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Qunar: Company victory in landmark s. 238 ruling

The Grand Court of the Cayman Islands has delivered its ruling in Re Qunar Cayman Islands Limited. This is only the third determination of the fair value of a Cayman Islands company's shares under section 238 of the Companies Law, following the Court's previous rulings in Re Integra and Re Shanda Games. The decision was a victory for the company in which the Court all but confirmed the merger price. 

Qunar (the Company), which is one of China's largest online travel platforms, was taken private in 2017 by way of a merger under Part XVI of the Companies Law. Eight shareholders dissented from the merger and demanded a determination of the fair value of their shares by the Court. At a three-week trial in February and March of 2019, the dissenters and their expert argued that the fair value of their shares was over four times the merger price, relying on a 100% discounted cash flow (DCF) methodology. The Company's expert opted for a 50/50 blended methodology of DCF and an analysis of the Company's traded share price, resulting in a valuation slightly below the merger price.

Central to the dissenters' valuation was a controversial theory propounded by their expert that all US-listed Chinese companies were systematically undervalued by US markets. This, they submitted, explained the remarkable divergence between the trading price and their valuation, and was also reflected in the prices at which certain companies had relisted in China after delisting in the US. Ultimately, the Court rejected the theory, which was not made out by the materials cited. The Court also took into account the fact that the Company was the subject of regular, in depth coverage by institutional analysts, none of whose valuations supported the dissenters' view of fair value.

After assessing the quality of the expert evidence, the Court adopted the blended valuation methodology of the Company’s expert and preferred her opinion on the vast majority of issues in dispute in relation to DCF. The Court accepted that the Company’s trading price on NASDAQ was reflective of fair value at the relevant time and emphasised the need for a cross-check for the “easily manipulated” DCF methodology. Issues relating to DCF where the Court preferred the Company’s evidence included beta, cash and Blume adjustments, size premium, risk-free rate, cost of debt, foreign exchange and the applicable tax rate. The Court also rejected adjustments to the management projections put forward by the dissenters’ expert on the basis that his ex post facto analysis should be given less weight than the Company’s evidence regarding its own projections. The only issues where the Court preferred the dissenters’ position were in relation to minority discount, terminal growth rate and treatment of share-based compensation.

This latest ruling by the Grand Court has potentially significant ramifications for all current and future section 238 proceedings. The Court’s reliance on the Company’s trading price, in particular, is a notable development in the Court’s approach to valuation methodology. The decision will also provide useful guidance on a number of issues relating to DCF valuations that the Court had not previously addressed.

Harneys acted for Qunar Cayman Islands Limited in the proceedings.

Qunar: Company victory in landmark s. 238 ruling

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