Cayman Appeal Court Hands Down Two Important Decisions In Appraisal Cases Under Section 238 Of The Companies Law

Two recent Cayman Islands Court of Appeal decisions will impact the position of Dissenting Shareholders in fair value appraisal cases coming before the Cayman courts.

Following the first of these decisions, Re Shanda Games Limited (6 March 2018), dissenting shareholders will need to take into account the commercial impact of a minority discount on the value of their shares in a company subject to a merger, consolidation or take-private transaction under section 238 of the Companies Law.

Section 238 of the Cayman Islands Companies Law entitles a member of a company to "payment of the fair value of his shares" upon dissenting in a merger or consolidation. Until now, the practice of the Cayman Court to determine the "fair value of [a dissenter's] shares" has been to calculate the value of the company and award the dissenting shareholder an amount representing their proportionate share of that value, with limited adjustments. However, the Cayman Islands Court of Appeal has now reversed this approach and made clear that it can be appropriate for a minority discount to be applied in determining the fair value of a dissenter's shares in a statutory appraisal case under section 238 of the Companies Law.

In order to quantify the consequences of this decision for the dissenters in the Shanda Games case itself, the minority discount was 23%. This figure was agreed by the experts and resulted in a reduction in the value of the dissenters' shares to the tune of US$16.9 million.. However, even with the minority discount applied, as a result of the appraisal proceedings the Dissenter's received a share value over 40% higher than the original price offered by the Company.

The First Instance Decision

The Honourable Mr Justice Segal had followed the earlier decision of Jones J in Re Integra Group [2016] 1 CILR 192 (though it is important to note that the minority discount question was not argued before Jones J in Integra) and rejected the suggestion of a minority discount at first instance on the basis that, inter alia:

1. The Cayman Islands' statutory appraisal regime was based on the Delaware statute and in that jurisdiction, no minority discount is applied (nor is it applied in Canada which also has a statutory appraisal regime). Rather it is the practice in those jurisdictions to value a dissenting shareholders' holdings as a proportion of the value of the company. Thus, the Courts have rejected a market value approach to appraisal in Delaware.

2. The purpose of the s238 regime is to protect the interests of minority shareholders and applying a minority discount to the assessment of the value of their shares is inconsistent...