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Appraising the fair value of minority shares

Ian MannSimon Hudd

In July 2011, in a case called HRH Prince Faisal v PIA Investments BVIHC, the British Virgin Islands' High Court considered whether parties could contract out of the BVI statutory mechanism for the appraisal of shares following a forced redemption by the majority (often referred to as the squeeze out of minority shareholders).

Justice Bannister also considered the issue as to whether any gloss should be put on the phrase "fair value" in section 179 of the BVI Business Companies Act 2004 (the Act), so as to create a protection against valuing minority shares at a discount by reason of their lack of marketability.

This decision is the first occasion upon which these issues have been considered and will be of interest to corporate lawyers advising their clients upon their rights in mergers, consolidations, sales, buy-outs, share redemptions and other corporate arrangements, which transactions also include the right for one or more minority shareholders to seek payment of fair value for their shares where they dissent to the proposed transaction.

HRH Prince Faisal and Pakistan International Airways Corporation (PIA) had entered into a joint venture owning and operating several well-known hotels in the US and Europe, using a BVI company.

The parties had agreed restrictive terms in a shareholders' agreement which subordinated the company's memorandum and articles of association, and which contained a right of first refusal which provided that should either party identify a third party that wished to purchase its shares, it had first to offer them to the other shareholder on the same or better terms.

Over a number of years, Prince Faisal had availed himself of this provision and had, in fact, made himself a minority shareholder through a series of dispositions of his shares to PIA. By reason of this diminution of his shareholding, ultimately, PIA was able to obtain the necessary majority to serve a notice of forced redemption for Prince Faisal's remaining shares.

PIA's notice required his remaining shares to be redeemed at a certain price. However, Prince Faisal objected to the price offered and sought to initiate the statutory appraisal procedure under section 179.

Forced redemption of minority shares

Subject to the memorandum or articles of a company, section 176 of the Act provides for the compulsory redemption of minority shares by the majority. The statutory requisite majority is 90% of the votes of the outstanding shares entitled to vote and 90% of the votes of the outstanding shares of each class of shares entitled to vote as a class.

In these circumstances, the members holding these statutory requisites may give written instructions to the company directing it to redeem the shares held by the remaining members whether or not the shares are by their terms redeemable.

The company is required to serve the notice of redemption on the minority, assuming the statutory requisite is met, setting out the price and manner in which redemption is to take place.

Fair value and the appraisal procedure

The Act provides that following a notice of redemption by the majority, a minority shareholder is entitled to payment of the fair value of his shares (s179(1)) and has the right to initiate a statutory process of appraisal (s179(9)).

It should be noted that a right to fair value attaches to a minority shareholder in a BVI company in a number of major corporate transactions involving that BVI company, including where a minority shareholder dissents from a merger, consolidation, or a sale/disposition of more than 50% in value of the assets of the company outside the ordinary course of business.

The statutory appraisal process is speedy and section 179 provides that if, within 30 days immediately following the date on which the offer is made, the company making the offer and the dissenting member agree upon the price to be paid for his shares, the company shall pay to the member the amount in money upon the surrender of the certificates representing his shares.

However, if the company and a dissenting member fail, within the period of thirty days to agree on the price to be paid for the shares owned by the member, within twenty days immediately following the date on which the period of thirty days expires, the following shall apply:

(i) the company and the dissenting member shall each designate an appraiser;

(ii) the two designated appraisers together shall designate an appraiser;

(iii) the three appraisers shall fix the fair value of the shares owned by the dissenting member as of the close of business on the day prior to the date on which the vote of members authorising the action was taken or the date on which written consent of members without a meeting was obtained, excluding any appreciation or depreciation directly or indirectly induced by the action or its proposal, and that value is binding on the company and the dissenting member for all purposes; and

(iv) the company shall pay to the member the amount in money upon the surrender by him of the certificates representing his shares.

This case gives welcome certainty to the possibility of contracting out of the statutory appraisal regime for shares.

Further, it provides interesting obiter reasoning in furtherance of a flexible and commonsensical approach to the valuations of shares held by minority shareholders in BVI companies, where such shareholders have dissented to a major corporate transaction.

Ian Mann and Simon Hudd

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