Introduction

It is an established principle that in the event of a buyout of shares of a quasi-partnership company, the shares of the minority shall be valued without any discount. The situation may be different, however, in a non-quasi-partnership company. A recent Singaporean case Senda International Capital Ltd v Kiri Industries Ltd and others [2020] SGCA(I) 01 explored the issue of whether minority discount applies to a buy-out order in a company which is not a quasi-partnership.

Background

The case concerns a non-quasi-partnership company known as DyStar Global Holdings (Singapore) Pte Ltd (the “Company”). Its minority shareholder Kiri Industries Ltd (“Kiri”) sued the majority shareholder Senda International Capital Ltd (“Senda”) for minority oppression in the conduct of the affairs of the Company. The Singapore International Commercial Court found that there is minority oppression and held that Senda acted oppressively by inter alia:

1.        excluding Kiri from management of the Company’s business;

2.        refusing to let the board of the Company declare a dividend for the year 2014, thus preventing Kiri from obtaining the benefits of its investment in the Company;

3.        causing the Company to:

a.        engage in transactions (which are contrary to the Company’s business interests) with Senda’s parent company Zhejiang Longsheng Group Co Ltd (“Longsheng”) and entities related to Longsheng;

b.        make a payment of US$2 million to the Chairman of Longsheng; and

c.         assigning a patent to Longsheng on a temporary basis and yet Longsheng then retained the patent wrongfully.

The Singapore International Commercial Court ordered Senda to buy out Kiri’s shares in the Company. The Court however refused to order a minority discount in valuation of Kiri’s shares (the “Minority Discount Decision”). Senda appealed to the Singapore Court of Appeal against, inter alia, the Minority Discount Decision.

Decision

The Singapore Court of Appeal dismissed the appeal. The Court of Appeal first started by confirming the following principles laid down in the earlier appellate decision of Thio Syn Pyn v Thio Syn Kym Wendy and others and another appeal [2019] 1 SLR 1065, where it was held that:

1.        there is no presumption that a minority discount applies in the valuation of shares of non-quasi-partnerships; and

2.        the court has to look at all facts and circumstances of the case in reaching its decision.

The Court of Appeal upheld the Minority Discount Decision and agreed with the Singapore International Commercial Court that the below two facts are particularly relevant in arriving at the decision:

1.        Cause of the breakdown in relationship:  Although Kiri was found to be in breach of the non-compete and non-solicitation clauses in the shareholders’ agreement, there was no evidence from Senda suggesting that Kiri’s conduct had caused or contributed to the deterioration in the relationship of the parties. The breakdown in the relationship between Senda and Kiri (and thus the subsequent buy-out order) was entirely caused by the oppressive acts by Senda. The Court of Appeal noted that Senda had not argued that its oppressive acts were connected to or justified by Kiri’s breaches of the shareholders’ agreement, and opined that “[h]ad there been a relation between Kiri’s breaches and Senda’s oppressive acts, that connection might call for minority discount, but even then the entirety of the circumstances would have to be assessed.” (at §38) 

2.        Motivation of Senda’s oppressive acts: Senda’s oppressive acts were directed at worsening Kiri’s position as a shareholder so as to force Kiri to sell out. On the facts, Senda had engaged in various commercially unfair actions designed to extract considerable value from the Company at the expense of Kiri.

The Court of Appeal also noted that Kiri had provided considerable financial and management support and contributions to the Company over the years, and it was Senda who excluded Kiri from management participation. Furthermore, the factual matrix of the case provided no basis for the court to hold that Kiri would obtain a windfall if a minority discount is not awarded. In conclusion, the Court of Appeal dismissed the appeal against the Minority Discount Decision.

Conclusion

There is limited Hong Kong authority on this issue. The Singapore decision suggests that the application of minority discount is facts-sensitive and must be considered on a case-to-case basis. As we await this issue to be argued before the Hong Kong courts in the future, it is helpful to take note of the factors the Singapore Court of Appeal took in account in reaching its decision.