“The truth is seldom pure, and never simple.” (Oscar Wilde) - Fair value determinations under section 238 of the Companies Law: In re Nord Anglia Education
The Grand Court has handed down its decision in yet another important case concerning share appraisal rights under section 238 of the Cayman Islands Companies Law. The extensive and wide ranging judgment, the first following the Privy Council’s recent decision in Shanda Games, is notable for its analysis ofhow the general legal principles governing the Court’s jurisdiction to determine the fair value of shares ought to be applied.
At the heart of the case were three valuation methodologies considered by the experts for arriving at the fair value of the dissenting shareholders’ shares: the market price of the shares, the transaction price (ie the consideration paid by the company to the requisite majority of shareholders agreeing to the merger), or the DCF (discounted cash flow) method. The company’s expert opined that the market price was the best indicator of fair value, whilst acknowledging that the DCF method may be helpful as a cross- check. The dissenters’ expert contended only for a DCF analysis.
The Court noted that there was no precedent in the three other s238 cases that have gone to trial for placing primary or sole reliance on the market price. It held that the market price did not provide reliable evidence of fair value on the basis, first, that there was insufficient evidence of market efficiency, and secondly, participants in the merger had considered it necessary to take into account non-public information that they considered to be material to value.
The transaction price did provide evidence of what a willing buyer and seller would exchange for the shares in the real world. However, the circumstances of the transaction, although arms-length, was held not to be robust; and accordingly the Court had doubts as to whether it could be relied upon (wholly or in part) without considering the “more elaborate” DCF analysis.
The Court held that “a DCF analysis should be given considerable weight in the Court’s valuation process, but not to an extent which generates a value which is significantly at variance with the market price, viewed together with the transaction price.” Such a finding may have considerable implications for section 238 cases moving forwards.
The Court held that section 238 permits the Cayman court to blend the approaches proposed by the experts. That being the case, it decided to apply a 60 per cent weighting to the transaction price and 40 per cent weighting to the particular DCF valuation that the Court had approved. This would, ultimately, result in a fair value valuation that was modestly more than the transaction price.
Harneys has extensive expertise in share appraisal actions. The above is intended as a very brief summary of a number of complex issues addressed in an extensive judgment that is essential reading for all those involved in s238 matters. Please do get in touch with us if you require further analysis or would like to discuss.