Cayman Court Relies On Market Value In Merger Appraisal

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...