The prudent-ish investor: determining fair rate of interest in s238 fair value proceedings
In iKang Healthcare Group Inc, the Grand Court of the Cayman Islands has released its judgment on the issues of the fair rate of interest under section 238(11) of the Companies Act and the costs of the proceedings. The Court’s fair value judgment was released back in June 2023.
The court has a broad discretion to determine what is a fair rate of interest, balancing any disadvantages suffered by the dissenters against any benefits received by the Company. The Court’s preferred methodology in section 238 cases is the ‘mid-point approach’, derived from pre-2007 Delaware law, which takes the mid-point between the company’s borrowing rate and the ‘prudent investor rate’.
In iKang, the main contested issue in relation to interest concerned the ‘prudent investor rate’. The dispute concerned whether the hypothetical prudent investor is purely objective in nature or should adopt subjective characteristics of the dissenters themselves. The Company favoured objectivity, while the dissenters preferred a subjective approach incorporating higher rates of return available to them as hedge funds.
The Court held that the correct approach is to start from a presumption that the ‘prudent investor rate’ should be assessed objectively on the basis of returns available to an average retail or professional investor. However, the presumption can be rebutted if the dissenters show that this would be unfair to them having regard to their position.
Justice Segal observed that the evidence filed by the iKang dissenters regarding their own investment strategies was “sketchy and too limited”, and so the presumption of objectivity was not displaced. He further held that the dissenters’ expert’s approach – based on hedge fund returns – was inconsistent with a prudent investment strategy, which he characterised as a conservative investment strategy with low to moderate risk. On this basis, the Court adopted an asset allocation of 45 per cent equities, 45 per cent bonds and 10 per cent cash, preferring the Company's expert’s data and methodology.
As summarised by Justice Segal, the core objective is to compensate the dissenters for the loss of the use of their money during the relatively short section 238 proceedings, and the Court retains the discretion to treat as unfair returns assumed to be generated by a very long term investment strategy.
Harneys acts for the Company.
