The Companies Law (2018 Revision) and Ehi Car Services Ltd

• Jurisdiction: Cayman Islands
• Judge: Raj Parker
• Judgment Date: 24 February 2020
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO. FSD 115 OF 2019 (RPJ)
• Date: 24 February 2020

In the Matter of the Companies Law (2018 Revision)

and

In the Matter of Ehi Car Services Limited

Before:

THE HON. Raj Parker

CAUSE NO. FSD 115 OF 2019 (RPJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

Headnote

Summons for directions-s.238 of the Companies Low-Petition-determination of fair value of shares-whether ‘standard’ directions should be followed-jurisdiction to order management meetings-scope of dissenter discovery-timing of factual evidence — information request procedure-coordination by attorneys/counsel-disclosure of number of shares to be considered at trial.

Appearances:

Ms Caroline Moran, Ms Allegra Crawford and Mr Adam Huckle on behalf of Maples for the Petitioner.

Mr Robert Levy QC, Mr Rupert Bell and Mr Patrick McConvey on behalf of the Walkers Dissenters.

Mr Jeremy Goldring QC, Mr Marc Kish, Ms Marie Skelly on behalf of the Ogier Dissenters.

Mr Adrian Beltrami QC, Mr Rocco Cecere and Ms Farrah Sbaiti on behalf of the Collas Crill Dissenters.

Mr Hamid Khanbhai and Mr Morgan Brennan on behalf of the Campbells Dissenter.

Introduction

1 The Petitioner (the company) is an exempted limited company under the laws of the Cayman Islands and petitions the court to determine the fair value of the shares of the dissenting shareholders identified in the Petition dated 24 June 2019, together with a fair rate of interest, if any, on the amount to be paid pursuant to section 238 of the Companies Law (2018 Revision) (the Companies Law).

2 On 18 February 2019, the company entered into a merger agreement with another exempted company (Parent) and one of its wholly-owned subsidiaries (Merger sub). Pursuant to the merger agreement Merger sub was merged with and into the company and ceased to exist whereas the company continued and became a wholly-owned subsidiary of Parent. Prior to the merger the company was listed in the form of American Depository Shares on the New York Stock Exchange. The merger was effected by the company on 9 April 2019 under Part XVI of the Companies Law.

3 The company is a provider of car services specialising in short and long term car rentals and chauffeured car services in the People's Republic of China.

4 Prior to the merger, 28 dissenting shareholders held class A shares in the company. They consider that the price offered for the shares by the buyer group of US$12.25 per ADS or US$6.125 per share (the merger price) does not fairly reflect the value of the shares. The dissenters therefore delivered objections and notices of dissent under the mechanism in section 238.

5 The company now seeks directions for the further conduct of the proceedings. The parties have been unable to agree on a number of issues, including the timing of the information request process, whether there should be a management meeting(s), the timing of factual evidence, and the scope of dissenter discovery. There are also disputes about whether the company should be required to disclose information about the dissenters' former shareholdings and whether the five different legal teams representing 28 dissenters should be required to coordinate by order of this Court.

Departure from directions that have previously been made Introduction

6 At the date of this judgment I am aware of only three section 238 cases which have been resolved at trial 1, although many such proceedings, I believe over 20, have made their way through the Grand Court and stopped short of trial.

7 This court has been making detailed directions orders in relation to section 238 litigation for about six years. The company applies to materially vary the directions orders made in similar cases, which have to some extent become fairly ‘standard’. The overarching question in this application is how the court should approach the company's position on the contested issues. Many of the company's arguments are premised on the underlying assumption that the procedural regime that has built up is unfair to companies who bring section 238 petitions and that the dissenters are likely to put the company to needless time, trouble and expense by making unreasonable and excessive demands. The point was made that the pre-trial discovery process has become a bit of an information gathering ‘free for all’ at the expense of a company and should be reconsidered afresh.

8 There are also applications which seek to obtain additional dissenter discovery and to alter the sequencing of the provision of factual evidence.

9 Section 238 litigation is hard fought, often for high stakes and involves large teams of lawyers as well as highly experienced experts and their teams. Case management issues which might be thought capable of agreement are sometimes not agreed and the court is often asked to resolve such issues. These cases are without doubt very expensive for the parties to resolve.

10 Most of the 20 or so cases that have progressed to directions have received much attention from the teams of lawyers involved. Judges have either heard contested directions hearings or were asked to approve the agreed orders made. In that way considerable experience has been built up in a relatively short space of time. The orders made in each case are to some extent bespoke, but a uniformity of approach in relation to certain issues is discernible from the decisions and orders made.

11 In particular there has been a reasonably uniform approach concerning the extensive initial documentary disclosure required by a company by way of uploading relevant documents to a data room, the information request process initiated by the experts

and the further questioning of company management by the experts at a management meeting. I accept that approach puts a company to considerable expense. The court has however been reluctant to accept the stated concerns and objections taken by companies who bring these proceedings

12 In ( JA Solar unreported 18 July 2019) Smellie CJ, (having, at §14, described the section 238 process as a ‘vital safeguard’ for minority shareholders designed to protect their economic interests), set out at §16 what he referred to as relatively ‘standard form’ directions which dealt with company discovery and then went on to add that other directions provided that:

“(iv) the dissenting shareholders upload [to the electronic data room] their documents that fall into the categories ordered by the Court of Appeal in [Qunar ( unreported, 10 April 2018)] and which are relevant to fair value;

(v) the parties be at liberty to file evidence of fact (before expert reports are exchanged) and leave given for cross-examination;

…

(vii) up until close to the time of exchange of expert reports the company uploads to the data room any further documents or information that either of the valuation experts…..request of the Company within a specified period of time from the date of the request, for example within 14 days of the request, as was ordered in [ ( Shanda Games unreported, 25 April 2017), Segal J];

(viii) the company makes available appropriate members of management to meet with the valuation experts (whether in person or by telephone) upon request to discuss information provided by the company and issues relevant to the valuation experts' reports; and

(ix) the experts file reports and then meet to ascertain agreement/disagreement amongst them and file supplemental reports.”

13 At §17, he went on to say:

“17. The foregoing is not meant to suggest that there is a rigid ‘standard form’ of directions for section 238 cases. The directions may have to be somewhat tailored to the facts of any particular case. However, the various steps outlined in the previous paragraph have typically been ordered across most, if not all of the post Integra cases, often by Judges with experience of section 238 cases.”

14 The Chief Justice went on to say at §21 and §22:

“21. Even while rendered with variations to the ‘standard’ order for directions in other more recent section 238 cases, I accept that the core directions set out above have largely been ordered given that the parties (and the Court) have found them effective and beneficial for the swift and proper resolution of the one issue that falls for determination on the Petition — what is the fair value of the dissenting shareholders' shares?

22.1 am told that over the course of the last 18 months or so, there have been some disagreements between companies and the dissenting shareholders in a number of section 238 cases about how each step of the directions is to operate. In such cases, the recent authorities show that the Court should be guided by the Overriding Objective and “must do its best to adopt a balanced approach to opposing contentions. An approach which will encourage the parties to cooperate in the ensuing phases of the proceedings, and indeed, in future similar cases”: see ( Nord Anglia unreported 19 March 2018 Kawaley J) and ( Xiaodu unreported 26 March 2018 Kawaley J.)

15 At §30, having dealt with the importance of the company's discovery in section 238 cases and the relevant authorities, which showed a tendency for companies to provide far more limited discovery than the dissenting shareholders sought, he went on to say:

“30. Indeed, companies in section 238 cases also have a tendency to offer directions that are far less obliging than those the dissenting shareholders seek (and have traditionally been ordered). The present appears to be just another example of such a case, given the areas of disagreement now presented for resolution. In view of the central importance of discovery by companies (and the directions generally) in such cases, I am satisfied that the Court should approach such attempts with scepticism.”

16 In this case Ms Moran for the company argues that the ‘standard form’ directions work in a way that is duplicative, unfair and disproportionately costly for the company (and by implication...