Re Integra Group

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 28 August 2015
• Court: Grand Court (Cayman Islands)
• Date: 28 August 2015

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF INTEGRA GROUP

M. Phillips, Q.C. for the petitioner;

M. Imrie and G. Newell for the respondents.

Cases cited:

(1) Brant Invs. Ltd., In re(1987), 42 D.L.R. (4th) 15; 1987 C.L.B. 571; 5 A.C.W.S. (3d) 69; 7 T.L.W.D. 715–001; 60 O.R. (2d) 737; 37 B.L.R. 65; [1987] O.J. No. 574, applied.

(2) Cede & Co. Inc. v. MedPointe Healthcare Inc., Chancery Ct. (Delaware), August 16th, 2004 (revised August 26th and September 10th, 2004), C.A. No. 19354–NC, unreported, referred to.

(3) Cyprus Anvil Mining Corp. v. Dickson(1986), 33 D.L.R. (4th) 641; 8 B.C.L.R. (2d) 145, referred to.

(4) Deer Creek Energy Ltd. v. Paulson & Co. Inc.(2008), 49 B.L.R. (4th) 1; 170 A.C.W.S. (3d) 66; 2008 ABQB 326, referred to.

(5) Weinberger v. UOP Inc.(1983), 457 A.2d 701, referred to.

Legislation construed:

Companies Law (2013 Revision), s.238(1): The relevant terms of this sub-section are set out at para. 6.

s.238(8): ‘. . . [T]he . . . company shall make a written offer to each dissenting member to purchase his shares at a specified price that the company determines to be their fair value . . .’

s.238(11): The relevant terms of this sub-section are set out at para. 14.

Companies—arrangements and reconstructions—dissenting shareholders—to determine ‘fair value’ of dissenting shareholders” shares under Companies Law (2013 Revision), s.238(11), court to determine value of business immediately before approval of merger then calculate proportionate value of shareholders” shares without minority discount, premium for forcible taking or benefits or burdens of merger—company”s fair value offer under s.238(8), rejected by dissenting shareholders, not presumed to be minimum

The petitioner sought the determination of the fair value of the respondents” shares pursuant to s.238(11) of the Companies Law (2013 Revision).

The petitioner was an oil field services provider operating in the Russian market. Certain members of its management team, who owned 32.5% of its issued share capital, proposed to purchase the rest of its shares. Although commercially the transaction was a management buy-out, it was structured as a statutory merger under Part XVI of the Companies Law between the petitioner and a newly incorporated special purpose vehicle. The petitioner”s board of directors accepted the proposal and details were communicated to shareholders and published to the market. The merger was approved by a special resolution of the petitioner”s shareholders at an extraordinary general meeting and was completed in accordance with the relevant statutory requirements two days later. As at the date of the EGM, the petitioner had issued 8,973,473 shares in total, but more shares were issued in the course of executing the merger.

The respondents were three investment funds which, at the date of the EGM, collectively owned 17.3233% of the petitioner”s issued share capital. They objected to the merger and exercised their right under s.238 of the Companies Law (2013 Revision) to dissent and demand payment of the fair value of their shares. Pursuant to s.238(8), the petitioner offered to pay US$10 per share for the respondents” shares (which was the same amount as the merger consideration). The respondents rejected the offer and no agreement was reached, prompting the petitioner to seek the court”s determination of the fair value of the shares and a fair rate of interest under s.238(11).

The petitioner submitted that the fair value of the respondent”s shares should be calculated principally using a market value methodology based

on published stock market prices for the petitioner”s shares listed on the London Stock Exchange. It relied on a discounted cash flow valuation as a cross-check.

The respondents disagreed, submitting that the fair value of their shares should be calculated using the income approach and conducting a discounted cash flow valuation. As a secondary method (with a 25% weighting), they also adopted the market approach and carried out a valuation using financial and market information relating to comparable publicly traded companies.

Held, ruling as follows:

(1) For the purposes of s.238(11) of the Companies Law, the ‘fair value’ of the shares of a dissenting shareholder was the value to it of its proportionate share of the business if it were sold as a going concern in a hypothetical, arm”s length transaction. It was the estimated price for the transfer of an asset between identified knowledgeable and willing parties that reflected the respective interests of those parties (in the present case, the identified parties would be the petitioner on one side and a market participant with an interest in buying the business on the other side). The Companies Law did not specify the date at which the determination of fair value was to be made. The logical date would be immediately before the merger was approved: in the present case, the date of the EGM. Determination of fair value would not include any premium for forcible taking nor apply a minority discount. The effects of the merger, whether positive or negative, would be disregarded. Dissenting shareholders would not therefore benefit from any enhancement to their shares resulting from a merger, nor suffer any diminution in value. There was no presumption that the fair value offer of US$10 per share made by the petitioner pursuant to s.238(8) constituted a minimum price and it was open to the court to determine that the fair value was less (paras. 17–27).

(2) The respondents” valuation approach would be adopted as the most appropriate in the present circumstances. Section 238 of the Companies Law did not specify a particular valuation method. There were three main approaches to the valuation exercise to be performed by the court: the market approach (comparing the asset with identical or similar assets for which price information was available); the income approach (converting cash flows to a single current capital value—this approach included the discounted cash flow method); and the cost (or asset-based) approach (based on the economic principle that a buyer would pay no more for an asset than the cost of obtaining an asset of equal utility, whether by cost or construction). The mere fact that a company”s shares were listed on a major stock exchange (in this case the London Stock Exchange) did not indicate that a valuation methodology based on its publicly traded prices was necessarily the most reliable approach to determining its fair value for the purposes of a s.238 court appraisal. That methodology would be preferred in cases in which there was a well-informed and liquid market

with a large, widely held free float. Its reliability would be diminished if there were any tendency for the market to be uninformed or misinformed. Although the petitioner had always complied with its formal reporting requirements, during the two years preceding the merger the market had been less well informed about the petitioner compared with similar companies. The petitioner”s shares appeared to have been very illiquid compared with its peers during the period leading up to the merger. The petitioner”s shares would be valued according to the respondent”s recommended approach, i.e. combining an income approach using a discounted cash flow method (giving it a 75% weighting) with a market approach, using a guideline public company methodology (with a 25% weighting). The fair value of the plaintiff as at the valuation date was US$105m. Given that, at that date, the respondents collectively owned 17.3233% of the petitioner”s issued shares, the fair value of the respondent”s shares was US$11.70 per share. The fact that more shares had been issued during the implementation of the merger so that, if the respondents were still shareholders, they would now hold a smaller percentage of the petitioner”s issued share capital, would be disregarded. The respondents should not bear any diminution in the value of their investment directly attributable to the merger transaction from which they dissented (paras. 28–32; paras. 38–53; paras. 66–70).

(3) The petitioner would be required under s.238(11) to pay interest from the date on which it made its written offer to pay US$10 per share until payment. The fair rate of interest was 4.95%, which was based on the mid-rate between the rate at which the petitioner had earned interest on the money properly belonging to the respondent, which in the absence of affidavit evidence was assumed to be 0.2% per annum, and the petitioner”s borrowing rate, which was assumed to be 9.7% per annum (paras. 74–77).

1 JONES, J.:

Introduction and general factual background

Introduction

This a petition presented by Integra Group (which I shall refer to as ‘the company’ or ‘Integra’) by which the court is required to determine the fair value of its Class A common shares in accordance with the provisions of s.238(11) of the Companies Law (2013 Revision). This is what might be described as a ‘valuation action’ or an ‘appraisal action.’

The company

2 The company was incorporated in the Cayman Islands on March 15th, 2004 and commenced business in the following year as an oil field services provider operating in the Russian market. On February 22nd, 2007, Integra completed an initial public offering of regulation S class A common shares global depository receipts (‘GDRs’) listed on the London Stock Exchange (‘LSE’). Its market capitalization as at December 31st, 2007 was US$2.3 bn., based upon EBITDA (earnings before interest, taxes, depreciation and amortization) of US$180m. Integra”s initial business plan was to grow through strategic acquisitions. By December 2009, it had completed 17 acquisitions, making it one of the leading companies in the oil field services and equipment manufacturing sectors of the Russian market. However, from 2010 onwards, Integra began to dispose of some of its...