51Job overpaid for its privatization, Cayman court says, ending dissenters’ challenge

A judge ruled last month that the management-led group’s privatization offer for the leading online job site was roughly double what the shares were worth

Key Takeaways:.

• A Cayman Islands judge ruled that 51Job’s shares were worth $31.11 at the time of their privatization, about a quarter of the $111.06 that dissident investors were seeking
• The ruling spotlights how cases using the Cayman Islands Companies Act are putting a “huge strain” on the territory’s legal system, the judge said

By Doug Young

It’s one of China’s top online job sites, known for its name that translates to “No worries on the road ahead.” But the last five years have been anything but smooth sailing for 51Job Inc. as it sought to drive off the Nasdaq through a privatization bid launched by a management-led group in 2020 before finally closing two years later.

But the story didn’t end there. In a tale that may sound familiar to some, a group of minority shareholders brought a dissenters claim in Cayman Islands court after the privatization closed, arguing they lost out because the buyout price was too low. The lengthy legal battle that followed, involving dozens of lawyers and experts, finally came to a close late last month, when the court rejected the dissenters’ argument. What’s more, it concluded the management-led group that privatized 51Job had actually paid roughly double the actual value of the company’s shares at the time.

The Cayman Island Companies Act allows holders of a company’s shares to dispute a privatization price, even if they bought the shares after the buyout terms were announced. In many cases, such shareholders weren’t actual investors who bought the stock expecting a return on their investment when the company was public. Instead, they may be looking to squeeze more money out of the company as it tries to delist by arguing the buyout price lowballs the company’s real worth.

Share prices of most Chinese companies declined in the years after the pandemic began, as reflected by slumps in key China indexes between 2020 and 2022, such as the MSCI China Index, the Nasdaq Golden Dragon Index and the KraneShares CSI China Internet ETF. Those three indexes fell by 39%, 57%, and 61%, respectively, from the end of 2020 to 2022, meaning companies that pursued privatizations near the pandemic’s start faced substantial drops in their fair value and, as a result, likely overpaid in their buyout offers.

A representative case

The 51Jobs case casts a spotlight on the type of jockeying that often happens behind the scenes when Chinese companies, most of which incorporated in the Cayman Islands, delist from U.S. stock exchanges, a trend that was accelerating when 51Job first announced its privatization plan in 2020.

Chinese firms that once captivated Wall Street with high valuations fueled by rapid economic growth saw investor enthusiasm fade in the years before the pandemic, leading to stock declines and privatization efforts by management teams who viewed their shares as undervalued. 51Job is one such case. It listed in New York in 2004 at $14 per American depositary share (ADS), and saw its shares peak at $113 in 2018. But they later plunged, leading CEO Rick Yan to spearhead a buyout that initially offered $79.05 per share in 2020 but was later cut to a final price of $61 before the delisting in 2022. The dispute with shareholders who thought the buyout price was too low continued under Section 238 of the Cayman Islands Companies Act.

David Doyle, a judge in the Grand Court of the Cayman Islands, ruled the present, and not the past, should dictate the value of a company, and management’s involvement in a buyout doesn’t rule out a fair offer price. In his Nov. 24 decision, Doyle cited several previous similar cases, where investors challenged buyout prices under the Cayman Islands Companies Act, according to a copy of the ruling seen by Bamboo Works.

The act allows dissenting shareholders to go to trial when they believe a privatization offer price is too low. The court’s job is to determine a fair offer price based on information available at the time. Judges usually determine the fair price by assigning certain weights to the valuation methods such as “discounted cash flow” (DCF) or “adjusted market trading price” (AMTP) as proposed by the litigating parties. The Cayman Court has also in recent years tended to put more weight on the DCF model, which is based on experts’ subjective projections.

However, in his ruling, Doyle rejected the dissenting investors’ request to use the DCF valuation method and relied solely on AMTP to decide the fair offer price. The judge also criticized the drawbacks of over-reliance on experts and the DCF valuation model and called the DCF analysis conducted by the dissenting shareholders’ expert “completely unreliable.”

Doyle ruled that the true value of 51Job’s shares at the time of the buyout was $31.11 per share. That was roughly half the $61 that the buyout group ultimately paid when the company completed the deal in May 2022. By comparison, the dissenters’ experts applied the DCF methodology and arrived at a price of $111.06 at the time of the privatization.

Legal system strain

In the 51job ruling, Judge Doyle expressed how Section 238 of the Cayman Islands Companies Act, under which the case was bought, has taxed the territory’s judicial administration and its judges. “The Cayman Islands appears to have created an industry of its own out of Section 238 cases,” Doyle wrote in his ruling. “But they put a huge strain on the legal system, on its judicial administration staff and on its judges. Well-resourced litigants, experts and lawyers raise every conceivable point and sometimes inconceivable points.”

The 51job ruling resolves a three-year shareholder dispute over fair value, favoring the buyout group by using the pre-privatization market price. The decision may guide – and discourage – dissenting shareholders thinking of pursuing future cases that seek higher prices using the Cayman Islands Companies Act.

The Bamboo Works offers a wide-ranging mix of coverage on U.S.- and Hong Kong-listed Chinese companies, including some sponsored content. For additional queries, including questions on individual articles, please contact us by clicking here.

To subscribe to Bamboo Works free weekly newsletter, click here