{"id":3034,"date":"2017-05-31T10:31:36","date_gmt":"2017-05-31T15:31:36","guid":{"rendered":"https:\/\/www.campbellslegal.com\/?p=3034"},"modified":"2019-08-06T09:48:27","modified_gmt":"2019-08-06T14:48:27","slug":"shanda-games-homeinns-hotel-group-qihoo-recent-case-law-concerning-cayman-islands-statutory-merger-regime","status":"publish","type":"post","link":"https:\/\/www.campbellslegal.com\/client-advisory\/shanda-games-homeinns-hotel-group-qihoo-recent-case-law-concerning-cayman-islands-statutory-merger-regime-3034\/","title":{"rendered":"Shanda Games, Homeinns Hotel Group and Qihoo: recent case-law concerning the Cayman Islands statutory merger regime"},"content":{"rendered":"

The Grand Court of the Cayman Islands has delivered three decisions concerning the statutory merger regime under section 238 of the Companies Law, which is typically triggered by the taking private of a publically listed Cayman Islands company. S.238 requires the Court to determine the \u201cfair value<\/em>\u201d of shares compulsorily purchased from a shareholder who dissents from the merger.\u00a0 All three cases involved the same investors as dissenting shareholders.[1]<\/a><\/p>\n

Most significantly, the judgment of Segal J in Shanda Games Limited<\/em>[2]<\/a> is the second Cayman Islands judgment to arise from a contested trial of a valuation dispute since the merger regime was introduced in 2009. In summary, the Court endorsed the approach taken by Jones J in the Integra<\/em>[3]<\/a> case, and Delaware jurisprudence, insofar as \u201cfair value<\/em>\u201d is to be determined on the basis of the company being a going concern, and without any minority discount. The judgment also addressed many technical issues of valuation methodology that will be of interest to specialists in this field.<\/p>\n

The Court has also delivered two interlocutory judgments: Homeinns Hotel Group<\/em>[4]<\/a> concerns the parties\u2019 discovery obligations in fair value<\/em> cases; and Qihoo<\/em>[5]<\/a> concerns whether the dissenting shareholder is entitled to an interim payment, pending final determination of the price to be paid for its shares.<\/p>\n

Shanda Games <\/em><\/strong><\/h2>\n

Factual background<\/em><\/strong><\/p>\n

Shanda Games Limited (\u201cShanda\u201d<\/strong>) is a Cayman Islands company that operates a multi-billion-dollar Chinese online gaming business.\u00a0 Shanda issued ordinary shares and \u201cAmerican Depositary Shares\u201d (\u201cADSs\u201d<\/strong>) that were listed on the NASDAQ. In 2016, Shanda was taken-private by means of a management buy-out which was structured in the form of a merger and subsequent de-listing. \u00a0The merger was approved by 99.03% of Shanda\u2019s shareholders, at a price of US$7.10 per ASD.\u00a0 The dissenting shareholders, which together held a 0.07% stake (the \u201cDissenters\u201d<\/strong>), were required to be bought-out at fair value under the s.238 regime. While Shanda made the Dissenters an interim payment at the merger price per share, the fair-value price was disputed.<\/p>\nLitigation<\/em><\/strong><\/a>\n

During the year after the date of the merger, Shanda and the Dissenters litigated their dispute about the fair value payable for the compulsory purchase of the Dissenters\u2019 shares. Shanda offered to pay US$9.56 per ASD (revised to US$10.84 during trial), whereas the Dissenters claimed a price of US$27.16 per ADS.<\/p>\n

Each party relied upon expert evidence in support of their position; Shanda\u2019s expert was a statistics professor, whereas the Dissenters instructed an accountant specialising in valuations.\u00a0 The expert evidence was crucial in a number of respects, as summarised below. Before turning to that evidence, however, the Court was required to address a question of legal principle.<\/p>\n

Decision on a question of legal principle: no minority discount <\/em><\/strong><\/p>\n

The Court was required to decide whether any minority discount should be applied to the price otherwise payable for the Dissenter\u2019s shares.\u00a0 Shanda\u2019s position was that a minority discount should<\/em> be applied, despite the Court having taken the contrary approach in Integra<\/em>, consistent with Delaware and Canadian case-law. Shanda argued that (i) in Integra<\/em> the Court had not heard legal submissions about this question because the principle of applying no minority discount had been agreed between the parties and (ii) English authorities dealing with buy-outs and minority prejudice were valued by applying a minority discount.\u00a0 The Court rejected these arguments, and affirmed the principle that no minority discount should be applied.\u00a0 Instead, the Court must simply establish the fair value of the company as a going concern immediately prior to the merger, and then award the Dissenters their proportionate share of that value. In doing so, the Court assesses the fair value afresh, rather than by reference to the merger price.<\/p>\n

Decision on questions of valuation methodology<\/em><\/strong><\/p>\n

Although s.238 does not dictate any particular valuation methodology, the parties\u2019 experts agreed that the valuation of Shanda should be done on the basis of a discounted cash-flow (\u201cDCF\u201d<\/strong>) model. However, the experts disagreed about many details of how to apply that model. Many of the points of disagreement concerned technical valuation questions, which we summarise briefly, below.<\/p>\n

The overarching importance of this decision, however, is to confirm that the Court will conduct a detailed and forensic examination of the expert evidence which will be tested exhaustively via cross-examination and legal submissions. The parties\u2019 choice of expert, and the analytical rigour of each expert\u2019s analysis, will be critical to their success. In Shanda<\/em>, the Dissenters\u2019 expert in general provided a more logical and sustainable analysis, and in several instances Shanda\u2019s expert modified his own opinion during the course of the trial. The Dissenters\u2019 expert had also made many detailed enquires of Shanda during the litigation, and sometimes received unsatisfactory responses \u2013 which led to adverse inferences being drawn by the Court against Shanda at trial.<\/p>\n

The main valuation issues considered in Shanda<\/em> were:<\/p>\n