Valuation of shares in M&A deals

These acquisitions can aid in restructuring a group that is experiencing a downturn due to the pandemic, or they can help businesses to capitalise on unique opportunities that only occur in conditions such as those created by the pandemic.

Regardless of the benefits that these deals can provide, careful consideration should be given at a board level to the expectations of shareholders regarding the valuation of their shares.

Where there is a merger or amalgamation involving one or more Bermuda companies, the Companies Act 1981 provides that the directors of each company shall submit the merger or amalgamation agreement to the shareholders of their respective companies in order to get approval.

Notice of the meeting of the shareholders shall be accompanied by a summary of the agreement and state the fair value of the shareholders’ shares as determined by the board of each company, and provide that a dissenting shareholder is entitled to be paid the fair value of his or her shares.

The significance in stating the fair value of the shares as determined by the board of directors is that, those shareholders who do not vote in favour of the merger or amalgamation and feel that they have not been offered fair value may apply to have their shares appraised by the court.

The court typically determines fair value on the basis of expert evidence submitted by the parties; this is why it is important to highlight in the board minutes the factors that were considered by the directors of the company when determining fair value. An application to have fair value appraised by the court must be made within one month of receipt of the notice to hold a shareholder’s meeting.

Where the amalgamation consideration is to be shares in the target company, the courts will only be concerned with expert evidence that aids them in determining the fair value of the shares in the amalgamating company and not the fair value of the shares in the target company.

It is important to note that no appeals shall be made once the court has made its determination of fair value. That will be the final resolution, however grievous the decision may be to either the company or the dissenting shareholder(s).

Once the court appraises the value of the shares, the company has two options. It may pay the dissenting shareholder(s) an amount equal to the fair value as appraised by the court, or it may terminate the amalgamation or merger in accordance with the Act.

This is another reason why the board must be able to clearly illustrate to the court how it arrived at the determination of fair value, as it is possible that an application by a few dissenting shareholders could result in the company having to pay out a greater sum than was originally considered – or ultimately lead to termination of the merger or amalgamation agreement.

Case law on this topic is rare, but Canadian authorities suggest that the appraisal process as determined by the court is to be taken on a case-by-case basis and that there is no one set of rules that answers all of the questions that may arise from clients looking to pursue a merger or amalgamation.

Despite this being the case, the courts have held that there are four commonly recognised approaches in valuing company shares:

• market value of the shares (their quoted price on a stock exchange);
• value of the assets of the company (either as a going concern or on liquidation);
• earnings, which looks at the capitalised value of a projected stream of income; or
• it could use some combination of the previous three methods.

One final note that was considered by a US court is that the remedy of a dissenting shareholder to seek appraisal is likely to be the exclusive remedy of that shareholder.

Although there is no Bermuda case law on this point, the US court in that particular case determined that if a Bermuda court were to address the issue, it would also find the appraisal remedy exclusive.

Authored by trainee Zantae Dill, a member of the Corporate department at Appleby.

For support and advice, contact our Mergers & Acquisitions (M&A) team.