Re Shanda Games Ltd

• Jurisdiction: Cayman Islands
• Judge: (Goldring, P., Martin and Morrison, JJ.A.)
• Judgment Date: 09 March 2018
• Court: Court of Appeal (Cayman Islands)
• Date: 09 March 2018

Court of Appeal (Cayman Islands)

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

IN THE MATTER OF SHANDA GAMES LIMITED

SHANDA GAMES LIMITED

and

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

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

and

SHANDA GAMES LIMITED

P. Jones, Q.C., M. Heal, P. Madden and J. Elliott for the appellant;

R. Levy, Q.C., M. Imrie and Gemma Freeman for the respondent.

Cases cited:

(1)Addbins Ltd., Re, [2015] EWHC 3161 (Ch), referred to.

(2)Banque Keyser Ullman SA v. Skandia (UK) Ins. Co. Ltd., [1987] Lexis Citation 1106, dicta of Steyn, J. considered.

(3)Bird Precision Bellows Ltd., In re, [1986] Ch. 658, referred to.

(4)Blue Index Ltd., Re, [2014] EWHC 2680 (Ch), referred to.

(5)CVC/Opportunity Equity Partners Ltd. v. Demarco Almeida, 2002 CILR 77, distinguished.

(6)Cavalier Oil Corp. v. Harnett, Delaware Ct. of Chancery, February 22nd, 1988, 1988 WL 15816; on appeal, 564 A.2d 1137, considered.

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

(8)DFC Global Corp. (Appraisal), In re, Delaware Ct. of Chancery, C.A. No. 10107–CB, July 8th, 2016, unreported, dicta of Bouchard, Chancellor considered.

(9)Dell Inc. (Appraisal), In re, Delaware C.A. No. 9322–VCL, Delaware Ct. of Chancery, May 31st, 2016, unreported, considered.

(10)Golar LNG Ltd. v. World Nordic SE, [2011] SC (Bda) 10 Com; [2011] Bda LR 9, applied.

(11)Grierson, Oldham & Adams Ltd., In re, [1968] Ch. 17; [1967] 1 W.L.R. 385; [1967] 1 All E.R. 192, followed.

(12)Hoare & Co. Ltd., Re [1933] All E.R. Rep. 105; (1933), 150 L.T. 374, considered.

(13)Integra Group, In re, 2016 (1) CILR 192, overruled.

(14)Irvine v. Irvine (No. 2), [2006] EWHC 583 (Ch); [2006] 4 All E.R. 102; [2007] 1 BCLC 445, referred to.

(15)Kummen v. Kummen-Shipman Ltd. (1983), 19 Man. R. (2nd) 92, distinguished.

(16)Ladd v. Marshall, [1954] 1 W.L.R. 1489; [1954] 3 All E.R. 745, referred to.

(17)Linton Park plc, Re, [2005] EWHC 3545 (Ch); [2008] BCC 17, dicta of Lewison, J. considered.

(18)Merion Capital LP v. 3M Cogent, Inc., Delaware Ct. of Chancery, July 8th, 2013, unreported, referred to.

(19)Olive Group Capital Ltd. v. Mayhew, Eastern Caribbean C.A., November, 7th, 2016, considered.

(20)Orchard Enterprises Inc., The (Appraisal), In re, Delaware C.A. No. 5713–CS; Delaware Ct. of Chancery, July 18th, 2012, unreported, referred to.

(21)Strahan v. Wilcock, [2006] EWCA Civ 13; [2006] 2 BCLC 555, dicta of Arden, L.J. considered.

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.”

Court of Appeal Law (2011 Revision), s.6:

“No appeal shall lie—

. . .

(f)without the leave of the Grand Court, or of the Court, from an interlocutory judgment made or given by the Judge of the Grand Court . . .”

Court of Appeal Rules (2014 Revision), r.12: The relevant terms of this rule are set out at para. 18.

Companies — arrangements and reconstructions — dissenting shareholders — fair value of shares — valuation methodologies

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

The company entered into a merger transaction pursuant to Part XVI of the Companies Law. 99.3% of its shareholders approved the merger. The company applied pursuant to s.238 for a determination of the fair value of the shares of the dissenting shareholders.

The company and the dissenting shareholders each engaged experts. They agreed that the company was to be valued according to a discounted cash flow (“DCF”) model. A DCF analysis required a prediction of future cash flows and the application of a discount rate to those cash flows in order to translate them into a present capital value and identify how much it would have cost at the valuation date to buy an investment with a rate of return and risk profile equivalent to the company’s business. Prediction of future cash flows typically involved estimating cash flow in two or sometimes three periods: a future finite period, perhaps a transitional period, and a terminal period. The discount rate was generally taken to be the expected rate of return on equivalent investment opportunities in the capital markets, also known as the company’s weighted average cost ofcapital. The weighting exercise involved estimating the cost of the company’s equity (it was common ground that the company had no debt, so the only assessment required was the cost of equity), through use of a capital asset pricing model assessing the rate of return on a risk-free investment and adjusting the rate to take account of risk factors.

One such factor was systemic risk represented by the relevant market as a whole, reflected by an equity risk premium, which was multiplied by a factor, beta, which measured the risk represented by a particular investment relative to the risk of the market as a whole. The parties’ experts disagreed on six points in relation to how the beta value should be determined, including whether the beta value should be directly measured or indirectly measured according to a peer group.

A further factor that might be considered was a size premium reflecting the possibility that investors might require a higher expected return for small companies to compensate for the greater risk associated with them, calculated according to Duff & Phelps tables, which divided companies into categories and ascribed a size premium to each category. There were originally three broad categories, but the tables also contained ten deciles based on the market capitalization of listed equity securities between 1926 to 2014. The parties disagreed as to the value to attribute to the company for the purposes of calculating the small stock risk premium and whether to place it within the broad categories or the deciles. The company’s expert had used the company’s unaffected stock price or market value when determining the appropriate decile size classification as the Duff & Phelps tables were based on unaffected market values and use of the outcome of the DCF analysis to calculate the company’s small stock risk premium, itself an element of the DCF analysis, would have been circular.

After the hearing but before the circulation of the Grand Court’s draft judgment, the company instructed new attorneys who commissioned an expert to review the evidence and reports of the parties’ experts. He concluded that the evidence given by the company’s expert was so inadequate that the court had been misled at trial. The new expert supported a much lower value for the shares. The company therefore applied to reopen the trial in order to admit the additional expert evidence.

That application was dismissed by the Grand Court (Segal, J.) as the issues dealt with in the additional expert’s report had been the subject of detailed submissions and cross-examination during the course of a long trial conducted by leading counsel, and most of the difficulties with the approach of the company’s expert were clear during the trial. In addition, the trial had concluded in November 2016 but the company had waited until March 2017 to apply to reopen the case, and had failed to act with sufficient expedition.

The Grand Court (Segal, J.) determined the fair value of the shares to be US$8.34 per share, more than double the merger price, and the fair rate of interest to be 4.295%. This resulted in an order for payment to the dissenting shareholders of US$73,575,995 plus interest of US$2,788,801. The court held that no minority discount should be applied as no suchdiscount was applied in Delaware and Canada, which had similar regimes to that contained in s.238 of the Companies Law. The judge took the average of the experts’ beta values. He used the unaffected market price in determining the company’s small stock risk premium. The methodology and growth rate of 4.5% given by the dissenting shareholders’ expert was to be adopted for the terminal period, but the transitional period was to be reduced from 10 years to 5 years. The fair value of interest was 4.295%, being the midpoint between 3.5% (the rate at which the company could have borrowed the amount representing the fair value of the dissenters’ shares) and 5.09% (the rate which prudent investors in the position of the dissenting shareholders could have obtained).

The company appealed against the Grand Court’s refusal to reopen the case. It submitted that it did not require leave to appeal. It also appealed against the court’s judgment, submitting inter alia that (a) the court had erred in holding that no minority discount was to be applied to the value of the dissenting shareholders’ shares; and (b) the court should not have adopted the midpoint approach to the calculation of the interest to be awarded to the dissenting shareholders, which was inconsistent with the purpose of an award of interest, and the judge should have awarded a rate representing only the cost to the dissenting shareholders of being deprived of their money, which was conventionally assessed as being the rate they would have had to pay to borrow money to replace the unpaid fair value of their shares.

The dissenting shareholders submitted in reply that (a) the company required leave to appeal against the Grand Court’s dismissal of their application to reopen the case; and (b) the court had been correct not to apply a minority discount to the value of the dissenters’ shares as fair value was different from market value.

The dissenting shareholders also appealed against aspects of the...