Dissenting shareholder claims in the Cayman Islands – the fair value date debate
27 January 2022
Section 238 Companies Act claims in the Cayman Islands, which provide recourse for shareholders who believe that their shares have been undervalued in a merger, continue at pace as PRC-based companies delist from US exchanges. With so much judicial development in this area since 2016, the suggestion in the recent decision of the Hon. Justice Parker in In the Matter of Sina Corporation ("Sina") that there had until now been no confirmed position as to the date at which the fair value of the dissenting shareholders' shares should be assessed, is surprising. The date at which fair value is assessed would seem to be pretty fundamental to the whole assessment.
In Sina, Sina Corporation owned a controlling share in Weibo, the PRC social media platform similar to Twitter. On 28 September 2020 Sina Corporation's Board executed a merger agreement accepting an offer from a buyer group to acquire Sina Corporation's shares for US$43.50 per share. The merger was then approved by a special resolution at an EGM on 23 December 2020. Prior to that date, certain dissenting shareholders had notified the company of their objections to the merger. On 22 March 2021 the Plan of Merger was completed and filed with the Registrar of Companies in the Cayman Islands.
According to Parker J and counsel for Sina Corporation, prior to this case, fair value had always been assessed as at the date of the approval of the merger at a general meeting of the company (the "Approval Date"); however, this had always been by agreement (save in the first fair value case in the Cayman Islands to reach trial, considered further below). Nevertheless, the dissenting shareholders in Sina challenged this position in and instead sought to argue that the correct date is the date that the Plan of Merger was filed (the "Completion Date") because (i) this accords with a fair construction of the statutory regime; and (ii) it is the date on which the non-dissenting shareholders 'reap the benefits' of the merger as well as being the trigger for the obligation to pay the dissenters the fair value of their shares.
Parker J rejected the dissenters' argument and decided to stick with the status quo, confirming that the applicable assessment date is the Approval Date. At first blush, this decision appears sound; but on closer analysis it isn't clear that this decision is entirely logical or consistent with previous decisions of the Grand Court including, in particular, Parker J's own decision in In the Matter of Qunar 2019 (1) CILR 611. In Qunar, Parker J held that "The valuation is to be performed immediately before the merger. Fair value does not take into account advantages which accrue to the company post-merger including anticipated synergies." This begs the question of what is meant by "immediately before the merger" and what "advantages" should be excluded from the assessment of fair value.
The decision in Qunar as to fair value indicates that "immediately before the merger" might actually mean before the company entered into the merger agreement (i.e. in Sina Corporation's case before 28 September 2020 or earlier) for two reasons: (i) in Qunar Parker J accepted the company's expert's valuation approach, which estimated the company's value (emphasis added) "by giving equal weighting to a DCF approach and a market trading approach which was based on the company’s share price immediately prior to the announcement of the merger on June 23rd, 2016" (Qunar first announced receipt of a preliminary non-binding offer on 23 June 2016); and (ii) Parker J accepted in Sina Corporation and in Qunar the view expressed by the Hon. Justice Jones in In the Matter of Intergra Group 2016(1) CILR 192 (the first s238 case to reach trial in the Cayman Islands) that fair value should be determined disregarding the effects of the merger, whether the effect would be positive or negative.
If it is accepted that (i) the share price of a publicly traded company is a relevant factor in assessing fair value (as it was in Qunar and in subsequent decisions); and that (ii) news of a merger could potentially have a substantial impact on the share price of a publicly traded company; and (iii) the impact of the news of the merger should not be taken into account in assessing fair value (since it is an effect of the merger), then the correct date must in fact be before the merger agreement is entered into and the merger is announced to the public.
To illustrate this point, one can look at the impact of a recent buy-out announcement on share price. On 10 January 2022, Zynga Inc announced that it has entered into a merger agreement with Take Two Interactive Software ("Take Two") by which it accepted Take Two's buy-out offer of Zynga at a value of US$9.86 per share (the transaction is subject to Delaware, not Cayman law). Immediately prior to the announcement, on Friday 7 January 2022, Zynga shares closed at US$6.01. On Monday 10 January 2022 (the next trading day and the day of the announcement), the share price moved sharply upwards, trading as high as US$9.20 before closing at US$8.90. It has continued to trade above US$8.00 since 10 January and history would suggest it is likely to do so up to the date of Zynga's stockholder meeting to approve the merger (assuming no higher offer is received during the current "go-shop" period). It is unarguable that the increase in Zynga's share price is directly attributable to the buy-out announcement. The question is – should any dissenting shareholders be entitled to the benefit of that announcement? If not, then shouldn't the effective valuation date be earlier than the point at which the share price of the company is impacted by the merger itself?
The Hon. Chief Justice Smellie in another s238 case, In the Matter of JA Solar Holdings Co., Ltd, held that "As confirmed in Integra, the "valuation date" is to be the date of the extraordinary general meeting, as "the fair value should be determined at the point immediately before the merger is agreed". Presumably this means agreed by the shareholders at the EGM, which may certainly be a pivotal date if there was any prospect in these cases that the merger would not be approved at the EGM. Practically speaking, however, there is little prospect of the merger not being approved by the members in these cases because the buyer group almost always has a controlling share and/or the majority shareholders are bound by the merger agreement to vote in favour of the proposal. That being so, the "value" (pun intended) of the Approval Date is questionable.