The Companies Act (2022 Revision) and FGL Holdings
| Jurisdiction | Cayman Islands |
| Judge | Justice Parker |
| Judgment Date | 19 April 2023 |
| Docket Number | CAUSE NO. FSD 184 OF 2020 (RPJ) |
| Court | Grand Court (Cayman Islands) |
The Hon. Justice Parker
CAUSE NO. FSD 184 OF 2020 (RPJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Costs-s.238 petition-successful party-costs of discovery exersise-indemnity costs-interim payment-specific costs of e discovery — interest.
Mr. Tom Lowe KC instructed by Mr. Sam Dawson and Mr. Tom Stuart and Mr. Nigel Smith of Carey Olsen for the Dissenters
Mr. Mac Imrie KC instructed by Mr. Malachi Sweetman and Ms. Christiana McMurdo of Maples and Calder (Cayman) LLP for the Company
Following the Court's determination that the fair value of the Dissenters' shares in the Company was the transaction price on the Valuation Date, by its Summons dated 25 November 2022, the Company seeks an order that it may recover its costs from the Dissenters pursuant to GCR O.62 r.4 on a standard basis.
It also seeks orders that the costs of providing discovery that it has incurred should be payable on an indemnity basis and that there should be an interim payment.
There is also an application for specific costs of the Company's e discovery provider (the Relativity database platform) if the Court were to award costs on a standard basis and for interest on those costs.
The Dissenters oppose each of the orders sought and submit that the Court should make no orders as to costs in the proceeding.
Mr Imrie KC submitted:
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a) The Company was the successful party in the proceedings because fair value was equivalent to the Merger price (referred to as the “Transaction Price” in the Ruling) and therefore the Dissenters did not recover more than they would have received if they had accepted the Merger consideration and not exercised their dissent rights under s.238.
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b) Similarly, the Dissenters did not recover more than if they had accepted the Company's offer made on 15 July 2020 pursuant to the mandatory provisions of s.238(8). Therefore the Dissenters are the unsuccessful parties in the litigation and the Company is entitled to a costs order in its favour on the basis that it was the successful party and that “costs should follow that event”: this result follows from an application of the usual cost principles and in particular the application of those principles to s.238 cases, as per the rulings in Integra, Qunar, and Trina Solar.
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c) Further and alternatively, following negotiations on a without prejudice except as to costs basis, on 28 August 2020 the Dissenters received from the Company a non-refundable interim payment for more than the Transaction Price. Applying the Cayman Islands principles applicable to Calderbank offers and interim payments, including in the context of s.238 cases, the Company is entitled to claim its costs incurred after the date of the Dissenters' acceptance of that payment; and
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d) Alternatively, if the Court was to apply an issues-based approach to the question of costs, the Company succeeded on all of the main issues in the case, subject to only one exception, and it should nevertheless be entitled to a full costs order in its favour.
Mr Lowe KC for the Dissenters submitted that at trial the Company asserted that the Merger Consideration was more than fair, and that it should not be expected to compensate the Dissenters by the same amount.
The Company argued that fair value could be determined by exclusive reference to the market price of FGL shares as at the Valuation Date, with adjustments to reflect the value ascribed to the Merger transaction (the “Unaffected Adjusted Market Price”). It proposed not to pay the Dissenters the Merger Equivalent Price, but instead to pay them an ‘unaffected adjusted market price’ of $8.60 per share (i.e. only 25 cents more than the cash portion of the merger consideration).
At trial the Dissenters argued that the market price of FGL Holdings was unreliable, and that the Merger Consideration was unfairly low. They proposed that fair value should be determined by reference to the forecasted dividends of FGL (had it continued as a going concern). The Dissenters' valuation expert, Scott Davidson, gave evidence proposing that the Court ascribe a 10–20% weighting to the Merger Equivalent Price and a 80–90% weighting to the output of a Discounted Dividend Model.
Mr Lowe KC submitted that by its judgment of 20 September 2022 the Court rejected both sides' case: it declined to adopt the Unaffected Adjusted Market Price contended for by the Company, but also declined to accept the Discounted Dividend Model (DDM) contended for by the Dissenters. 1 Essentially, the Court found that the former was unduly skewed by the short-term
impact of Covid-19 and the latter was unreliable in the context of an insurance company subject to particular capital requirements 2The Court held that the fair value was the Merger Consideration. The Company was ordered to pay the Dissenters $11.06 per FGL share outstanding at the time of the merger, which was the experts' best estimate of the Merger Equivalent Price as at the Valuation Date. The Court determined that the Merger Consideration was neither an upper-bound nor a lower-bound of fair value. Rather, it was an “ estimate which the Court considers is equally likely to be below fair value, as it is to be above it” 3.
Mr Lowe KC also submitted that properly analysed, the interim payment was less than the fair value: the Company is seeking to take advantage of a collateral gain on the sale of FNF shares, which was not part of the interim payment.
Section 238 (14) of the Companies Act provides: “.. the costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances”.
In the first s.238 case to come to trial the Court held that a shareholder who does nothing more than record his dissent and decline the Company's offer, thereby triggering his right to a judicial determination, should not be liable for the Company's costs 4. No subsequent case has proceeded to trial on that basis. Dissenting shareholders have advanced vigorous positive cases.
Where a shareholder actively participates in the proceeding and asserts a positive case, Order 62, Rule 4 of the Grand Court Rules will apply 5.
O. 62, r 4(2) provides that:
“ The overriding objective of this Order is that a successful party to any proceeding should recover from the opposing party the reasonable costs incurred by the successful party in
conducting that proceeding in an economical, expeditious and proper manner unless otherwise ordered by the Court.”
The Court needs to assess who the successful party was. 6 The meaning of ‘success’ in s. 238 cases is, necessarily, fact dependent. It is not simply a question of ‘who writes the cheque’ but depends on matters such as the arguments advanced by the parties at trial, their conduct in the lead up to and at trial, the opinions provided by valuation experts, the decision ultimately reached by the Court, and any prior offers made by the Company 7. Some of the previous cases are illustrative, but each case is highly fact dependent.
In Re Integra Group 8, the Dissenters contended that the value of their shares was $135 million, and not $85 million as alleged by the Company. The Court determined that the ‘fair value’ was somewhere between the parties' positions – US$105 million. This led both parties to argue that they had been the successful party.
Jones J concluded that fair value was more (in fact 17% more) than the merger price, and that the Dissenters were therefore the successful party because they had recovered more than had been offered to them in the merger and much more than the Company contended for at trial.
At § 8 Jones J stated:
“ I do not think that it is helpful for me to attempt to lay down any generally applicable principles or criteria by which to determine what constitutes success or failure in an appraisal action, save to say that it must depend upon the circumstances of the particular case. In this case the Company's fair value offer made pursuant to section 238(8) was US$10 per share (or $20 per GDR). In effect, the Company thereby confirmed its determination that the amount of the merger consideration constituted fair value. There is no evidence before the Court about any negotiations which may or may not have taken place at this stage or at any later stage during the course of the proceeding 9. All I know is that the Respondents rejected $10 per share. However, the Company resiled from this
position and put its case on the basis that the fair value was US$8.41 per share with the result that the principal amount payable to the Respondents collectively would be US$13,073,513.20. In the event, I concluded that the fair value was US$11.70 per share, resulting in a principal amount payable of US$18,187,883.00. On this basis I think that the Respondents must be regarded as the successful party.”
The Court also regarded the Dissenting Shareholders as successful because it had relied on and preferred the Dissenters expert evidence. 10
“ I regard the [Dissenters] as the successful party because I preferred Mr Taylor's valuation approach which led me to conclude that the fair value of Company shares was substantially greater than the mid-point of the value advanced by Mr Robinson”.
The Company, as the unsuccessful party, argued for an issues based costs award. The Court rejected that argument 11. Jones J stated at §9:
“ The Company argues that the Court should take a more nuanced approach. Whilst there may be circumstances in which it is appropriate to exercise the Court's discretion by reference to the outcome of identifiable issues rather than the overall result, I do not think that there is an...
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