Between: Changyou.com Ltd Appellant v (1) Fourworld Global Opportunities Fund, Ltd (2) Corbin Opportunity Fund, L.P. (3) Corbin Erisa Opportunity Fund, Ltd (4) Boothbay Diversified Alpha Master Fund LP (5) Boothbay Absolute Return Strategies, LP (6) Athos Asia Event Driven Master Fund (7) Athos Special Situations Fund SPC for and on behalf of Athos Global Opportunities Sp 1 (8) Fmap ACL Ltd Respondents
| Jurisdiction | Cayman Islands |
| Judge | Martin JA,Morrison JA,Goldring P |
| Judgment Date | 16 September 2022 |
| Docket Number | CICA (Civil) Appeal No 6 of 2021 |
| Court | Court of Appeal (Cayman Islands) |
The Rt. Hon Sir John Goldring, President
The Hon John Martin, Justice of Appeal
The Hon C Dennis Morrison, Justice of Appeal
CICA (Civil) Appeal No 6 of 2021
(FSD 120 of 2020 (ASCJ))
IN THE COURT OF APPEAL OF THE CAYMAN ISLANDS
ON APPEAL FROM THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Jonathan Crow KC, Alex Potts KC and Erik Bodden of Conyers Dill & Pearman LLP for the Appellant
Jonathan Adkin KC, Rocco Cecere, Annalisa Shibli and Dawn Major of Collas Crill for the Respondents
Part XVI of the Companies Act (2020 Revision) (“the Act”), consisting of sections 232 to 239A, sets out a statutory merger and consolidation regime. Section 233(1) permits two or more companies limited by shares and incorporated under the Act to merge or consolidate in accordance with the procedure identified in that section. Subsection (3) requires the directors of each constituent company participating in a merger or consolidation to approve a written plan of merger or consolidation, and subsection (6) requires that plan to be authorised by a special resolution of the members of each constituent company. A merger authorised in that way is known as a long-form merger. However, subsection (7) dispenses with the need for a special resolution if the merger is between a parent company and a subsidiary and a copy of the plan of merger is given to every member of the subsidiary. In that context, a parent company is one which holds at least 90% of the voting shares in the subsidiary. A merger effected in this way is known as a short-form merger.
Section 238 of the Act entitles members of a constituent company who dissent from a merger or consolidation to payment of the fair value of their shares. The section sets out steps leading to an appraisal by the court of the fair value. Those steps are predicated on the holding of a vote on the merger or consolidation. In a short-form merger, there will be no vote. The question which therefore arises is whether or not the section 238 appraisal right is available to minority shareholders in a subsidiary which merges in a short-form merger with a company holding a 90% or greater majority of the voting shares in the subsidiary.
This question was framed as a preliminary issue for determination in these proceedings in the following terms:
“ Where a merger between a parent company and a subsidiary company is effected pursuant to section 233(7) of the Companies [Act], is a member of the subsidiary company entitled to payment of the fair value of their shares pursuant to section 238 of the Companies [Act] and, if so, what steps (if any) are required to be taken by such member to dissent from the merger?”.
By Order dated 15 April 2021, following a judgment promulgated on 28 January 2021, the Chief Justice answered the preliminary issue as follows:
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“a. where a ‘short-form’ merger between a parent company and a subsidiary company is effected pursuant to section 233(7) of the Companies Act (2020 Revision), a member of the subsidiary company is entitled to payment of the fair value of their shares as appraised by the court pursuant to section 238 of the Companies Act (2020 Revision) upon dissenting from the merger; and
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b. a member of a subsidiary company wishing to dissent from a ‘short-form’ merger effected pursuant to section 233(7) of the Companies Act (2020 Revision) must give a notice of dissent within 20 days of the copy of the plan of merger being given to the member”.
The present appeal is against that Order.
The preliminary issue arises in proceedings brought under section 238 of the Act by eight former shareholders (“the Petitioners”) in Changyou.com Limited (“the Company”). The Company is the appellant in this appeal, and the Petitioners the respondents.
The following short summary of the background is derived primarily from the Statement of Agreed Facts which formed the factual basis of the decision below. The Company invited us to have regard additionally to facts derived from the documents included in the bundle, in particular that a special committee of independent disinterested directors of the Company was formed to assess the proposed terms of the merger with the assistance of independent financial advice from Houlihan Lokey (China) Limited, as a result of which the merger price was increased from US$5 to US$5.40 per class A ordinary share – a price which Houlihan Lokey stated was fair to the minority shareholders. Although the Petitioners objected to the Company's reliance on this material, I think it helpful to recognise its existence, while at the same time bearing in mind that the Chief Justice based his judgment on the Statement of Agreed Facts.
The Company was incorporated in the Cayman Islands on 6 August 2007. At all relevant times it has been a leading online game developer and operator in China; has been engaged in the development, operation and licensing of online games for personal computers and mobile devices; and has operated the 17173.com website, a leading information portal in China providing news, electronic forums, online videos and other information services on online games to game players.
From its incorporation, the Company was a member of the Sohu group of companies (“the Sohu Group”). The Sohu Group is a leading Chinese online media, search and game service group providing comprehensive online products and services on personal computers and mobile devices in China. Relevant members of the Sohu Group are Sohu.com Limited (“ Sohu”) and its subsidiaries Sohu.com (Game) Limited (“ Game”) and the Company.
The authorised share capital of the Company has at all relevant times consisted of Class A Ordinary Shares (“ A Shares”) and Class B Ordinary Shares (“ B Shares”). Holders of A Shares and B Shares vote together as one class. At a general meeting of the Company, each A Share carries one vote and each B Share carries ten votes.
As at 9 September 2019, Game held all the B Shares issued by the Company. These shares, together with a relatively small number of A Shares held by Sohu, carried 95.2% of the votes exercisable in a general meeting.
On 9 September 2019, with the goal of effecting an internal restructuring of the Sohu Group, Sohu sent the Company a proposal to acquire all of the outstanding A Shares not already owned or beneficially owned by Sohu in a going-private transaction. The offer price was US$5 for each A Share (or US$10 for each American Depository Share (“ ADS”), equivalent to two A Shares, trading on the NASDAQ Global Select Market). The offer price was subsequently increased to US$5.40 for each A Share, US$10.80 for each ADS.
On 2 January 2020, Changyou.com Merger Co Limited (“Parent”) was incorporated as an exempted limited liability company in the Cayman Islands; and on 13 January 2020 Game transferred to Parent all the B Shares in the Company.
On 24 January 2020, Game, Parent and the Company entered into an agreement and plan of merger (“the Merger Agreement”).
On 19 February 2020, the Company, Sohu, Game and Parent jointly filed with the United States Securities and Exchange Commission a transaction statement setting out details of the Merger. The transaction statement was amended on 9 March 2020.
The Merger Agreement and the transaction statement contained statements to the effect that shareholders would not be able to exercise dissenters' rights under section 238 of the Act.
On 27 March 2020, attorneys acting for the Petitioners wrote to the Company giving written notice of the Petitioners' objection to the merger, stating that they proposed to demand payment for their shares if the merger became effective, giving written notice of their election to dissent from the merger in respect of all the shares they held, and demanding payment for the fair value of those shares. A further letter to similar effect was written in respect of some of the Petitioners on 1 April 2020.
On 13 April 2020, the Company sent a copy of the final form of the plan of merger to every member of the Company by express courier.
On 14 April 2020, the Company entered into and filed with the Registrar of Companies of the Cayman Islands a definitive plan of merger dated 14 April 2020, with an effective date of 17 April 2020.
On 17 April 2020, the merger became effective. Pursuant to it, Parent merged with the Company, with the Company as the surviving company; the Company became a private company wholly-owned directly and indirectly by Sohu; and the ADSs were no longer traded on the NASDAQ.
On 30 April 2020, 8 May 2020 and 14 May 2020 the Petitioners were paid the merger price in respect of their shares.
The Petitioners' petition seeking relief under section 238 of the Companies Act was served on the Company on 11 June 2020, and amended on 30 June 2020.
The whole of Part XVI of the Act, together with sections 86-8 (dealing with schemes of arrangement and squeeze-outs), is set out in an appendix to this judgment. It is, however, necessary to set out here the provisions most relevant for present purposes.
Section 232 is so far as material in the following terms:
“In this Part – …
“constituent company” means a company that is participating in a merger or consolidation with one or more other companies;
“merger” means the merging of two or more constituent companies and the vesting of...
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