The phrase ‘fair value’ continues to bedevil the high courts and create very different expectations when parties are forced to figure out what to pay when buying and selling. That’s the premise of a thoughtful analysis on the current meaning of fair value by Chris Brierley, legal director at RDC (London). In ‘Calculating Fair Value—Is It Really Fair?’ Brierley looks at the new Shanda Games Ltd v Maso Capital Investments Ltd Privy Council decision, which highlights the ongoing confusion.

‘The case arose as a result of Shanda Games Ltd (Shanda), a Cayman Islands company, merging with Capitalcorp Ltd, as part of a transaction to take Shanda back into private ownership and remove its listing on Nasdaq,’ writes Brierley.

Maso, a minority shareholder in Shanda, objected to the merger price in accordance with Cayman Islands company law. This law provides that an objecting shareholder can apply to the Grand Court in the Cayman Islands for a determination of the fair value price.

Unfortunately, in this case, the decision escalated from the Grand Court to the Court of Appeal of the Cayman Islands and finally on to this decision by the Privy Council, the ultimate court of appeal for the Cayman Islands comprising five judges from the UK’s Supreme Court.

Brierly argues that ‘typical assumptions’ guide the courts about the meaning of fair value. Unfortunately, ‘the inclusion (or not) of a particular assumption can drastically alter the amount paid as “fair value,” as was seen in the case of Doughty Hanson & Co Ltd v Roe decided by the High Court in England in 2007,’ he says. Still, when business valuers advise clients, they can improve clarity by referring to those assumptions, which Brierly summarises as:

• That the sale is on arm’s-length terms between a willing seller and a willing buyer;
• That the sale is of all the shares in the company;
• That the company is a going concern (provided that it is a going concern at the date of determination);
• The date on which the valuation will be made;
• Disregarding whether the shares being valued represent a minority or majority interest or, alternatively, considering what value would be paid for the shares if there had been a sale of all of the shares and the proceeds had been allocated through the distribution ‘waterfall’ in the articles (i.e., where different share classes are entitled to different amounts of any sale proceeds); and
• That the shares can be transferred without restriction and are not subject to any encumbrances.