Qihoo 360 Technology Company Ltd

• Jurisdiction: Cayman Islands
• Judge: (Martin, Newman and Morrison, JJ.A.)
• Judgment Date: 09 October 2017
• Court: Court of Appeal (Cayman Islands)
• Date: 09 October 2017

Court of Appeal

(Martin, Newman and Morrison, JJ.A.)

IN THE MATTER OF QIHOO 360 TECHNOLOGY COMPANY LIMITED

QIHOO 360 TECHNOLOGY COMPANY LIMITED

and

MASO CAPITAL INVESTMENTS LIMITED, BLACKWELL PARTNERS LLC—SERIES A and CROWN MANAGED ACCOUNTS SPC (on behalf of CROWN/MASO SEGREGATED PORTFOLIO)

M. Heal, J. Elliott and D. Vekaria for the applicant;

R. Levy, Q.C., N. Dunne and R. Bell for the respondents.

Cases cited:

(1) Bancredit Cayman Ltd., In re, 2009 CILR 578, referred to.

(2) British Assn. of Glass Bottle Manufacturers Ltd. v. Nettlefold, [1912] A.C. 709; (1912), 81 L.J.K.B. 1121; 107 L.T. 529, followed.

(3) Dyxnet Hldgs. Ltd. v. Current Ventures II Ltd., 2015 (1) CILR 174, referred to.

(4) Integra Group, In re, 2016 (1) CILR 192, followed.

(5) Lonrho plc v. Fayed (No. 3), [1993] T.L.R. 347, referred to.

(6) Mueller Europe Ltd. v. Central Roofing (South Wales) Ltd., [2012] EWHC 3417 (TCC), referred to.

(7) Shanda Games Ltd., In re, Grand Ct., Cause No. FSD 14 of 2016, April 25th, 2017, unreported, referred to.

Legislation construed:

Companies Law (2016 Revision), s.238:

“(1) A member of a constituent company incorporated under this Law shall be entitled to payment of the fair value of his shares upon dissenting from a merger or consolidation.

. . .

(9) If the company and a dissenting member fail . . . to agree on the price to be paid for the shares owed by the member . . .

(a) the company shall . . . filed a petition with the Court for a determination of the fair value of the shares of all dissenting members . . .”

Grand Court Rules 1995 (Revised), O.24, r.7:

“(1) Subject to rule 8, the Court may at any time, on the application of any party to a cause or matter, make an order requiring any other party to make an affidavit stating whether any document specified . . . is, or has at any time been in his possession, custody or power . . .”

O.24, r.8: The relevant terms of this rule are set out at para. 10.

O.24, r.20(1): The relevant terms of this sub-rule are set out at para. 25.

Companies — arrangements and reconstructions — dissenting shareholders — fair value of shares — if company’s approach to discovery inconsistent and cavalier, affidavit verifying discovery not conclusive

Companies — arrangements and reconstructions — dissenting shareholders — fair value of shares — appointment of forensic expert to conduct audit of company’s IT systems exceptional — ordered following company’s cavalier attitude to and failure to comply with discovery orders — under inherent jurisdiction or GCR O.24, r. 20(1)

A company applied in the Grand Court for the determination of the fair value of dissenting shareholders’ shares pursuant to s.238 of the Companies Law (2016 Revision).

Following a merger, the company and its dissenting shareholders failed to agree a fair value for the dissenting shareholders’ shares. An order was made by consent giving directions to the parties in preparation for the final hearing. The company was to open an electronic data room, accessible to the parties and their advisers, consultants and experts, and to upload to it all documents and other materials in its possession, custody or power which were relevant to the determination of the fair value of the shares. The company and the dissenting shareholders had leave separately to instruct an expert witness as to the fair value of the shares.

The dissenting shareholders subsequently issued a summons seeking specific discovery of documents and information (listed in Schedule A to the summons) that it alleged were in the possession, custody or power of the company and which had not been disclosed when requested by the dissenting shareholders’ expert, including valuations, long-term forecasts, tax analysis, internal communications, documents held by its attorneys (“the Skadden emails”) and correspondence with its financial adviser, J.P. Morgan. The dissenting shareholders also sought orders that the company prepare and serve a list of all relevant documents, and that the company and the dissenting shareholders jointly appoint an independent forensic technology expert to conduct an independent review of the company’s discovery.

The Grand Court (Mangatal, J.) found the company to have approached its discovery obligations in a cavalier and inconsistent manner. It ordered the company to take all steps necessary to preserve its electronic devices and all data that might be relevant to the proceedings; to give specific discovery of all correspondence with J.P. Morgan regarding J.P. Morgan’s refusal to provide documentation and of the Skadden emails in their native format; to prepare and serve a list of all relevant documents; and that the company and the dissenting shareholders would jointly appoint an independent forensic technology expert to conduct an audit of the company’s IT systems (that decision is reported at 2017 (2) CILR 43).

The company sought leave to appeal against the order on the grounds that (a) the judge erred in law in failing properly to apply the test for specific discovery in GCR O.24, r.8; (b) the judge was wrong in law to treat the company’s verifying affidavit as not conclusive; and (c) the judge was wrong in law to regard the appointment of an independent forensic technology expert as a remedy available under GCR O.24, r.7.

Held, refusing leave to appeal:

(1) The judge’s decision on specific discovery was well reasoned and within the range of conclusions open to her. She stated that although in ordinary cases of discovery relevance was not a matter of opinion but was determined by the pleaded issues, in a s.238 application the sole issue was fair value. The discovery exercise was central to the proper determination of value and experts had a special role to play. The judge accepted that an expert had to express his views as to relevance with independence and not allow the instructing party or its attorneys to dictate relevance, but it would be highly speculative for her to decide on the interlocutory application, and without cross-examination, that the view as to relevance expressed by the dissenting shareholders’ expert was not his own opinion and considered view as to what was relevant for his assessment and necessary to complete his work. The request had to be viewed against the backdrop of repeated requests by the expert’s firm. The judge ultimately concluded that the court was not in a position to second-guess or sift through his assertion of relevance. The applicant would not be granted leave to appeal against this decision (paras. 14–15).

(2) Nor could the judge’s approach to the issue of the conclusivity of the company’s verifying affidavits be validly criticized. There were clearly grounds on which the judge was entitled to conclude that, despite the company’s assertions to the contrary, complete discovery had not been given. The judge was also correct to recognize that there were exceptions to the general rule that an affidavit verifying discovery was conclusive. In ordinary litigation, allegations of suppression of documents could be relevant not only to discovery but also to the substantive issues in the litigation, which should not be decided at an interlocutory stage. It was also the case that in ordinary litigation an absence of discovery could be dealt with by drawing adverse inferences against the party refusing to make full discovery. The rationale of the conclusivity presumption did not apply in the special circumstances of a s.238 application. In a s.238 application, the sole task of the court was to determine the fair value of shares, for which it required full information. If the information was lacking, the court would not prejudge any substantive issue by ordering disclosure. The absence of information could not be dealt with by drawing adverse inferences. In the present case, having identified inconsistencies and problems with the company’s discovery, the judge had been fully entitled to order further discovery (paras. 18–20).

(3) It could not be said that the Grand Court had no jurisdiction to order an IT audit. The present case was exceptional not only because of the central importance of discovery in s.238 proceedings and the role of the company in that process but also because of the company’s inconsistent and cavalier approach to discovery. An order for a forensic audit was necessary to avoid a denial of justice to the dissenting shareholders and to permit the court to determine the fair value of their shares. Although the order was intrusive, it was justified in this case. The court did not have power under GCR O.24, r.7 to order a forensic audit by a third party expert but the court had power under its inherent jurisdiction to ensure that its orders were observed. It was this inherent jurisdiction that the judge exercised, given the insufficiency of discovery made under previous orders. Although the judge did not rely on it, the order for a forensic audit could have been made pursuant to GCR O.24, r.20(1) which provided that where the court had made an order for discovery which had not been complied with, the court had a wide discretion to make such order as it thought just. There was a clear jurisdictional basis for the order made. The judge had ample grounds for concluding that a forensic audit was the only practical way to ensure that the company complied with its discovery obligations. Leave to appeal would not be granted (paras. 23–25).

(4) The court drew attention to the possibility of abuse of the autonomy that was of necessity to be given to experts in s.238 proceedings. There was a danger that the liberty given to experts to define what was relevant to value could be abused or even used to put pressure on a company to agree an inflated value for dissenters’ shares rather than accept the wholesale disruption of an external inspection of its physical and electronic records. An order for the appointment of a forensic expert would not be appropriate in every s.238...