In the recent decision in the matter of Changyou.com Limited, the Grand Court of the Cayman Islands has resolved the question of whether shareholders who dissent from a “short form” merger are entitled to the same fair value appraisal rights under section 238 of the Companies Act as shareholders who dissent from ordinary mergers.
“Short form” (or “vertical”) mergers are mergers between a parent company and a subsidiary, where the parent company wields at least 90 per cent of the voting rights in that subsidiary. Unlike standard mergers, the Companies Act does not require shareholders to pass a special resolution in favour of a short form merger – the outcome of the vote is a foregone conclusion. The question of whether shareholders who dissent from the short form merger are entitled to appraisal of the fair value of their shares arises because the procedure for dissent prescribed by the Companies Act is predicated on there being a vote of the shareholders.
Changyou.com Limited is a Cayman Islands company that underwent a short form merger. A number of shareholders dissented from the merger and commenced fair value appraisal proceedings in respect of their shares, which was objected to by Chagyou.com on the basis that the dissenters lacked standing to do so under the short form merger regime.
The Court dealt with this question as a preliminary issue and found, based on an exercise of statutory construction, that dissenters from short form mergers are entitled to fair value appraisal notwithstanding the apparent anomalies in the drafting of the underlying legislation.
The Court suggested that the "tidiest" way of reading the statutory procedural provisions in the case of a short form merger would be to require that notice of dissent from the merger be given within 20 days of the shareholder’s receipt of the plan of merger (as opposed to, in the case of an ordinary merger, within 20 days of receipt of notice of the passing of the resolution authorising the merger). The Court did not specifically address how the statutory pre-merger objection step might be adapted to a short form merger. The pre-merger objection step is useful for companies proposing to undertake a merger in order to gauge the views of the minority shareholders before the merger is undertaken (which may, in turn, result in the company abandoning the merger or modifying its terms to meet the concerns of shareholders). It may be that, going forward, companies undertaking short form mergers will want to introduce a pre-merger objection step even though the decision in Changyou suggests that this is not necessary.