The successful appeal by dissenting shareholders in Trina Solar provides key insights into the importance of establishing a robust merger process, the company’s burden to make all relevant information available in appraisal proceedings and discounted cash flows.
Trina Solar Limited (the “Company”), a listed manufacturer in the renewable energy sector, was the subject of a take-private transaction on 13 March 2017, which resulted in a number of dissenting shareholders exercising their rights under section 238 of the Companies Act to seek fair value appraisal of their shares. The initial valuation, as determined by the Cayman Islands Grand Court on 23 September 2020, rested on a combination of the market price, transaction price and discounted cash flow (“DCF”) analysis. This analysis yielded a fair value calculation only slightly higher than the merger price and was subsequently appealed by the dissenting shareholders to the Cayman Islands Court of Appeal.
The Court of Appeal handed down its decision on 3 May 2023, highlighting the challenges of relying on merger price when determining fair value, especially where the disclosure by the Company during the appraisal proceedings is unsatisfactory and the merger process did not have sufficient protections for shareholders to address potential conflicts of interest.
The Court of Appeal acknowledged the pitfalls of the merger price as an exclusive measure of a company’s value in certain circumstances. In fact, the Court held that no weight should be given to the merger price in this case and granted greater prominence to the DCF analysis. A noteworthy aspect of the judgment was the Court’s decision to raise the weight assigned to DCF analysis to 70% (compared to the Grand Court’s initial weighting of 45%), resulting in dissenting shareholders receiving an uplift of ~26% to the merger price. A short summary of the Court of Appeal’s key findings are set out below:
- Unreliable Merger Price: The Court of Appeal found that the merger price could not be relied upon as a result of the deficiencies of the special committee of the Company (which were acknowledged by the Grand Court) regarding a robust market check for potential bidders and dealing with conflicts of interest related to the management buy-out.
- Market Price Discrepancy: The Court of Appeal recognised that market prices may not accurately reflect a company’s true value, particularly in instances of illiquidity or market volatility. However, this was not enough for the Court of Appeal to overturn the Grand Court’s decision to adjust the weighting given to market price.
- DCF Methodology Weightage: The Court of Appeal significantly increased the weight assigned to DCF analysis, elevating it to 70%. The Court of Appeal rejected the dissenting shareholders’ challenges to the discount rates applied by the Grand Court.
- Management Projections Departure: The Court of Appeal held that the threshold adopted by the Grand Court for departing from management projections (i.e. that they had to be “obviously wrong, careless or tainted by an improper purpose”) was too high. Instead, the Court of Appeal noted that the Judge must review and weigh all evidence before them, and, following such assessment, they must be able to depart from management projections if they don’t appear to be the most realistic forecasts for the circumstances.
- Deficient Disclosure: The Court of Appeal did not shy away from commenting on the deficiencies in the disclosure provided by the Company during the proceedings, which required requests for specific discovery by the dissenting shareholders. This extends to all information relevant to the merger process (such as discussions with potential bidders and financial advisors regarding value) and evidence supporting the relevant assessment undertaken by the special committee.
The Court of Appeal’s ruling in Trina Solar underscores the importance of establishing an independent special committee that adequately addresses any potential or perceived conflicts of interest if a company is seeking to rely primarily on the merger price as an indicator of fair value for the purposes of section 238 proceedings.