Trina Solar: Guidance on Valuation Methods in Section 238 Proceedings

In a Nutshell

Trina Solar provided authoritative guidance from the Privy Council (“PC”) that Cayman fair value appraisals are case specific, and the methodologies used and their weightings will vary on the facts and circumstances of each case. The PC held that the reliability of any individual valuation methodology is not binary, but existing on a spectrum, and that regard must be had to the comparative reliability of other relevant valuation methodologies before a fair value conclusion can be reached. The PC ruled that Delaware jurisprudence is helpful while not binding and re-stated that appeal courts should be slow to overturn the conclusions of trial judges who were immersed in the detailed evidence.

Shortly afterwards, the judgment in Sina Corporation, which did not refer to the PC ruling in Trina Solar, rejected any reliance on adjusted market trading price (“AMTP”) or merger price in favour of exclusive reliance on a sum of the parts analysis (“SOTP”) on the basis that the flaws in the AMTP and merger process made them wholly unreliable.

This outcome is contrasted with the judgment in 51job, which had specific regard to the PC’s guidance, and concluded that the AMTP evidence in that case was the most reliable indicator of fair value, and the merger process evidence, while not perfect, was a ceiling on fair value. By contrast, the discounted cash flow (“DCF”) evidence in that case was found, on the facts, to be wholly unreliable.

Both Sina Corporation and 51job are being appealed to the Cayman Islands Court of Appeal (“CICA”) and it remains to be seen how the appeal courts will apply the Trina Solar guidance to these starkly different fair value outcomes.

Background and Facts

Trina Solar was a PRC-based solar panel company listed on the Nasdaq and registered in the Cayman Islands and was taken private by way of statutory merger in 2017.
At the hearing of the fair value petition, the dissenters’ expert relied solely on a DCF valuation of the company. The company’s expert opined that fair value should be determined based on a blend of a 40% weighting on the market price on the last trading day before the signing of the merger was announced (the ATMP); 40% weighting on the merger price; and 20% weighting on her DCF valuation which was significantly lower than the dissenters’ expert’s DCF valuation. The first instance judge in the Grand Court (the “Court”) largely accepted the evidence from the company’s expert including as regards the deficiencies or weaknesses in the market-based methodologies but allocated different weightings – 30% on AMTP; 45% on merger price and 25% on a DCF.

On appeal by the dissenters, the CICA upheld the trial judge’s reliance on the AMTP but found that he was wrong to place any reliance on the merger price, which the CICA found was not a conclusion that was reasonably open to him on the evidence. In particular, the CICA found that the trial judge had failed to have due regard to the deficiencies in the merger process (in particular the lack of a robust market check) that made it, in the view of the CICA, wholly unreliable as an indicator of fair value. In the circumstances, the CICA ordered that the 45% weighting placed on the merger price be allocated to the DCF valuation. The CICA also ordered that two inputs into the management projections needed to be adjusted, resulting in an uplifted DCF valuation. The company appealed to the PC.

General Guidance From the PC

• When determining fair value in merger disputes, a variety of valuation methods may be used, either individually or on a blended basis, with no set preference for any one approach – the choice depends on the case’s specific facts with each method being assessed for its strengths and weaknesses based on extensive evidentiary support.
• The individual reliability of each method exists on a spectrum. Uncertainties in any method may exist but, aside from when the Court may draw adverse inferences or find that a party has not met its evidential burden, the Court must determine the impact of these uncertainties as opposed to dismissing the methodology entirely.
• Reliability is comparative between different methods. The Court may assign different weights to methods or use one as a cross-check for another, but significant divergence between methods may limit the utility of any cross-check. The Court may place pre-dominant weight on a valuation methodology even if the Court is not convinced that it is more reliable than not. Ultimately, the Court must qualitatively assess both the individual and comparative reliability of the valuation methods under consideration.
• The factors provided in the Delaware cases which have been adopted by the Court in many respects offer helpful but non-determinative factors.
• The trial judge’s role in determining valuation is highly fact-sensitive and requires nuanced judgment, especially given hypothetical scenarios and uncertainties. Ultimately, the weight given to any method depends on the circumstances of the case and relative reliability.

The PC restated the settled legal position that an appellate court should not interfere with a trial judge’s decision unless it was plainly wrong, and observed that this applied with particular force to a case such as this, where the trial judge’s conclusion was based on extensive cross-examination, their familiarity with the whole case, and the complexity of the issues involved.

Decision

The PC found that the CICA had wrongly substituted its own view for that of the trial judge and therefore re-instated his conclusion on fair value. The trial judge had considered the strengths and weaknesses of the merger price evidence holistically as opposed to the binary assessment by the CICA, which appeared to treat the presence of a robust market check as an absolute requirement as opposed to a relevant factor to be considered. For the same reason, the PC overturned the changes made by the CICA to the DCF inputs.

Conclusion

The PC’s guidance in relation to reliance on merger process is welcome, as the CICA judgment seemed to apply a “checklist” of features, that would likely have been difficult if not impossible to comply with and created increased deal uncertainty. The comments about comparative reliability are also helpful with other methodologies such as AMTP and comparable companies, meaning that some uncertainty about an aspect will not preclude them from being relied upon.

¹ [2025] UKPC 48