A review on the first time that the Financial Services Division considered the various issues that arise as a result of 'fair value' determination in the context of a merger.
Integra Group was a Cayman Islands company in the business of providing oil field services in the Russian market.
In 2013, certain members of its management team made a proposal to buy-out the Company’s shares not already owned by them. A separate committee of independent directors was established to accept or reject the buy-out offer and Deutsche Bank AG was engaged to provide a fairness opinion on the value of the shares. Deutsche Bank AG opined that that the offer price of US$10 per share was fair.
Minority shareholders, representing 17% of the shareholding in the Company, dissented from the buy-out offer on the basis that US$10 per share was not a fair valuation of the shares. Accordingly, the minority shareholders took advantage of the Cayman Islands statutory provisions that allowed them to engage the jurisdiction of the Grand Court to provide a ruling on what constituted fair value.
This is the first time that the Financial Services Division has considered the various issues that arise as a result of ‘fair value’ determination in the context of a merger (section 238 of the Cayman Islands Companies Act).
Guidance for litigators
A number of matters are important for litigators in the context of fair valuation proceedings:-
- The case re-emphasised that as always great care should be taken when preparing expert evidence, especially regarding the valuation methods used by experts. Mr Justice Jones QC criticised the evidence of one expert on the basis that a wide valuation bracket for the company was unhelpful and found that a definite figure was to be preferred. It would therefore appear that the greater the precision the more weight the opinion will hold with the court;
- Where a company’s shares are listed on a stock exchange it does not necessarily follow that the traded price of the shares is an appropriate methodology for calculating the fair value of the shares. It will be necessary to consider whether there is a well informed and liquid market with a large, widely held free float;
- Where possible, an electronic data room should be established and all relevant material should be made available to the experts. The judge was critical of the fact that the company controlled the material available to the experts and redacted certain documents that they (the company) considered irrelevant. The relevance of a document should be determined by the expert; and,
- Fair value is a value that is ‘just and equitable’ and should be determined immediately before the merger is approved without any minority discount or any premium for the forcible taking of the shares;
Guidance for minority shareholders
It is clear that minority shareholders are protected by the provisions of section 238. In the case of Intergra, a fair value for the shares was found to be US$11.70 – a significant increase on the offer of US$10 per share. If a minority shareholder has clear grounds for doubting the fairness of the offer then they should consider invoking the fair value determination procedure where that is available.
However, it is important that minority shareholders appreciate that the court makes an independent assessment of fair value regardless of the offer that the company has made. This means that a court could determine that the shares are worth less than the original offer resulting in the loss of significant time and expense in litigation and loss in terms of the value of the shareholder’s shares as well as the potential for adverse costs orders.
Guidance for companies
An action pursuant to section 238 is likely to be a great inconvenience to a company. A company can reduce the impact of any such action by ensuring that great care is taken to document and assess the fair value of the shares in the most transparent way possible and by taking into account the principles being established in respect of applications under Section 238 of the Companies Act.
If the company cannot avoid litigation then they should take steps to ensure that they make all relevant information available to the experts who are providing valuation evidence in the proceedings lest the company be criticised for withholding information which may have an impact on the assessment of fair value. The process of identifying such information should begin before any proceedings and when the company originally assesses the fair value by ensuring that the original valuation is as robust as possible and that the expert whom originally comes to a view has all necessary and relevant information before it; any short-cuts at that original stage may be very costly in due course.
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