Cayman Islands: Cayman Court Relies On Market Value In Merger Appraisal

Last Updated: 16 May 2019
Article by Nigel K. Meeson QC

In a recent decision of the Financial Services Division of the Grand Court of the Cayman Islands, Qunar Cayman Islands Limited (10 May 2019) ("Qunar"), Parker J rejected the central hypothesis of the dissenting shareholders' expert that there was a systematic undervaluation of Chinese companies on US exchanges which meant that their publicly traded share price was not a reliable indicator of the fair value of such companies. Having rejected this theory, he attributed a 50% weighting to the market value of the shares following the approach of the Company's expert. Save in two minor respects, he also rejected the dissenting shareholders' expert's DCF calculation in excess of 4x the market price which was not credible unless there was a systematic undervaluation of Chinese companies on US exchanges.

Qunar is only the third1 reported merger appraisal case in the Cayman Islands, and is the first to be decided after the Court of Appeal's decision in shanda games2 holding that the focus of attention in such cases should be on the value of the dissenters shares themselves, rather than on seeing the entitlement of the dissenting shareholders as being to a proportionate share in the value of the business as a going concern, as is the case in Delaware, and as had been accepted by the Court previously in Integra and in shanda games at first instance. Parker J expressly stated that "the exercise is to value the shares as at the valuation date."3

The value which was to be found was the "fair value" which Parker J held4 to add the concepts of just and equitable treatment and flexibility to "value". Neither the motivation and conduct of the company in effecting the merger on the one hand, nor the character and motivation of the dissenting shareholders on the other, are relevant considerations. In order to arrive at a fair value, the Court should look at all the information relevant to fair value and should not confine itself to information which would be relevant to market participants at the relevant time. He said that "the imbalance of control and information between the Company and the dissenters is corrected by a full enquiry into the relevant commercial reality from which to assess fair value." He thus recognised and confirmed the need for extensive discovery to be given by the company in an appraisal case.

The use of the trading price of the shares on NASDAQ, both as a direct evidence of fair value (as to 50%) and as a "real-world" cross-check to the DCF calculation is a unique and novel feature of the decision in Qunar.

In Integra, although Jones J had said that a market based approach would be preferable where the shares being valued are listed on a major stock exchange and there is a well informed, liquid market with a widely held free float, the shares in Integra were in fact illiquid, and his use of a market based approach as to 25% of the valuation in that case5 was based upon comparable companies and not the share price of the company itself. In shanda games the company's expert did not suggest that the trading price of the shares was relevant, probably because there had been a delay of 22 months between the last unaffected trading price and the valuation date. Both experts agreed that 100% DCF valuation was appropriate in that case.

In Qunar, there was no dispute that the shares were liquid, and the company's expert conducted an event-study to confirm the reliability of Qunar's share price, as well as a portfolio study of trading multiples of comparable companies which also supported the market valuation. The dissenting shareholders' expert did not dispute the liquidity of the shares, and did not carry out any kind of market efficiency test. He relied upon the fact that 94% of the shares were controlled by Ctrip, whose strategic partner was effecting the take-private transaction. However, the Judge held that, absent evidence of the controlling shareholder exercising control so as to benefit itself at the expense of the company, this factor alone would not undermine the reliability of the trading price.

The main argument of the dissenting shareholders' expert was that the trading price could not be relied upon because of a systematic undervaluation of Chinese companies by US markets.

There were two limbs to this argument. The first was a series of studies which demonstrated stigmatisation of all Chinese companies as a result of certain well-known accounting scandals which had affected some Chinese companies in 2010-2011. However, the Judge held that there was no evidence that such an effect persisted up to the time of this transaction in early 2017. The second was the fact that a significant number of Chinese companies had delisted from US stock markets and subsequently re-listed in China or in Hong Kong, or had been the subject of trade sales, all at values representing many multiples of their previous US market capitalisation. The Judge rejected such examples in the absence of proof that there had been no substantial changes to the business of these companies in the intervening period. He was also not convinced that it had been demonstrated that the Chinese markets were efficient and the US markets inefficient.

The final piece of evidence upon which the Judge relied to reject the dissenting shareholders' expert's theory was the views of analysts who had followed Qunar, and produced numerous reports on the company since it had been listed, none of whom had suggested any significant undervaluation of the company.

Having rejected the theory underpinning the dissenting shareholders' expert's justification of the very high value resulting from his DCF calculation, the Judge relied instead upon the company's expert's DCF calculation, subject to two minor adjustments relating to the terminal growth rate and the future cost to the company of its share based compensation scheme.

The final aspect which the Judge considered was the amount of the minority discount which he was required to apply in accordance with the decision of the Court of Appeal in shanda games6. On the facts, the Judge found that the applicable minority discount was in fact nil. This was a publicly traded liquid security in a well-run company without any risk of minority disadvantage regarding management control or the payment of dividends, and so a nil value was appropriate.

This is a significant decision in the context of appraisal litigation under Section 238 of the Cayman Islands Companies Law, being the first case to rely upon the publicly traded share price as evidence of fair value.

Notably, what is not explored in the judgment is the reliability of a pre-announcement market price as a measure of fair value as at the valuation date many months later, when macroeconomic circumstances may have changed, and there may be industry or firm specific events or developments which, by definition, will not have been reflected in the preannouncement trading price many months before. There is also the potential for non-public information which would not be reflected in the share price, and this may be particularly so when the bidder is a 94% controlling shareholder.

In the latest decision from the Delaware Supreme Court, in Veriton Partners Master Fund -v- Aruba Networks,7 published only one month prior to the decision in Qunar, a first-instance valuation based upon the 30 day average pre-announcement trading price was rejected in favour of the merger price less an estimate of deal synergies. The Court noted that the unaffected market price "was a measurement from three to four months prior to the valuation date," during which it was possible for new, material information regarding the company's future earnings to emerge, and the bidder had a greater incentive to evaluate the company more closely than an ordinary trader of small blocks of the company's shares.

The other aspect which may affect the reliability of the publicly traded share price as a proxy for fair value will be the decision of the Privy Council in shanda games which is currently awaited. Parker J appears to have been influenced significantly by the approach of the Court of Appeal in shanda games to minority discount and their rejection of the Delaware approach of looking at a proportionate share of the company as a going concern. If the Privy Council reaches a different conclusion then its reasoning may impact the extent to which direct reliance should be placed upon the traded value of a company's shares as evidence of fair value.

The focus of the recent Delaware Supreme Court decisions8 on the deal price is based upon there having been a "robust sale process involving willing buyers with thorough information and the time to make a bid", which are features significantly absent from the Cayman Islands cases to date. This has resulted in the deal price being ignored in the Cayman cases and an emphasis on a DCF valuation methodology in the cases prior to Qunar.

It is not known at this time whether any of the dissenters will appeal the decision in Qunar or what impact the decision will have on other appraisal cases before the Cayman Court.

Footnotes

1 The others beingIntegra [2016] 1 CILR 192 and shanda games unrep. 25 April 2017

2 [2018] 1 CILR 352

3 Paragraph 52

4 Paragraph 62

5 75% weight being given to a DCF calculation

6 Currently awaiting the outcome of an appeal to the Privy Council

7 C.A. No. 11-448-VCL (Del. 2019)

8 In addition to Aruba Networks see the earlier decisions in DFC Global Corp. -v- Muirfield Value Partners, L.P., 172 A.3 346 (Del. 2017) and Dell, Inc. -v- Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017).

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 QC
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
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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