The Cayman Court has delivered judgment in Trina Solar Limited. This is likely to be the first case under section 238 of the Companies Law in which fair value is determined to be below the merger price. This is a significant win for Trina and will have a big impact on future s238 cases.
Trina, a solar panel manufacturer formerly listed on the NYSE, was taken private by way of merger in 2016. Two shareholders dissented and applied to Court for valuation of their shares.
The trial was heard in May and June 2019, with supplemental closing submissions heard in April 2020, following the Privy Council’s decision in Shanda Games, reported here.
The Company’s valuation expert used a blended approach to valuation, ascribing 40 per cent weighting to the merger price, 40 per cent to the unaffected trading price and 20 per cent to a discounted cash flow (DCF) valuation, reaching a valuation that was below the merger price.
The dissenters’ valuation expert placed 100 per cent weighting on a DCF valuation, and produced competing DCF valuations, reaching values that were up to 18 times the merger price.
In a 252-page judgment, the Court preferred the approach of the Company’s expert, and adopted a blended approach, ascribing 45 per cent weighting to the merger price, 30 per cent to the unaffected trading price and 25 per cent to the DCF valuation.
The Judge was assisted by recent Delaware cases, including DFC Global and Dell, where market-based valuation methodologies were preferred over DCF.
He rejected the dissenters’ submissions that the trading price was unreliable because of the so-called China Effect - a theory relied on by the dissenters in other cases and reported here that all US-listed Chinese companies are systematically undervalued by US markets. He also rejected their submission that Trina held material non-public information such as to make the trading price unreliable.
Regarding the merger price, the Judge found it persuasive that the Buyer Group held only 5.6 per cent of the shares, and therefore could not force through the merger, and that the merger was approved by over 97 per cent of the company’s shareholders, including a large number of institutional investors.
The Judge also largely preferred the approach of the Company’s expert to the DCF valuation. He rejected the dissenters’ submission that Trina’s projections could not be relied on, although he required minor adjustments to be made to the discount rates used by the Company’s expert.
The Judge has directed the parties and valuation experts to agree a revised DCF calculation and fair value based on his conclusions. Although the fair value figure is yet to be agreed, given the heavy weighting ascribed to the unaffected trading price (which was itself 63 per cent of the merger price), it is likely that the fair value will be less than the merger price.
Harneys acts for Trina in these proceedings.