Cayman Court makes first fair value determination in merger dispute
First published by Appleby in September 2015
The Cayman Islands legislature introduced the statutory merger and consolidation regime which is now found in Part XVI of the Companies Law (2013 Revision) in May 2009.
Since then, the regime has been widely used to effect mergers and consolidations, but until very recently the disputes which had arisen between shareholders dissenting from the merger or consolidation and the companies involved as to the fair value of the dissenters’ shares had all been settled out of Court.
The reluctance to proceed to trial was perhaps, in part, due to uncertainty as to how the Cayman Court would approach the task of determining the fair value of the dissenters’ shares, if it was called upon to do so. Much of this uncertainty has been removed by the recent judgment of the Cayman Islands Grand Court in In the matter of Integra Group (Jones J, 28 August 2015). The Court in Integra accepted, quoting from an article entitled Dissenting Shareholders’ Appraisal Rights in Cayman Islands Mergers and Consolidations which the authors published in The M&A Lawyer (Oct. 2014, Vol. 18, Issue 9), that:
“Fair value is the value to the shareholder of his proportionate share of the business as a going concern, save where it is worth less on a net assets (i.e. liquidated) basis as at the merger date: ex hypothesi the shareholder has bought into the company as a going concern, not in anticipation of participating in a liquidation, and it follows that, when he elects to dissent from a merger or consolidation brought about at the behest of the majority, he is thereafter deprived of his proportionate share of an active enterprise and is entitled to be compensated for it. In determining the measure of such compensation, the Court should be guided by the following considerations:
1.1 Fair value does not include any premium for forcible taking (i.e. expropriation of the shares).
1.2 It is neither appropriate nor permissible to apply a minority discount when making the determination”.
The Court further accepted that the concept of fair value excludes any enhancement or diminution in the value of the shares which is attributable to or results from the merger, holding in particular that any cost saving which resulted from the delisting of shares in the company, and any dilution of the dissenters’ shareholdings which occurred as a result of the merger, could not be taken into account in arriving at fair value.
The acceptance of these key principles by the Cayman Court in Integra is a welcome development for Cayman Islands law in this area. The ruling serves to narrow the valuation issues which can reasonably be in dispute between the parties and ensures that the expert valuation evidence is prepared with a certain definition of fair value in mind. The parties to future fair value disputes will doubtless approach their negotiations and the proceedings themselves with greater clarity and confidence in light of this decision.
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