Changyou.Com Ltd v Fourworld Global Opportunities Fund Ltd and Seven Others

• Jurisdiction: Cayman Islands
• Court: Court of Appeal (Cayman Islands)
• Judge: (Goldring, P., Martin and Morrison, JJ.A.)
• Judgment Date: 16 September 2022

CHANGYOU.COM LIMITED

and

FOURWORLD GLOBAL OPPORTUNITIES FUND LIMITED and SEVEN OTHERS

(Goldring, P., Martin and Morrison, JJ.A.)

Court of Appeal (Cayman Islands)

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 — s.238(1) read and given effect in way compatible with right to peaceful enjoyment of property in Bill of Rights, s.15

Held, dismissing the appeal:

(1) Applying the ordinary rules of construction, s.238(1) was not a freestanding provision conferring an appraisal right on all dissenters but to be read in the context of the remaining subsections of s.238 and confined by them to long-form mergers. It was plain that subs. (2)–(16) applied only to long-form mergers. That was evident from the fact that the opportunity to object and the opportunity to dissent depended on the existence of a shareholder vote, and the timing of the matters set out in subsequent subsections depended on the existence of such a vote. If s.238(1) were intended to confer a freestanding right on all dissentients, there was no plausible reason why those subsections of s.238 should be confined in this way. Nor, secondly, was there any plausible reason why the provisions of subs. (5) (requirement to dissent in respect of entire shareholding), subs. (7) (cesser of membership rights), subs. (8) (offer to dissentients), subs. (15) (cancellation of shares acquired pursuant to the section) and subs. (16) (enforcement of appraisal rights to exclude other membership rights) should apply only to long-form mergers (as they must do, because the timing was throughout determined by the presence of a vote) if appraisal rights were meant to apply in the case of short-form mergers as well. Therefore, s.238 as drafted was not apt to apply to short-form mergers. However, the court did not consider that this was what the legislature intended. The wording of s.238(1) was clear and unqualified in stating that “a member … shall be entitled to payment of the fair value of that person’s shares upon dissenting from a merger or consolidation.” Although s.238operated in such a way that dissent could only be notified once a vote approving the merger had been taken, that did not detract from the apparently wide intent of the s.238(1) wording. Moreover, the court could see no plausible reason why the legislature should have sought to draw a distinction between the rights of dissentients from a long-form merger and those of dissentients from a short-form merger. There was no practical reason why dispensing with the need for a vote in a short-form merger should have the consequence of depriving minority shareholders of their shares without the possibility of obtaining an appraisal of their fair value. The court rejected the company’s suggestion that the value of a minority interest of 10% or less was so minimal as to make unjustifiable the expense and inconvenience of appraisal litigation. Moreover, although the legislature clearly made a decision that 90% was the appropriate threshold for deciding whether or not a shareholder vote was necessary, there was no logical reason why the same threshold should apply to appraisal rights. Other provisions of the Act which were capable of being used to effect a merger, i.e. those contained in ss. 86–88 consisting of schemes of arrangement and squeeze-outs, provided a means of access to the court in which the fairness of the transaction could be called into question. The availability to a dissenter of a means of challenge in a squeeze-out indicated an overall legislative intention that minorities of 10% or less should not be left without some means of disputing the fairness of the price at which their shares were to be taken. It seemed to the court that the sensible and commercially justifiable decision to dispense with a shareholder vote in a short-form merger had had the unintended and hitherto unrecognized effect of depriving minority shareholders in a short-form merger of appraisal rights which the legislature intended them to have (paras. 43–52).

(2) The situation could not be rectified by a process of construction falling within the proper ambit of judicial interpretation. Although the court was satisfied that (a) the intended purpose of s.238 was to give appraisal rights to all dissenters regardless of the form of merger used; (b) the legislature had inadvertently overlooked that, by removing the requirement of a vote in a short-form merger, the provisions of s.238 would have no application to such mergers; and (c) had the error been noticed, the legislature would have made identical provision for dissenters in short-form mergers to that made for dissenters in long-form mergers, the lacuna in the legislative provisions was too great to fill by a process of ordinary construction, even taking into account the principle of legality (para. 53).

(3) Section 15 of the Bill of Rights, which assured a right of peaceful enjoyment of property in terms which ordinarily precluded dispossession without compensation, applied. Shares in a limited company were clearly property for the purposes of s.15. The interference with the peaceful enjoyment of property in a short-form merger did not fall within the carve-out in s.15(2)(a)(iii). Dispossession in a short-form merger could not be said to occur as an incident of the contract between shareholders. It was solely a consequence of legislative intervention. The absence of anyappraisal right in short-form mergers meant that the requirements of s.15(1)(c) (provision for the prompt payment of adequate compensation and a right of access to the Grand Court for the determination of the amount of any compensation and for the purpose of obtaining prompt payment of that compensation) could not be satisfied. There were no alternative remedies available to a shareholder dissenting from a short-form merger which satisfied the requirements of s.15 of the Bill of Rights. Section 25 of the Bill of Rights governed the interpretation of Part XVI of the Companies Act. If the court concluded that the compatibility of s.238 with the Bill of the Rights was unclear or ambiguous, s.238 must, so far as it was possible to do so, be read and given effect in a way which was compatible with the Bill of Rights. If, however, the court concluded that s.238 was not merely unclear or ambiguous but was incompatible with the Bill of Rights, it must make a declaration of incompatibility under s.23 of the Bill of Rights. The court considered s.238 to be unclear or ambiguous as to its compatibility with s.15 of the Bill of Rights. Although, as a matter of ordinary construction, s.238 could not be read as applying to short-form mergers, that was not the legislative intent. It was possible to read and give effect to s.238 in a way which made it compatible with s.15 of the Bill of Rights, so that s.238 would confer appraisal rights on dissenters in a short-form merger. The effect of s.25 of the Bill of Rights was to give the court a greater degree of interpretative latitude than was available under the ordinary rules of construction. The Chief Justice appeared to have added in s.238(5) the words “or the date on which the plan of merger is given to the member pursuant to section 233(7)” immediately after the existing words “the date on which the notice referred to in subsection (4) is given,” with the rest of s.238 left unamended. Reading the section in that way had the effect of making it compatible with s.15 of the Bill of Rights and justified the order made by the Chief Justice. However, the court preferred the following alterations (deleted words being struck through and added words appearing in bold type):

“(1) A member of a constituent company incorporated under this Act 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 (if any such vote is to be held) or (if no such vote is to be held) immediately after the date on which the plan of merger is given to the member pursuant to s.233(7), 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 bythe voteor approved.

(4) Within twenty days immediately following the date on which the vote of members giving authorisation for the merger or consolidation is made, or (if no such vote is to be held) within twentydays immediately following the date on which the plan of merger or consolidation is filed with the Registrar pursuant to s.233(9), the constituent company shall give written notice of the authorisation or filing 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 written notice of that person’s decision to dissent, stating—

(a) that person’s name and address;

(b) the number and classes of shares in respect of which that person dissents; and

(c) a demand for payment of the fair value of that person’s share.”

Read in this way, s.238 would confer appraisal rights on dissenters from a short-form merger, in conformity with the requirements of s.15 of the Bill of Rights. It would conform with the intention of the legislature. The court was satisfied that it was permissible and necessary to make these amendments (paras. 58–81).

Cases cited:

(1) Att.-Gen. v. Horner (1884), 14 Q.B.D. 245, considered.

(2) Att. Gen....