Snapshot: Cayman Grand Court Reviews Section 238 Valuation Date and Impact of PRC Discovery Obligation Laws

In the recent judgment of In the Sina Corporation case, the Cayman Islands Grand Court has determined that the appropriate valuation date for shareholder valuation shares under Section 238 of the Companies Act is the date of the extraordinary general meeting approving the merger. The Court also confirmed that communication obligations in proceedings in the Cayman Islands should be complied with in the usual way, notwithstanding uncertainties about the impact of recent data protection laws in the People’s Republic of China (PRC).

Background

Sina Company (sina) completed a privatized merger in the Cayman Islands. Certain minority shareholders opposed this merger and had their shares canceled in exchange for the right to be paid the fair value of their former interests under article 238 of the Law.

During a first instructional hearing, the Court had to determine among other things (i) the date on which the fair value of the former dissident shareholdings should be assessed (the Valuation date); and (ii) whether Sina should be allowed to delay its disclosure while it seeks certain regulatory approvals under recent PRC data protection laws.

Valuation date

The law does not specify the date by which interests in the valuation procedure under Article 238 must be valued.

Sina argued that the valuation date should be the date of the extraordinary general meeting, while the dissenters argued that the valuation date should be the date the merger was completed. The extraordinary general meeting and the completion date will normally coincide within a few days of each other. However, there was a three-month interim period in this case, during which certain events occurred that could have materially affected the fair value of the former dissident interests, depending on the measurement date applied.

The Court did not consider itself bound by the valuation date that had been agreed between the parties in prior Section 238 proceedings, but noted that it was desirable for the Court to be consistent in its approach and that the approach adopted in the 238 previous cases was of considerable help. The Court ultimately concluded that the fair value of the dissidents’ shares should be determined on the date of the extraordinary general meeting, because that was when the merger was considered by all shareholders in light of the information and advice available, then authorized by resolution. That said, the Court noted that each case will depend on its own facts and that the valuation date should not be fixed rigidly in all cases.

Impact of PRC Laws on Discovery

The PRC government recently enacted a Data Security Law, a Personal Information Protection Law and a Cybersecurity Law (collectively, Data Protection Laws), which Sina said required it to obtain various approvals from PRC regulatory authorities before complying with its discovery obligations.

Sina has therefore sought to suspend its disclosure obligations while it seeks these regulatory approvals. The dissidents challenged the applicability of data protection laws to Sina’s discovery and also argued that he had failed to establish that there was a real risk of prosecution in the event that his discovery turned up. would be found to violate data protection laws. As a result, the dissidents sought an order for Sina to provide its discovery within 70 days and objected to this process being delayed pending approval from any regulatory body in the PRC.

The Court acknowledged the dissenters’ concerns and reiterated the critical importance of Sina’s discovery in the Section 238 proceedings, which is necessary to ensure a fair and proper trial and to achieve a determination of fair value. Although the Court encouraged Sina to continue its attempts to obtain the regulatory approvals it deemed necessary, the Court was unwilling to suspend the discovery process in the interim. As a result, Sina was ordered either to comply with her discovery obligations within 70 days or to go to court as soon as she realized she was unable to do so.

If Sina makes such a request at a later date, the Court will carefully consider the specific documents Sina may seek to withhold, the applicability of data protection laws to those particular documents, and the nature and extent of the risk to Sina from being sued in the PRC if these documents were disclosed without obtaining regulatory approval.