Cayman Appraisal Rights

In the 12th Edition of the Mergers and Acquisitions Review, the entry regarding the Caymans Islands includes discussion of the Cayman appraisal regime and confirms what other commentators have observed: Cayman Islands appraisal is in flux as the result of appeals of some of the first major appraisal decisions in that jurisdiction.  Like in Delaware, Cayman courts have to contend with various precedents, some of which are later overturned or modified.  In particular, recent Cayman decisions have dealt with minority discounts, cost-sharing, and other issues relevant to appraisal.

** Lowenstein Sandler does not practice in the Cayman Islands.

Loeb Smith, a law firm with a Cayman office, provides this update on dissenters’ rights in the Cayman Islands, focusing on recent developments in interim payments. In reviewing the landscape of investor strategies regarding Cayman mergers, Loeb Smith also notes–as we have written about previously–“Information can also be disclosed during court proceedings for a judicial determination of the ‘fair value’ that could later lead to a securities class action in a US court or other jurisdiction where the target company was listed.” Indeed, this is true in not just Cayman appraisal but also in any appraisal action. Although recently dismissed on statute-of-limitations grounds, a securities action against Towers Watson had previously been proceeding based in part on information gained in the Delaware appraisal.

Appraisal is a creature of statute, including in the Cayman Islands. Cayman appraisal has become a notable topic recently, with major decisions coming down from the Cayman courts and an uptick in investors using the appraisal remedy. Similarly, authors writing about Delaware have noted that quasi-appraisal is getting traction. Do the two have a meeting point?

The Cayman Financial Review provides an answer. Yes, the quasi-appraisal remedy exists in the Caymans; yes, much like in Delaware, it would require more than just an undervaluation of the company to access it–a violation of disclosure requirements, for example. As the authors note, a failure to provide sufficient disclosures frustrates shareholders’ ability to seek appraisal in the first place–leaving them with a post-merger quasi-appraisal remedy.

But the Cayman story does not end there; because of the somewhat unique way most Cayman companies involved in appraisal proceedings are structured, a Cayman quasi-appraisal case seems unlikely. This is because the kinds of Cayman companies at issue are usually held by shareholders who in turn hold ADS–American Depository Shares (or Securities). In other words, they are not actually shareholders of the Cayman company but instead hold an IOU security in the U.S. that can be converted to a Cayman registered security.

As the authors explain in more detail:

One potential impediment to obtaining either form of relief from a breach of the relevant duties however arises from the fact that the minority shareholders in these companies hold their interests in the form of ADSs. All such holdings must be converted into registered shares in the company before any entitlement to assert shareholder rights will be recognized by the Cayman courts, i.e. pending conversion, as a matter of Cayman Islands law, such persons are not actually considered shareholders of the company at all. This is likely to preclude most of the minority shareholders of the companies which have recently been taken private from pursuing any claim for quasi-appraisal relief, since it is unlikely that they will have converted their ADSs to registered shares without having intended to exercise dissent rights and pursue payment of fair value.

Compounding this is an enforcement issue. Unlike appraisal, where at least one still has the stock at issue, quasi-appraisal is a purely post-merger remedy. Again, the authors set out the problem. “If the quasi-appraisal action were to succeed, the shareholder might still encounter enforcement difficulties depending on the whereabouts of the individual defendants and the location of their assets, whereas judgment in an appraisal action would fall to be enforced against the Cayman company itself, assuming that the surviving entity is not foreign, if necessary, with further assistance from the Cayman courts.”

So, will we see quasi-appraisal cases in Cayman? These authors suggest there’s still a chance, but the hurdles are high, and the better course of action remains statutory appraisal.

Subject to the need to convert their ADSs to registered shares, where minority shareholders have been misinformed or misled into accepting a merger price which is well beneath fair value and giving up their rights to dissent, they may accordingly be able to obtain compensation from those responsible for their loss in a quasi-appraisal action. However, the considerably better course for a minority shareholder who is in any doubt as to the fairness of the merger price remains, again, subject to converting its ADSs to registered shares, to exercise its right to dissent from the merger and to demand to be paid fair value for its shares.

It’s a general truism that appraisal only directly benefits those who dissent and seek fair value for their shares.  But appraisal can also spur further litigation – especially when the result of the appraisal decision is a 100% premium over merger price. Such is the case with Shanda Games Limited. While our friends in Cayman have covered the Shanda Games Cayman appraisal, US litigation has followed.  In a class action complaint filed in the SDNY, ex-Shanda shareholders have alleged that the Shanda board made misrepresentations in the lead-up to the merger, relying in part on the findings of the Cayman courts in their determination of Shanda’s fair value.

While appraisal requires no showing of wrongdoing, a board could overstep in campaigning for (or perhaps, against) a merger – and thus lead to additional fiduciary duty or securities law liability. As we previously covered, appraisal can be linked to disclosure obligations, and the failure to make proper disclosure can lead to liability.

Conyers Dill, a Cayman firm, has this new article out about Cayman appraisal, including the recent Trina Solar case.  This article discusses appraisal appeals, payments to dissenting shareholders, and discovery of dissenters.  Notable to US practitioners is that the scope of the discovery of dissenters/petitioners and even whether dissenters/petitioners should be required to give discovery in a Cayman appraisal action remains a live issue.  This is unlike the US, where discovery of dissenting/petitioning shareholders is expected, and has been the subject of disputes in the Delaware courts.  Conyers notes that the “the local statutory appraisal procedure is becoming increasingly well-defined and mature” – with more cases and more precedent, there may indeed be more certainty in Cayman appraisal, just as Delaware law has developed a robust and deep set of appraisal (and valuation) precedents.

** Lowenstein Sandler LLP does not practice in the Cayman Islands; we thank the team at Conyers Dill for their pointing us to this article and their coverage of Cayman appraisal.

*** The content of this post is contributed by Conyers Dill & Pearman’s Cayman Office.  We thank Ben Hobden, Erik Bodden and the entire Conyers team for their contribution.  Lowenstein Sandler does not practice in the Cayman Islands.

In In the matter of Trina Solar Limited*, the Grand Court had at first instance refused an interlocutory application made by a group of dissenting shareholders (the “Dissenters”) for worldwide freezing orders over the assets of the company in question pending the outcome of fair value appraisal proceedings, commenced pursuant to section 238 of the Cayman Islands Companies Law.  The Dissenters had applied to the Grand Court because the company had agreed to transfer many of its assets in its subsidiaries to other companies in China, ostensibly to progress the company’s post-merger restructuring. While the Dissenters had received an interim payment from the company following a separate application to the Grand Court, the Dissenters argued that the company’s actions would have the effect of significantly reducing the assets of the company so that it would ultimately be impossible for the company to satisfy in full any judgment of the Grand Court following the substantive trial.  The Grand Court declined to grant the injunction.

Unhappy with the Grand Court’s decision, the Dissenters took their case on to the Cayman Islands Court of Appeal (the “CICA”) which, while finding that the Dissenters had crossed the “jurisdictional threshold” so as to be entitled to ask for the grant of an injunction on the terms they had sought, determined that the company’s evidence had proved the transactions in question were not undertaken for less than proper consideration or on terms that were prejudicial to the company. Further, the fact that the company had made a provision for payment to the Dissenters, based on a realistic assessment of the company’s liability to the Dissenters, was enough to avoid the need for an injunction. The CICA held that the provision made by the company did not need to be for the full amount claimed by the Dissenters with reference to their expert advice, but a “reasonable and prudent provision” made after taking advice from legal and valuation advisers and with the company “forming a balanced and cautious view of the risks of the litigation”. No injunction was granted by the CICA, but the decision remains a helpful guide to companies facing similar litigation.

* CICA 26 of 2017 (unreported, 9 February 2018)

We’ve posted before about the availability of appraisal rights in the Cayman Islands. In this post, we focus on a specific merger involving a Cayman Islands company to highlight some of the important considerations in Cayman appraisal.*

A number of Cayman companies are listed in the United States, a subset of which are companies with their headquarters in the People’s Republic of China. Chinese companies may use the Cayman Islands as a “bridge” between mainland rules and listing rules, taking advantage of certain legal structures, such as variable-interest entities (VIEs) or similar, in order to comply with their legal obligations in China and in whatever market they list in–such as the New York Stock Exchange or London Stock Exchange.

For our example today, we focus on just one way Chinese-qua-Cayman companies may operate: issuing American depository shares, or ADS. ADS are not, per se, shares of the Cayman company itself–even if, by contract, an ADS holder receives the economic benefits of share ownership. Rather, ADS are issued by depository institutions (such as U.S. banks), in U.S. dollars. In turn, the depository institution has a contractual arrangement with the Cayman company, whereby the depository institution itself holds the Cayman company shares.

While this arrangement may seem confusing, it actually is not all that different from the share ownership arrangements in the United States, which involve the Deposit Trust Clearing Corp., its nominee Cede & Co., and a network of brokers (depository institutions) who hold stock in “street name.”

For our example, the merger at issue contained the following announcement**:

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Critically, the Cayman company tells ADS holders–effectively any U.S. shareholder–that in order to perfect their appraisal rights in the Caymans, they will need to execute a few steps. In particular, they will need to surrender their ADS to the depository institution, convert the ADS into company stock (i.e., Cayman stock), register the Cayman stock, pay a fee to the depository institution, and then certify its instructions (or lack thereof). And that’s just the procedure to get to a point where investors can potentially exercise their rights!

While this may seem like a tall order, these steps are fundamentally ministerial–but this can take a very long time.***

Nonetheless, after conversion, a dissenter does have Cayman appraisal rights, something the announcement confirms:

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Like in Delaware, merger dissenters in Cayman can seek appraisal of their shares. It just may take a few additional steps–and more time–to get there.

* Lowenstein Sandler LLP does not practice law in the Cayman Islands and does not advise on issues of Cayman law. This blog post is for informational purposes only, summarizes an existing, publicly available merger announcement, and should not be taken as legal advice as to the specifics of Cayman law.

** All images herein are taken from the publicly filed merger announcement of JA Solar Holdings Inc. For a fuller statement of the ADS portion of this announcement, see here.

*** We thank Ben Hobden of ConyersDill for his input.

Conyers Dill & Pearman, a firm whose work we’ve noted before has a further update on Cayman appraisal rights. Examining the over 100 page decision in In the matter of Shanda Games Limited (FSD 14 of 2016, 25 April 2017), Conyers Dill recaps the case, including the valuation approach, discount rate,  as well as the Cayman court’s consideration of Delaware law.  Of particular interest to U.S. appraisal, Conyers Dill notes that the Cayman court determined that the Cayman appraisal statute and the Delaware statute had similar “core concepts and terms” – and the Cayman court referenced Delaware decisions in its ruling.


** Lowenstein Sandler LLP does not practice in the Cayman Islands. We thank Bernadette Carey of Conyers Dill for bringing this work on Cayman appraisal to our attention and thank the authors at Conyers Dill for their coverage of this area.

Conyers Dill & Pearman, a firm with offices in, among other places, Bermuda and the Cayman Islands, prepared this write-up on the use of appraisal rights in the Cayman Islands. Like Delaware, the Cayman Islands have seen an uptick in shareholders exercising their appraisal rights to seek fair value for their shares. A prior article by Conyers Dill provides extensive background on the availability of appraisal rights in the Cayman Islands; the firm has also written on the principles considered by Cayman courts in determining fair value. While Delaware is the focus of appraisal activity in the United States, there are appraisal issues and opportunities in other states and around the world.

** We thank Bernadette Carey of Conyers Dill for corresponding with us about that firm’s knowledge of Cayman appraisal rights. Lowenstein Sandler LLP does not practice in the Cayman Islands.