Introduction
Where a minority[1] shareholder of a Cayman Islands company is unfairly prejudiced by actions of those in control of the company, it may petition the Court to have the company wound up on the just and equitable ground. In many such cases, the controllers’ misconduct will be sufficiently egregious to warrant the most draconian response, i.e. an order that the company be put into liquidation. But the Court has the jurisdiction to make certain, less severe orders, where it considers that these would provide an adequate solution instead – provided that it is satisfied that a winding up of the company would otherwise be appropriate.
The form of order which is perhaps most commonly made as an alternative to winding up in such circumstances is an order that the petitioning shareholder’s shares are to be purchased by other shareholders or the company itself at their fair value, on a valuation date to be fixed by the Court, with the fair value to be determined by an independent expert if not agreed between the parties. By that means, the petitioner can exit the company with the fair value of its investment, and the company can continue as a going concern.
Whilst that may seem relatively straightforward, in cases where the value of the shares has fluctuated considerably over the course of the dispute, the selection of the appropriate valuation date may itself be highly contentious. This was recently the subject of c.50 pages of detailed analysis in Re Madera Technology Fund (CI), Ltd (unrep. 21 Aug. 2024, Richards J), in which the Grand Court confirmed the breadth of its discretion to set a valuation date which is fair to each side, and provided a thorough analysis of the factors which will influence that assessment of fairness.
The authors discuss the Cayman courts’ approach to such situations, and the factors which can be expected to (and in Madera did) inform the selection of the appropriate valuation date for a buyout order, in further detail below.
The Court’s Approach to Determining the Valuation Date
The Court has the widest discretion that it could to determine the appropriate valuation date. As Richards J explained:
“The overarching principle is that in determining the appropriate valuation date, the Court has a discretion which must be exercised so as to achieve fairness between the parties as far as is possible…
[It] is to be exercised judicially and on rational principles in such a way that the purchase order arrived at is fair and equitable in all the circumstances of the particular case”.[2]
With that overarching principle in mind, the learned Judge reviewed several English cases where that determination had been made.
The English authorities demonstrated that the appropriate valuation date is entirely fact-dependent. More recent authorities regarded the date of the buyout order as the logical starting point – since “[p]rima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased”[3] – but further recognised that this is very much a starting point, there having been many cases in which fairness has required the court to select a different valuation date. In Profinance,[4] the English Court of Appeal described certain of those cases (non-exhaustively) as follows:
“i) Where a company has been deprived of its business, an early valuation date (and compensating adjustments) may be required in fairness to the claimant…
ii) Where a company has been reconstructed or its business has changed significantly, so that it has a new economic identity, an early valuation date may be required in fairness to one or both parties… But an improper alteration in the issued share capital, unaccompanied by any change in the business, will not necessarily have that outcome…
iii) Where a minority shareholder has a petition on foot and there is a general fall in the market, the court may in fairness to the claimant have the shares valued at an early date, especially if it strongly disapproves of the majority shareholder’s prejudicial conduct…
iv) But a claimant is not entitled to what the deputy judge called a one-way bet, and the court will not direct an early valuation date simply to give the claimant the most advantageous exit from the company, especially where severe prejudice has not been made out…
v) All these points may be heavily influenced by the parties’ conduct in making and accepting or rejecting offers either before or during the course of the proceedings…”
As to the last of those factors, Richards J further observed that the principles relevant to the determination of liability for costs in litigation following the rejection of a reasonable offer were also applicable to the determination of value of shares in the context of a buy-out order. In O’Neill v Phillips,[5] the English House of Lords had applied the Calderbank[6] principles to an unfair prejudice petition, to the effect that:
“…if the petitioner was offered everything to which he was later held to be entitled after trial, this would entitle the respondent to say that all costs after the offer was made should be borne by the successful petitioner”.[7]
Richards J went on to cite the following terms identified in O’Neill v Phillips which a reasonable offer would ordinarily contain:
“It must be to purchase shares at a fair value without a discount for a minority shareholder unless there are special circumstances.
If the value is not agreed, it should be determined by a competent expert.
…
The offer should provide for equality of arms, meaning that both parties should have the same right of access to company information as to the value of the shares and the right to make submissions to the expert.
The offer should provide for costs”.[8]
The Factors at Play in the Madera case
The petitioner was the largest shareholder of the company when it invested, and its shares carried entitlements to vote and to be provided with certain information. Importantly, the shares were not redeemable at its option, but it had been given to understand that it would be able to exit once the initial “lock-up period” applicable to its shares ended on 31 December 2020, and the company had completed its IPO.
Prior to the end of the lock-up period, however, the relationship between the petitioner and the company’s management significantly deteriorated. The petitioner wanted greater oversight over its investment, and questioned the trustworthiness of one of the company’s directors. And when that director was copied inadvertently on an email in late June 2020 indicating that the petitioner might consider seeking a winding up of the company in the circumstances, the management were naturally concerned and gave notice, almost immediately, that the company was compulsorily redeeming all of the petitioner’s shares. The petitioner then obtained an injunction in late August 2020 restraining the company from doing so, and the company confirmed that it would not seek to proceed with the redemption.
Once the lock-up period expired at the end of that year, the share price rose exponentially to a high of $59.09 per share. The company then notified the petitioner in January 2021 that 20% of its shares would be redeemed, to which the petitioner replied that it was happy to accept a redemption of all of its shares, but the company nonetheless proceeded with redeeming only 20%.
Between late January and mid-February 2021, the petitioner and two other shareholders then sought to convene an extraordinary general meeting for the purpose of appointing four new directors all connected with the petitioner. Having been advised by the company’s attorneys that they lacked sufficient voting power to convene an EGM, the petitioner commenced further proceedings in the Cayman courts seeking to force the issue – and this was almost immediately followed by a further redemption of 50% of the petitioner’s remaining shares, and the purported conversion of its then remaining shares to non-voting shares in March 2021, each of which the Court subsequently held had been done for an improper purpose. The petitioner thus presented its winding up petition in March 2021.
At a hearing in June 2021, the company argued that a buy-out of the petitioner was an effective alternative remedy and made a clear and unequivocal offer to purchase its shares at the NAV which obtained at that time. The petitioner maintained that the only appropriate remedy was a winding up, including because a full investigation by an independent liquidator into the company’s financial affairs was required. There was no evidence of any attempt by the petitioner to consider the offer or to negotiate.
Between January 2021 and October 2023, Madera’s share price declined significantly, from a high of US$59.09 per share down to US$12.00 per share, for which neither the company nor the petitioner was responsible. Unsurprisingly, the petitioner argued that the valuation date for the purchase of its remaining shares should be January 2021 – being the date on which it sought, but was refused, full redemption after the lock up period ended – and the company contended that the valuation should be performed as at the date of the buyout order.
Ultimately, the Court concluded that the petitioner had rejected out of hand a reasonable buyout offer in June 2021, when the share price was at its highest, and did so because it maintained throughout the proceedings that a winding up order was necessary to enable liquidators to carry out an investigation into the company’s affairs. Having taken that course, the petitioner had made a one-way bet that it would succeed in obtaining a winding up order, and it was fair that its shares should be valued as at the date of the alternative order for their purchase. Furthermore, there was no connection between the decline in share price and the prejudicial conduct by the company. It would have been unfair to the company, after having made a reasonable buyout offer in the early stages of the dispute and being made to resist a winding up over three years of litigation, to order it to acquire the shares at the substantially (3x) higher price which obtained when that offer was made.
Importantly, the learned Judge further indicated that, were it not for that offer, she would have concluded that the fairest valuation date was 5 March 2021, when the petitioner elected to treat the unfair conduct of the majority as effectively destroying the basis on which it had agreed to be a shareholder.
Key takeaways
The determination of the appropriate valuation date for a buyout order is entirely fact-dependent and will differ from case to case. The Court will weigh all the relevant factors to achieve fairness between the parties in accordance with the overarching principle, which is also consistent with the approach reflected in the Hong Kong jurisprudence.[9] Perhaps most importantly, a petitioning shareholder should proceed with caution in the face of a buyout offer, particularly where the value of its shares seems likely to fall significantly throughout the course of lengthy court proceedings and such share price movements cannot be tied to prejudicial conduct by the company, since it may find that it is left with far less if the Court does conclude at trial that the offer was reasonable and that a buyout will be an adequate alternative to a winding up, as was the case in Madera.
[1] Or non-voting.
[2] In Madera at [26]-[27].
[3] Re London School of Electronics [1986] Ch 211 at 224 per Nourse J, cited with approval by the English Court of Appeal in Profinance Trust SA v Gladstone [2002] 1 BCLC 141 at [60].
[4] Id. at [61].
[5] [1999] 1 WLR 1092
[6] [1976] Fam 93
[7] In Madera at [137].
[8] In Madera at [139].
[9] See e.g. Orlov v Roth and Three Towns Capital Ltd [2019] HKCFI 2120, at [374], per Coleman J: “It seems to me that in the exercise of my discretion as to the appropriate valuation date I am not bound by the way in which the parties may have chosen to formulate their claims, and that I should not blinker myself when considering all circumstances as might be appropriate in finding the date which appears to be fair”.
