Appraising Section 238 'Fair Value' Proceedings In The Cayman Islands: An Overview

Section 238 of the Companies Law (2020 Revision) ("section 238") provides an avenue through which shareholders of a merged or consolidated Cayman Islands company can apply to have the "fair value" of their shares determined by the Grand Court of the Cayman Islands (the "Court").

Development

Section 238 has its origins in section 262 of the General Corporation Law of the US State of Delaware1, and was first introduced into the Cayman Islands Companies Law in May 2009 as part of a wider reform concerning mergers and consolidation.

After a relatively uneventful first few years in operation, section 238 is now at the forefront of Cayman Islands jurisprudence. In particular, there has been a trend of Cayman Islands incorporated companies operating in the People's Republic of China being taken private, delisting from the US stock exchange, and then relisting on alternative stock exchanges, sometimes at a much higher value shortly thereafter. This has provided significant opportunities for institutional investors to obtain returns by investing in such companies in the lead up to their imminent merger or consolidation and relying on their appraisal rights under section 238 to challenge the value that the company has ascribed to their shares.

Process

The procedure for section 238 proceedings is largely prescribed by the statutory wording of section 238 itself, which sets out the formalities to be complied with by both the company and the dissenting shareholders. These steps include prescribed timeframes for issuing written notices of objection, authorisation, and dissent, a written offer by the company to purchase dissenters' shares at a specified price (that the company determines to be their fair value), and, in the absence of agreement, ultimately filing a petition to have the fair value of the dissenting shareholdings determined by the Court.

Shortly after the petition is filed, typically a directions hearing takes place at which the Court will resolve procedural issues to regulate the next steps in the proceeding. The Court's orders are primarily focussed on the preparation of reports by valuation experts that will later be relied on as evidence as to the fair value of the shareholdings in dispute. They usually include orders relating to the appointment of experts, disclosure of documents relevant to valuation, confidentiality protections, expert information requests, meetings between the experts and the company's management, exchange of expert reports, factual evidence and provision for a further case management conference as the proceeding nears trial.

The orders made in each case are to some extent bespoke but a convergence in approach in relation to certain issues is discernible from the reasoned decisions and...