Changyou.com Ltd
| Jurisdiction | Cayman Islands |
| Judge | Smellie, C.J. |
| Judgment Date | 28 January 2021 |
| Court | Grand Court (Cayman Islands) |
(Smellie, C.J.)
GRAND CT.
Companies — arrangements and reconstructions — dissenting shareholders — fair value of shares — dissenting shareholders in short-form merger effected pursuant to Companies Act (2020 Revision), s.233(7) entitled to payment of fair value of shares (as appraised by court) pursuant to s.238(1), despite such mergers not involving vote of members
Held, ruling as follows:
(1) Section 238(1) of the Companies Act conferred the right to be paid fair value on any shareholder dissenting from a merger or consolidation. Ambiguity arose from the mismatch between the compendious terms of s.238(1) and the subsequent provisions of s.238 when considered in the context of short-form mergers under s.233(7). Nonetheless, the subsequent provisions of s.238 described the procedure by which a member might apply to the court for the appraisal of fair value without exclusion of short-form mergers. It would be absurd to exclude a dissentient member of a company subject to a short-form merger from the protection of s.238 simply because, unlike in the case of a long-form merger, that member was not allowed to vote. The need for protection was no less clear. Parliament should not be taken to have intended such a consequence absent express words to that effect. The exclusion of short-form mergers from s.238 appraisal rights would be anomalous, having regard to the protections afforded to minorities under schemes of arrangement and squeeze-outs elsewhere within the Companies Act and under s.237(10) in the case of a merger acquisition by an overseas company. Instead of reading the procedural provisions of s.238 as excluding short-form mergers, they should be construed or read down so as to allow for access to the protection of s.238 and so to avoid any implication of minority shareholders being susceptible to having their shares compulsorily acquired at other than fair value as appraised by the court and without the need to assume the difficulties and risks of other doubtful or not readily available alternative recourse to the court (paras. 127–159).
(2) Accordingly, the petitioners had taken the appropriate steps to dissent from the merger and had the right to prosecute their petition (para. 159).
(1) Att.-Gen. v. Horner(1884), 14 Q.B.D. 245, dictum of Brett, M.R. considered.
(2) BSB Holdings Ltd. (No. 2), Re, [1996] 1 BCLC 155; [1995] T.L.R. 452, referred to.
(3) Blue Metal Indus. Ltd. v. R.W. Dilley, [1970] A.C. 827; [1969] 3 W.L.R. 357; [1969] 3 All E.R. 437, considered.
(4) Borden, In re, 2013 (2) CILR 444, referred to.
(5) Bramelid v. Sweden(1983), 5 EHRR 249, considered.
(6) Bugle Press, Re, [1961] Ch. 270, considered.
(7) CVC/Opportunity Equity Partners Ltd. v. Demarco Almeida, 2002 CILR 77, considered.
(8) Chilton v. Telford Dev. Corp., [1987] 1 W.L.R. 872; [1987] 3 All E.R. 992; [1987] 1 EGLR 12, referred to.
(9) de Freitas v. Agriculture Secy., [1999] 1 A.C. 69; [1998] 3 W.L.R. 675, followed.
(10) Ebanks (A.G.) v. R., 2007 CILR 403, referred to.
(11) Entick v. Carrington, [1558–1774] All E.R. Rep. 41; (1765), 19 St Tr 1029; 95 E.R. 807, dictum of Pratt, C.J. considered.
(12) Equitable Life Assur. Soc., In re, [2002] EWHC 140 (Ch); [2002] 2 BCLC 510; [2002] BCC 319, dictum of Lloyd, J. considered.
(13) GFN Corp. Ltd., In re, 2009 CILR 650, referred to.
(14) Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968), 121 C.L.R. 483, referred to.
(15) Hawk Ins. Co. Ltd., In re, [2001] BCC 57, considered.
(16) Herald Fund SPC, In re, sub nom. Pearson v. Primeo Fund, 2017 (2) CILR 75, dictum of Lord Mance referred to.
(17) Hoare & Co., In re(1933), 150 L.T. 374, referred to.
(18) Howard Smith Ltd. v. Ampol Petroleum Ltd., [1974] A.C. 821; [1974] 2 W.L.R. 689; [1974] 1 All E.R. 1126, considered.
(19) Inco Europe Ltd. v. First Choice Distribution, [2000] 1 W.L.R. 586; [2000] 2 All E.R. 109; [2000] 1 All E.R. (Comm) 674; [2000] 1 Lloyd's Rep. 467; [2000] C.L.C. 1015; (2000), 2 T.C.L.R. 487, dicta of Lord Nicholls of Birkenhead considered.
(20) Inland Revenue Commrs. v. Hinchy, [1960] A.C. 748, referred to.
(21) JA Solar Holdings Co. Ltd., Cause No. FSD 153 of 2018, Grand Ct., July 17th, 2019, unreported, considered.
(22) Maso Capital Invs. Ltd. v. Shanda Games Ltd., 2020 (1) CILR 293, considered.
(23) Methuen-Campbell v. Walters, [1979] Q.B. 525, referred to.
(24) Mills v. Mills(1938), 60 CLR 150; [1938] HCA 4, considered.
(25) Ming v. R., 2009 CILR N [28], considered.
(26) Mutual Life Ins. Co. of New York v. Rank Org. Ltd., [1985] BCLC 11, referred to.
(27) Nairne, In re, 2013 (1) CILR 345, considered.
(28) Nord Anglia Education Inc., In re, Cause No. FSD 235 of 2017, Grand Ct., March 17th, 2020, unreported, referred to.
(29) Qunar Cayman Islands Ltd., In re, 2019 (1) CILR 611, referred to.
(30) R. (Edison First Power Ltd.) v. Central Valuation Officer, [2003] UKHL 20; [2003] 4 All E.R. 209; [2003] 2 EGLR 133, dicta of Lord Millett considered.
(31) R. (Noone) v. Governor of HMP Drake Hall, [2010] UKSC 30; [2010] 1 W.L.R. 1743; [2010] 4 All E.R. 463, dictum of Lord Saville, S.C.J. considered.
(32) Singularis Holdings Ltd. v. PricewaterhouseCoopers, [2014] UKPC 36; [2015] A.C. 1675; [2015] 2 W.L.R. 971; [2015] BCC 66; [2014] 2 BCLC 597, considered.
(33) Waste Recycling Group plc, Re, [2003] EWHC 2065 (Ch); [2004] BCC 328, considered.
Minority shareholders petitioned for a determination of the fair value of their shares pursuant to s.238 of the Companies Act (2020 Revision).
Changyou.com Ltd. (“Changyou”) was a Cayman Islands incorporated company operating in the People's Republic of China in the technology sector. It was an indirect wholly owned subsidiary of Sohu.com Ltd. (“Sohu”).
Between January 2020 and April 2020, a merger was announced and implemented, pursuant to an agreement and plan of merger, entered into between Sohu.com (Game) Ltd. (“Sohu Game”), an indirect wholly owned subsidiary of Sohu, and Changyou Merger Co. Ltd. (“Changyou Merger Co.”), a direct wholly owned subsidiary of Sohu Game, and Changyou. The goal was to effect an internal restructuring of the Sohu Group. Pursuant to the merger agreement, Changyou Merger Co. merged with and into Changyou, with Changyou being the surviving company.
Ordinarily, a merger or consolidation required a special resolution of the members of each constituent company, pursuant to s.233(6)(a) of the Companies Act. As Changyou Merger Co. owned over 90% (95.2%) of the voting power represented by all issued and outstanding shares of Changyou, the merger was not subject to a shareholder vote. In accordance with s.233(7) of the Companies Act it was structured as a “short-form” or “vertical” merger, i.e. a merger in which a subsidiary which was already at least 90% owned by a parent company (as defined by s.232 of the Act) merged with the parent.
The result of the acquisition of the minority shareholding under the merger was the privatization of Changyou so that it became an indirect wholly owned subsidiary of Sohu, which was the ultimate 100% parent of Sohu Game.
Section 233 of the Companies Act provided in relevant part:
“(6) A plan of merger or consolidation shall be authorised by each constituent company by way of—
(a) a special resolution of the members of each such constituent company; and
(b) such other authorisation, if any, as may be specified in such constituent company's articles of association.
(7) Notwithstanding subsection (6)(a), if a parent company incorporated under this Act is seeking to merge with one or more of its subsidiary companies incorporated under this Law, a special resolution under that subsection of the members of such constituent companies is not required if a copy of the plan of merger is given to every member of each subsidiary company to be merged unless that member agrees otherwise.”
The petitioners, who were the minority shareholders holding the remaining 4.8% of the voting shares of Changyou, were paid what was assessed by independent consultants to be the consideration for their shares. The petitioners purported to dissent from the merger and petitioned for the appraisal of the fair value of their shares pursuant to s.238 of the Companies Act. They did not agree that, because the company was entitled to dispense with the need for a shareholder vote pursuant to s.233(7) of the Act, shareholders were not entitled to the right to payment of fair value under s.238(1) or otherwise. They claimed that, correctly interpreted, s.238 of the Act provided the statutory right to payment of fair value for members in respect of a merger to which s.233(7) applied, including the merger in the present case. They gave the company written notice of their objection to the merger and demanded payment for the fair value of their shares. The company's position was that dissenter's rights were not available in respect of the merger.
Section 238 provided as follows:
“238. (1) A member of a constituent company incorporated under this Law shall be entitled to payment of the fair value of that person's shares upon dissenting from a merger or consolidation.
(2) A member who desires to exercise that person's entitlement under subsection (1) shall give to the constituent company, before the vote on the merger or consolidation, written objection to the action.
(3) An objection under subsection (2) shall include a statement that the member proposes to demand payment for that person's shares if the merger or consolidation is authorised by the vote.
(4) Within twenty days immediately following the date on which the vote of members giving authorisation for the merger or consolidation is made, the constituent company shall give written notice of the authorisation to each member who made a written objection.
(5) A member who elects to dissent shall, within twenty days immediately following the date on which the notice referred to in subsection (4) is given, give to the constituent company a...
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