On 28th August 2015 the Grand Court of the Cayman
Islands finally had the opportunity to give judgment in an
appraisal action brought by dissenting shareholders in a statutory
merger transaction under Part XVI of the Companies Law. Although
there is nothing new or surprising in the judgment, it nevertheless
provides welcome guidance and confirmation of the principles to be
applied in an appraisal action, whilst recognising that the
valuation exercise is fact specific and each case will be decided
upon its own facts.
In the Matter of Integra Group (Jones J) a management
buyout was effected by means of a statutory merger, and a price was
set of US$10 per share after consideration by an independent
committee and a fairness valuation. Shareholders dissented and the
appraisal remedy was triggered.
The first point to note in
connection with the proceedings is that each party appointed their
own valuer to provide expert evidence to the Court. This would be
the normal practice in the Cayman Islands, rather than appointing a
single joint expert.
In order to provide a valuation each expert required access to a
large volume of corporate information and for this purpose an
electronic data room was established with the intention that all
relevant material would be uploaded so as to be available to the
experts and the legal advisers, subject to appropriate undertakings
of confidentiality. The Court was critical of the company's
management in not complying by refusing to upload material on the
basis that they considered it irrelevant. Ordinarily one would have
expected that an application to court would have been made, but
apparently this was not done and so there was material requested by
one expert that had not been provided which the Court said
"there was no means of knowing whether material withheld by
Integra's management might have affected the experts'
judgment in any way". The experts also conducted interviews
with the company's management.
In terms of the expert reports provided to the Court, the Court
was critical of one expert who produced a range of valuations which
the Court said "was not particularly helpful".
The Court rejected the use of the accounting definition of
"fair value" as it appears in the International
Financial Reporting Standards ("IFRS") as being
irrelevant and not informative, but looked to the definition
provided by the International Valuation Standards
The Court looked to jurisprudence in both Canada and Delaware,
and a number of applicable propositions were derived:
The relevant date was the date
immediately prior to the approval of the merger, i.e. the date of
The business was to be valued as a
The effect of the merger itself
should be disregarded, whether positive or negative.
There should be no premium for the
forcible expropriation of the shares by the merger.
There should be no minority
There is no set valuation methodology
to be used. Fair value can be proved by any admissible evidence
according to any techniques or methods generally considered to be
acceptable in the financial community.
The Court recognised that there are three generally accepted
approaches to valuation:
The Market Approach
The Income Approach
The Cost (or asset based)
The approach used may differ from one case to another. In the
case before it, the Court accepted an approach which combined an
income approach using a discounted cash flow methodology with a
market approach using a guideline public company methodology with a
weighting of 75%/25% in favour of the income approach.
The Court did however remove from the calculation the cost
saving of going private because the dissenters should not benefit
from any enhancement in value attributable directly to the
transaction they dissented from. In the end the Court awarded the
dissenters US$11.70 per share as opposed to the merger price of
US$10 per share.
In addition the Court awarded a "fair rate of
interest" as being the midpoint between the company's
assumed rate of return on cash and it's assumed US$ borrowing
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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