Recognising the Privy Council’s decision in Maso Capital Investments Ltd v Trina Solar Ltd  (Trina Solar), the Court determined that the merger consideration of US$56 per ADS represented the fair value of the dissenters’ shares, noting that “a flawed [merger] process does not automatically disqualify the merger price”.

Prior to the merger, 58.com was a NYSE-listed, Cayman Islands-incorporated company which operated an online classifieds platform in the People’s Republic of China. In 2020, its founder and CEO, Mr Jinbo “Michael” Yao, led a management-backed take-private by a consortium including Ocean Link Capital, Warburg Pincus and General Atlantic, at a price of US$56 per ADS. The merger, valued at US$8.7 billion, was the largest take-private of a PRC company at the time.

Following completion, the dissenters (comprising professional appraisal arbitrage investors) exercised their statutory right under section 238 of the Cayman Islands’ Companies Act to have the Court determine the fair value of their shares. At trial, the Company argued that fair value represented an average of the merger price blended with a mid-point of Adjusted Market Trading Price (AMTP), so that merger price operated not as a primary indicator of fair value but as a ceiling that should not be exceeded. The dissenters, on the other hand, relied exclusively on a DCF analysis, arguing that no weight could be placed on merger price due to flaws in the merger process. They also challenged the reliability of an AMTP valuation on the basis that the market for the Company’s shares was inefficient and that material non-public information (MNPI) was available to insiders – both of which they argued rendered fair value unreliable.

The Court acknowledged that the “decision in Trina Solar makes it clear that the reliability of the transaction price forms part of the Court’s assessment of the appropriate valuation methodology and must be evaluated before determining the weight to be given to competing indicators of value”.

The Court upheld the Privy Council’s determination that reliability of the merger price is not a binary concept but a qualitative assessment on a sliding scale and there is no presumption in favour of, or against, the merger price. The Court further noted that deficiencies in the deal process do not automatically disqualify it and that factors identified in the relevant Delaware authorities (on which the Cayman Islands courts have relied in section 238 appraisal matters) can be persuasive and are useful guides, but they are not a checklist that must be satisfied before any reliance may be placed on a merger price.

While the Court acknowledged certain imperfections during the merger process in 58.com, including informal communications between a Special Committee member and the buyer group, and the absence of a go-shop/market check, it was not persuaded that those features distorted the merger price ultimately agreed or deprived the Special Committee of its ability to act independently.

The Court also concluded that AMTP was not a reliable indicator of fair value in this case and should be accorded no material weight given certain MNPI (comprising revised management projections and operational updates that were available to insiders of the Company) and concerns regarding the roll-forward carried out by the Company’s expert, undermined the premise that the market price reflected intrinsic value.

The Court also rejected the dissenters’ DCF valuation on the basis that that their chosen cash flow inputs were unreliable and which led to “a valuation materially in excess of all contemporaneous prices, including the merger price and observed trading prices”  which the Court determined undermined the reliability of the dissenters’ DCF valuation.

Following the Privy Council’s confirmation that reliability of merger price is a qualitative, sliding-scale assessment, the 58.com judgment demonstrates how that framework operates in practice: a management-led transaction with identifiable process imperfections can still yield a merger price that the Court accords determinative weight. Perceived flaws such as informal backchannels between the Special Committee and the buyer group, absence of a broader market check and the structural constraints of a founder-led buyout do not disqualify the merger price – what matters is whether the evidence demonstrates actual distortion of the merger price.

The Court identified the following factors that it considered to be persuasive when conducting a fact-specific assessment of the merger process (and which may prove useful guidance for future cases):

• If the merger process took place against the backdrop of a well-functioning public market for the Company’s shares – ie the shares were widely held, actively traded on a major public exchange, followed by a substantial number of analysts, exhibited consistently high trading volumes, providing a reliable context for price formation and negotiation;
• If the merger consideration was the product of a negotiated transactions involving commercially sophisticated participants who had access to extensive information about the Company and were able to conduct informed due diligence with the co-operation of management;
• If the buyer group undertook its own assessment of the Company and negotiated the price with the Special Committee, which was advised throughout by independent legal and financial advisers;
• If the Special Committee was composed of individuals who, although they had not previously served on a special committee, brought significant professional experience to that role, exercised independent judgment throughout and did not simply accept the initial proposal but negotiated on price; and
• If the absence of competing bids reflected the limited universe of buyers for a transaction of this scale, rather than any price-suppressing effect arising from Mr Yao’s dual role or from a failure to conduct a market check.

The 58.com judgment comes shortly after the judgment in 51job, Inc. where Justice Doyle determined that fair value was below both the merger price and significantly below the dissenters’ DCF valuation, ultimately deciding to give full weight to 51job’s ATMP at the valuation date.

The 58.com and 51job judgments therefore illustrate that a DCF analysis is under increasing pressure by the Courts, particularly in circumstances where the cash-flow projections relied upon are unreliable or inaccurate. Here, the Court was alert to the provenance of the cash-flow projections relied upon, concluding that they did not provide a sound basis for the DCF valuation of fair value at the valuation date. This follows the Court’s characterisation of unreliable projections in the context of a DCF analysis in the 51job judgment, describing the mechanism as “garbage in, garbage out” and ultimately allocating it zero weight.

The Court also appears to be increasingly distrusting of DCF valuations that render valuations far in excess of contemporaneous prices, including merger price and trading prices. These factors would suggest that DCF analyses in the context of 238 appraisal matters will continue to face heightened uncertainty and scrutiny from the Courts.