Judgment Confirms Appraisal Rights

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Introduction

The Grand Court has ruled that shareholders of companies that complete a short-form merger under Section 233(7) of Part XVI of the Companies Act (2021 Revision) are entitled to receive the fair market value of their shares if they dissent from the merger. The long-awaited Changyou.com decision clarifies a topic that had previously been the subject of much discussion.

Under The Company Acts

A special majority of the members of a long-form merger would normally approve it. Before the shareholder vote, a member who wishes to object to a long-form merger shall submit a written objection. If the merger is approved, the corporation must notify each member who filed a written objection with a notice of authorization. Any member who opposes the merger has the right to sue.

A special resolution of its members is not needed in a short-form merger, where a parent merges with a subsidiary in which the parent already retains 90% of the voting power. (7) It was previously unclear whether the consequential legislative mechanism mentioned above (in relation to long-form mergers) might apply in the absence of a shareholder vote. If representatives of short-form mergers had access to shareholder appraisal rights.

Petition

Changyou.com Limited Changyou.com is a developer and operator of online and smartphone games based in the Cayman Islands. It was previously listed on the NASDAQ stock exchange and operates in China. Changyou’s parent company controlled over 90% of Changyou’s voting rights prior to the merger. The Securities and Exchange Commission (SEC) of the United States needs merger documentation and filings.

Changyou.com suggested merging with its parent company and delisting from the NASDAQ stock exchange (thereby effectively forcing out the minority independent shareholders under a short-form merger). In these circumstances, Changyou.com said, Section 238 dissent rights did not apply. Certain shareholders (petitioners) were not on board. Changyou’s reading of the applicable provisions of the Companies Act (2021 Revision) purported to formally dissent from the merger under that statute’s terms.

Changyou.com argued that appraisal privileges should only be exercised by shareholders who oppose a merger that is subject to a shareholder vote (i.e a long-form merger). It claimed that since a short-form merger does not require a vote, no valuation rights were available. As a result, the Grand Court was asked to rule on whether members of a subsidiary in a short-form merger are entitled to payment of the fair value of their shares and, if so, what measures (if any) must be taken to allow them to dissent.

Decision

The petitioners were successful in convincing the Grand Court that:

The valuation regime could be construed in a way that was consistent with the rights granted by the Constitution, including the right to peaceful enjoyment of land, by reading down the provisions of Section 238 in this way.

The exclusion of short-form mergers from Section 238 will be inconsistent with other parts of the Companies Act (2021 Revision) that provide for minority rights.

Because of this exclusion in short-form mergers, the Companies Act (2021 Revision) will essentially be an outlier among comparable regulatory regimes in other jurisdictions; and Changyou.com argued that the alternative legal options open to shareholders who wanted to contest a short-form merger were insufficient substitutes for the contractual right to be paid fair value.

As a result, the Grand Court determined that the right to payment of fair value for shareholdings upon dissenting from a merger is an absolute right that can be exercised in a short-form merger by giving the company a notice of dissent within 20 days of the plan of merger being provided. The petitioners were found to have exercised their right in a valid manner.

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