Cayman: minority discounts

Until recently, Cayman followed the approach of the courts in Delaware and Canada when it came to applying minority discounts to the valuation of dissenting shareholders' shares in an appraisal action: no such discount was applied.

But in a recent case, the Cayman Islands Court of Appeal took a surprising approach to the matter by ruling that a minority discount could, in fact, be applied to the valuation of dissenting shareholders’ shares in a company called Shanda Games.

In the Grand Court at first instance, Mr Justice Segal had followed existing Cayman Islands case law, as well as Delaware and Canadian cases, in holding that shareholders ought to be compensated for the full value of their share in a company.

The Court of Appeal took a different view, departing from Segal J’s reliance on Delaware case law. In particular, the Court of Appeal relied heavily on English case law concerning unfair prejudice petitions, schemes of arrangement and squeeze-outs. In light of this, it is possible that in future the Cayman courts may put less emphasis on Delaware law, and more on English precedent in section 238 cases.

The case was also notable because the Court of Appeal upheld Segal J’s decision not to allow Shanda to re-open part of its case in order to include evidence from a new expert. This was because the company’s application was late, and the Court of Appeal thought that Segal J was actually best-placed to decide whether the evidence justified resumption of hearing.

In future, the Shanda Games case will help guide companies and dissenting shareholders over the possible approaches the Cayman courts might take in this kind of dispute.