The short-form merger
Part XVI of the Act sets out the statutory merger regime. As part of the regime, section 238 of the Act entitles shareholders who dissent from a merger to payment of the fair value of their shares. Section 233(7) of the Act provides for a short-form merger which dispenses with the ordinary need for a special resolution if a merger is between a parent company and a subsidiary where the parent holds in excess of 90% of the shares in the subsidiary and a copy of the plan of merger is given to every shareholder of the subsidiary.
Changyou.com Limited (the "Company"), a company then listed on the NASDAQ Global Select Market, announced on 17 April 2020 that it was being taken private by way of a short-form merger with its parent that held more than 90% of the shares in the Company such that the minority shareholders would be offered cash consideration for their shares.
Certain of the minority shareholders (the "Dissenting Shareholders") followed what they considered was the statutory process to dissent from the merger (in analogous way to a long-form merger) and ultimately presented a petition to the Grand Court of the Cayman Islands (the "Grand Court") seeking the Grand Court's appraisal of the fair value of their shares. The Company objected to the presentation of the petition contending that the Dissenting Shareholders did not have appraisal rights following the completion of the short-form merger.
In essence, the parties agreed the Grand Court should determine the preliminary issue of whether an appraisal right is available to a minority shareholder in a subsidiary which merges with its parent in a short-form merger.
The litigation
The Grand Court and the Cayman Islands Court of Appeal (the "CICA") both confirmed that a minority shareholder in a subsidiary which merges with its parent in a short-form merger is entitled to exercise appraisal rights to determine the fair value of the minority shareholders' shares, albeit for differing reasons.
The Grand Court decision was based on its construction of the Act (which the CICA disagreed with) whereas the CICA' s decision was based upon section 238 of the Act not conforming with a person's right to peaceful enjoyment of property protected by section 15 of the Constitution of the Cayman Islands (the "Constitution").
Both the Company and the Dissenting Shareholders appealed to the Privy Council.
The Privy Council's advice
The Privy Council unanimously upheld the CICA's decision.
The Privy Council agreed with the CICA (and the Company) in respect of the construction issue – that is, that Part XVI of the Act did not confer appraisal rights in a short-form merger, and that this could not be rectified as a matter of the ordinary construction of that Part of the Act (see para 52 of the Privy Council's judgment in Re Changyou.com).
The Privy Council also agreed with the CICA (and the Dissenting Shareholders) on the constitutional issue holding that:
• section 238 of the Act did not conform with the constitutionally protected right to peaceful enjoyment of property pursuant to section 15 of the Constitution;
• under section 5 of the Constitution, all "existing laws" (i.e. laws that existed on 6 November 2009, the day the Constitution came into effect) must be read "with such modifications, adaptations, qualifications and exceptions as may be necessary to bring them into conformity with the Constitution";
• an "existing law" under section 5 of the Constitution was to be determined by "whether there have been any material amendments to the provisions in question" and that section 238 of the Act remained an "existing law'" notwithstanding that amendments to other provisions of the Act had been made after 2009; and
• consequently, section 238 of the Act must be read with the necessary modifications required to bring it into conformity with the Constitution.
The Privy Council endorsed the modifications made to the wording of section 238 of the Act by the CICA, ensuring that the appraisal remedy applies equally to both short- and long-form mergers (see paras 93-97 of the Privy Council's judgment in Re Changyou.com). The procedures to be followed by a minority shareholder to dissent and pursue its appraisal rights in a short-form merger context (as settled by the CICA and endorsed by the Privy Council) are set out in the schedule below (see modifications in bold).
Conclusion
The Privy Council's decision importantly confirms that a minority shareholder of a subsidiary undertaking a short-form merger with its parent is entitled to dissent from the merger and pursue its appraisal rights in the Grand Court. The steps that are required to be taken by the minority shareholder and company are set out (with modifications in bold) in the schedule below.
Please find a link to the full ruling here.
Schedule: The CICA’s modification of section 238 of the Act (endorsed by the Privy Council)
(1) A member of a constituent company incorporated under this Act shall be entitled to payment of the fair value of that person's shares upon dissenting from a merger or consolidation.
(2) A member who desires to exercise that person's entitlement under subsection (1) shall give to the constituent company, before the vote on the merger or consolidation (if any such vote is to be held) or (if no such vote it to be held) immediately after the date on which the plan of merger is given to the member pursuant to section 233(7), written objection to the action.
(3) An objections under subsection (2) shall include a statement that the member proposed to demand payment for that person's shares if the merger or consolidation is authorised by the vote or approved.
(4) Within twenty days immediately following the date on which the vote of members giving authorisation for the merger or consolidation is made, or (if no such vote is to be held) within twenty days immediately following the date on which the plan of merger or consolidation is filed with the Registrar pursuant to section 233(9), the constituent company shall give written notice of the authorisation or filing to each member who made a written objection.
(5) A member who elects to dissent shall, within twenty days immediately following the date on which the notice referred to in subsection (4) is given, give to the constituent company a written notice of that person's decision to dissent, stating-
a) that person's made and address;
b) the number and classes of shares in respect of which that person dissents; and
c) a demand for payment of the fair value of that person's shares.
