Short-form Mergers ' The Appraisal Saga Continues In Changyou.com

• Law Firm: Ogier
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Shareholders
• Author: Mr Shaun Maloney and Farrah Sbaiti
• Published date: 15 March 2023

The Cayman Islands Court of Appeal has recently dismissed challenges to its decision that shareholders of companies effecting 'short-form' mergers¹ are entitled to be paid fair value for their former shareholdings upon dissenting from the merger.²

The judgment confirms that any attempt to reverse engineer new grounds of appeal based on the ultimate findings of the appellate court will be dismissed. It also provides helpful guidance on when a decision on a preliminary issue will be considered final for the purposes of applying for leave to appeal to the Judicial Committee of the Privy Council.

Background to Changyou

Changyou.com Limited (Changyou) is a Cayman Islands incorporated company operating in China which merged with its parent company and de-listed from the NASDAQ (thereby effectively forcing out the minority independent shareholders under a short-form merger).

Changyou asserted that dissent rights under section 238 of the Companies Act did not apply in these circumstances. However, certain shareholders still attempted to dissent from the merger. Changyou contended that appraisal rights could only be exercised by shareholders who dissent from a merger in which there is a shareholder vote (i.e. a long-form merger) and that since no vote is required for a short-form merger no appraisal rights were available. The dissenters filed a petition seeking payment of the fair value of their former shares.

Decisions

First instance decision granting appraisal rights

The point was determined as a preliminary issue in favour of the dissenters. The Grand Court held that the provisions of section 238 should be read so as to allow the appraisal process to operate in the absence of any vote authorising the merger to avoid what would otherwise be an absurd result and a violation of the rights guaranteed by the Constitution, namely the right to peaceful enjoyment of property.³ For a more detailed overview read our article Short-form mergers - appraisal rights confirmed in the Cayman Islands in Changyou judgment.

Appeal decision confirming appraisal rights

The Court of Appeal preferred Changyou's interpretation of section 238 based on ordinary principles of construction, but agreed with the Grand Court that this produced an absurd result arising from an obvious drafting error. Since shares in a company were plainly "property" for the purposes of the Constitution, the Court of Appeal found that the operative provisions of section 238 needed to be reworded so as not to...