court noted that it was not particularly helpful to be given a range of values in this imprecise way. Therefore, in future cases, valuers should take this guidance on board as to how they present their valuation evidence. This valuation equated to a per share price of US$11.14 or US$9.89 depending on the number of shares taken into account. In relation to the number of shares, two approaches were suggested: (i) the 8,973,473 of shares as set out in the circular; or (ii) a higher number of 10,107,344 (this would take into account allegedly unvested shares to be awarded post-merger by way of deferred remuneration to certain of Integra's directors and employees under its restricted stock unit plan).
The Dissenters' Valuation Evidence
The dissenters' valuation expert concluded that fair value was more than the Offer Price and placed a specific price on his opinion of the value of the company as at the valuation date. This was also determined using a market valuation approach, but the methodology was based on a combination of a DCF valuation and the guideline public companies method valuation (which relied upon financial and market information relating to publicly traded securities of companies comparable to Integra). The dissenters' expert then weighted the two outcomes 75% / 25% in favour of the DCF valuation.
The Court held that the fair value of Integra was higher than the Offer Price and higher than the highest estimate of the range of valuations provided by Integra's expert. The dissenter's valuation evidence was preferred; with the Court discounting the valuation in places to reflect the conclusions it had reached as to how to assess "fair value". This resulted in the Court deciding that Integra should be valued at US$105 million and that the fair value of each of Integra's shares was US$11.70.
In reaching this decision, the Court took into account guidance concerning similar statutory merger processes which exist in the State of Delaware and Canada. The following guidance can be taken from the Grand Court's decision:
(a) Fair value is the value to the shareholder of his proportionate share of the business as a going concern – it is a value that is "just and equitable" and provides adequate compensation consistent with the requirements of justice and equity. Fair value does not include any premium for forcible taking of shares and a minority discount cannot be applied. In determining fair value neither the upside nor downside of the transaction being dissented from should be taken into account (for example, any costs savings obtained by a company going private).
(b) Assessing fair value is a fact-based exercise, which
requires an important element of judgement by the court.
(c) Where a company's shares are listed on a major stock exchange this does not mean that a valuation methodology based upon its publicly traded prices is necessarily the most reliable. Whether this valuation methodology is appropriate will depend on whether there is a well informed and liquid market with a large, widely held, free float. As Integra's GDRs were an illiquid stock from 2012 onwards (with an increasing trend to illiquidity) the publicly traded share price methodology was not an appropriate valuation methodology to apply. As such, the more nuanced approach of Integra's expert was to be preferred.
(d) The date for determining fair value was the date of the EGM – this was the date on which the offer could be accepted. Importantly, the Court concluded that dissenting shareholders could not take advantage of the cost savings going forward as a result of the merger. The Court's view was that dissenting shareholders should not benefit from any enhancement in the value of their shareholding attributable directly to the transaction from which they have dissented.
(e) A fair rate of interest to be paid by a company was the mid-rate between a company's assumed return on cash and its borrowing rate. Applied to Integra this meant that the dissenting shareholders were entitled to interest at 4.95% calculated from 2 July 2014 (the date which Integra made its written offer to pay fair value of US$10 per share) until payment.
1. Maples and Calder acted for the dissenting shareholders.
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