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01 April 2021
The Grand Court has confirmed that shareholders of companies that effect a short-form merger pursuant to Section 233(7) of Part XVI of the Companies Act (2021 Revision) are entitled to be paid the fair value of their shares on dissenting from the merger under Section 238 of the act.
The eagerly awaited judgment in Changyou.com(1) clarifies an issue which was previously the subject of extensive debate and provides welcome certainty to minority shareholders of Cayman companies.
A typical long-form merger must ordinarily be approved by a special majority of its members.(2) A member who wishes to dissent from a long-form merger must object to it in writing before the shareholder vote.(3) If the merger is subsequently approved, the company must then give a notice of authorisation to each member who provided a written objection.(4) Any member who objected to the merger may then elect to give a notice of dissent.(5) Upon dissenting from the merger, the member ceases to have rights as a shareholder but becomes entitled to payment of the fair value of their shares, which must be determined by the Grand Court under Section 238 of the Companies Act (2021 Revision).(6)
However, in a short-form merger, where a parent merges with a subsidiary in which the parent already holds 90% of the voting power, a special resolution of its members is not required.(7) In the absence of there being a shareholder vote, it was previously unclear whether the consequential statutory process described above (in respect of long-form mergers) could apply and, consequently, whether shareholder appraisal rights were available to members in short-form mergers.
Changyou.com Limited (Changyou) is a Cayman Islands-incorporated company and a developer and operator of online and mobile games. It operates in China and was formerly listed on the NASDAQ stock exchange. Prior to the merger, over 90% of Changyou's voting power was held by its parent company. In merger documents and filings with the US Securities and Exchange Commission, Changyou proposed to merge with its parent and delist from the NASDAQ (thereby effectively forcing out the minority independent shareholders under a short-form merger). Changyou asserted that dissent rights under Section 238 did not apply in these circumstances. Certain shareholders (petitioners) disagreed with Changyou's interpretation of the relevant provisions of the Companies Act (2021 Revision) and purported to formally dissent from the merger in accordance with the terms of that statute.
Changyou contended that appraisal rights can be exercised only by shareholders who dissent from a merger in which there is a shareholder vote (ie, a long-form merger). It argued that as no vote is required for a short-form merger, no appraisal rights were available.
Accordingly, the Grand Court was asked to adjudicate whether members of a subsidiary in a short-form merger are entitled to payment of the fair value of their shares and, if so, what steps (if any) must be taken in order for such members to dissent.
The Grand Court disagreed with Changyou's interpretation of the Companies Act (2021 Revision), which it found:
effectively elevated the procedural or mechanical provisions contained in subsections 238(2) to 238(16), for the access to and conduct of an appraisal, to the status of the substantive right to fair value appraisal conferred by subsection 238(1).(8)
The Grand Court held that the petitioners should not be precluded from accessing the rights afforded by Section 238 because of a mismatch between the mechanical provisions of that section and the substantive right to fair value conferred by Section 238(1). The Grand Court found that this would result in absurdity and was not what the legislature had intended. The court determined that, properly construed, Section 238 should be read so as to allow the appraisal process to operate in the absence of any vote authorising the merger.
The Grand Court agreed with the petitioners that:
The Grand Court therefore determined that the right to payment of fair value for shareholdings upon dissenting from a merger is an absolute right, which can be exercised in a short-form merger by giving a notice of dissent to the company within 20 days of the plan of merger being provided. The petitioners were held to have validly exercised that right.
Subject to any appeal, the petitioners' shareholder appraisal action will now be tried in the usual way.
While the majority of mergers effected under Part XVI of the Companies Act (2021 Revision) to date have been long-form mergers, there have been several short-from mergers, the majority of which have denied shareholders the right to dissent and be paid fair value.
Until now, an acquirer who wished to take a publicly held company private, but held less than 90% of the target company's voting power, could seek to acquire more shares in order to cross the 90% threshold in order to try to effect a short-form merger and not recognise shareholder appraisal rights. However, any former perception that this strategy precluded minority shareholders having appraisal rights has been dispelled by the ruling in Changyou.
For further information on this topic please contact Marc Kish or Farrah Sbaiti at Ogier's Grand Cayman office by telephone (+1 345 949 9876) or email (email@example.com or firstname.lastname@example.org). Alternatively, contact Jeremy Snead at Ogier's London office by telephone (+44 1481 752301) or email (email@example.com) or Shaun Maloney at Ogier's Jersey office by telephone (+44 1534 504 000) or email (firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
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