“Fair Value” In Appraisal Actions Under The Companies Act 1981 S 106(6)

Feb 2025

Introduction

On 4 February 2025, Martin J handed down judgment in Glendina Pty Limited & Ors v NKWE Platinum Ltd (2025) SC (Bda) 15 Civ. It is the first “fair value” appraisal claim on a merger or amalgamation under the Companies Act 1981 (“Companies Act”) to go to trial in this jurisdiction in about 15 years. During the intervening period there have been a significant number of appraisal claims in the Cayman Courts with the resulting case law having a decisive impact on the way in which the claim was decided.

Conyers acted for the defendant company, NKWE Platinum Ltd (“NKWE”). The minority shareholders (the “Dissenters”) were paid A$0.10¹ per share following amalgamation and at trial sought A$0.27 to A$0.34 per share. They also sought compound interest on any uplift at a commercial rate. Martin J decided that the fair value of the Dissenters’ shares was A$0.13 and that they were entitled to simple interest at 3.5% being the rate in section 10 of the Interest and Credit Charges Act 1975 (“Interest Act”).

The decision provides useful guidance on the following issues that typically arise both in appraisal claims of this kind and for boards contemplating a merger or amalgamation. They are:

1. The meaning of the term “fair value”.
2. Guidance for independent directors appointed for the purposes of evaluating and seeing through an amalgamation.
3. The Court’s assessment of the expert evidence and its consequences.
4. The availability and size of any minority discount in determining fair value.
5. Whether minority shareholders are entitled to interest if they are successful and on what basis.

Background

NKWE and its subsidiaries are involved in the acquisition, exploration and development of platinum group and associated base metal projects in South Africa. During the period 2008 to 2010 NKWE acquired a 74% interest in a licence to mine platinum group metals in an area known as the Bushveld Complex and thereafter began exploration.

In March 2018 NKWE announced that its majority shareholder², Zijin Mining Group Co. Ltd, had made a bid to acquire a one hundred percent interest in NKWE by means of an amalgamation under section 104 of the Companies Act at A$0.08 per share. NKWE appointed two independent directors to oversee the amalgamation and in August 2018 the independent directors signed the amalgamation agreement with an increased offer price of A$0.10 per share. By NKWE’s bye-laws, the super-majority (75%) vote required by section 106(6) of the Companies Act at the shareholders’ meeting to vote on the amalgamation was reduced to a simple majority on board approval.

Accordingly on 24 October 2018 the shareholders at the SGM voted in favour of the amalgamation and approved the amalgamation agreement. On 14 March 2019 the amalgamation became effective and the appointment of the independent directors ceased. By operation of section 106 the Dissenters’ shares in NKWE were cancelled and replaced with a right to receive the amalgamation price.

The Dissenters owned about 20% of NKWE’s shares and, being dissatisfied with the offer price, they exercised their rights under section 106(6) of the Companies Act seeking an appraisal by the Court.

The meaning of “fair value”

Section 106(6) of the Companies Act relevantly provides: “Any shareholder who did not vote in favour of the amalgamation or merger and who is not satisfied that he has been offered fair value for his shares may within one month of the giving of the [relevant notice by the company] apply to the Court to appraise the fair value of his shares.”

The concept of “fair value” for the purposes of section 106(6) is not defined under the statute. Martin J adopted Jones J’s meaning of fair value in Re Integra Group (2016) CILR 192 under section 238 Cayman Islands Companies Act: “the ‘fair value” of the shares of a dissenting shareholder was the value to it of its proportionate share of the business if it were sold as a going concern in a hypothetical, arm’s length transaction. It was the estimated price for the transfer of an asset between identified knowledgeable and willing parties that reflected the respective interests of those parties”.

Citing Segal J in Re Trina Solar Ltd (2017) CILR 858, the Court held that the reference to “fair” in fair value requires that the manner of assessment is fair to the dissenters by ensuring that all relevant facts and matters are considered and that the sum selected properly reflects the true monetary worth of what he has lost. Citing Segal J in Re Qunar Ltd (2019) CILR 611, the Court emphasised that neither party bears the burden of proving fair value but that each carries the onus of adducing evidence to establish, on balance, the correctness of its contentions.

Guidance for independent directors

The Court provided useful guidance for independent directors appointed to oversee an amalgamation.  The Court felt it especially necessary to comment on this aspect of the case as it acknowledged that there were few if any Bermuda cases dealing with directors’ duties in this area. The Court determined that, in the context of an amalgamation, the directors did not owe a specific duty to minority shareholders. Instead, adhering to established legal principles, the Court affirmed that the directors’ primary duty was to the company as a whole. That duty nonetheless included a duty to take into account the interests of the minority shareholders when faced with a bid to compulsorily acquire their shares. It was important for the directors to act as objectively and transparently as possible.

The Court then gave examples of the ways in which this would translate in pragmatic terms. Two aspects are worth emphasising. First, Martin J held that the independent directors should have taken independent legal advice (that is independent of the attorneys appointed by the company) to advise them of the scope and extent of their duties under Bermuda law. Secondly, he held that they could and should have sought independent financial advice on the fairness opinion produced by the company’s experts.

The Court’s assessment of the expert evidence

The parties each instructed a technical mining expert and a valuation expert to support their respective positions as to the fair value of the NKWE shares. One of the principal difficulties faced in valuing a mining company at the exploration stage is that one is valuing the company when the minerals are still in the ground.

Perhaps uniquely in cases of this kind, not only did the Court reject the Dissenters’ expert evidence in its entirety and NKWE’s expert evidence in part, but Martin J found that, ultimately, he was unassisted by either party’s expert evidence in determining fair value. He did so for two principal reasons:

First, the Court rejected the Dissenters’ expert evidence on the basis it was premised on a mistaken assumption that a “mineral reserve” (a more valuable asset in mining terms than a ‘mineral resource’) had been declared by the company. The Court found, on the facts, that such a declaration was never made and/or was not capable of being supported to the required technical standard by the underlying technical data.

Secondly, the Court accepted the company’s valuation evidence, which showed that a Discounted Cash Flow (DCF) analysis resulted in a negative Net Present Value (NPV). This compelled the Court to reject the DCF method as unsuitable. Second, the Court explored the possibility of determining value through comparable projects of similar scale and size. However, it found that the evidence from both parties’ technical experts relied on sample sizes too small to be reliable.

Rejection of the expert evidence: what to do?

Unable to rely on the expert evidence, ordinarily this would mean that the Dissenters had failed to discharge the evidential burden of satisfying the Court that the offer price did not represent fair value.  But the Court did not agree that the usual evidentiary requirement necessarily applied in the context of section 106(6) appraisal proceedings, reasoning: “the Court considers that [dismissing a plaintiff’s case for failing to meet the evidentiary burden] would not do justice to the Dissenters’ case, nor to the proper evaluation of the evidence, and would not fulfil the Court’s ultimate duty to appraise fair value of [the company’s] shares.”

The Court admitted that it found itself “in something of a quandary as to how best to achieve an appraisal that reflects the fair value of the shares”. The Court concluded that: “The Court’s job is nonetheless to appraise the fair value of the shares at the [‘valuation date’ of the shares under the amalgamation agreement].  While the Court is guided by the evidence of the experts, the Court is not bound to adopt the evidence of either of them, and may select some parts but not others, and may come to its own view.”

The Court found that the fair value of the Dissenters’ shares (exclusive of the application of the minority discount) was A$0.135 per share.

This price corresponded with the mid-way point of the spread in a draft of the company’s fairness opinion prepared in anticipation of the decision whether to proceed with the amalgamation.  In the Court’s view, this document was prepared “before the views of those concerned were influenced (unconsciously or otherwise) by the objections of the Dissenters and/or any desire to support the successful outcome of the amalgamation that NKWE’s main board desired”.

On the evidence, in the Court’s view this was the value that the independent directors (appointed to oversee the transaction) had thought was appropriate during the amalgamation process and concluded that A$0.135 was the fair value of NKWE’s shares at the valuation date.  It then turned to the question of whether to apply a minority discount.

Minority discount

The Dissenters argued that no minority discount should be applied. NKWE sought a minority discount of 24%.

As to the question of whether a “minority discount” was to be applied at all, the Court held that it was bound by the Privy Council’s decision in Shanda Games Ltd v Maso Capital Investments & Ors [2020] UKPC 2 to apply a minority discount and was satisfied that there were no “special circumstances” in this case to displace the application of the principle.

As to the appropriate rate of discount, the Court first considered the question of control. Although it accepted that a control premium was the inverse of a minority discount, it did not accept that the same percentage must apply in each case. There were many reasons why shares might command a control premium including takeover synergies, management replacement and board control.

Here the Court felt unable to apply the minority discount sought by the company. First, in the compulsory acquisition of a minority shareholder’s interest there were no special circumstances to justify it; the Court felt that such a large discount would effectively penalise a shareholder for having his shares compulsorily acquired when no such discount was applied, for example, on sale on the exchange.

Secondly, the Court felt that the discount would act as a powerful disincentive to minority shareholders to exercise their appraisal rights thereby not only giving the bidder an undue advantage but also undermining the commercial purpose behind the legislation (to produce an objectively fair result).

The Court was guided by the approach in one Bermuda case³ and a number of Cayman cases based on similar legislation. Martin J ultimately adopted the guidance of Kawaley J in Re Xingxuan Technology Ltd (unreported, FSD 227 of 2017 (IKJ), 9 September 2024) where the Court had applied a 5% minority discount on the basis of no control and illiquidity; here it was felt it was appropriate to apply a minority discount of 3.7%. This was applied to the mid-point value of the fairness opinion spread (A$0.135) to produce a final fair value figure of A$0.13 per share for the Dissenters’ shares.

Entitlement to interest

The Court’s assessment of fair value coming in higher than the amalgamation price meant that it was necessary to consider whether interest was payable and if so the rate of interest. While the Cayman legislation makes express provision for the Court to assess fair value and a fair rate of interest, section 106 of the Companies Act and its surrounding provisions are silent on the issue.

The Dissenters’ primary case was that interest was payable on a compound basis in equity and that the rate should be determined by reference to the nominal commercial corporate borrowing rate for unsecured loans prevailing in Australia⁴. Their fall-back position was that simple interest was payable under section 10 of the Interest Act.

NKWE denied that the Dissenters were entitled to interest at all. First, there was no equitable remedy (giving rise to equitable compensation) because there had been nothing “unjust” in the circumstances of the case for equity to intervene: the Dissenters’ ‘loss’ resulted from the ordinary operation of the statue in accordance with its terms. Secondly there was prima facie no debt or damages under section 10 of the Interest Act: nothing was due until the fair price was assessed and there was no entitlement to damages because there had been no breach.

The Court awarded simple interest on the difference between the price offered and paid to the Dissenters on amalgamation and the court’s assessed value (the ‘uplift’) from the date of the SGM (being the valuation date) until payment is made in full, reasoning that the Court’s appraisal of fair value “represents a debt declared to be owed, but which until now was entirely inchoate, contingent and unquantifiable in amount.”

Conclusion

Arising from the judgment in this case there are three practical matters which clients and practitioners would be well advised to note. First, the independent directors should obtain separate legal advice as to their duties under Bermuda law and should be sure to interrogate the company’s assessment of share value including possibly taking independent financial advice. Secondly, absent special circumstances a high level minority discount is unlikely to be given, especially where the company’s shares are illiquid and there is no real change in control as a consequence of the acquisition. Thirdly, simple interest on any uplift will likely be payable at 3.5% from the date of the SGM (being the valuation date) until payment is made.

[1] Australian Dollars.  NKWE was listed on the Australian Stock Exchange (ASX) before the amalgamation.

[2] Holding 60.47% of NKWE’s issued share capital.

[3] Golar LNG v World Nordic SE [2011] Bda LR 9.

[4] As above, NKWE was listed on the ASX before the amalgamation.