Merger appraisal actions in Bermuda – a balanced regime

Bermuda, like a number of other jurisdictions, has a statutory regime to facilitate corporate restructurings by enabling majority shareholders to “squeeze out” minority shareholders through an amalgamation or merger, with the quid pro quo being that the minority shareholders have the right to have the ‘fair value’ of their shares appraised by the Bermuda Court. The Cayman Islands has seen a very large number of ‘merger appraisal’ actions and in recent years Bermuda has followed suit with a series of appraisal actions having been filed in the Supreme Court.

Section 106(6) of Bermuda’s Companies Act 1981 provides that any shareholder (“dissenting shareholder”) who does not vote in favour of an amalgamation or merger and who is not satisfied that they have been offered fair value for their shares may apply to the Court to appraise the fair value of their shares (“appraisal action” or “section 106 proceedings”).

In the Cayman Islands, a significant body of caselaw has developed in relation to actions under the near equivalent provision in the Cayman Companies Act (section 238). Although decisions of the Cayman Islands Court are not binding on the Bermuda Court, as a “sister jurisdiction” the Bermuda Court will pay close regard to decisions of the Cayman Islands Court in the absence of relevant Bermuda caselaw.

One appraisal action currently before the Bermuda Court concerns a pharmaceutical company called Myovant Sciences Ltd. where Kennedys is acting for the dissenting shareholders (“Myovant”). Bermuda’s Chief Justice recently handed down his ruling on directions in Myovant[1], which addresses a number of key issues in section 106 proceedings. This decision follows several procedural and substantive rulings by the Bermuda Court in the earlier filed Jardine Strategic Holdings Limited appraisal action (“Jardine”)[2].

General discovery

The scope of discovery ordered by the Court is of particular importance in appraisal actions where there is an inherent asymmetry of information between the company and the outside shareholders. In his ruling in Myovant, the Chief Justice identified the following factors, peculiar to section 106 proceedings, which must be taken into account when determining whether a defendant company should be required to provide general discovery:

• the Court’s statutory duty to appraise the fair value of the dissenting shareholder’s shares, which is necessarily a quasi-inquisitorial process, as opposed to an adversarial process;
• the appraisal right given to dissenting shareholders is granted by the legislature as the quid pro quo for the company’s ability to compulsorily acquire their shares;
• in order to determine fair value, the Court needs to have all relevant information;
• all this information will primarily be in the hands of the company and its financial advisers; and
• neither the Court nor the dissenting shareholders or the experts appointed by them, will know precisely what relevant information is in the possession of the company which is required to be disclosed by the company in order to allow the Court to properly discharge its statutory duty in relation to section 106 proceedings.

The Supreme Court concluded that:

“In the ordinary case, the above considerations in relation to section 106 proceedings will require that the Company should provide general discovery of all relevant information in its possession in relation to the issue of the fair valuation of the shares. This is consistent with the approach taken by the Cayman courts in relation to appraisal actions under section 238 of the Companies Law (2016 revision).”[3]

The Chief Justice pointed out that his earlier directions decision in Jardine,[4] where the defendant company was not required to provide general discovery, reflected the wholly exceptional nature of that case owing to the size and complexity of the business structure involved. The Chief Justice also made clear that Jardine did not establish the proposition (as put forward by the company) that a defendant company will only be required to provide general discovery where there is a credible suggestion of wrongdoing and where a forensic audit is required to uncover that wrongdoing.

Statement of grounds

In addition to issues of discovery, in Myovant the Court was also faced with a novel request by the company for the dissenting shareholders to provide a ‘Statement of Grounds’ early on in the procedural timetable setting out why the dissenting shareholders claim not to have been offered fair value for their shares. This would have required the dissenting shareholders to state their valuation case at a point in time when they were unlikely to have received all information necessary to do so. However, the Chief Justice did not accept that a Statement of Grounds would assist the Court in discharging its statutory duty in section 106 proceedings, stating:

“The Court accepts that if a dissenting shareholder had to identify some basis for disputing the merger price offered by the company, the section loses much of its safeguarding character and would tilt the field in favour of the company.”[5]

 Conclusion

The Bermuda Court in Myovant was faced with a request to adopt, and in relation to the Statement of Grounds, to expand on, the particular approach to directions and discovery that was taken in Jardine. The Court, however, firmly rejected this approach and instead largely adopted the orthodox Cayman approach to directions and discovery in appraisal actions, emphasising that the directions in Jardine reflected the Court’s view of the particular circumstances in that case and were not intended to set a standard approach for all appraisal actions before the Bermuda Court. 

As a result, Myovant has levelled the playing field for dissenting shareholders in Bermuda, at least as it was perceived by some following Jardine. As Bermuda continues to evolve as a hub for international business transactions and corporate activities, and as companies look to restructure their operations including through mergers and amalgamations, Myovant has confirmed that the respective, and often competing, interests of controlling and minority shareholders will be balanced by the Bermuda Court. 

 

[1] APS Holding Corporation v Myovant Sciences Ltd & Alpine Partners (BVI), L.P. v Myovant Sciences Ltd [2023] SC (Bda) 67 Civ. (25 August 2023)

[2] For example, [2021] Bda LR 94 and [2023] SC (Bda) 8 Civ. (14 February 2023)

[3] Myovant, paragraph 20

[4] [2021] Bda LR 94

[5] Myovant, paragraph 35