Under section 238 of the Companies Act (2022 Revision), shareholders of a merged or consolidated Cayman Islands company who dissent from the merger can ask the Grand Court to determine the “fair value” of their shares.
In early Cayman Islands appraisal cases, the Grand Court placed heavy reliance on discounted cashflows as a means of valuing companies, as the transactions were typically MBOs with weak evidence of market efficiency. The very high fair value figure in Shanda Games, in particular, encouraged some institutional investors to invest in Cayman Islands companies after a merger or consolidation was announced with a view to obtaining an uplift on what they paid for the shares via the section 238 procedure, often by arguing that the US markets systemically undervalued companies operating in China and that the potential for re-listing in China at multiples of the transaction value was a better indicator of fair value. With significant sums at stake, often billions of dollars, the length and complexity of such cases has risen.
In FGL Holdings, the latest case to go to a full trial and Court decision, the Grand Court (Parker J, 20 September 2022) determined that the merger price represented fair value, meaning that the shareholders who dissented from the merger, claiming that fair value was more than twice the merger price, did not receive any uplift via the appraisal proceeding.
The ruling is notable because it is the first time the Grand Court has placed full weight on the transaction price to determine fair value and no reliance on an income approach. In doing so, the Court concluded that while the market for FGL's stock was efficient, no reliance should be placed on the adjusted market price due to the temporary dislocation in value caused by COVID (the merger was approved in May 2020). The Court also rejected the Dissenters' attempt to rely upon an income approach to value their shares via a discounted earnings analysis.
Richard Boulton KC acted for FGL in the proceeding alongside Mac Imrie KC and Malachi Sweetman of Maples and Calder (Cayman) LLP. Among other things, he conducted a four day cross examination of the Dissenters’ valuation expert.
The full decision can be found here.