1. Blackwell Partners LLC – Series A v Qihoo 360 Technology Company Ltd
| Jurisdiction | Cayman Islands |
| Judge | Mr. Justice Charles Quin |
| Judgment Date | 26 January 2017 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | Cause No: FSD 129/2016 (IMJ) |
| Date | 26 January 2017 |
In the Matter of the Companies Law (2016 Revision)
And in the Matter of Qihoo 360 Technology Co. Ltd
The Hon. Mr. Justice Charles Quin Q.C.
Cause No: FSD 129/2016 (IMJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Section 238 of the Companies Law — Whether dissenting shareholders can receive an interim payment in s.238 Petition proceedings or whether the provisions of s.238 are a self-contained statutory code which does not permit any discretionary overlap for an interim payment as provided for under GCR O.29 Part II.
Mr. Robert Levy Q.C. instructed by Mr. Rupert Bell of Walkers on behalf of the Applicants (the “Dissenters”)
Mr. Richard Millett Q.C. instructed by Mr. Dhanshuklal Vekaria of Harneys on behalf of the Petitioner
1. This is the hearing of a Summons issued by the Applicants on the 25th day of November 2016 by each of Blackwell Partners LLC — Series A, Crown Managed Accounts SPC for and on behalf of Crown/Maso Segregated Portfolio and Maso Capital Investments Limited (collectively the “Dissenters”) seeking orders that:
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i. Qihoo 360 Technology Co. Ltd. (the “Petitioner”) do make the following interim payments pursuant to O. 29 r.10 of the GCR 1995 (the “GCR”) (as applicable pursuant to O. 29 r.18 of the GCR):
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a) US$46,155,571.15 to Blackwell Partners LLC — Series A;
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b) US$10,125,124.20 to Crown Managed Accounts SPC for and on behalf of Crown/Maso Segregated Portfolio; and
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c) US$35,719,304.64 to Maso Capital Investments Limited,
or such other amount/s as the Court considers fit (collectively the “Interim Payments”).
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ii Upon provision by the Dissenters of bank wiring details to the Registrar of the Financial Services Division (of the Grand Court of the Cayman Islands), the Interim Payments shall be paid to the Dissenters out of the funds held by the Court in account number 023-09492 within seven (7) days;
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iii. The costs of and incidental to the Summons be paid by the Petitioner; and
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iv. Such further or other relief as the Court sees fit.
2. The Petitioner is a Cayman Islands exempted limited company whose operations and business has overwhelmingly been conducted in the People's Republic of China (the “PRC”). The Petitioner's 2015 Annual Report described it as “a leading internet company in China.”
3. On the 11th January 2016: The Petitioner announced that it had entered into an agreement and plan of merger dated the 18th December 2015 (“the Merger Agreement”) with:
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i. Tianjin Qixin Zhicheng Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC;
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ii. B Tianjin Qixin Tongda Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC;
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iii. True Thrive Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands;
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iv. New Summit Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands; and
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v. (Solely for the purposes of Section 6.19 of the Merger Agreement), Global Village Associates Limited and Young Vision Group Limited.
4. Immediately prior to the completion of the merger, the Petitioner's shares comprised of Class A and Class B ordinary shares. A number of the Class A ordinary shares were represented by American depositary shares (“ADSs”), 2 ADSs representing three Class A ordinary shares, and were held by the Bank of New York Mellon, in its capacity as the ADS depository. The ADSs were listed on the New York Stock Exchange.
5. The Dissenters were all shareholders of the Petitioner holding 329,097 shares.
6. It was a term of the Merger Agreement that all of the shares issued in the Petitioner (including ADSs) would be cancelled and cease to exist for the right to receive US$51.33 per share in cash without interest and each ADS would have the right to receive US$77.00 in cash without interest (the “Merger Consideration”) except for:
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i. 3,534 Class A ordinary shares and 29,340,366 Class B ordinary shares held by Global Village Associates Limited;
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ii. 4,904,709 Class B ordinary shares held by Young Vision Group Limited;
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iii. the Petitioner's treasury shares, which were cancelled with no payment or distribution; and
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iv. the ordinary shares held by the shareholders who validly exercised their right to dissent from the Merger Agreement, which shares were cancelled and ceased to exist in exchange for the right to receive the payment of fair value of such shares as determined in accordance with s.238 of the Companies Law.
7. The position of the Dissenters is set out in the First Affidavit of Manoj Jain, sworn on the 25th November 2016.
8. The Dissenters maintain that the Petitioner entered into an agreement and plan of merger, the effect of which was to take it private (the “Merger”). The buyer group taking the Petitioner private was made up of certain members of the management of the Petitioner and their affiliates and financing partners (“Buyer Group”). The Dissenters contend that the vote in favour of a merger was essentially a foregone conclusion because whilst management owned 25.4% of the Petitioner's shares, it owned over 60% of the Petitioner's voting rights and therefore any vote in favour of a merger was essentially a foregone conclusion.
9. As part of the Merger process, the Petitioner commissioned a report from JP Morgan Securities (Asia Pacific) Limited (“JP Morgan”). JP Morgan's remit was to give an opinion on the fairness of the Merger Price, from a financial point of view, to the holders of shares unaffiliated with the Buyer Group.
10. On the 18th December 2015: JP Morgan provided its independent opinion — confirming that it considered that the Merger Consideration represented the fair value of the shares. Taking the JP Morgan report at fair value i.e. US$51.33 per ordinary share, the total value of the Dissenters' shareholdings is approximately US$16,892,549.01.
11. The Dissenters complain that JP Morgan relied solely on unverified and unchecked and untested numbers provided by management, and submit that the JP Morgan report should be treated with the utmost caution.
12. There is considerable controversy and difference of opinion between the Petitioner and the Dissenters relating to the value of the JP Morgan report.
13. On the 18th December 2015: The Petitioner's board approved the Merger Agreement, the Plan of Merger and the transactions contemplated thereby, and resolved to recommend the approval and authorisation of the Merger Agreement to the shareholders.
14. On the 24th March 2016: The Dissenters wrote to the Petitioner setting out their objections to the Merger, pursuant to s.238(2) of the Companies Law.
15. On the 30th March 2016: By way of a special resolution at an EGM which was convened to consider the same, the Merger was approved. The Dissenters submit that this was essentially a foregone conclusion due to management's control of such a significant portion of the voting rights.
16. In mid-April 2016: The Dissenters received notices confirming the approval of the Merger Agreement.
17. On the 5th May 2016: The Dissenters provided the Petitioner with further written notices of dissent with regard to the Merger and demanded the payment of the fair value of the shares pursuant to s.238(5) of the Companies Law.
18. On the 15th July 2016: The Plan of Merger was filed with the Registrar of Companies who issued a Certificate of Merger on the same day, deeming the Merger effective on the 15th July 2016.
19. On the 22nd July 2016: The Dissenters received an offer of the Merger Price for their shares and the Petitioner submits that this is a fair value offer of US$51.33 per ordinary share which corresponds to the amount independently valued by JP Morgan.
20. The Dissenters were and remain of the view that the Merger Price was substantially less than the fair value of the shares.
21. On the 31st July 2016: The Dissenters rejected the Petitioner's offer and without prejudice to their position demanded a payment on account of the sum of US$16,892,549.01 (equivalent to the Merger Consideration).
22. On the 8th August 2016: The Dissenters' attorneys wrote to the Petitioner's former attorneys to request further information concerning the holding structure of the Petitioner, and in particular the transfer out of Tianjin Qisi Technology Co. Ltd from the group structure, which the Dissenters alleged caused value to be transferred out of the Petitioner without appropriate consideration. In the same letter, the Petitioner was asked to confirm that security would be given for the Dissenters' claim.
23. On the 9th August 2016: The Petitioner's then attorneys wrote to the Dissenters' attorneys stating that the Dissenters were not entitled to, nor would they receive, any security in respect of their fair value claims.
24. On the 16th August 2016: The Dissenters' attorneys sent the Petitioner's attorneys a valuation memorandum setting out the Dissenter's assessment as to fair value.
25. On the 31st August 2016: The Dissenters' attorneys again requested that an interim payment on account be made to the Dissenters in the amount of US$51.33 per share. This was rejected by letter dated the 2nd September 2016 from the Petitioner's then attorneys.
26. On the 7th September 2016: The Dissenters' attorneys wrote to the Petitioner's attorneys requesting payment of the Merger Consideration as an interim payment and foreshadowed this application for an interim payment if the Petitioner did not comply.
27. On the 20th October 2016: The Petitioner's attorneys wrote to say that they would be willing to pay the sum of...
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