Shanda Games In The Privy Council: The Beginning Of The End Of Share Appraisal Litigation Involving Cayman Islands Companies, Or Just The End Of The Beginning?

• Published date: 11 September 2020
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Shareholders
• Law Firm: Conyers
• Author: Mr Alex Potts QC and Erik Bodden

In Shanda Games Ltd v. Maso Capital Investments Ltd [2020] UKPC 2 (27 January 2020) the Judicial Committee of the Privy Council has considered one important aspect of s.238 of the Cayman Islands' Companies Law, relating to minority shareholder appraisal rights in the context of a corporate merger or consolidation involving a Cayman Islands company. While the case focuses on the law of the Cayman Islands, its wider discussion of fair value should be of broader interest to practitioners in the UK and beyond.

In summary, the Privy Council has concluded that in a corporate merger, a dissenting minority shareholder's shares should ordinarily be valued by the Cayman Islands Court as a minority shareholding, with the application of a "minority discount", subject to the facts of any particular case. This is the first time that the meaning and effect of s.238 of the Companies Law has been considered by the Privy Council at a final appellate level since its enactment in 2009.

It is unlikely to be the last time, since a number of other controversial, and high-value, s.238 shareholder appraisal cases still remain pending before the Grand Court and the Court of Appeal of the Cayman Islands, giving rise to significant potential for further appeals to be brought before the Privy Council (despite the fact that an appraisal action is particularly fact sensitive, and quintessentially a matter for resolution by a trial judge at first instance, with the benefit of expert valuation evidence).

The Privy Council's judgment in Shanda Games Ltd is particularly important for its general appellate guidance to the Cayman Islands courts (and to lawyers and expert witnesses dealing with valuation issues) as to the manner in which the Cayman legislation should be interpreted and applied, having regard to reported case law on similar, or related, statutory provisions from Delaware, Canada, England and Wales, Bermuda and the British Virgin Islands.

The judgment is almost as important, however, for what it has not yet decided, as much as what it has decided.

Summary of sections 238 and 239 of the Cayman Islands' Companies Law

Under s.238 of the Cayman Islands' Companies Law, where there has been a merger or consolidation involving at least one Cayman company pursuant to Pt XVI of the Companies Law, a dissenting shareholder is entitled to payment of the "fair value" of his shares.

If the dissenter and the company cannot agree on the "fair value", the company shall, or the dissenter may, present a petition to the Grand Court of the Cayman Islands for its determination of the fair value of his shares and a fair rate of interest, if any, to be paid by the company.

• The entitlement of the member to fair value is set out in subs.(1) of s.238. The right is limited to members.
• The dissenter must give notice that he objects to the merger and intends to demand payment for his shares before the resolution to approve the merger takes place (subss.(2), (3)).
• The company must give him notice that the merger has been approved within 20 days of the approval (subs.(4)).
• The dissenter then has 20 days to give notice of his decision to dissent, which he must do in respect of all his shares in the company (subs.(5), (6)).
• On giving that notice, he loses his status as a member save that he may pursue his claim to payment of fair value and bring a claim to have the merger declared...