Changyou.com Ltd v Fourworld Global Opportunities Fund Ltd and 7 others

Heard on 7 and 8 October 2024

This appeal concerns a question on the companies legislation of the Cayman Islands. At the relevant time the legislation was found in Part XVI of the Companies Law (2020 Revision). This has now been renamed the Companies Act and the current version is the Companies Act (2025 Revision) but it has not been suggested that the text of Part XVI (now known as Part 16) has altered from what it was in 2020, and it is convenient to refer to the Companies Act as the legislation now is.

Part 16 (sections 232 to 239A) of the Companies Act contains provisions enabling two or more companies incorporated in the Cayman Islands to be merged or consolidated. Under the procedure laid down by Part 16, such a merger or consolidation normally requires a special resolution of each company concerned. A merger carried out in this way is commonly referred to as a “long-form” merger. But where company A is a parent of company B holding shares representing at least 90% of the voting power in company B, the requirement for special resolutions can be dispensed with if a copy of the plan of merger is given to the members of company B. This is commonly referred to as a “short-form” merger.

In the case of a long-form merger, members of a constituent company who dissent from the merger have a statutory right to payment of the fair value of their shares, and may, if agreement is not reached with the company, petition the Grand Court for determination of the fair value. These rights can be conveniently referred to collectively as “appraisal rights”. The question raised by this appeal is whether shareholders in a short-form merger enjoy similar appraisal rights or not.

In the present case the appellant, Changyou.com Ltd (“the Company”), merged with its parent, Changyou Merger Co Ltd (“the Parent”), in a short-form merger, sending a copy of the plan of merger to every member of the Company. That included the various respondents. The merger plan provided for their shares to be cancelled in exchange for a cash sum representing US$5.40 per share. The respondents had already notified the Company that they objected to the merger and dissented from it, and subsequently petitioned the Grand Court for determination of the fair value of their shares. A preliminary issue was ordered as to whether members of a subsidiary company that is the subject of a short-form merger are entitled to appraisal rights.

The preliminary issue was heard in the Grand Court by Smellie CJ (“the Chief Justice”). In a judgment handed down on 28 January 2021 he decided the issue in favour of the respondents, holding that they were entitled to payment of fair value, and had taken appropriate steps to dissent.

The Company appealed to the Court of Appeal (Goldring P, Martin JA and Morrison JA). On 16 September 2022 the Court dismissed the appeal for the reasons given in the judgment of Martin JA, namely that although as a matter of ordinary statutory interpretation appraisal rights were not available in relation to short-form mergers, it was possible to read and give effect to the legislation in a way that made it compatible with section 15 of the Bill of Rights pursuant to the interpretive obligation under section 25 of the Bill of Rights.

The Company now appeals to the Privy Council. The Court of Appeal concluded that the Company was entitled to appeal as of right, but said that they would have given leave to appeal in any event in the light of the great general or public importance of the issue.

For the reasons given below the Board considers that the appeal should be dismissed and will humbly advise His Majesty accordingly.

Part 16 of the Companies Act is set out in the Annexe to this judgment, and references hereafter to sections are to sections of the Companies Act unless otherwise specified.

The following points may be noted:

(1) Part 16 distinguishes between merger and consolidation, the difference being that in a consolidation two or more constituent companies are consolidated into a new company, whereas in a merger the constituent companies are merged, with one of the existing companies being the surviving company: see the definitions in section 232. The present case is one of merger in which the Parent was merged with its subsidiary, the Company, with the Company as the surviving company.

(2) Where (as here) all the constituent companies are Cayman Islands companies incorporated under the Companies Act (and limited by shares) the procedure for effecting a merger or consolidation is that set out in section 233. Provision is also made by section 237 for a merger or consolidation between one or more Cayman Islands companies and one or more overseas companies, in which case there are certain further requirements in addition to those in section 233.

(3) The ordinary procedure under section 233 consists of the following steps. First, the directors of each constituent company approve a written plan of merger or consolidation: section 233(3). Second, the plan is authorised by each constituent company by special resolution (or other authorisation as specified in the company's articles): section 233(6). Third, the plan is signed by a director of each company and filed with the Registrar of Companies together with certain confirmations in the form of a certificate, an undertaking and various director's declarations: section 233(9). Fourth, the Registrar (on payment of the applicable fees and on being satisfied that the requirements of section 233(9) have been complied with) registers the plan and issues a certificate of merger or consolidation: section 233(11). The merger or consolidation is effective as from the date the plan is registered by the Registrar (unless, as permitted by section 234, provision is made in the plan for it to be effective on a specified later date up to 90 days afterwards): section 233(13). Pursuant to the undertaking required by section 233(9)(g), a copy of the certificate is then to be given to the members of each constituent company and notification of the merger or consolidation published in the Gazette.

(4) The plan approved by the directors must give particulars as specified in section 233(4). By section 233(4)(e) this includes particulars of:

“the terms and conditions of the proposed merger or consolidation, including where applicable, the manner and basis of converting shares in each constituent company into shares in the consolidated or surviving company or into other property as provided in subsection (5).”

(5) This is a reference to section 233(5) which provides that one of the provisions that a plan may contain is as follows:

“Some or all of the shares whether of different classes or of the same class in each constituent company may be converted into or exchanged for different types of property (consisting of shares, debt obligations or other securities in the surviving company or consolidated company or any other corporate entity, or money or other property, or a combination thereof) as provided in the plan of merger or consolidation.”

The effect of this therefore is that a plan may require the shares of minority shareholders to be exchanged for a specified cash consideration.

The appraisal rights of dissenting shareholders are found in section 238, which among other things provides as follows:

“ Rights of dissenters

238 (1) A member of a constituent company incorporated under this Act shall be entitled to payment of the fair value of that person's shares upon dissenting from a merger or consolidation.

(2) A member who desires to exercise that person's entitlement under subsection (1) shall give to the constituent company, before the vote on the merger or consolidation, written objection to the action.

(3) An objection under subsection (2) shall include a statement that the member proposes to demand payment for that person's shares if the merger or consolidation is authorised by the vote.

(4) Within twenty days immediately following the date on which the vote of members giving authorisation for the merger or consolidation is made, the constituent company shall give written notice of the authorisation to each member who made a written objection.

(5) A member who elects to dissent shall, within twenty days immediately following the date on which the notice referred to in subsection (4) is given, give to the constituent company a written notice of that person's decision to dissent…

…

(7) Upon the giving of a notice of dissent under subsection (5), the member to whom the notice relates shall cease to have any of the rights of a member except the right to be paid the fair value of that person's shares and the rights referred to in subsections (12) and (16).

(8) Within seven days immediately following the date of the expiration of the period specified in subsection (5), or within seven days immediately following the date on which the plan of merger or consolidation is filed, whichever is later, the constituent company, the surviving company or the consolidated company shall make a written offer to each dissenting member to purchase that person's shares at a specified price that the company determines to be their fair value; and if, within thirty days immediately following the date...