From time to time a British Virgin Islands ("BVI") company and its minority member(s) will not agree on certain matters affecting the minority's interests and objectives. As a business and investor friendly jurisdiction, BVI company law includes a regime for the minority to exit, and achieve a fair value for their shares (in cash), whilst ensuring that the company's transactions are not at risk of delay or derailment.
The BVI Commercial Court has taken a sensible and pragmatic approach so as to make the statutory process workable in practice. In this update, we digest the Court's guidance to date on the way in which the fair value of a minority's shares is reached.
The Right to Dissent
The right for a minority member to exit and be paid a fair value for his shares arises on his dissenting from any of the following acts:
- A merger (unless the member continues to hold the same or similar shares in the merged entity) or a consolidation;
- Any sale or transfer of more than 50% of the company's assets by value, other than in the ordinary course of the business of the company (which may include standard dealings in investment property, depending on the circumstances) or if the terms of the deal require all or substantially all of the net proceeds to be paid out to members within a year;
- A squeeze out of his shares at the instigation of a majority holding 90% of the shareholding or more; and
- A plan of arrangement, if the court orders that dissent rights should apply (dissenting members' rights will never apply to a scheme of arrangement as opposed to a plan).
The Process for Fixing Fair Value
The BVI Business Companies Act 2004 (the "Act") sets out the process and timetable for the dissenting member to object to the proposed act, and for the company and that dissenting member to agree a price for his shares.
If the company and the dissenting member fail, within 30 days, to agree on the price to be paid for the shares owned by the dissenting member, then within 20 days after the end of the 30 day period:
- the company and the dissenting member shall each designate an appraiser;
- the two designated appraisers together shall designate a third appraiser; and
- the three appraisers shall fix the fair value of the shares owned by the dissenting member.
Fair value is to be fixed as at the close of business on the day prior to the date on which the members' vote authorising the act was taken, or the date on which written consent was obtained from the members. The value must exclude any appreciation or depreciation directly or indirectly induced by the act or its proposal, and that value is binding on the company and the dissenting member for all purposes.
The BVI High Court has confirmed in Brantley Inc v Antarctica Asset Management Ltd(2008) that the 20 day period for the appraisal process is not an extension of the negotiation period, but is the timeframe within which the appraisal process must be started and completed. If the 20 day period expires without anything having been done (whether intentionally or unintentionally) the court has an inherent jurisdiction "to deal justly and fairly with matters of such nature". For example, the court has jurisdiction to order appraisers to be designated even though the 20 day period has passed, but the parties should not assume that the court will consider it appropriate to do so in every case.
Discount for Minority Shares
The BVI High Court in HRH Prince Faisal v PIA Investments Limited (2011) was asked to consider whether fair value should reflect the general lack of marketability of minority shares (there will usually be no public market for the shares). A contractual valuation provision would typically state whether a minority discount will be applied or not, but the Act is silent.
The Judge commented that "fair value" is capable of meaning different things in different cases: a discount for minority shares was only one component in determining fair value. A determination of fair value might well require an assessment of the nature of the business of the company: where assets based valuations might be appropriate, an earnings approach may not. It may be that where an assets based approach was used, the minority discount had no application at all.
The Judge also said that "fair" must apply to fairness to both parties but no particular gloss should be put on the phrase so as to impose a principle that a discount could never be applied due to the lack of marketability of minority shares.
Agreement to Alternative Appraisal Procedures
The BVI High Court in HRH Prince Faisal also upheld the validity of an agreement between a dissenting member and the company that the fair value of the dissenter's shares would be appraised under an alternative to the statutory appraisal process.
The Court held that the parties may contract out of the statutory mechanism for assessing fair value, which is "merely a mechanism for establishing a price". If a particular dissenting member prefers other machinery he is merely choosing a different route to achieve the same end, albeit the company's agreement is required to that alternative route.
Value may be Fixed by a Majority of the Appraisers
The BVI Commercial Court has recently confirmed, in an unreported decision (2015), that a majority of two out of the three appraisers designated to carry out the appraisal may, in the absence of unanimity, fix the value of the shares owned by the dissenting member.
This decision is very welcome, as it:
- removes the spectre of deadlock (which itself raised further complications, such as whether the three appraisers could themselves agree a deadlock breaking mechanism; whether they could do so by majority, and whether they needed to reach agreement on that mechanism before the commencement of the valuation or only if and when deadlock was reached);
- avoids the need to consider the extent of the jurisdiction (if any) of the court to break a deadlock; and
- sidesteps the question of whether deadlocked valuers could be replaced so as to attempt to increase the prospect of unanimity.
All of the above were a recipe for uncertainty and expense. Appraisal of fair value within the statutory timeframe can now be completed efficiently and cost effectively on the basis of a majority view