Appraisal is a creature of statute, including in the Cayman Islands. Cayman appraisal has become a notable topic recently, with major decisions coming down from the Cayman courts and an uptick in investors using the appraisal remedy. Similarly, authors writing about Delaware have noted that quasi-appraisal is getting traction. Do the two have a meeting point?
The Cayman Financial Review provides an answer. Yes, the quasi-appraisal remedy exists in the Caymans; yes, much like in Delaware, it would require more than just an undervaluation of the company to access it–a violation of disclosure requirements, for example. As the authors note, a failure to provide sufficient disclosures frustrates shareholders’ ability to seek appraisal in the first place–leaving them with a post-merger quasi-appraisal remedy.
But the Cayman story does not end there; because of the somewhat unique way most Cayman companies involved in appraisal proceedings are structured, a Cayman quasi-appraisal case seems unlikely. This is because the kinds of Cayman companies at issue are usually held by shareholders who in turn hold ADS–American Depository Shares (or Securities). In other words, they are not actually shareholders of the Cayman company but instead hold an IOU security in the U.S. that can be converted to a Cayman registered security.
As the authors explain in more detail:
One potential impediment to obtaining either form of relief from a breach of the relevant duties however arises from the fact that the minority shareholders in these companies hold their interests in the form of ADSs. All such holdings must be converted into registered shares in the company before any entitlement to assert shareholder rights will be recognized by the Cayman courts, i.e. pending conversion, as a matter of Cayman Islands law, such persons are not actually considered shareholders of the company at all. This is likely to preclude most of the minority shareholders of the companies which have recently been taken private from pursuing any claim for quasi-appraisal relief, since it is unlikely that they will have converted their ADSs to registered shares without having intended to exercise dissent rights and pursue payment of fair value.
Compounding this is an enforcement issue. Unlike appraisal, where at least one still has the stock at issue, quasi-appraisal is a purely post-merger remedy. Again, the authors set out the problem. “If the quasi-appraisal action were to succeed, the shareholder might still encounter enforcement difficulties depending on the whereabouts of the individual defendants and the location of their assets, whereas judgment in an appraisal action would fall to be enforced against the Cayman company itself, assuming that the surviving entity is not foreign, if necessary, with further assistance from the Cayman courts.”
So, will we see quasi-appraisal cases in Cayman? These authors suggest there’s still a chance, but the hurdles are high, and the better course of action remains statutory appraisal.
Subject to the need to convert their ADSs to registered shares, where minority shareholders have been misinformed or misled into accepting a merger price which is well beneath fair value and giving up their rights to dissent, they may accordingly be able to obtain compensation from those responsible for their loss in a quasi-appraisal action. However, the considerably better course for a minority shareholder who is in any doubt as to the fairness of the merger price remains, again, subject to converting its ADSs to registered shares, to exercise its right to dissent from the merger and to demand to be paid fair value for its shares.
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