Qunar Cayman Islands Ltd

• Jurisdiction: Cayman Islands
• Judge: (Parker, J.)
• Judgment Date: 13 May 2019
• Court: Grand Court (Cayman Islands)
• Date: 13 May 2019

IN THE MATTER OF QUNAR CAYMAN ISLANDS LIMITED

QUNAR CAYMAN ISLANDS LIMITED

and

MASO CAPITAL INVESTMENTS LIMITED and SEVEN OTHERS

(Parker, J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — arrangements and reconstructions — dissenting shareholders — fair value of shares — on application for determination of fair value of shares under Companies Law (2016 Revision), s.238, “fair value” is legal not economic construct — to be determined by court

Companies — arrangements and reconstructions — dissenting shareholders — fair value of shares — court rejected argument that Chinese companies systematically undervalued in US markets

Held, ruling as follows:

(1) The valuation approach taken by the company’s expert, namely using a combination of the market trading approach and the DCF method, led to a just and equitable outcome which would determine fair value for the dissenters’ shares. Both approaches had advantages and disadvantages and giving them equal weight was the most appropriate way to determine fair value in the present case. The court accepted the company’s expert’s valuation methodology and conclusions, save in respect of the approach to share-based compensation, terminal growth rate and minority discount. In respect of the market trading approach, absent unusual market events such as the global financial market crash in 2008 or the “dot com bubble” in 2000–2002, it was generally thought that the share price of a well traded liquid security provided an approximation of the fair value of the security. All large well regulated markets such as the NASDAQ were necessarily imperfect but they were generally regarded as good indicators of share values. The court concluded that the share price of the company in the particular circumstances of the present case and the NASDAQ market at the time could reasonably be relied on as good evidence of value. It therefore also provided a good cross-check against the DCF value. The court rejected the much higher valuation by the dissenters’ expert. In particular, the court rejected the theory of systematic undervaluation of shares in companies which operated in China but were listed on US exchanges. The dissenters failed to prove the inefficiency of the NASDAQ or the efficiency of the Chinese markets. As the basic premise underlying the DCF methodology was that the value of a company was equal to the projected future cash flows (discounted to the present value at the opportunity cost of capital), the first part of the calculation involved estimating future cash flows. The experts agreed that the management projections were the most useful starting point. There was no good reason to second-guess the projections, which were prepared with care. The second stage in relation to the DCF analysis was the approach to the applicable discount rate. The DCF valuation methodology discounted projected free cash flow over the relevant period by reference to the costs of capital (or equity), also known as the discount rate. The discount rate was the expected rate of return on equivalent investment opportunities in the capital markets. The court decided that in the circumstances there should be no minority discount. The court would be advised by the experts in relation to the fair value determination this produced, together with interest, in due course (paras. 130–132; paras. 139–141; paras. 166–180; para. 218; paras. 269–270; paras. 406–411).

(2) This result could not reasonably be said to be objectively unfair to the dissenters who were entitled to be paid the fair value of their shares under s.238. They would have had no reasonable expectation of buying the shares at the price they did when the company traded on the NASDAQ after the merger announcement and then being paid a price for those shares which was over four times the price at which they bought, having dissented from the merger (para. 410).

(3) The effect of the provisions of Part XVI of the Companies Law was that a merger or consolidation ordinarily required authorization only by special resolution of the shareholders of each constituent company, i.e. by a two-thirds majority, and no court approval. This could be contrasted with other regimes contained in the Law for corporate reorganizations which required majorities of 90% (squeeze out) or 75% (scheme of arrangement) and contemplated intervention by the court. Section 238 provided a mechanism by which the entitlement to obtain the fair value for their shares of the dissenting minority shareholders was protected in this more simplified regime. This was by means of an appraisal by the court, after the transaction was completed. The effect of having given notices of dissent was that the dissenters ceased to have any of the rights of shareholders, except the right to be paid the fair value of their shares and to bring an action to establish those rights. A first step towards arriving at the fair value of the dissenters’ shares was the making by the company of an offer for the dissenters’ shares at a specified price which the company determined to be their fair value (s.238(8)), but that could not occur before the dissenters lost their rights as members by virtue of s.238(7). Similar statutory regimes had long been part of the law in certain US states and Canada. Delaware had had similar legislation for a very long time. The Cayman Islands courts had been assisted in applying s.238 by considering the decisions and reasoning of courts from other jurisdictions but they were not binding. The approach in Delaware and Canada was not always to be followed in this jurisdiction as there were differences in the language of the relevant legislation, the policy behind it and procedure (paras. 22–29; para. 34).

(4) “Fair value” was a legal rather than economic construct. The valuation was to be performed immediately before the merger. Fair value did not take into account advantages which accrued to the company post-merger including anticipated synergies. The cost saving of going private was an inherent result of the transaction from which the dissenters had dissented. They had in effect disqualified themselves from the benefit by dissenting from the merger. Dissenters should not be afforded the benefits of the transaction from which they had dissented, nor should the burdens of the transaction be imposed on them. The phrase “fair value” did not appear in any other part of the Law in Cayman. It was to be construed like any other Cayman statute with a view to discerning the Cayman legislative intent behind the provision (paras. 38–42).

(5) Section 238 referred in numerous places to “the shares.” That did not mean as a matter of law a share in the undertaking of the company. The shares in a company and the assets of the company were legally distinct. Section 238 required fair value to be attributed to what the dissenting shareholder possessed. If it was a minority shareholding, it was to be valued as such. If the shares were subject to particular rights or liabilities, the shares were to be valued as being so subject. Calculating the value of a company as a whole was a way of assessing the value of a block of shares but it was not correct to regard the block of shares as pro rata shares in an enterprise’s value. A valuation of the rights to the capital of a company might be affected by matters such as the profitability of the company but it was essentially different from a valuation based upon a proportionate share in the assets of the company. (This was to be contrasted with the position in Delaware where the shares of dissenters were regarded as proportionate shares in the value of the business itself as a going concern.) There was nothing in the wording of s.238 which required the focus to be on the value of the company rather than the value of the shares. The exercise was to value the shares as at the valuation date (before merger). This was what the dissenters possessed. The dissenters had not been deprived of an interest in the assets or business undertaking of the company but of their shares (paras. 43–52).

(6) The court itself was directed to carry out the appraisal of the fair value of the dissenters’ shares (s.238(11)). This implied an independence of determination by the court, divorced from considerations of the reasonableness or otherwise of the dissenters’ rejection of the offer price. The Legislative Assembly had decided to leave it to the judgment of the court and had not provided a legislative formula for the exercise. The court would use its usual methods of resolving disputed questions of fact and expert evidence. Neither party bore the burden of proving the fair value of the shares. The proper approach to the resolution of the various matters in dispute was that the onus was on each party to adduce evidence establishing, on the balance of probabilities, the correctness of any contention relied upon. There was no burden generally on dissenters to show that the value offered by the company was unfair, or on the company to show that it was fair. If necessary, the court was entitled to substitute its own view for that of the experts. Having conducted a trial, it might be that the court determined matters in dispute on an issue-by-issue basis (including the correct methodologies and approach to apply) and then left the parties to revise their calculations on the basis of the court’s decisions and findings. Judges were generally not experts in the specialist fields of business valuations, financial principles and corporate finance (paras. 54–57).

(7) “Fair value” must be construed in its particular context, i.e. the simplified regime to give a mechanism for the majority to effect a merger. The dissenters’ entitlement was a quid pro quo to be paid the fair value of their shares, having had their shares cancelled as part of the transaction. The court accepted the dissenters’ submission that it could not only mean,or only be a proxy for, the market or traded...