S238 In Action: Five Things To Note In "Fair Value" Appraisal Proceedings

• Published date: 15 June 2022
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Shareholders
• Law Firm: Carey Olsen
• Author: Mr James Noble, Helen Wang and Kate Lan

The section 238 appraisal process under the Companies Act¹ in the Cayman Islands is a vital safeguard designed to protect minority shareholders' economic interests. When there is a merger or consolidation involving at least one Cayman company under Part XVI of the Companies Act, a dissenting shareholder may demand payment of the "fair value" in respect of all his shares. If the company and the dissenting shareholder cannot reach an agreement on the price within a specified period, the company shall (and any dissenting shareholder may) file a petition with the Grand Court of the Cayman Islands for an appraisal and/or determination of the fair value of the dissenting shareholder's shares.

Jurisprudence in relation to section 238 cases has developed rapidly since In the Matter of Integra Group [2016] (1) CILR 192, the first section 238 case which reached trial in late 2015. This briefing sets out five practical points highlighted in recent decisions of the Cayman Islands Courts.

THE MEANING OF FAIR VALUE

There is, unsurprisingly, no "one size fits all" approach to determine what the 'fair value' is. The question often turns on a question of valuation methodology and involves consideration of extensive expert evidence. The Court's methodology in weighing expert evidence is taken from Delaware jurisprudence, cited in Shanda Games:²

"In making the fair value determination, the court may look to the opinions advanced by the parties' experts, select one party's expert opinion as a framework, fashion its own framework, or adopt piecemeal some portion of an export's model methodology or mathematical calculations. But, the court may not adopt an 'either-or' approach and must use its judgment and an independent valuation exercise to reach its conclusion."

Importantly, this means that while the Court is restrained in undertaking its own expert analysis, it is allowed to adjust the figures determined by the experts.

Further, there is no fixed methodology which an expert must consider. In Trina Solar Limited³, the Grand Court explained that:

"[t]he reference to fair requires that the manner and method of that assessment and determination is fair to the dissenting shareholder by ensuring that all relevant facts and matters are considered and that the sum selected properly reflects the true monetary worth to the shareholder of what he has lost, undistorted by the limitations and flaws of particular valuation methodologies and fairly balancing, where appropriate, the...