58.Com Inc.

• Jurisdiction: Cayman Islands
• Court: Grand Court (Cayman Islands)
• Judge: (Kawaley, J.)
• Judgment Date: 22 March 2023

IN THE MATTER OF 58.COM INC

(Kawaley, J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — arrangements and reconstructions — dissenting shareholders — fair value of shares — Companies Act (2020 Revision), s.238(7) limits ability of dissenting shareholders to claim joint interest privilege in advice received by company save to extent that (a) advice relevant to appraisal of fair value of dissenters’ shares, and (b) company unable properly to invoke legal professional privilege in respect of particular advice

Held, ruling as follows:

(1) Section 238(7) of the Companies Act did not exclude the application of the rule in Woodhouse altogether, on the assumption that it potentially applied. The dominant legislative purpose of s.238 was to create a legal framework through which minority shareholders who objected to a company’s appraisal of the fair value of the shares to be acquired through an amalgamation or merger could apply to court for a judicial adjudication of the fair value issue. In a variety of scenarios advice received by a company might potentially be relevant to the fair value of the company’s shares in circumstances where the Woodhouse rule would ordinarily be expected to apply, for example, if significant assets were subject to a title dispute or a significant operating subsidiary was subject to a damages claim, advice received by the company about the merits of the hostile claim would potentially be highly relevant to the valuation exercise. Legal advice received in relation to the negotiation of the merger agreement might be so relevant that it would be undesirable for the company to be able to rely on privilege. If lawyers were instructed by the special committee to lead the negotiations, communications between them and the special committee might be a significant part of the narrative since the fairness of the bargaining process might be in dispute as well as the fairness of the agreed share valuation detached from the negotiated price. Allowing a dissenting former shareholder to assert joint interest privilege (or requiring the constituent company to waive privilege) in relation to advice relevant to the fair value question (as opposed to advice at large) would obviously amplify rather than stifle the efficacy of the appraisal remedy. Depriving dissenters and the court from being able to consider advice highly material to the fair value question would obviously diminish the efficacy of the remedy rather than enhance it. If joint interest privilege could (s.238(7) apart) be asserted by former shareholders seeking to vindicate their property rights looking back to the period before service of their notices ofdissent when they were shareholders, clearer language would be required to take away such vested rights. It was trite law that there was a presumption that Parliament did not intend to interfere with fundamental rights such as vested property rights and fair hearing rights (paras. 36–45).

(2) Section 238 of the Companies Act effectively provided a statutory basis for a modified form of joint interest privilege rights that dissenters generally could invoke in the statutory appraisal proceedings. Section 238(7) intended to prevent dissenters who were no longer shareholders from exercising rights they no longer possessed. Section 238, read as a whole, did not create an appraisal regime under which dissenters and the court were expressly or by necessary implication intended to be denied access to legal advice received by the company which was not covered by litigation privilege, and which was relevant to the central issue of fair value. Section 238(7) should be read as limiting the ability of dissenting shareholders to claim a joint interest privilege in advice received by the petitioning company, save to the extent that (a) the advice was relevant to the central adjudicative task of appraising the fair value of the dissenters’ shares in the company because the only rights which remained vested in a dissenter were its fair value appraisal rights; and (b) the company was unable to properly invoke legal professional privilege in relation to a particular instance of advice. The rule in Woodhouse was essentially based on the proposition that where a shareholder could establish a joint interest together with the company in legal advice obtained in relation to the general conduct of its business, the relevant advice was not privileged as between company and shareholder. Where a shareholder exercised dissent rights under s.238 and relinquished under s.238(7) all shareholder rights save for the appraisal rights conferred by s.238, the scope for assessing joint interest privilege must be commensurately narrowed. The position should be viewed in two stages: first, the pre-merger period and, secondly, the period after preparations for a merger had begun. In respect of the pre-merger period, a s.238 dissenter had no subsisting general interest in the administration of the company’s affairs and retained solely the right to obtain the fair value for its shares as adjudicated by the court. Accordingly, any advice obtained by the company in the course of its general administration, excluding litigation against the dissenter, which was relevant to ascertainment of fair value would prima facie be subject to a joint interest privilege claim. Any advice which was not relevant to the fair value question, whatever the position might have been before the dissenter became a dissenter under s.238, would no longer be subject to a joint privilege claim by the shareholder. After preparations for the merger had begun, the position appeared more complicated but should in principle be the same. Advice obtained about the general administration of the company was not, by virtue of s.238(7), advice in which a dissenter had any cognizable interest. As to whether the work of the special committee was carried out having regard to the interests of shareholders as a whole so a joint interest existed in all advice received before litigation was reasonably contemplated, the focus should be on whether the specific advice to whichthe joint interest claim related was sufficiently relevant to the question of fair value to confer a joint interest in it operating in favour of dissenters as a procedural incident of their substantive s.238 rights. Such a conclusion rejected the unrealistic blanket assumption that all advice received after s.238 litigation was first contemplated qualified for litigation privilege protection. It also rejected the equally unrealistic blanket assumption that joint interest privilege automatically attached to any advice received by a merger company before the s.238 dissent notices were served. The construction of s.238(7) was consistent with the relevant fundamental rights which underpinned the present legal context. The right to a fair hearing (Bill of Rights, s.7) was relevant to the litigation privilege rights of all parties and all parties’ rights to a fair determination of their civil rights and obligations. The property rights protected by s.15 of the Bill of Rights were the high-level basis for the dissenters’ statutory right to receive due compensation for the loss of their property under s.238 (paras. 48–61).

(3) A dissenter or its predecessor in title, particularly where that predecessor was merely a nominee, must have been a shareholder when the relevant advice was received by the company to give rise to a common or joint interest in the advice when it was received, to the extent that the rule in Woodhouse was relied upon. The court expressed no view as to whether an ADS holder had the right to assert joint interest privilege, qua ADS holder, independently of the s.238 context. In the present context, however, the court rejected the proposition that a petitioning company could assert privilege against a dissenter in relation to legal advice (a) which was not protected by litigation privilege, and (b) which was relevant to the fair value of the dissenter’s shares. Section 238 created a remedy to ensure that dissenters were fairly compensated for the “confiscation” of their shares effected by the merger or amalgamation process. It was a remedy necessarily asserted by a former shareholder which was unarguably available to a former shareholder which was only a nominee during the period of time when advice relevant to fair value might potentially have been obtained. The fact that a dissenter only acquired its shares after the merger was announced was not said to diminish its economic rights. The court did not accept that in all legal contexts joint interest privilege would only arise if the shareholder asserting the claim was a shareholder when the relevant legal advice was received by the company. In the present context at least, s.238 conferred on each dissenter a right to “payment of the fair value of that person’s shares.” It had not been suggested that valuation fell to be carried out on a basis which assigned different values based on when each dissenter acquired their actual shares. Instead, the assumption was that each shareholder, even those who acquired their shares with a view to commercially exploiting the dissenter process, acquired as successors in title whatever economic rights were attached to the shares. It followed that joint privilege rights despite their procedural character should properly be viewed as ordinarily attaching to shares. Accordingly, it made no sense to view the beneficial shareholder who subsequently sued as legal shareholder as lacking standing to assert a joint interest claim because they were notregistered shareholders when any relevant legal advice was received by the company. Any joint interest which the nominee as registered shareholder held, it held on behalf of the beneficial owner of the shares. In equity, when the legal title in the shares was transferred by the nominees to the former ADS holders, there was no transfer of equitable...