27 July 2021

On 3 June 2021, the Singapore International Commercial Court (“SICC”) issued its decision in Kiri Industries Ltd v Senda International Capital Limited & Anor [2021] SGHC(I) 2 (“3 June decision”) which related to adjustments to a court-ordered interim valuation of Kiri Industries Ltd’s (“Kiri”) stake in another company, DyStar Global Holdings (Singapore) Pte Ltd (“DyStar”), following a finding of minority oppression in 2018.

Pursuant to the findings in the 3 June decision, which are discussed here, the SICC on 21 June 2021 in Kiri Industries Ltd v Senda International Capital Ltd & Anor [2021] SGHC(I) 6 determined the value of Kiri’s shares in DyStar to be US$481.6 million (“Final Valuation”).

An article on the primary 2018 judgment relating to the finding of minority oppression is available here.

Allen & Gledhill Partners Dinesh Dhillon, Lim Dao Kai and Margaret Joan Ling acted for Kiri Industries.

1. Background

In 2018, the SICC held, in what was its first ever minority oppression decision, that Senda International Capital Ltd (“Senda”) had engaged in oppressive conduct against Kiri and was ordered to purchase Kiri’s shares in DyStar, their joint venture. The court also ordered that the losses caused by the oppressive acts were to be written back into the value of the shares in DyStar.

The majority shareholder in DyStar, Senda was a vehicle through which Zhejiang Longsheng Group Co Ltd (“Longsheng”) made investments. Kiri is listed on the Bombay Stock Exchange and the National Stock Exchange of India, while Longsheng is listed on the Shanghai Stock Exchange. In this decision, the SICC had found several actions by the majority shareholder to be oppressive acts, including Longsheng failing to reassign a patent to DyStar and instead collecting fees from the licensing of the patent to third parties. These fees were considered in the present judgment (“Licensing Fees”).

The SICC held in 2019 that no minority discount for lack of control need be applied to the valuation of Kiri’s shares in Dystar. Senda appealed this decision but was unsuccessful.

Following further proceedings in relation to the valuation of the shares, the SICC provided an interim valuation of DyStar (“Interim Valuation”) in Kiri Industries Ltd v Senda International Capital Ltd & Anor [2021] 3 SLR 215 (“Valuation Judgment”). In arriving at the Interim Valuation, the SICC generally accepted the approach and valuation model adopted by Kiri’s expert (“Valuation Model”). The present judgment considered nine issues that remained outstanding after the Interim Valuation.

2. Present issues

Two of the nine issues outstanding from the Interim Valuation decision were agreed by the parties. These concerned adjustments to the value of Kiri’s shares in DyStar due to lack of marketability and a special incentive payment made by DyStar. The parties’ experts submitted a joint report to the court setting out their views on the remaining issues (“Report”).

The remaining seven issues were as follows:

  • Two issues concerned the applicable historical tax rates for various sums that were taken into account in determining the Interim Valuation. 
  • Two issues concerned the impact of the expiry of various patents on the Interim Valuation.
  • Two issues concerned the adjustments, if any, for country risk premium and the effective tax rate of 26.7%, to the Discounted Cash Flow component of the Valuation Model. 
  • The final issue was the impact on the Interim Valuation of the insurance pay-out received by DyStar in May and June 2019.

3. Decision

As the SICC had accepted the Valuation Model in prior proceedings, the court here noted that any impact of the outstanding issues would need to be assessed within the Valuation Model framework.

Applicable tax rates 

There were three components to the applicable tax rates:

  • The effect of the SICC’s directions in the Valuation Judgment was that DyStar’s actual historical tax rates ought to be applied. This was because (a) amounts that were oppressively drained from DyStar should be treated as never having been paid out of the company’s coffers, and (b) amounts that ought to have been paid to DyStar should be regarded as having been paid timeously. 
  • The effective tax rates of the DyStar group, and not the simple tax rate, ought to be applied. The effective tax rate was the appropriate metric, as it correctly accounted for the profit/loss of individual companies in the group in a given year. In contrast, the simple tax rate is the rate stipulated in tax regulations, which does not take into account the tax savings or liabilities of individual companies in the DyStar group in a given year of assessment as a result of their financial performance. DyStar’s group rates (i.e. the historical effective group tax rates of the DyStar group) was the appropriate metric to apply, as it accounted for the savings (or increased tax) of the DyStar group by reason of the profit/loss of individual companies in the group in a given year.
  • DyStar’s group rate, and not the tax rates of the individual entities in the group, ought to be applied. The experts agreed that this was the effect of the SICC’s decision in the Valuation Judgment.

Licensing fees 

The SICC determined that the audit fees incurred by Longsheng, when collecting the Licensing Fees should not be taken into account in DyStar’s final valuation. The point was res judicata. In arriving at the quantum of licence fees payable by Longsheng to DyStar, the SICC declined to include any line items apart from those specified in the Valuation Judgment. Further, as a matter of fairness, Senda ought not to be allowed to claim on Longsheng’s behalf expenses incurred during Longsheng’s wrongful exploitation of DyStar’s intellectual property.

Effect of patent expiry

The SICC held that the expiration of the relevant patents (which were not reassigned to DyStar) ought to have a finite impact on DyStar. The evidence did not support a perpetual impact and instead, suggested the contrary. As a matter of commercial and common sense, plans would have been formulated by the DyStar board to mitigate any losses arising from the expiration of the patents if they were commercially significant to DyStar.

Discounted Cash Flow component

The SICC accepted the use of the Discounted Cash Flow (“DCF”) method by Kiri’s expert to assess the finite impact of the expiration of the patents on DyStar’s final valuation on the basis that only the DCF method was capable of making that assessment. The SICC did not accept the approach of Senda’s expert as it was based on the assumption that the impact of the expiration of the patents was perpetual.

Kiri’s expert used a different approach to assess the effects of the country risk premium on the Interim Valuation. However, the SICC found this to be explicable and acceptable as the country risk premium was already factored into the financials of the group of companies that was the basis of the Valuation Model. This approach was not applicable to the impact of the expiry of the patents. This was because the commercial importance of the patents was unique to DyStar and accordingly could only be assessed with reference to DyStar.

The SICC also agreed with the approach of Kiri’s expert in incorporating the effects of the country risk premium and the 26.7% tax rate using the Valuation Model.

Insurance pay-out

The net impact of the insurance pay-out to DyStar was US$4.6 million and ought to be incorporated into DyStar’s final valuation.

Based on the findings above, the SICC in its Final Valuation found Kiri’s shares in DyStar to be valued at US$481.6 million.

Reference materials

The following judgments are available on the website of the Supreme Court of Singapore www.supremecourt.gov.sg:

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