Reappraising Section 238 "fair Value" Proceedings: An Update On Recent Developments

• Published date: 25 January 2022
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Shareholders
• Law Firm: Ogier
• Author: Mr Shaun Maloney and Farrah Sbaiti

Section 238 of the Cayman Islands Companies Act (2022 Revision) (the Act), provides a mechanism by which shareholders in Cayman Islands companies are able to dissent from mergers and consolidations, and have the "fair value" of their shares determined by the Grand Court of the Cayman Islands.

As we begin 2022, it is helpful to take stock of the current appraisal landscape in this relatively new, but rapidly evolving, area of law. In particular, there have been a number of interesting developments since our initial overview was published in 2020. This article provides an update on these advancements and considers what the future may hold.

Recent outcomes

Soon after the overview was published, the Grand Court (Court) delivered its substantive judgment in Nord Anglia. ¹ In ordering a 16% uplift on the merger price, the Court applied a blended 60% weighting to the deal price and 40% to a discounted cash flow (DCF) analysis. Importantly, no weight was given to the trading price, primarily due to material non-public information not being available to market participants.

The Court then gave judgment in Trina Solar in September 2020. ² Again, the Court determined fair value using a blended valuation methodology. However, unlike previous decisions ³ where two methodologies were given weight, this decision was the first to blend three different valuation methodologies - applying 45% to the deal price, 30% to the adjusted trading price and 25% to a DCF valuation. Upon applying these weightings, and a 2% minority discount to both the deal price and DCF components, the Court ultimately determined fair value to be 1% above the merger price.

A number of other section 238 proceedings have also recently settled, including eHi Car⁴ and KongZhong. ⁵ However, the terms of these settlements are confidential and any uplifts on the merger price cannot be publicly disclosed.

Extension of appraisal rights to "short-form" mergers

In Changyou.com, ⁶ the Court confirmed that shareholders of companies that effect "short-form" mergers ⁷ are entitled to be paid the fair value of their shares on dissenting, even though no shareholder vote is required to authorise the merger.

In determining that the right to payment of fair value for shareholdings upon dissenting from a merger was an absolute right, the Chief Justice took a purposive approach to interpreting section 238. This right was found to not be fettered by the apparent "mismatch" between the mechanical provisions of the legislation ⁸ and the substantive right to receive fair value. The Chief Justice held that, properly construed, the provisions of section 238 should be read so as to allow the appraisal process to also operate in respect of short-form mergers. For a more detailed analysis of this decision, see Short-form mergers: Changyou judgment confirms appraisal rights in the Cayman Islands.

An appeal against the Chief Justice's decision was heard by the Cayman Islands Court of Appeal (CICA) in November 2021 and judgment on this appeal remains pending at the time of writing.

Differing procedures for dissenting from long and short-form mergers

As explained in the earlier overview, certain statutory steps must be taken within prescribed timeframes in order for dissenters to avail themselves of their entitlement to be paid fair value for their former shareholdings under section 238. Following the extension of appraisal rights to short-form mergers in Changyou.com, the timeframes in which some of these steps must be taken are triggered by different events, depending on whether the merger is in long or short-form.

The steps and the relevant time periods for compliance for both long and short-form mergers are summarised in this timeline.

Other developing areas

Amongst the many recent developments in section 238 jurisprudence were a number of important...