Market conditions have sparked a series of take-private transactions by Chinese companies.
In some instances, minority shareholders consider that they have missed an opportunity to share in the possible upside and will seek resolution through court processes. In the case of Cayman companies’ mergers, it will be a matter for the Court to resolve claims by dissenting minority shareholders, under s.238 of the Cayman Companies Law, by determining ‘fair value’. This is an exercise in striking a balance, a process where quantitative estimates derived from alternate valuation methodologies are calibrated to appraise value. The Integra Group ruling (Integra) provided initial practical guidance in determining fair value while making clear that there is no ‘one size fits all’ approach, and that each case is dependent on individual circumstances.
Integra guidelines suggest an approach combining discounted cash flow (DCF) and market based methodologies, placing a greater weighting in this case on the ‘intrinsic’ value of the company as implied by DCF, due to case specific factors. The underlying drivers of DCF are forward looking estimates that are not wholly observable in the market and there is necessarily a degree of subjectivity in estimation under this methodology. For this reason, it is important to also reference market prices in determination of fair value as these are quantitative points that are observable in the market. Chinese company take-private transactions are undertaken with reference not only to US but also China markets.
Value is assessed on the basis of future expectations, and so it is rational to consider all markets, including China, when preparing an analysis of valuation multiples. For any more information, please contact Rose Kehoe of Zolfo Cooper (Hong Kong).