Introduction
In a decision that serves as a clear warning to companies seeking to limit their discovery obligations in proceedings brought under section 238 of the Companies Law (2018 Revision) (the "Law"), the Chief Justice of the Cayman Islands has handed a group of dissenting shareholders a significant victory in what will likely become the benchmark for future directions orders in section 238 proceedings in the Cayman Islands.
Ogier represented a group of dissenters comprising over 82% of the total dissenters by number of shares (the "Dissenters").
Background
On 23 August 2018, JA Solar Holdings Co., Ltd ("JA Solar") presented a petition to the Grand Court of the Cayman Islands ("Petition") pursuant to section 238 of the Law to have the fair value of the shares held by the Dissenters determined by the Court. Section 238 of the Law gives a shareholder a statutory right to dissent from the merger of a Cayman Islands incorporated company, and to be paid a judicially determined fair value for the shareholders' shares instead of the merger consideration offered by the company.
Following the presentation of the Petition, there was considerable disagreement between JA Solar and the Dissenters as to the appropriate directions with respect to discovery (by both JA Solar and the Dissenters), the holding and conduct of management meetings, and whether JA Solar should be valued "as a going concern".
JA Solar had sought to amend several of the typical directions ordered in previous section 238 proceedings in order to ensure that those directions were substantially more favourable to its own interests. More particularly, JA Solar sought, among other things:
- That the disclosure of JA Solar's
documents be limited to a two year period ending with the valuation
date (the date on which non-dissenting shareholders approved the
merger). This was in contrast to the five year period proposed by
the Dissenters;
- The provision of "general
discovery" by the Dissenters (in addition to specific
discovery);
- A restriction on the Court-appointed
valuation experts (the "Experts")
requesting information/documents from JA Solar produced after the
valuation date;
- That the Dissenters be required to
respond to requests from the Experts;
- A limit that only a single management
meeting be held between JA Solar's management and the Experts,
to be held on a "without prejudice" basis and with no
ability for the Experts to raise new topics and/or questions not
previously agreed in writing; and
- The removal of the phrase "as a going concern" as the basis for valuation.
Decision
In his ruling dated 18 July 2019, Smellie CJ rejected each of the above directions sought by JA Solar.
Beginning with the "very vexed" issue of discovery by companies in section 238 proceedings, His Lordship noted the Court's experience of companies providing far more limited discovery than that which dissenting shareholders were seeking, or what would ordinarily be discovered in contested commercial litigation. His Lordship considered that these attempts to circumscribe the scope of company discovery should be viewed with "scepticism", in view of what His Lordship considered to be "the central importance of discovery by companies" in section 238 proceedings and accordingly, found that:
- As to the time period from which a
company should discover relevant documents, the Court found that
the purpose of discovery in section 238 proceedings is restricted
by relevance to the issues in the proceedings, and also involves
proportionality. However, this did not extend to setting an
arbitrary cut-off date for discovery, which could prevent the
Experts from fully understanding JA Solar's value. The Court
considered JA Solar's proposed two year cut-off to be
"grossly inadequate" and contrary to the orders
previously made by the Grand Court in section 238
proceedings. A five year cut-off, as sought by the
Dissenters, was ordered.
- There was no purpose in straying
outside the much more limited categories of dissenter disclosure
that the Court of Appeal had ordered in Re
Qunar1, and JA Solar's application for much
wider general discovery against the Dissenters was refused.
- In relation to JA Solar's
proposed directions on expert information requests, the Court
pointed out that the directions sought by the Company were
"entirely different to the 'standard form' of
directions for such information requests seen in other section 238
cases". More particularly, the Court rejected JA
Solar's proposal that the Dissenters answer information
requests from the Experts. The Court further ordered that the
Experts can request information produced after the valuation date
from JA Solar.
- The Court was unclear as to why JA
Solar wanted to restrict the number of management meetings between
JA Solar management and the Experts, or place restrictions on their
operation, in circumstances where management meetings serve as a
"crucial element in the valuation process for ensuring the
experts are able to determine the fair value [of the
Dissenter's shares]". In rejecting all but one of JA
Solar's proposed amendments (being the allowance of non-Cayman
Islands legal advisors to attend management meetings), the Court
agreed with the Dissenters' submissions that JA Solar's
proposed restrictions would not only hinder the effectiveness of
management meetings, but also the ability of the Experts to prepare
their valuation reports.
- In addressing the basis of valuation, the Court acknowledged that the term "going concern" is not a defined term in law, but its meaning was well-understood, and the notion that JA Solar is not a going concern, and should not be valued as such, was plainly wrong.
Conclusion
The Chief Justice's reasoned judgment in this matter is likely to be treated as the benchmark for the determination of future directions in section 238 proceedings. It represents a significant victory for dissenting shareholders wishing to have the fair value of their shares determined by the Court under section 238 of the Law.
Footnotes
1 In the Matter of Qunar Cayman Islands Limited [2018(1) CILR 199]
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Article by Ulrich Payne, Shaun Maloney, Richard Parrish, Oliver Payne, Joey Cheung and Michael Snape
Ogier
