Re Shanda Games Ltd

JurisdictionCayman Islands
Judgment Date25 April 2017
CourtGrand Court (Cayman Islands)
Docket NumberCAUSE NO FSD 14 OF 2016 (NSJ)
Date25 April 2017
In the Matter of the Companies Law (2013 Revision)
And in the Matter of Shanda Games Limited

The Hon. Justice Segal.





Section 238 Companies Law (2013 Revision) — determination of fair value of the shares of shareholders dissenting from a statutory merger — whether a minority discount is to be applied — the approach to be adopted by the Court in determining fair value — the resolution of various disputes relating to the valuation of the Company and the dissenters' shares.


Mr. Nigel Meeson QC and Mr. Erik Bodden of Conyers Dill & Pearman for Shanda Games.

Mr. Robert Levy QC and Mac Imrie, James Eldridge and Gemma Freeman of Maples & Calder for the Dissenting Shareholders.

Introduction and outline of my decision on fair value

This is my judgment on the petition (the Petition) presented on 4 February 2016 by Shanda Games Limited (Shanda) pursuant to section 238 of the Companies Law (2013 Revision) (the Companies Law).


Section 238 applies where there has been a merger or consolidation of Cayman companies pursuant to Part XVI of the Companies Law and members of a constituent company dissent from the merger or consolidation. Section 238(1) of the Companies Law provides that a dissenting member is entitled to payment of the fair value of his shares. Section 238(9) requires that the constituent company, following compliance by the dissenting member with the procedural requirements of section 238 and in the event that agreement cannot be reached on the fair price to be paid for the dissenting member's shares, file a petition with the Court seeking a determination of the fair value of the shares of the dissenting member. Section 238 (11) requires the Court, at the hearing of the petition, to determine the fair value of the dissenting member's shares and a fair rate of interest, if any, to be paid by the company upon the amount determined to be the fair value.


The Petition was presented pursuant to section 238(9) of the Companies Law. The dissenting shareholders in this case are (1) Blackwell Partners LLC-Series A (Blackwell) (2) Crown Managed Accounts SPC (Crown) and (3) Maso Capital Investments Limited (Maso) (together the Dissenting Shareholders). At all material times Blackwell was the registered owner of 3,446,358 Class A ordinary shares, Crown was the registered owner of 2,078,940 Class A ordinary shares and Maso was the registered owner of 3,296,764 Class A ordinary shares.


I would summarise my conclusions as follows:

  • (a). after the cross-examination of the experts and in closing submissions, Shanda, as I explain in paragraph 72 below, confirmed that it was prepared to accept the opinion of the Dissenting Shareholders' expert save in relation to nine issues (which were, unsurprisingly, the issues with the greatest impact on the valuation of Shanda).

  • (b). my decision on these nine points (adopting the shorthand I have used in paragraphs 71 and 72 to describe these issues) can be summarised as follows:

    • (i). the minority discount point: I hold that there is no minority discount to be applied in a fair value determination under section 238 (see paragraph 93 below).

    • (ii) game revenue intensity: I hold that the valuation of Shanda should be based on and use Mr Inglis' corrections and estimates (see paragraph 113 below).

    • (iii). depreciation: I hold that the Court should use Mr Inglis' forecasts and figures for depreciation and amortisation (see paragraph 118 below).

    • (iv). Mir II mobile revenues: I hold that the Court should use Mr Inglis' projections and figures for Mir II mobile revenues (see paragraph 126 below).

    • (v). two or three stage growth model: I hold that the Court should use a three stage model (see paragraph 136 below) and that the transitional period should be five years (see paragraph 140 below).

    • (vi) the estimate of beta to be used in calculating Shanda's DCF: I hold that the estimate of beta should be 1.39 (see paragraph 160 below).

    • (vii). the equity size or small stock premium: I hold that the Court should use Professor Jarrell's small stock premium of 1.71% (see paragraph 175 below).

    • (viii). the treatment of restricted stock, restricted stock units and employee share options (together “securities”); I determine the applicable principle but decide that since I have not been referred to or had submissions on the relevant terms and conditions governing these securities I am unable to make a final determination on how the principle is to be applied in the present proceedings. As regards the principle, I hold that if the employees and holders of the stock or units had rights to subscribe for and to the issue of shares in Shanda which were exercisable as at the Valuation Date without reference to or reliance on the merger (so that such rights were not conditional or dependent on the merger) then the Dissenting Shareholders' interest in Shanda was always subject to the issue of further shares and at risk of being diluted by shares issued to the holders and employees — and therefore the stock held or issued under these securities should be included in Shanda's equity for the purpose of calculating the Dissenting Shareholders' proportionate interest (see paragraph 179(d) below).

    • (ix). whether transaction costs paid by Shanda prior to the Valuation Date should be added back to and included in the valuation of Shanda: I hold that they should not be added back (see paragraph 186 below).

  • (c). I have not, using the decisions I have made, (re) calculated the valuation for Shanda (including the revised cost of equity estimate) but will leave this to the parties. I assume that this will not result in any difficulties but if it does I shall quickly determine any disputes and resolve any disagreements.

  • (d). I do not, in this judgment, deal with the interest issue. Since this point had not been the subject of detailed written submissions and had not been addressed by counsel during the hearing I gave the parties the opportunity to file further submissions and evidence after the hearing, which the parties have done. I will deliver a further judgment shortly on this issue.

  • (e). I would add that I have in this judgment quoted extensively from the written submission of counsel, the reports of the two experts and their cross-examinations. This does make a long judgment even lengthier and to that extent is a disadvantage. But this case has involved a large number of points with a very wide range of arguments and disputes on factual and legal issues. So it seemed to me to be necessary, in order to do justice to the detailed and carefully crafted submissions as well as the extensive and extended elaboration of the experts' opinions on a range of difficult points, to set out without paraphrasing, redaction or reformulation the written submissions and reports that I have received. In this context I should like to thank both counsel for the very helpful manner in which they presented the case and the clarity of their submissions, particularly on the difficult and more arcane questions of statistics which have arisen.

The merger transaction and the giving of the notices required by section 238

The Petition arises in connection with a merger (the Merger) between Shanda and Capitalcorp Limited (Capitalcorp), an exempted limited company under the laws of the Cayman Islands. The Merger was completed on 18 November 2015 (the Effective Date). The Merger involved a Chinese take private transaction led by the principal shareholders and management of Shanda.


Pursuant to the Merger, Shanda and Capitalcorp merged with Shanda as the surviving company. Shanda became a wholly owned subsidiary of Capitalhold Limited (the Parent), a Cayman Islands company. The Parent is now beneficially owned by a consortium of parties some of whom were the majority shareholders in Shanda before the Merger.


The Merger was agreed and documented initially in a merger agreement dated 3 April 2015 but the merger agreement was amended and restated on 23 September 2015. Under the terms of the merger agreement as amended each of Shanda's (i) ordinary shares and (ii) American depository shares (ADSs) (each representing two Class A ordinary shares) issued and outstanding immediately prior to the effective time of the Merger were to be cancelled in exchange for the right to receive US$3.55 per share (amounting to US$7.10 per ADS) in cash.


On the Effective Date, the Merger was approved by Shanda's shareholders at an extraordinary general meeting. 99.3% of those who voted at the EGM voted to authorise the Merger and in favour of the resolution to approve the merger agreement.


Prior to the EGM, on 17 November 2015, the Dissenting Shareholders had given written notice of objection to the Merger pursuant to section 238(2) of the Companies Law. On 7 December 2015, within the time period prescribed and as required by section 238(4), Shanda gave written notice of the authorisation of the Merger to each of the Dissenting Shareholders. On 29 December 2015, the Dissenting Shareholders each gave written notice to Shanda of its decision to dissent pursuant to section 238(5) (whereupon they each ceased to have any of the rights of a member except the right to be paid the fair value of their shares). Thereafter, on 4 January 2016, Shanda made a written offer to each of the Dissenting Shareholders as required by and pursuant to section 238(8) of the Companies Law, to purchase their shares at a price of US$3.55 per share (amounting to US$7.10 per ADS).


However, since Shanda and the Dissenting Shareholders were unable to agree a price for the Dissenting Shareholders' shares within the period prescribed by section 238(8) of the Companies Law, on 4 February 2016 Shanda issued the Petition as required by section 238(9)(a) of the...

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