Maso Capital Investments Ltd and Others v Shanda Games Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Lady Arden |
| Judgment Date | 27 January 2020 |
| Neutral Citation | [2020] UKPC 2 |
| Docket Number | Privy Council Appeals No 0062 and 0058 of 2018 |
| Court | Privy Council |
[2020] UKPC 2
Lord Reed
Lord Wilson
Lord Briggs
Lady Arden
Lord Kitchin
Privy Council Appeals No 0062 and 0058 of 2018
Privy Council
Hilary Term
From the Court of Appeal of the Cayman Islands
Shanda Games Ltd
Philip Jones QC
Ian Mann
Anya Park
(Instructed by Harney Westwood & Riegels)
Maso and others
Jonathan Crow QC
Rupert Bell
Donald Lilly
(Instructed by Edwin Coe LLP)
Heard on 12 March 2019
A key feature of the statutory regime for mergers in the Cayman Islands is that it gives significant rights to dissenting shareholders (“dissenters”). They include an appraisal right, that is, the right to apply to the Grand Court for determination of the “fair value” of their shares and a right to the payment of “a fair rate” of interest on the outstanding consideration. These two appeals concern those two rights. The first appeal (the “fair value appeal”), brought by minority shareholders in Shanda Games Ltd (“Shanda”) known as the “Maso parties”, concerns the meaning of “fair value”, specifically whether it means that there should be a discount to reflect that the dissenters do not have control of the company or whether it means a pro rata share of the full value of the company (“per share value”), as it has in a number of authorities been held to mean in Delaware law. The second appeal (the “interest appeal”), brought by Shanda, concerns the determination of a fair rate of interest.
Under section 238 of the Companies Law (2013 revision) of the Cayman Islands (“the Companies Law”), where there has been a merger or consolidation involving at least one Cayman company pursuant to Part XVI of the Companies Law, a dissenter is entitled to payment of the “fair value” of his shares. If the dissenter and the constituent company cannot agree on “fair value”, the company shall, or he may, present a petition to the Grand Court for its determination of the fair value of his shares and a fair rate of interest, if any, to be paid by the company.
Sections 238 and 239 of the Companies Law are set out in the appendix to this judgment. The key provisions may be summarised as follows. The entitlement of the member to fair value is set out in subsection (1) of section 238. The right is apparently limited to members, but no argument has been addressed to that. The dissenter must give notice (“an advance demand”) that he objects to the merger and intends to demand payment for his shares before the resolution to approve the merger takes place (subsections (2), (3)). The company must give him notice that the merger has been approved within 20 days of the approval (subsection (4)). The dissenter then has 20 days to give notice of his decision to dissent which he must do in respect of all his shares in the company (subsections (5), (6)). On giving that notice, he loses his status as a member save that he may pursue his claim to payment of fair value and bring a claim to have the merger declared void or unlawful (subsections (7), (12) and (16)), (but not for example to bring a claim for outstanding distributions or past breaches of fiduciary duty). The company (or the surviving or consolidated company) must make an offer (“an advance offer”) of what it considers to be the fair value of the shares within a further seven days following the expiration of the 20-day period for dissenting (subsection (8)). If that offer is not agreed, a petition must be presented within a further 20 days to the court for determination of the fair value (subsection (9)). The court must determine the fair value together with a fair rate of interest, if any, on that amount (subsection (11)). The shares of the dissenters are cancelled on acquisition by the offeror (subsection (15)). Section 239 contains an important exclusion for listed shares (“a market exception”) but that exclusion is subject to an exception where, for example, the dissenter is required to accept a cash element, as in this case.
Sections 238 and 239 contain many similarities with section 262 of the Delaware Corporations Code (prior to amendment in 2019). This also confers a right on stockholders who dissent from a merger to have their shares appraised by the Delaware Court of Chancery at their fair value. A dissenter must similarly make an advance demand before the resolution to approve the merger is passed (section 262(d)). The exceptions in section 262(b)(1) are similar to those in section 239 save that there is a further exception for cases where the number of registered stockholders is 2,000 or less. The company is not obliged to make an advance offer to dissenters as under section 238(8) of the Cayman Companies Law. Section 262(h) contains directions for ascertaining fair value and ordering interest. It directs the Court of Chancery to find the fair value of the dissenters' shares “exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation” (“synergies”). There is also an express requirement to take into account all relevant factors. Interest is from the effective date of the merger down to the date of payment at 5% over the Federal Reserve discount rate unless the Court determines otherwise “for good cause shown”. The dissenter's status as a member ceases at the effective date of the merger but he may claim unpaid distributions declared before that date (section 262(k)). Court approval is required for the dismissal of appraisal proceedings (section 262(k)), but section 262 does not prohibit out of court settlements with any stockholder who is not a party to proceedings.
Shanda is an exempted limited company incorporated in the Cayman Islands and its American Depository Shares (“ADSs”) were listed on an American stock exchange known as NASDAQ. Its issued share capital is divided into ordinary shares, comprising Class A shares and Class B shares including Class A ordinary shares represented by ADSs (each ADS representing two Class A ordinary shares).
On 18 November 2015, Shanda merged with Capitalcorp Ltd as part of a transaction (“a take-private transaction”) to enable a group of investors in Shanda to purchase all the shares which they did not own and return it to a privately-held company (“the Merger”). The consideration for each ordinary share was US$3.55 per share and US$7.10 per ADS (the “merger” or “deal” prices). The closing price of Shanda's ADSs as quoted by NASDAQ on 24 January 2014, the last trading day immediately prior to the announcement leading to the Merger, was US$5.65 per ADS, so that the merger price represented a premium of 25.7% over that closing price. The offer excluded “Rollover Shareholders”, namely shareholders who had entered into a support agreement dated 3 April 2015 to vote in favour of the transaction and to receive shares in the parent company in exchange for their Shanda shares. The Rollover Shareholders represented approximately 75.6% of Shanda's issued shares, entitling them to approximately 90.7% of the total number of votes capable of being cast at general meetings and so the Rollover Shareholders held more than the two-thirds majority necessary to approve the special resolution required under Cayman law for approval of the merger.
The Maso parties are Maso Capital Investments Ltd, Blackwell Partners LLC – Series A and Crown Managed Accounts SPC, acting on behalf of Crown/Maso Segregated Portfolio. Their aggregate shareholding is 8,822,062 Class A ordinary shares of Shanda, representing some 1.64% of its issued share capital.
On 17 November 2015, prior to the extraordinary general meeting (“EGM”) of Shanda to approve the Merger, the Maso parties duly gave written notice of objection to the Merger pursuant to section 238(2) of the Companies Law. On 18 November 2015, the EGM of Shanda was held at which the terms of the Merger were approved. On 29 December 2015, the Maso parties gave written notice of dissent pursuant to section 238(5) of the Companies Law.
On 4 January 2016, pursuant to section 238(8) of the Companies Law, Shanda offered to pay the Maso parties what it determined to be the fair price of their shares, namely, the Merger consideration. The Maso parties refused this offer. The parties failed to agree on the price to be paid for the Maso parties' shares within the prescribed time under section 238(8) of the Companies Law.
Shanda presented a petition on 4 February 2016 pursuant to section 238(9)(a) of the Companies Law which requires the Court to determine the fair value of the Maso parties' shares and a fair rate of interest.
At trial, the experts, Professor Gregg Jarrell, appointed by Shanda, and Mr William Inglis, appointed by the Maso parties, agreed (i) that the fair value of the Maso parties' shares should be determined by applying a discounted cash-flow model, and (ii) that, if it were appropriate to apply a minority discount, the rate should be 23%. The parties agreed that the valuation date should be the date of the EGM of Shanda to approve the merger held on 18 November 2015.
Segal J, sitting in the Grand Court, heard the petition. He observed, in his judgment dated 25 April 2017, that, at the second reading of the Bill introducing what became section 238, the minister, the Honourable G Kenneth Jefferson, noted that:
“… this Bill responds to requests from the private sector in relation to merger and consolidation provisions and reflects extensive consultation with the private sector as well as the review of Bermuda, BVI, Delaware and UK legislative...
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