The Privy Council has today handed down the eagerly awaited judgment in the Maso & Blackwell v Shanda Games appeals. In a judgment delivered by Lady Arden, the Board has unanimously held that a minority discount is to be applied to the fair value determination of the dissenters’ shares in this case under section 238 of the Cayman Islands Companies Law.
Under section 238, dissenters to a merger can seek a judicial determination of “fair value” of their shares in lieu of accepting the merger price. This is the first decision on section 238 to be appealed to the Privy Council – the highest appellant court in the jurisdiction. A hotly contested issue in Cayman jurisprudence, and in other jurisdictions with comparable shareholder appraisal regimes, has been whether dissenters’ shares should be valued with a minority discount to account for the lack of control or whether shares should be valued as a pro rata part of the value of the company’s net assets or business undertaking.
The first instance Judge in Shanda Games had held that a minority discount should not be applied to the fair value determination. The Cayman Islands Court of Appeal (CICA) overturned this decision on appeal in reliance inter alia on jurisprudence from England and Wales on squeeze outs and schemes of arrangement, and on cases decided under other provisions of the Companies Law.
The Board today affirmed the order made by the CICA and held inter alia:
- The meaning of “fair value” is to be ascertained by statutory interpretation. The Court must ascertain the intention of the legislature from the words used in their context and any material that demonstrates the mischief sought to be redressed.
- The general principle of share valuation is that, unless there is some indication to the contrary, the court should value the actual shareholding which the shareholder has to sell and not a hypothetical share. In absence of special circumstances, the minority shareholder’s shares should be valued as a minority shareholding and not on a pro rata basis.
- There are comparable provisions in the Companies Law which do not provide for pro rata valuation and there is no reason to take a different view on section 238 proceedings.
- The House of Lords decision of Short v Treasury established the general principle that 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 share of the value of the undertaking of the company. There is no indication the legislature intended to displace this principle.
- The similarities between the Delaware appraisal remedy and section 238 do not justify a departure from the general principle. The CICA was right to resist the temptation to hold that “fair value” must mean the same as in Delaware. While the jurisprudence of Delaware is of great value in this field, the Cayman legislature can only have intended that Cayman courts should interpret this phrase as and when cases arise – as opposed to a wholesale intention to adopt a Delaware interpretation on this issue. There may be different policy considerations at play.
Harneys acts for Shanda Games in this Privy Council appeal and also acted for Shanda Games at the CICA. To date, Cayman has seen 25 section 238 petitions filed. Harneys has advised in 13 of those petitions.