A “Black Swan” takeover: a new decision under the statutory dissenting shareholder regime in the Cayman Islands
The Grand Court of the Cayman Islands delivered an unusual judgment in section 238 proceedings to determine the fair value of merger dissenters’ shares in an unlisted company, Xingxuan Technology Ltd. Unlike typical management buy-outs where the majority shareholders acquire the shares of the minority, Xingxuan was acquired by a competitor. The trial was uncontested as Xingxuan neither appeared nor had legal representation. The dissenter’s valuation expert gave oral evidence without being cross-examined – described by Justice Kawaley as a “Black Swan” event.
The dissenter’s expert opined that the merger price was unreliable and a discounted cash flow impracticable. Therefore, the primary valuation methodology should be based on the valuation investors had placed on Xingxuan in financing rounds, a methodology not previously considered in any section 238 proceedings. The dissenter contended that the fair value of its shares was US$354.1 million compared to the value derived from the merger price of US$42 million, more than eight times the merger price.
Justice Kawaley found that the merger process supported the dissenter’s position that Xingxuan was sold at an undervalue, with Xingxuan having abandoned any effort to justify the merger price during the proceedings. Further, the expert’s valuation of Xingxuan (US$2.5 billion) fell within the range of values implicitly assigned to Xingxuan and its competitors by those who participated in various financing rounds pre- and post-merger.
Even where there is only one expert, the Court must critically evaluate the expert valuation evidence and determine whether and to what extent it accepts that expert’s evidence and substitute its own view if it is found to be unsatisfactory.
An analogy can be drawn between a joint expert and a single expert whose evidence is uncontested: fairness dictates the trial judge should only accept expert evidence which can withstand scrutiny and be slow to reject the unchallenged evidence of an expert witness. The function of an expert in fair value proceedings is to assist the Court in assessing complex financial information; not to deliver a definitive fair value calculation. Like general civil litigation, the Court’s determination involves factual findings applied to determine liability or quantum of loss and evaluative findings to measure general damages. The Court’s statutory adjudicative function is not extinguished merely because only one party presents expert evidence. However, unchallenged expert evidence should not be rejected unless it is unsustainable on its face or having regard to the underlying facts, or it relates to an issue the expert has been given an opportunity to address before or at the trial. The Court must consider the commercial rationality of the appraisal result contended by the expert as a whole.
In these proceedings, Justice Kawaley held the evidence of the dissenter’s expert, whom he questioned at length, was neither unsustainable on its face or inherently improbable, when viewed commercially. He accepted the methodology adopted by the dissenter’s expert, being the EV/GMV (multiple Enterprise Value to Gross Merchandise Value viz the total number of transactions on the company’s platform) – notably a methodology not previously considered in any fair value case. Justice Kawaley considered it appropriate to apply a five per cent minority discount plus a five per cent share rights discount, reducing the fair value contended for by the dissenter to US$318.69 million.
While this uncontested fair value hearing was characterised as a ‘Black Swan’ event, it is still a helpful reminder to legal practitioners of the principles and duties of an expert valuer and that the valuation process in any given case will depend on the particular facts and circumstances.
