Two hedge fund investors in 58.com have filed a discovery application related to US legal and governance consultants, who helped the Chinese online classified business go private, to support a claim in the Cayman Islands Grand Court that minority shareholders were underpaid in the deal.
58.com was founded in 2005 in Beijing and is China’s largest online marketplace for classifieds. The Cayman-domiciled holding company was listed on the New York Stock Exchange in 2013.
In 2020, 58.com Inc merged with Quantum Bloom Company Ltd, a wholly-owned subsidiary of Quantum Bloom Group, in a going-private transaction valued at US$8.7 billion.
The buyers, consisting of private equity firms Warburg Pincus, Ocean Link, General Atlantic and Yao Jinbo, the chairman and CEO of 58.com, purchased all the issued common shares of 58.com at US$28 per share, equivalent to US$56 per American depositary share under the merger agreement.
US hedge fund FourWorld Event Opportunities LP and Guernsey-based Genesis Emerging Markets Investment Company filed an application with the US District Court for the Southern District of New York to take discovery from law firm Fenwick & West and shareholder services provider Morrow Sodali to be used in legal proceedings in the Cayman Islands concerning the fair value of the shares of 58.com.
The investors claim “the merger was coercive and fundamentally unfair to minority shareholders, with respect to both the merger price, which significantly undervalued 58.com’s shares, and the process to approve the merger”.
Frequent shareholder valuation disputes
They argue that the deal capitalised on the temporary decline of 58.com’s share price during the COVID-19 pandemic and that the company had made no effort to seek competing bidders.
Instead, the merger was orchestrated by majority shareholders, including the company’s founder and CEO, “without the consent of a substantial amount of minority shareholders, who were offered inadequate consideration for their shares”, the petitioners said in their application published by Offshore Alert.
Cayman is frequently used by Chinese companies to raise funds overseas and list on the US stock market.
In recent years, a considerable number of Cayman-domiciled, US-listed Chinese companies proceeded to take their business private again.
These deals are typically pushed through by larger shareholders, which often include the original owner.
Some take-private transactions have found their way to the Cayman courts with minority shareholders saying they only received low-ball offers for their shares in the deals.
In one case, Shanda Games, the Cayman court agreed, concluding that the company was worth more than double the valuation price applied to buy out the shares.
In some other cases, subsequent stock market listings in China suggested the companies may have been undervalued during the take-private transactions.
Section 238 of the Cayman Companies Act protects minority shareholders whose shares have been acquired in such mergers by giving them access to a fair value appraisal by the court.
Shareholders in 51job.com, a Cayman-domiciled, Chinese human resources company, applied for a fair value determination of their shares by the Grand Court just this month, after the company revised the original US$79 per share consideration down to US$61.
Disputes tend to centre on how the fair value is calculated, for example by using a discounted cash flow method, market-based approaches or a blend of the two.
So far, the court has ruled consistently that the market price of the shares at the time of the merger is not automatically the fair value described by the Companies Act.
Non-privileged communication sought
The petitioners seek to obtain Fenwick & West’s non-privileged communications with counterparties to the merger, including the buyer group. Fenwick acted as legal counsel to a special committee of independent members of 58.com’s board of directors in the deal.
The discovery from Morrow Sodali, which acted as proxy solicitor in the merger, would help establish the company’s strategy for obtaining shareholder support for the merger and in addressing dissenting shareholders, the petitioners said.
“All of this discovery is relevant to the appraisal proceeding, in which the Cayman court will examine both the fairness of the merger consideration and also the process undertaken by the company to approve the merger,” they said.
In the Cayman proceedings, 58.com sought a wide-ranging discovery from the dissenting shareholders. However, the Grand Court rejected to expand the scope beyond basic discovery defined in previous case law, deciding that dissenting shareholders are not subject to the valuation exercise and their commercial motives, views and actions were largely irrelevant for the appraisal.
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