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Cayman Fair Value Claims: Do Dissenters need to beware of Delaware?

As we previously blogged, with the release of the decision in Shanda, Cayman now has its second judgment (following Integra) in a fully contested fair value claim. In Shanda, Segal J noted that Delaware and Canada are jurisdictions with similar regimes to Cayman’s fair value provisions under section 238 of the Companies Law (2016 Revision).

Unsurprisingly, Delaware was described as being of particular significance because it shares the key concept of fair value and because of its “well-developed jurisprudence”. Segal J outlined an approach to Delaware (and Canadian) authorities that is “in accordance and consistent with that taken by Jones J in Integra”. The Court would apply Cayman law and would not treat Delaware (and Canadian) authorities as binding. However, such authorities would frequently be of assistance on questions of law and valuation practice. Obviously, practice and procedure in Delaware is, and will continue to be, of significant interest to Cayman judges in deciding fair value claims. Are there further legal tools that can be applied from Delaware going forward in Cayman? An interesting issue, as yet undecided in Cayman, is whether disclosure obligations should apply to Dissenters.  Up to this point it appears that disclosure has been a one way street, with the obligation to disclose falling squarely with the Company.  That could change in fair value claims involving arbitrage investors. In In re Appraisal of Dole Food Company, Inc., Consol C.A. No. 9079—VCL (Del. Ch. Dec. 9, 2014) the Company sought discovery of internal valuations prepared by the dissenting hedge fund shareholder.  Unsurprisingly, the application was vehemently opposed. However, in a well-reasoned opinion, the Delaware Court of Chancery ordered the dissenters to provide the discovery for the following reasons:

  1. The appraisal statute authorizes the court to consider all factors relating to fair value, which includes (among other things) the prices for which knowledgeable insiders sold their shares – this also helps as a “cross-check” on the experts’ figures, and provides the court with additional assistance;
  2. Lay witnesses (including stockholders) under Delaware procedure are competent to express their views on valuation, particularly a “fair value” appraisal determination required to be made by judges who themselves are not financially-trained valuation experts; and
  3. Non-expert evidence, particularly, the pre-litigation position of the parties, is useful to test the credibility of valuation inputs, in order to “temper…the adversarial hyperbole that inevitably influences an expert’s opinion in [contested] valuation proceedings.”

The Court in Dole also noted the usefulness of the Company having the dissenters’ internal valuation documents to aid more constructive settlement negotiations.  Such negotiations are expressly contemplated under the Cayman statute with a cooling off period to seek agreement between the parties. Given that Delaware sees arbitrage dissenter’s valuations as relevant to the determination of fair value, will Cayman, clearly taking significant guidance from Delaware, follow suit?  And should dissenters be concerned?  Watch this space! 

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