2016 in review: The rise of Cayman Islands share valuation disputes and professional dissenting shareholders

Shareholders in Cayman Islands companies are increasingly asking the Cayman Islands Court to determine the fair value of their shares, a trend which is likely to continue into 2017. A substantial driver of this has been a perceived opportunity by value arbitrage investors looking to take advantage of the trend for US-listed, Cayman Islands incorporated, China companies going private. A take private transaction involves a valuation by a Cayman Islands company of the fair value of its shares. Shareholder-investors objecting to the company-determined value are keeping the Cayman Islands Court increasing busy.

Nine shareholder valuation proceedings commenced in the Cayman Islands to date in 2016—compared to two in the two-year period of 2014-2015. Of the nine companies whose shares are subject to a fair value determination, eight conduct their operations through subsidiaries in the People’s Republic of China (the other conducts a large onshore drilling operation in Russia).

Harneys has acted in the vast majority of the cases filed to date, amassing world class expertise and, consistent with its dominating Asia-Pacific footprint, acting for the China corporates.

Previous decision

Section 238 does not prescribe a valuation methodology for the Court to apply. In Integra Unreported, FSD 92 of 2014, Jones J , the Court combined an income approach (using a discounted cash flow methodology) with a market approach, with a 75 per cent and 25 per cent weighting respectively. The Court also confirmed that there should be no minority discount.

Looking to 2017

We predict that 2017 will be the high point for share valuation litigation in the Cayman Islands. Participation in share valuation litigation is a very unattractive prospect for a company. These proceedings are highly resource intensive on the company side: the company typically fields numerous information requests from its own and the dissenting shareholders’ independent expert; maintains an electronic data room; and the company’s management is usually required to participate in at least one conference with the experts – the dissenting shareholder does not bear the same burdens. Some dissenting shareholders may abuse the process.