Cayman Islands: Appealing Appraisal Actions: New Judgments From The Cayman Courts

 A well-known and now widely used part of local legislation, Section 238(8) of the Cayman Islands Companies Law (the "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". Disputes about how to determine "fair value", both in terms of procedure and calculation methodology, have been voluminous over the past eighteen months or so, and have resulted in a sharp increase in the number of fair value appraisal actions before the Grand Court of the Cayman Islands (the "Grand Court").

Flowing from that litigation, and adding to the growing jurisprudence on this front, the Cayman Islands Court of Appeal (the "CICA") has recently released a number of highly anticipated decisions concerning various interlocutory issues arising in the course of litigation of this nature. The most important of the judgments released so far and discussed in brief below, analyse the contentious issues of: (1) interim payments to and injunctions by dissenting shareholders (referred to generally below as "Dissenters") pending the outcome of the appraisal litigation; (2) discovery of documents by Dissenters; and (3) the application of a "minority discount" to the value of the Dissenters' share price.

Section 238 of the Companies Law

As is now widely accepted, in an appraisal action commenced by petition under Section 238 of the Companies Law, the sole purpose of the action is for the Court to determine the fair value of the shares of the shareholders who have dissented to the merger of two companies, together with a fair rate of interest to be paid by the company to the Dissenters. However, this type of action differs from litigation in the normal course in that there is no plaintiff and no defendant, and there is no burden of proof on one party or the other to prove the allegations they make. Instead each party bears the burden of proving the value for which it contends, and relies on the Court to finally determine the fair value. In theory, the process should be a straightforward and non-contentious valuation exercise with reference to the necessary financial and business information. However, as has been shown in the following judgments, various interlocutory issues inevitably arise as to the various rights and entitlements of the parties involved, and the proceedings can quickly veer into contentious territory.

Provisions for Payments to Dissenters

In In the matter of Trina Solar Limited1, 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. While the Dissenters had received an interim payment from the company following a separate application to the Grand Court, the Dissenters argued that the company's 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 in full any judgment of the Grand Court following the substantive trial. The Grand Court declined to grant the injunction.

Unhappy with the Grand Court's decision, 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, determined that 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 CICA held that the provision made by the company 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 by the CICA, but the decision remains a helpful guide to companies facing similar litigation.

Minority Discount

The separate question of whether a minority discount should be applied to the Dissenters' shares in the course of the valuation exercise was one of the issues considered in the decision of In the matter of Shanda Games Limited2 ("Shanda"). The decision in Shanda is particularly interesting because the CICA has moved away from earlier local authority and seemingly altered the landscape against which fair value of the Dissenters shares is to be properly assessed in the future.

At first instance in Shanda, it was the view of the company that a minority discount should be applied to the Dissenters' shares, on the basis that the shares to be valued constituted a very small minority of the total shares in the company and such a discount would be applied in any market-based sale of the company's shares. However, the Grand Court had determined that a minority discount should not apply in assessing the fair value of the shares of Dissenters, on the basis that it was the Dissenters' proportionate interest in the company considered as a whole that was being valued. This was 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 In the Matter of Integra Group.3

However, reversing the decision of the trial judge in Shanda, the CICA agreed with the company and held that certain English authorities (which permit a minority discount to be applied in other contexts4) 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. And, 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 be applied to Dissenters' shares in appraisal actions before the courts of the Cayman Islands.

Dissenter Discovery

Finally, in In the matter of Qunar Cayman Islands Ltd5 the Court was required to determine, among other things, the scope of discovery in a Section 238 action and in particular whether the Dissenters ought to give discovery. In that case, the company had also been the subject of a 'take private' transaction resulting in a merger but four groups of Dissenters had dissented and commenced the statutory appraisal process. In the course of the proceedings, the company made an application for discovery by the Dissenters, notwithstanding that the Grand Court had already ruled on this question in In the matter of Homeinns Hotel Group where the same application had been dismissed.6 In advancing its case, the company relied upon a Delaware decision known as In Re Appraisal of Dole Foods Company,Inc. ("Dole")7 in which the Dissenters had been ordered to give discovery. At first instance, the Grand Court noted that while it would take into account and pay close attention to the decision of the courts in Delaware, given the similarity of the jurisprudence and statutory merger provisions, the Dole decision was of 'little assistance in relation to procedural matters such as discovery where the Delaware jurisdiction is so different'. The Grand Court ultimately decided in favour 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, the CICA disagreed. 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 also considered by the CICA to be of importance to the valuation exercise: the Dissenters were held to be 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 expressed the view 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 practised. Discovery by the Dissenters was therefore ordered, and will be expected in future proceedings of this nature.

Further Judgments

Further judgments are anticipated, both from the Grand Court and the CICA, in the coming months. These will likely bring even greater clarity and further specific guidance not only as to the roles and responsibilities of the different parties to statutory appraisal litigation in the Cayman Islands, but also as to the expectations of the local Courts regarding the proper conduct of the parties as they work their way through the valuation process. Results may differ, but the local statutory appraisal procedure is becoming increasingly well-defined and mature.

Footnotes

1 CICA 26 of 2017 (unreported, 9 February 2018)

2 CICA 13 of 2017 (unreported, 9 March 2018)

3 [2016] 1 CILR 192

4 See for example Re Grierson, Oldham & Adams Ltd [1968] Ch 17, Irvine -v- Irvine (No 2) [2007] 1 BCLC 445, Golar LNG Ltd -v- World Nordic SE [2011] Bda L R 9, and Olive Group Capital Limited -v- Mayhew [2016] ECSCJ No 167, as cited by the Honourable Judges.

5 CICA 24 of 2017 (unreported, 10 April 2018)

6 [2017] 1 CILR 206

7 CA No 9079 (December 9, 2014)

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Nigel K. Meeson Q.C.
Paul Smith
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions