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In the matter of Shanda Games Limited

The Grand Court of the Cayman Islands (the Honourable Justice Nicholas Segal) has handed down its judgment in In the matter of Shanda Games Limited.

Why is this blog-worthy? Because the Shanda Games decision is only the second final judgment on Section 238 of the Cayman Islands Companies Law (the first being the 2015 decision in In the matter of Integra Group) in a jurisdiction now brimming with dissenting shareholder litigation.

The Court has clarified a number of handy principles in this latest judgment. Harneys was, after the hearing, appointed to replace the company’s previous attorneys.

  1. The relevance of Delaware and Canadian case law in Cayman: Section 238 was drafted using the same core concepts and terms as appear in the Delaware and Canadian legislation. While not binding, the Cayman Court confirmed that it was appropriate to have regard to the decisions made by Delaware and Canadian courts.

  2. No minority discount to be applied to a “fair value” determination: The parties in Integra had agreed that a minority discount should not be applied, so Shanda Games was the first occasion that the Cayman Court had heard the argument that a minority discount should be applied to the value of the dissenting shareholders. The well-settled position in Delaware and Canada is that no minority discount applies and that the shares are to be valued as a proportionate share of the value of the company. The Cayman Court agreed with this approach, although this is likely to be fertile source of disagreement in future proceedings.

  3. The “China effect”: The Court accepted the existence of what it termed the “China effect” – the adverse perception by U.S investors of Chinese businesses listed in the U.S. such that the shares of those companies came to be undervalued by the market – with the consequence that historical market data may be subject to distortion and inaccurate. Given that 8 of the 9 section 238 petitions filed in 2016 were in respect of corporate structures with operations in the PRC, this observation is likely to be the subject of much further debate.
  4. Transaction costs are to be deducted:  The Court agreed that the company’s costs of the merger should be deducted from the company’s equity value. The Court was not prepared, given the absence of evidence before it on the law and practice of the courts of Delaware and Canada, to extend the well-established principle that dissenting shareholders should not benefit from the future improved performance of the business that results from the merger to the proposition that the dissenting shareholders should also not have to pay their share of the costs of the merger.

Consistent with the approach in Delaware, the judgment confirms the Court’s approach on each disputed element of the fair value determination (having regard to the opinions of the respective experts) and the Court has left it to the parties to calculate a fair value consistent with that judgment (with resort to the Court to the extent of any remaining disagreement). 

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