In a decision released on 6 March 2018 in In the matter of Shanda Games Limited, the Cayman Islands Court of Appeal overturned the Grand Court and held that a minority discount should be applied in assessing the fair value of a dissenting shareholder’s shares, dismissing other appeals and grounds brought by both the company and the dissenters. See the Company’s press statement here.
As we previously blogged here, Shanda Games was only the second trial judgment in section 238 proceedings in the Cayman Islands (the first being in In the matter of Integra Group). In both Shanda Games and Integra, the Grand Court adopted the Delaware approach in finding that no minority discount should apply to the dissenting shareholders’ shares. In Delaware, the shares are valued as a proportion of the overall value of the company. This is significant: in Shanda Games the experts agreed that if a minority discount applied, it was worth 23% of the dissenters’ share value: or nearly US$17 million.
Shanda Games argued that it has never been unjust in England & Wales (for example in a squeeze-out or scheme of arrangement), to compulsorily acquire shares for less than the shareholder would receive on the sale of the company’s business and a distribution of the proceeds. In England, the shares are valued taking into account their specific characteristics, including that they represent a non-controlling interest – in other words, the value of what the shareholder actually possesses. The Court of Appeal, noting the parallels between the respective English and Cayman company laws on compulsory acquisition (and the lack of any corresponding parallels with Delaware company law), saw nothing to indicate that section 238 intended to depart from the established approach in England. Shanda Games’ appeal was therefore allowed on this ground.
Shanda Games will affect most ongoing and future dissent actions in the Cayman Islands, as dissenting shareholders hold, by their nature, a non-controlling interest. Shareholders who weigh turning down the merger price to exercise dissenter’s rights under section 238, must now consider having a discount applied to their interest by the court.
As for Delaware and Cayman? The last word goes to the Court of Appeal: “So long as that jurisprudence does not conflict with Caymanian law and practice, it is sensible to look to Delaware for assistance in solving problems that are novel to Cayman but not to Delaware. There is no point trying to invent the wheel”.