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As we previously reported in our briefing FGL Holdings – Cayman Court determines fair value
at transaction price, in September 2022 the Grand Court of the
Cayman Islands delivered final judgment in FGL
Holdings1, an appraisal action arising out of a
section 238 dissent to a Cayman merger.2
Parker J ruled that the fair value of the dissenting
shareholders’ former shares was the same as the merger price
that had originally been offered to them.
Parker J has now handed down a further judgment dealing with the
costs of these proceedings.3 The judgment holds the
dissenters jointly and severally liable for FGL’s costs on the
standard basis. However, for reasons we explain further below, the
judgment does contain some good news for the dissenting
shareholders that will also be encouraging for other section 238
dissenters.
Costs in section 238 cases
Section 238(14) of the Companies Act provides that the costs of
section 238 proceedings may be determined by the court and taxed
upon the parties “as the Court deems equitable in the
circumstances“. The discretion is a wide one, with a
focus on doing what is just.
If dissenting shareholders participate actively in the trial (as
they did in FGL Holdings and have done so in every other
section 238 trial to date) then it is well established that O.62,
r.4 of the Grand Court Rules applies,4 meaning that the
“successful party” should recover from the
opposing party the reasonable costs they have incurred in
conducting the proceedings in an economical, expeditious and proper
manner (unless otherwise ordered by the court).
In the judgment Parker J laid out how these principles have been
applied in previous section 238 cases which have gone to
trial. Briefly:
- Integra5: the dissenter was held to have
been the successful party because the court preferred the approach
of the dissenter’s valuation expert and fair value was found to
be 17% more than the merger price. The dissenter was therefore
awarded its costs - Qunar6: fair value was held to be slightly
more than the merger price, but no order was made as to costs.
Although the dissenters had technically “beaten” the
merger price by 2.6%, the court found that the company was the
successful party because most of the company’s valuation
evidence had been accepted - Trina Solar7: the dissenters were found to
have been the successful party even though they only got a 1.29%
uplift from the merger price.8 However, since the
dissenters’ and the company’s valuation experts each had
evidence rejected on significant issues, the court considered an
issues-based approach to be appropriate and made no order as to
costs
Costs award in FGL Holdings
Parker J confirmed that “success” in each section 238
case is fact specific. It is not simply a question of “who
writes the cheque” at the end of the trial but depends on
factors such as
- the arguments advanced by the parties
- their conduct in the lead up to and at trial
- the opinions provided by the valuation experts
- the fair value determination
- any prior offers made by the company
While the previous cases may be illustrative, each case is
highly fact dependent.
At trial, Parker J had accepted the primary valuation method of
FGL’s valuation expert, while finding that the dissenters’
expert’s methodology provided neither a balanced view nor a
central estimate. The dissenters had also accepted an interim
payment from FGL before trial equivalent to the merger price, with
an agreed condition that they would not have to repay any of it
should fair value be determined at less than the merger price. Upon
doing so, the dissenters then continued the litigation to try to
beat that price and failed to do so.
Taking all these factors into account, Parker J ultimately
decided that FGL was the successful party and ordered the
dissenters to pay FGL’s costs (including the costs of its data
hosting platform and contract reviewers outside the Cayman Islands)
on the standard basis.
Furthermore, Parker J ordered that these costs be payable on a
joint and several basis (rather than the more standard pro-rata
basis according to the number of shares held by each dissenter).
Parker J considered that the dissenters had dealt with the
litigation as a group making common cause, and that FGL should not
be exposed to the risk of having to pursue multiple entities for
pro-rata slices of the costs award rendered against the dissenters
as a whole.
FGL’s unsuccessful indemnity costs application
The dissenters did however still enjoy some success, in that
Parker J refused FGL’s application for the dissenters to pay
its costs of providing discovery on the indemnity basis.
FGL argued that the dissenters behaved unreasonably in pushing
it to conduct a massive and expensive discovery exercise, in
circumstances where only a very small number of the documents
provided were later referred to by either valuation expert in their
reports. In rejecting the application Parker J decided that the
dissenters had not acted unreasonably, and it would not be fair or
just in all the circumstances to penalise the dissenters with
hindsight based on what documents the expert reports expressly
referred to.
Comment
The court’s decision to award costs against the dissenters
will no doubt have been disappointing for them but is consistent
with the approach that the Grand Court of the Cayman Islands has
taken in past section 238 cases.
The court’s refusal to penalise the dissenters with
indemnity costs in respect of the company’s discovery will
however have been welcomed and is encouraging for current and
future dissenting shareholders. In particular, this ruling allows
dissenters to continue to hold companies to account with regard to
their discovery obligations without fear of later penalty based
upon what documents the independent valuation experts may
ultimately choose to rely on.
Footnotes
1. FSD 184 of 2020, Unreported Judgment,
20 September 2022 (Parker J)
2. See section 238 of the Cayman
Companies Act (2022 Revision).
3. In the matter of FGL
Holdings, FSD 184 of 2020, Unreported Judgment, 19 April 2023
(Parker J)
4. In the matter of Qunar Cayman
Islands Limited, FSD 76 OF 2017, Unreported Judgment, 29 March
2021 (Parker J)
5. In the matter of Integra
Group [2016 (1) CILR 192]
6. In the matter of Qunar Cayman
Islands Limited, FSD 76 OF 2017, Unreported Judgment, 29 March
2021 (Parker J)
7. In the matter of Trina Solar
Limited, FSD 92 of 2017, Unreported Judgment, 23 September
2020 (Segal J)
8. The fair value amount ordered has
since been overturned on appeal (in a decision which was released
after the FGL Holdings judgment) but the costs principle
in Trina Solar remains relevant.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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