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Fair Value Proceedings: Shanda Games

The Court of Appeal of the Cayman Islands (“CICA”) has reversed the Grand Court on an important point of principle for determination of the “fair value” of the shares of a shareholder who dissents from a statutory merger under Part XVI of the Companies Law. See Shanda Games (CICA 12 of 2017, unrep., 6 March 2018).

The CICA held that, if a dissenter holds a minority shareholding, fair value of the dissenter’s shares should reflect any applicable minority discount. In terms of the mechanics of carrying out the valuation exercise, the Court is to determine the value of the shares as a proportion of the total value of the company, but that value should then be adjusted to reflect any applicable minority discount and to reflect the rights and obligations attaching to the shares that the dissenter actually possesses. On the facts of the case, the experts appear to have agreed that a minority discount would reduce the value by around 23%, which would still have meant that fair value was some 81% higher than the merger price.

The CICA also held that, when assessing a fair rate of interest to be applied in the context of such proceedings, the judge should take into account (i) the disadvantage to the dissenter (of being kept out of his money) and (ii) the advantage to the company (of having the benefit of that money). A judge may properly take a midpoint between (i) the return a prudent investor would have received on an investment of the money at the time of the merger (lost opportunity) or the investor’s cost of borrowing the sum that was found to be payable (cost of borrowing) and (ii) the rate of interest which the company would pay to borrow money during the proceedings.

Appeals were brought in relation to other aspects of the case, the detail of which are beyond the scope of this advisory. However, we touch on the company’s application to reopen the case after trial below.

Fair Value

In Integra [2016] 1 CILR 192 and Shanda Games at first instance, the Grand Court had relied in part on jurisprudence from Delaware and Canada before finding that, for the purposes of a petition under section 238 of the Companies Law,  the fair value of a dissenter’s shares should not include any discount for being a minority shareholding.

The CICA has held that to be the wrong approach. The CICA has held that in fact what is to be valued are the shares that the dissenter actually possesses. If it is a minority shareholding in a company that is not a quasi-partnership, it should reflect any applicable minority discount. If there are rights and obligations attaching to those shares which affect the value of the shares, then those too should be reflected in the determination of the fair value of the dissenter’s shares. The Court should arrive at fair value by adjusting the value that the shares would otherwise have as a proportion of the total value of the company.

The CICA’s decision was based on two principal reasons – first, by analogy with the position in England & Wales, Bermuda and BVI; second, for reasons of public policy.

Position in England, Bermuda, BVI

Bermuda and BVI have equivalent appraisal proceedings. In Bermuda, there is authority to the effect that the value of a minority shareholding should reflect any applicable minority discount. In BVI, that is possible in principle, but each case will turn on its facts.

Although there is no equivalent of appraisal proceedings in England & Wales, the CICA looked at the principles that apply to squeeze-outs and schemes of arrangement for the forcible acquisition of a minority’s shareholding, as well as unfair prejudice petitions leading to a minority shareholder’s shares in a company being bought out. None of those proceedings deal with a statutory standard of fair value, but the CICA found that they were all nevertheless concerned with fair value of the shares. With squeeze-outs and schemes, a minority discount would not in principle make the offer price unfair. On unfair prejudice petitions, the value of the shares should reflect any applicable minority discount unless the company was a quasi-partnership.

Public policy

The public policy rationale underpinning the position in Delaware has to do with the majority shareholders being unfairly enriched by imposing a penalty for lack of control on the minority shareholder whose shares are being forcibly taken away.

The CICA said that this was directly inconsistent with the policy expressed in England in Re Grierson [1968] Ch 17 (a squeeze-out case), where the English High Court had to consider whether a minority discount was unfair to the minority shareholder. In Grierson, the Court held that “is not unfair to offer a minority shareholder the value of what he possesses, i.e. a minority shareholding… [T]he element of control is not one which ought to have been taken into account as an additional item of value in the offer of these shares”.

The policy expressed in Grierson (and other cases) applies in the Cayman Islands, since the squeeze-out provisions interpreted in Grierson have been replicated in the Cayman Islands Companies Law. More importantly, there are three mechanisms in the Companies Law for forcibly taking shares from shareholders who dissent from a takeover, merger or consolidation – a squeeze-out, a scheme of arrangement, and the merger procedure under section 238. As the first two mechanisms would involve the application of a minority discount, the CICA held that the same approach must have been intended for the third mechanism.

Fair Rate of Interest

The company argued that the judge erred in principle by taking the mid-point between a rate reflecting the company’s cost of borrowing on sums payable to the dissenters, and a rate reflecting what a prudent investor in the position of the dissenters could have obtained if they had not been out of their money.

By reference to awards of interest on damages, the company argued that the Court should have awarded a rate representing only the cost to the dissenters for being out of their money, to be assessed as equivalent to the cost to them of borrowing the unpaid fair value of their shares.

The CICA distinguished an award interest on damages from interest in fair value proceedings. The former arises from the need to put a plaintiff in the position he would have been in had a legal right not been infringed. The focus in that scenario would be solely on the plaintiff. That is why, in the case of interest on damages, the Court may consider the plaintiff’s cost of borrowing.

By contrast, no right has been infringed in fair value proceedings; the Court’s task is to ensure the dissenter receives fair value for what he is obliged by statute to give up. When it comes to a fair rate of interest, there will not be the same single focus on the dissenter, but the court should have regard to all the circumstances.

The CICA held that it was appropriate to consider both the disadvantage to the dissenter and the advantage to the company, with the result that a mid-point approach could be a logical way of balancing the advantage and disadvantage, with a fall-back reliance on the judgment rate if the evidence supported no other conclusion. For that reason, the judge had not erred in adopting a mid-point approach.

In terms of measuring the disadvantage to the dissenter, the Court could use either the dissenter’s cost of borrowing or the return a prudent investor could have achieved. The advantage to the company is the avoidance of borrowing costs.

Reopen Application and Appeal

Before the trial judge, the company had applied to reopen its case and rely on additional expert evidence (“Reopen Application”). The application was made after trial and after judgment had been handed down in draft. The company argued that both experts at trial had failed properly to deal with critical issues, with the result that their valuations were fundamentally flawed and their evidence so seriously deficient that the court had been materially misled, such that the first instance decision at trial was unsafe. In large part the company’s argument at first instance relied on saying that its own expert’s evidence was inadequate, in terms of methodology and approach and in its failure adequately to challenge the dissenters’ work and conclusions.

The trial judge had dismissed the summons. The judge did not accept that the additional evidence established that the dissenters’ expert’s evidence on material matters was, in short, negligent. The judge had held that the court had been properly able to rely on the dissenters’ expert evidence, as well as on parts of the company’s expert’s evidence. Although parts of the company’s expert evidence were weak and unreliable, the failures did not undermine the credibility and reliability of all of that expert’s evidence. The fact that the company had belatedly found an expert who was prepared to support a much lower value for the shares was not sufficient to justify the conclusion that the evidence at trial was seriously compromised and flawed and that the judgment was unsafe. The company should not be permitted to indulge in opinion shopping.

The CICA refused permission to appeal (and dismissed the appeal if permission were not necessary) from the judge’s dismissal of the Reopen Application. On appeal it was argued by the company that section 238 proceedings are different in nature from ordinary litigation, since the court makes a determination binding all dissenters, whether or not they participate in the litigation. In turn that meant that the correct test to apply on the Reopen Application should have been simply whether the additional evidence was relevant to the court’s determination of fair value.

The CICA rejected the company’s premise about the different nature of section 238 proceedings. The process by which a judge makes a determination by reference to expert evidence was no different in section 238 proceedings from ordinary litigation: in each case, the court considers on an issue-by-issue basis whether or not an expert’s evidence is to be accepted and may, if necessary, substitute its own view. The process is one familiar to most judges.

The CICA did not accept what amounted to an assertion that, in section 238 proceedings, the judge did not have any real discretion and was obliged to take into account any evidence relevant to fair value presented to him before formal delivery of his judgment. Rather, the judge’s dismissal of the Reopen Application related to the conduct of an aspect of the trial, and was plainly a matter for his discretion; it was impossible to fault the judge’s exercise of that discretion.


The decisions in relation to the applicability of a minority discount in fair value proceedings, as well as the fair rate of interest to be applied, are to be appealed to the Privy Council. Pending that decision, however, it is interesting to note that even after an adjustment to incorporate a minority discount – which the experts agreed would be a reduction of 23% –  the Court’s determination of fair value was still substantially higher (approximately 81% higher) than the merger price.


Guy Manning - Partner, Campbells Grand Cayman - Litigation, Insolvency & Restructuring

Guy Manning

Partner, Head of Litigation, Insolvency & Restructuring
+1 345 914 5868
Hamid Khanbhai - Senior Associate, Campbells Grand Cayman - Litigation

Hamid Khanbhai