Minority shareholders – Philip Gillyon considers the meaning of 'fair value' in light of Shanda Games, a Privy Council decision on 'fair value' in Cayman Islands law on mergers

Minority shareholders – Philip Gillyon considers the meaning of ‘fair value’ in light of Shanda Games, a Privy Council decision on ‘fair value’ in Cayman Islands law on mergers

In Shanda Games Ltd v Maso Capital Investments Ltd (Cayman Islands) [2020] UKPC 2, the Privy Council upheld the Cayman Islands Court of Appeal (CICA) decision that, in a statutory merger under Cayman Islands law, the ‘fair value’ of the shares of the dissenting minority shareholders should be determined according to what those shareholders had to sell, and that the shares in question were therefore subject to a minority discount.

The Privy Council’s analysis of ‘fair value’ covers issues which are potentially of wider relevance and it is that analysis that is the focus of this article.

Background to Privy Council decision

The statutory regime for mergers in the Cayman Islands gives significant rights to dissenting shareholders. Under s 238 Companies Law (2013 revision) of the Cayman Islands (Companies Law), a dissenting shareholder to a statutory merger that involves at least one Cayman Islands company is entitled to payment of the ‘fair value’ of its shares; and if this cannot be agreed, has the right to apply to the Grand Court of the Cayman Islands to determine the fair value. ‘Fair value’ is not defined in the Companies Law.

The merger regime in the Cayman Islands is similar to those in Canada and Delaware, which also confer ‘fair value’ buy out rights on members dissenting to mergers, and whose courts have developed expertise in valuation issues arising from the appraisal of ‘fair value’.

Legislation in other offshore jurisdictions gives a dissenting minority shareholder a right to be bought out for the ‘fair value’ of its shares in a variety of circumstances. In some cases, the ‘fair value’ is to be determined by the court (as in the Cayman Islands); in others, in the absence of agreement, the ‘fair value’ is to be determined by a third party valuation by ‘appraisers’ appointed for that purpose. For example, in the British Virgin Islands, in the case of disagreement, the ‘fair value’ is fixed by three appraisers: one appointed by the company; one appointed by the dissenting minority shareholder; and a third appointed by the two party-nominated appraisers (s 179(9) BVI Business Companies Act 2004 (BCA 2004)).

The common feature of all those provisions is that the value fixed for the minority shareholder’s shares must be ‘fair’. The Privy Council’s decision in Shanda Games is therefore likely to be persuasive in offshore jurisdictions other than the Cayman Islands. However, Shanda Games does not definitively answer the principal questions which arise on such valuations, namely:

  • What is meant by a ‘fair’ price?
  • How is ‘fairness’ to be determined?
  • What considerations should be taken into account in assessing ‘fairness’?
  • In what circumstances will a price be deemed to be ‘fair’ or ‘unfair’?

Therefore, the law remains uncertain and in a state of flux notwithstanding Shanda Games.

The facts in outline

Shanda Games Ltd (SGL), a company incorporated in the Cayman Islands, merged in November 2015 with Capitalcorp Ltd as part of a ‘take-private’ transaction. Maso Capital Investments was part of a group of minority shareholders in SGL (Maso parties) who, following s 238 Companies Law requirements, gave notice of their dissent to the merger in writing. In accordance with s 238(8), SGL offered the Maso parties what it determined to be the fair price for their shares, which was the same as the offer price under the merger of US$3.55 per share and US$7.10 per American Depository Share. This offer was refused because, in the Maso parties’ view, it represented a discount to their share of the value of SGL. As a result, SGL petitioned the Grand Court to determine the fair value of the Maso parties’ shares and the fair rate of interest, if any, payable by the company on the outstanding consideration.

Grand Court judgment

In the Grand Court, Segal J held that the Maso parties’ shares should be valued on the basis of a pro rata share of the value of SGL, with no minority discount applied. In his view, the purpose of the fair value provision was to protect the dissenting minority, which meant that they were entitled to be compensated for their full interest, which was their proportionate share in the capital and value of the company. This broadly followed obiter comments in an earlier Cayman Islands case, In the Matter of Integra Group [2016] 1 CILR 192 in which the parties had accepted that there should be no minority discount and the judge indicated that he agreed with this position, adopting the approach of the Delaware courts.

Segal J considered that English unfair prejudice cases under s 994 CA 2006 applying a minority discount in the context of an order for sale of the petitioner’s minority shareholding were distinguishable. He considered that the statutory language of s 994 CA 2006 differed from s 238 Companies Law and provided for a different remedy, ie an order for sale of the petitioner’s shares. In contrast, s 238 did not assume a notional sale of the dissenters’ shares.

CICA judgment

CICA overturned the Grand Court’s judgment on ‘fair value’ and held that a minority discount should have been applied. Martin JA (with whom the other members of CICA agreed) considered that the correct approach to interpreting s 238 was in a way which was consistent with the other provisions of the Cayman Islands Companies Law which permitted the acquisition of the shares of dissenting, or non-assenting, shareholders (namely those dealing with schemes of arrangement and statutory ‘squeeze-out’ rights), rather than the Delaware law on which the Grand Court had focused. CICA held that, for the purposes of s 238, the value of a dissenter’s share was the value of what he possessed, ie a minority shareholding. This meant that a minority discount should be applied.

Martin JA highlighted that the position as to minority discounts differed between (i) Delaware and Canada (where it is established that no minority discount is to be applied) and (ii) England and Wales and Bermuda. He commented that, as regards England and Wales, the fact that shares were to be acquired at a discount was no obstacle to a statutory squeeze-out under s 979 CA 2006 or a scheme of arrangement under Part 26 CA 2006, and that the application of a discount was “the general rule where shares are purchased in the context of an unfair prejudice claim unless the company is a quasi-partnership”. While not dealing with an appraisal mechanism or statutory standard of fair value, the English cases were concerned with the fair value of the shares. As such, the mere fact that s 238 was not, unlike the unfair prejudice regime, predicated on a sale was not an adequate ground of distinction. Moreover, the Delaware approach was heavily influenced by public policy considerations.

Martin JA pointed to the fact that the Companies Law replicated the statutory squeeze-out and scheme of arrangement provisions interpreted in the English authorities. If it were assumed that the English approach to these provisions was to be applied in the Cayman Islands, those mechanisms allowed a minority discount to be applied to dissentients’ shares. It was unlikely that the merger regime introduced into the Companies Law was intended to depart from that approach, and it was to be presumed that the three mechanisms were to be construed from the same standpoint.

Privy Council

The Maso parties appealed against CICA’s decision. The main question for the Privy Council was whether CICA was correct in its interpretation of s 238 and whether, in determining the ‘fair value’ of the dissenting shareholders’ shares, a discount should be applied to reflect their minority holding. The Privy Council considered the matter to be one of statutory interpretation, noting that this appeal gave rise to a very narrow question which did not entail a detailed analysis of fair value.

Nevertheless, in giving the judgment of the Board, Lady Arden: (i) reviewed the judgments of Segal J and CICA at length; (ii) considered comparable provisions of the companies legislation in various  jurisdictions regarding fair value, including relevant English authorities (at paras 30-41); and (iii) analysed the general principle of the valuation of shares on sale in a solvent company (at paras 42-47).  The judgment is therefore more wide-ranging than it might initially appear, in respect of a solvent company reorganisation.

The Privy Council agreed with CICA and dismissed the appeal for three principal reasons:

  1. comparable provisions of the Companies Law did not provide for valuation on a pro rata basis;
  2. the general principle of share valuation on a sale was that what had to be valued was what the shareholder had to sell; and
  3. the similarity between the Delaware fair value appraisal remedy and s 238 Companies Law did not justify departure from that general principle.


Comparable provisions of the Companies Law

Giving the decision of the Privy Council, Lady Arden noted that the Companies Law contained other provisions enabling a minority shareholder to ask the court to review or fix the value of its shares, namely schemes of arrangement and statutory squeeze-outs. Under the equivalent UK provisions, the court would in effect approve a value reflecting that the shares were a minority holding. The Privy Council proceeded on the same assumption as CICA that the Cayman Island courts would apply English law when interpreting equivalent provisions of the Companies Law.

As regards schemes of arrangement under Part 26 CA 2006, the English authorities demonstrated that a court asked to sanction the scheme approved by the statutory majority would, if a shareholder opposed sanction, be slow to differ from the view of the majority that the terms of the scheme were fair.

In relation to statutory squeeze-outs under Part 28 CA 2006, provision was made for the compulsory transfer of those shares not acquired pursuant to the offer at the offer price or on such other terms as the court thought fit. The onus of showing that the offer price was unfair fell on the dissenting shareholder and was a heavy one. It was not unfair to offer the minority shareholder the value of what it possessed (ie a minority holding), without any uplift for the fact that the acquirer would gain control of the company. However, equally, it was not the rule that a minority discount would always be applied, as the court might be satisfied that a special exception should be made in the circumstances.

As regards the comparable provisions (on schemes and squeeze-out) in the Companies Law itself, the Privy Council agreed with CICA that the position would be the same as under CA 2006. While those provisions did not use the phrase ‘fair value’, they performed a comparable function to s 238 Companies Law in providing for a review of the valuation of shares on a non-voluntary disposition. It would be surprising if the legislature had intended to introduce a fundamentally different approach to share valuation under s 238. However, Lady Arden’s reasoning in relying on the provisions of CA 2006 regarding schemes of arrangement and ‘squeeze-outs’ (at paras 31 to 33) is not properly developed in the judgment and it is questionable whether, and how far, those provisions assist on the ‘fair value’ issue.

The Privy Council was less willing than CICA to draw on the unfair prejudice provisions in CA 2006, considering that they were not comparable to the same extent. There were no equivalent provisions in the Companies Law. Further, under the CA 2006 regime, the disposal of shares resulted from a purchase order made by the court, which had a judicial discretion as to the form of relief.

General principle of share valuation

In the Privy Council’s opinion, it was a general principle of share valuation that, unless there was some indication to the contrary, the court should value the actual shareholding which the shareholder had to sell and not some hypothetical share. On a merger, the offeror did not acquire control from any individual minority shareholder and so, in the absence of some contrary indication or special circumstances, the minority shareholder’s shares should be valued as a minority holding and not on a pro rata basis.

Lady Arden identified Short v Treasury Commissioners [1948] 1 KB 116 as the clearest authority on the principle, even though it concerned different statutory provisions. In that case, the Crown was acquiring the whole share capital of a company and was required, under the applicable legislation, to pay compensation to the shareholders. The Court of Appeal held (in a decision affirmed by the House of Lords) that, even though the Crown was acquiring the entire share capital, the members were not entitled to a pro rata share because they were only individually selling their own minority shareholding. Short established a general principle that (per Lady Arden in Shanda Games, at para 47):

“where it is necessary to determine the amount that should be paid when a shareholding is compulsorily acquired pursuant to some statutory provision, the shareholder is only entitled to be paid for the share with which he is parting, namely a minority shareholding, and not for a proportionate part of the controlling stake which the acquirer thereby builds up, still less a pro rata part of the value of the company’s net assets or business undertaking.”

In the Privy Council’s opinion, the subsequent enactment of CA 2006 must have been on the basis of this general principle and, while the principle could be displaced or varied by the legislature, in the Cayman Islands there was no indication that s 238 Companies Law was intended to do so.

Delaware legislation and s 238 Companies Law

The Privy Council considered that CICA was right to dismiss the interpretation of ‘fair value’ in s 238 as having the same meaning as in the Delaware legislation. That concept had been (and would continue to be) developed incrementally in the Delaware courts and was not defined in statute.

While comparative law could be useful, in enacting s 238 and referring to ‘fair value’, the Cayman Islands’ legislature decided to use a new and undefined phrase which was different from that used in other provisions of the Companies Law. This strongly implied an intention that the courts should interpret the term in a way that was consistent with principles of statutory interpretation, but otherwise free from the constraints of other jurisprudence relating to different valuation standards or circumstances. The value of the Delaware jurisprudence was outweighed by an analysis of the comparable provisions in the Companies Law and the general principle of valuation outlined above.

The Privy Council’s conclusions on the fair value appeal

The Privy Council concluded that the judge should not have held that fair value always means no minority discount: such a ‘bright-line’ rule could not be applied in every case. However, in the same way, CICA should not have held that a minority discount should invariably be applied as a matter of law. Under s 238, the court was required to ascertain the ‘fair value’ of the dissenter’s shareholding.

Although the scope of the appeal in Shanda Games was expressed to be narrow (at para 55), the Privy Council examined the ‘general rule’ regarding the application of a minority discount. In so doing, it could not rule out a case where a minority discount was inappropriate due to the particular valuation exercise under consideration. Accordingly, Shanda Games fails to clarify the circumstances in which a minority discount may be applied: for further guidance on that question, it is necessary to review the substantial body of authority which has grown up, particularly in English first instance authorities, as to when a minority discount should be made.