02 March 2020
Valuation of a party’s shareholding for the purpose of a buy-out order by the Court has become a subject of interest in its own right, with various rules and principles having been developed in this context. For example, it is well-established that the general rule is that no minority discount is applicable for a minority shareholding in a quasi-partnership company: see CVC v Demarco  BCLC 108 (PC) per Lord Millett at §41, as cited in a number of Hong Kong cases. The rationale for this is that the valuation of shares in a quasi-partnership, like in the case of a true partnership, is based on a notional sale of the company as a whole to an outside purchaser, rather than direct sale of the outgoing partner’s share to the continuing partners (see CVC at §42).
What about the situation in the case of a private company which is not a quasi-partnership? This was a question expressly left open by the Hong Kong Court of Appeal in the recent decision of Re Minloy Limited  HKCA 461 (Unrep., CACV 9/2017, 24 April 2019) at §69.
The Singapore Court of Appeal, on the other hand, had to grapple with this precise question in the case of Senda International Capital Ltd v Kiri Industries Ltd and others  SGCA(I) 01, where an order had been granted by the Court for Senda International Capital Ltd (“Senda”) to buy out the shareholding of Kiri Industries Ltd (“Kiri”) in the subject company, which was found not to be a quasi-partnership. At first instance, it was held, inter alia, that in valuing Kiri’s shareholding, a minority discount for lack of control should not be applied. Senda appealed against this decision.
The Court of Appeal began by confirming the general principle it laid down in the earlier decision of Thio Syn Pyn v Thio Syn Kym Wendy and others and another appeal  1 SLR 1065 that there was no presumption that a minority discount applied in the context of non quasi-partnerships, and the court has to look at all the facts and circumstances of the case in arriving at its decision (§35). This general principle had been laid down following an extensive review of relevant case law and legal literature, which led to the conclusion that there was no overarching principle or legal policy justifying such a presumption: see Thio Syn Pyn at §§17-33.
Applying this general principle to the facts of Senda International v Kiri Industries, the Court of Appeal upheld the first instance decision that no minority discount should be factored into the valuation of Kiri’s shareholding, taking into account the below:-
(a) Despite breaches by both Senda and Kiri, Senda’s oppressive conduct was directed at worsening the position of Kiri as shareholders to compel them to sell out, and it was Senda’s conduct which was entirely responsible for precipitating the breakdown in the parties’ relationship (§38). This appears to be the crucial factor.
(b) Unlike in Davies v Lynch-Smith and others  EWHC 2336 (Ch), where the minority shareholder did not provide anything more than nominal value for his shares, here Kiri was the party which secured the investment opportunity and brought Senda into the picture. Kiri had also provided significant financial and management contributions, even if over the years the same were outweighed by Senda’s (§40).
(c) As to Senda’s point that Kiri did not contribute to the growth of the business in any substantial way, it was held that Kiri did play an active role in management for some time, and there was no evidence that thereafter Senda complained about Kiri taking a back seat. In fact, Senda excluded Kiri from management (§43).
(d) There was also no justification for concluding that Kiri would obtain a windfall if a minority discount were not applied (§44).
(e) On the other hand, Senda would benefit from the buy-out, as its shareholding in the subject company would increase from 62.43% to 100% i.e. full ownership (§45).
This decision illustrates the fact-sensitive nature of the enquiry. Given the surprising dearth of authority in Hong Kong on this point, these recent Singapore decisions shed valuable light on the proper approach in valuing minority shareholdings in non quasi-partnership private companies. In light of the variety of factual permutations that may arise in private companies which are not quasi-partnerships, a fact-sensitive, context-specific approach seems to be a sensible one.