The Bermuda Court’s approach to valuation in shareholder appraisal proceedings

In February 2025, Bermuda’s Supreme Court handed down its valuation ruling in Glendina Pty Limited v NKWE Platinum Ltd [2025] SC (Bda) 15 civ. This decision marks the first fair value determination of the Bermuda Court under s.106 of the Bermuda Companies Act 1981 following the development of Cayman Islands jurisprudence in relation to their comparable provision (s.238 of the Cayman Islands Companies Act) and therefore now represents the most authoritative Bermuda s.106 valuation decision.

This article provides a brief overview of s.106 appraisal proceedings before addressing the Glendina decision in detail, considering the factual background to that case, the deficiencies in the expert evidence that was available, and the Court’s approach to valuation, including the important finding that the Bermuda Court must apply a minority discount.

Section 106 proceedings

Section 105 of the Companies Act 1981 deals with amalgamations or mergers and provides that each company intending to amalgamate or merge shall enter into an agreement setting out the terms and means of effecting the amalgamation or merger. It then sets out a number of matters that must be included in any amalgamation or merger agreement.

Section 106(1) provides that the directors of each amalgamating or merging company shall submit the amalgamation or merger agreement for approval at a shareholders’ meeting. Section 106(2) makes provision in relation to the notice of that meeting and requires that it include or be accompanied by a summary of the amalgamation or merger agreement and state the fair value of the shares as determined by the company and that a dissenting shareholder is entitled to be paid the fair value of his shares.

Section 106(6) provides that any shareholder who does not vote in favour of the amalgamation or merger and who is not satisfied that he has been offered fair value for his shares (i.e. a dissenting shareholder) may apply to the Court to appraise the fair value of his shares.[1]

This statutory regime facilitates corporate restructurings by enabling the majority shareholders to forcibly acquire the shares of the minority shareholders, whilst simultaneously providing the minority shareholders with a mechanism to ensure that they receive fair value for their shares. A similar provision has been the subject of much litigation in the Cayman Islands, and s.106 has recently generated a lot of interest in Bermuda.

The Glendina case

Glendina concerned an amalgamation between NKWE Platinum Ltd (“NKWE”), a Bermuda exempt company listed on the Australian stock exchange (“ASX”), and Gold Mountains (Bermuda) Investment Limited (“Gold Mountains”), as a result of which shares of NKWE not already owned by Gold Mountains were compulsorily acquired by Gold Mountains at a price of A$0.10 per share (“the Offer Price”).  Gold Mountains’ parent company, Zijin Mining Group Co. Limited (“Zijin”) owned 60.47% of the shares of NKWE before the amalgamation (through another wholly owned subsidiary, Jin Jiang Mining Limited (“Jin Jiang”)). Those shares were excluded from the amalgamation. The amalgamation therefore enabled Gold Mountains to acquire the 39.53% held by minority shareholders so that its parent, Zijin, would become the ultimate holder of 100% of NKWE’s shares.

Ordinarily, a statutory majority of 75% is required for approval of an amalgamation, meaning that Zijin, through Jin Jiang, would not be able to control the outcome of the shareholder vote with its 60.47% share. In this case, however, NKWE’s bye-laws reduced the statutory majority to a bare majority of shareholders provided the Board approved the amalgamation. The two independent directors who formed the Board for this purpose (having no affiliation with Zijin or Jin Jiang) approved the amalgamation, meaning that Jin Jiang (and Zijin) had the power to control the outcome by voting its 60.47% in favour. The independent directors did not seek independent legal or financial advice on how they should approach the question of fair value, which the judge considered “regrettable”.

Unsurprisingly, the amalgamation was subsequently approved at a special general meeting (“SGM”) on 24 October 2018.

A total of 456 dissenting shareholders, owning 201,399,396 shares representing just over 20% of the shares acquired as part of the amalgamation, brought appraisal proceedings on 11 October 2018. It is of note that the proceedings were commenced before the SGM took place, no doubt because of the time limit under s.106(6), which requires appraisal proceedings to be commenced within one month of the notice of the meeting and which, depending on the amount of notice given, can result in the somewhat odd requirement to commence appraisal proceedings before the amalgamation itself has been voted through. In this case, as with many of the cases that we have encountered in recent years, the outcome of the meeting was a foregone conclusion, of course, because of the interests of the majority shareholder, who could effectively get the deal through without the approval of any other shareholders.

The negotiations and the role of the independent directors

The initial offer by Zijin was A$0.08 per share. Following receipt of a draft fairness opinion prepared by RSM Australia Pty Ltd (“RSM”) (suggesting a range of A$0.086-A$0.19 with a mid-point of A$0.135), Zijin increased its offer to A$0.09. The independent directors (who conducted the negotiation of the deal on behalf of the Company) concluded that the mid-point of A$0.135 was fair. They did not think the offer would be increased all the way to A$0.135 but decided to push for a minimum of A$0.10 per share, provided this also fell within the range of reasonable values in the final fairness opinion, which represented a premium over the weighted average price of the NKWE shares over the preceding 12 months.

Having achieved an increase of A$0.02 to A$0.10 per share, the independent directors considered that they had achieved their objective and approved the Offer Price, despite this having been A$0.035 less than they themselves considered to be the appropriate fair value, and proceeded to pass a resolution approving the amalgamation (before receiving the final fairness opinion). Because of the provision in the company’s bye-laws, this resolution had the effect of reducing the majority required at the SGM from 75% to a bare majority, thereby enabling Jin Jiang (and Zijin) to control the vote.

After the independent directors had approved the amalgamation, the final fairness opinion relied on by the company to support the Offer Price was released. The final opinion reduced the range of fair values to between A$0.08 and A$0.148 with a mid-point of A$0.114. The independent directors did not question the reasons for this change, although they expressed pleasure that the figure they had already accepted now looked more justifiable.

The Court found that the role of the independent directors was not to ensure that the Offer Price fell within a range of fair values supported by an independent opinion, but rather to ensure that the Offer Price reflected what they independently considered to be the fair value of the shares. Martin J described the independent directors as “the guardians of the independence of the process by which the independent Fairness Opinion was obtained”, noting that it was “vitally important that the directors should act as objectively and transparently as possible, without forming any view of whether the proposal should or should not proceed because of subjective factors (such as, for example as in this case, the possible desire of some shareholders to exit at a higher price than the historic traded market price, or the possible desire of others not to sell at all).” To this end, the Court remarked that the fact that the independent directors negotiated a price increase of 25% on the initial offer "obviously had nothing to do with an objective assessment of fair value of the shares," and criticised the independent directors for not "sticking to their guns" as regards their own assessment of fair value.

The approach to valuation

The judge in Glendina approved the dicta of Jones J in the Cayman case of In re Integra Group (2016) CILR 192 as to the meaning of fair value:

“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 interests of those parties.”

The experts in Glendina agreed that, in the circumstances of that case, fair value was to be achieved by “breaking out each of the main components of value, valuing them separately, and then aggregating those values to achieve a total value of the ‘sum-of-the-parts’” (“SOTP”), which is then used to calculate a pro rata per share value, subject to any relevant discounts that may be required to reach a final fair value per share.

The valuation exercise was particularly difficult because of the uncertainty surrounding the prediction of future income streams from a proposed mining development (“the Garatau Project”) which comprised NKWE’s most valuable asset, thereby driving the value of NKWE’s shares. This uncertainty seems to have led both parties’ experts into error.

The dissenters’ valuation expert valued the company on a discounted cash flow (“DCF”) basis, whereby the present value is estimated based on the predicted value of future cash flow, but wrongly relied on the existence of a mineral reserve, which was in fact a mineral resource, as part of her calculations. (This mistake was made through no fault of the expert as there was plausible evidence to suggest that a mineral reserve had been declared, including in a report from Venmyn Deloitte, although the judge found this was not in fact the case.) Reserves are more valuable than resources, because a mineral reserve is only declared if it has been concluded that it is technically feasible to extract the minerals at an economic cost, so this inaccuracy significantly increased the valuation so as to make it unreliable. The dissenters sought to hold the company to statements, made in its June 2018 financial statements and reported to the ASX, to the effect that it was ready to proceed with the development of the mine (suggesting a reserve rather than a resource) in order to justify assessing fair value on the basis that there existed a mineral reserve, but the judge considered that it was the Court’s role to assess the actual fair value, not to give effect to statements that the company might have made that might have indicated a different value:

“On the surface it does appear to be wrong for the directors to say one thing for the purposes of the financial statements and then take a diametrically opposite position when it comes to an appraisal, but the Court is still bound to appraise the value of the shares at their true and objective fair value.”

NKWE’s valuation expert, Nadine Marke of RSM (who had also provided the fairness opinions referred to above), carried out her valuation based on an assessment value of comparable transactions, although there were a limited number of transactions that were properly comparable in size and stage to the Garatau Project. (Indeed, although the fairness opinion had used a list of 11, the technical experts could only identify two that they considered to be properly comparable, which was plainly an inadequate sample.) It was also of note that Ms Marke – who had also provided the fairness opinion – had reached four different recommended fair values based on the same data set of comparable transactions, producing mid-points of A$0.135 in the draft fairness opinion, A$0.114 in the final fairness opinion, A$0.126 in her first expert report, and A$0.125 in her revised expert report. Martin J found this “baffling”.

Ultimately, the judge was not greatly assisted by the evidence of either expert. He did consider whether he could resolve the case on the basis that the dissenters had failed to prove that the value was other than the Offer Price, but dismissed this idea on the basis that neither party bears the burden of proving fair value; it is simply a matter for the Court to appraise.

Martin J instead relied on the draft fairness opinion, which had been produced by RSM prior to the amalgamation being approved and which had provided a mid-point that the independent directors considered to be fair value of A$0.135. This valuation: (i) was contemporaneous with the offer; (ii) reflected what the experts considered fair at the time; (iii) was untainted by any pressure to justify the ranges against the dissenters’ objections (which had been communicated to RSM by the independent directors prior to the fairness opinion being finalised); and (iv) represented what the independent directors had considered was fair value when they approved the amalgamation.

Minority discount

When it comes to share valuation, it will often not be appropriate simply to value the company as a whole and then divide that figure by the number of shares to identify the value of each share (i.e. a pro rata valuation). This is because not all shares are created equal. Some shareholders, for example, own sufficient shares to give them control over the company (i.e. a majority interest). Generally speaking, their majority shareholding will command a premium to reflect this control and influence. Conversely, when valuing minority shares, a discount is often applied to reflect the fact that the minority shareholders do not have the same ability to influence the company’s decision-making and may therefore find it more difficult to sell their shares on the open market. There are no hard and fast rules as to the amount of any discount, however; what is appropriate will always depend on the circumstances.

One of the leading cases on this issue in recent years is Shanda Games Ltd v Maso Capital Investments [2020] 1 BCLC 577 (“Shanda Games”), in which the Privy Council upheld a decision of the Cayman Islands Court of Appeal that “fair value” under the equivalent Cayman appraisal litigation (s. 238) required the Court to value what the dissenting minority shareholders actually had to sell, i.e. a minority shareholding, which in turn required the application of a minority discount. The Privy Council noted, however, that there may be special circumstances in which a minority discount is not appropriate without giving any guidance as to what such circumstances might be. Consequently, Shanda Games does not offer any clarity on when a minority discount should and should not be applied.

Notwithstanding this lack of clarity, Martin J in Glendina considered himself bound by the opinion of the Privy Council in Shanda Games Ltd to apply a minority discount: “The Court is reluctant to apply a discount rate of 0% in the light of the broad statement of principle by the Privy Council in Shanda Games Ltd v Maso Capital Investments Ltd where there are no ‘special’ circumstances to displace the application of the principle.”

Martin J was not, however, persuaded to award the 24.7% discount contended for by the company. He took the view that this was much too high a discount, noting that no such discount would apply if the shares were sold on the exchange, and therefore it would be “odd to penalise a shareholder so heavily for having the misfortune of having his or her shares acquired compulsorily”.

The judge was guided by the following authorities from Bermuda (in relation to s.103 of the Companies Act) and the Cayman Islands on the appropriate discount:

• In Golar,[2] the discount was 10%. This brought the price of shares down to the offer price, which the Court then found to have been fair value.
• In Qunar,[3] FGL,[4] and Nord Anglia[5] the discount was 0%, although Kawaley J stated in Nord Anglia that, had a discount been required, he would have applied a 2% discount. In Qunar and FGL, this was expressed to be because there was no element of transfer of control. In Nord Anglia, it was because the DCF valuation basis had already taken into account the minority position of the shares.
• In Trina Solar,[6] the discount was 2% based on “the value of control per se”.
• In Xingxuan,[7] the discount was 5% to take account of “a combination of (i) no control and (primarily) (ii) illiquidity.”

Based on these authorities, Martin J considered that any minority discount should normally be small and assessed the appropriate discount at 3.7%. It appears that this discount was reverse engineered based on a desire to reach a round number (A$0.13 per share), rather than there having been any particular magic to the figure of 3.7%.

Interest

Section 106 of the Companies Act is silent as to whether interest is payable in the event that appraisal proceedings are successful in establishing that the company has not paid fair value for the shares of the minority shareholders.

In Glendina, the dissenting shareholders contended for compound interest by reference to the nominal rate for unsecured corporate borrowing in Australia, given NKWE’s listing on the ASX, on the basis that any uplift owing on the deal price represented equitable compensation. The company argued that no interest should be payable on the basis that there was no debt because nothing was due until fair value had been assessed. Ultimately, the Court ordered the company to pay simple interest at a rate of 3.5% from the date of the SGM until payment of the balance of the fair value owed on the basis that the statutory appraisal process created a judgment debt rather than a right to equitable compensation.

Conclusion

The Glendina decision was an interesting one, albeit one that was heavily influenced by the unusual facts of that case. There are, however, some points of general application that clients and practitioners alike can take away from it:

1. The independent directors have an important role to play in relation to any proposed merger or amalgamation. They should only grant their approval based on what they independently believe to be fair value, rather than simply seeking to increase the offer price or else reach a defensible position, and should expect their conduct to be scrutinised by the Court.
2. The independent directors should take independent legal and financial advice to inform their approach to determining fair value.
3. Neither party will bear the burden of proof in appraisal proceedings; the Court will strive to assess fair value as best it can in light of the evidence available.
4. The Bermuda Court is likely to feel compelled to apply a small minority discount, at least until the effects of Shanda Games can be clarified.
5. The Bermuda Court is likely to award simple interest on any amount found to be owing.

 

 

[1] A decision is awaited on the precise meaning of this provision in relation to one of Kennedys’ cases, which was recently argued before the Privy Council. See: https://jcpc.uk/cases/jcpc-2024-0009

[2] Golar LNG v World Nordic SE [2011] Bda LR 9 at [22]-[24]

[3] Re Qunar Ltd (2019) 1 CILR 611 at [410] and [406]

[4] Re FGL Holdings [2020] FSD 92/2107 at [604]

[5] Re Nord Anglia Education Inc [2020] FSD 235/2017 at [249]-[252]

[6] Re Trina Solar Ltd [2023] 1 CILR 569 at [344] and [352]

[7] Re Xingxuan Technology Ltd [2017] FSD 227/2017