Court of Appeal Limits Scope of Discovery Required to Determine the Valuation of Shares in Amalgamating or Merging Companies under s106 of the Companies Act 1981

Court of Appeal Limits Scope of Discovery Required to Determine the Valuation of Shares in Amalgamating or Merging Companies under s106 of the Companies Act 1981

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By Dan Griffin & Jennifer Haworth

The recent Supreme Court judgment In the matter of Jardine Strategic Holdings Limited [2021] SC (Bda) 87 Com (12 November 2021) has warned against using general discovery as a means of putting pressure on opponents and limited the scope of discovery available to dissenting shareholders in an action to appraise the fair value of shares on the amalgamation of a company under section 106 of the Companies Act 1981 (the “Act”).

Jardine Strategic Holdings Ltd was recently acquired and amalgamated by JMH Bermuda Ltd as part of a simplification of the Jardine Matheson group structure. The group is a large conglomerate comprising approximately 1,150 companies and employing over 400,000 people across a range of sectors in China and Southeast Asia. A majority are active trading companies and most are subject to independent audit requirements. Some are listed companies.

The Act requires that amalgamations and mergers are approved by the shareholders at a special general meeting. The directors must also provide a declaration to the shareholders that the share valuation offered represents ‘fair value’, this was obtained from Evercore Partners International LLP.

Dissenting shareholders were unhappy with the valuation provided, claiming that the price offered represented a 43% discount on the net asset value of Jardine Strategic Holdings Ltd. Some may also have been unhappy with the prospects of resisting the amalgamation given Jardine Matheson Holdings Ltd owned almost 85% of the shares whereas the law requires a 75% majority.

The dissenting shareholders applied to the Supreme Court pursuant to section 106 of the Act, which provides that any shareholder who did not vote in favour of the amalgamation or merger and who is not satisfied that they have been offered fair value for their shares can apply to the Court to appraise the fair value of their shares. If the Court finds that amount paid to the dissenting shareholder for their shares is less than the value appraised by the Court then the amalgamated or surviving company must pay the shareholder the difference between the amount paid and the value appraised by the Court. The Court will routinely hear valuation expert evidence from the parties on the fair value of the dissenting shareholders’ shares.

The main dispute concerned the appropriate scope of discovery requests sought by dissenting shareholders from the Jardine Matheson group of companies for the purpose of obtaining expert share valuations.

The dissenting shareholders asked the court to order discovery of a wide range of documents going back 5 years for over 700 group companies including for example, monthly management accounts, consolidated quarterly accounts, monthly and/or quarterly management information used to monitor financial performance, audited financial statements and annual financial budgets. It was estimated that the request could result in discovery of 35 million pages of documentation.

The defendants argued the scope of the request was unreasonably broad, diffuse, and largely irrelevant to the issue and clearly intended to exert the maximum pressure on the defendants to settle the claim rather than face the difficult task of providing discovery. The defendants highlighted that the broad request had been made even before valuation experts were appointed or had the opportunity to identify what documents were needed to carry out the valuation exercise.

The dissenting shareholders relied on the standard directions given in appraisal actions in the Cayman courts which can include a requirement for a company to provide ‘all value relevant documents and information’ going back five years. The Supreme Court identified that although Cayman authorities had included those directions, the authorities make clear that they should not been seen as precedents and in each case the directions must be fair, necessary to do justice and economically sensible. In effect the requirement to provide discovery was limited by the requirement of proportionality.

Rather than make the order requested by the dissenting shareholders, the court agreed with the request of the defendants and ordered that it provide the documents and valuation opinion obtained from Evercore for the purpose of amalgamation first, from which the dissenting shareholder’s expert can perform a preliminary assessment of fair value. If the experts consider it necessary they could make written requests for additional documents from the company, with liberty to apply to the court if the documents were not provided within 28 days.

The judgment highlights some important considerations for experts:

  • The court is ready to limit it to what it considers necessary at any stage. Only in cases where there is a credible suggestion of wrongdoing (which there was none here) could general discovery be ordered on such a large scale
  • Obvious attempts to put pressure on larger opponents by making disproportionate requests for large classes of documents are unlikely to succeed
  • The court will defer to experts when ordering discovery who will likely determine the scope of discovery required for valuations.