27 February 2020
Liew Kit Fah & Ors v Koh Keng Chew & Ors  SGCA 78
The Singapore Court of Appeal in Liew Kit Fah v Koh Keng Chew by a majority ordered an independent valuer to re-value a minority shareholding that was sold to majority shareholders pursuant to a buyout order. This buyout order was made pursuant to a consent order. The independent valuer was ordered to (i) take into account the discount for lack of control, and (ii) decide whether the discount for lack of marketability should apply in re-valuing the shares. This decision overturned the decision of the High Court below, which decided that no minority discount ought to apply in the valuation.
The minority shareholders of the Samwoh Group of companies (“Samwoh Group”) initially commenced an action against the majority shareholders of Samwoh Group for minority oppression under section 216 of the Companies Act. The minority shareholders collectively held about 28% of the shares while the majority shareholders held the remainder.
Before trial commenced in the High Court, the parties reached an agreement to part company but were unable to agree as to who should buy out whom. Both parties wanted to buy out each other. A consent order (“Consent Order”) was recorded in the High Court on a without admission of liability basis in respect of any alleged acts of oppression committed against the minority shareholders. The Consent Order provided that the court was to order the majority shareholders to purchase the minority shareholding in Samwoh Group, or vice versa (“Buyout Issue”).
At the trial, the High Court decided as follows:
- On the Buyout Issue, the High Court ordered the majority shareholders to buy out the minority shareholders (“Buyout Order”).
- The High Court gave directions for a reference date for valuation as well as its process, and decided against a reasoned valuation.
- On the request of the independent valuer, parties had sought to obtain the court’s directions as to whether any discounts for the lack of control or lack of marketability should be applied to the valuation of the minority shareholding. The High Court decided that no discount should apply to the value of the minority shareholding.
The majority shareholders appealed against the third decision of the High Court.
Court of Appeal’s majority decision
The majority of the Court of Appeal, comprising Justice of Appeal Steven Chong and Justice Quentin Loh, decided that the independent valuer should (i) take into account the discount for lack of control, and (ii) decide whether the discount for lack of marketability should apply in re-valuing the shares.
Buyout Order was made not under section 216 of Companies Act
The Court of Appeal found that the source of the court’s jurisdiction to determine the Buyout Issue, in the absence of any oppression finding, was from the Consent Order.
The court found that the High Court had erred in treating the Buyout Order as an order under section 216(2) of the Companies Act. The Court of Appeal reasoned that the powers under section 216(2) of the Companies Act was not invoked as minority oppression had not been established. The oppression action became spent the moment the Consent Order was entered on terms that the majority shareholders made no admission of liability for minority oppression.
Sale of minority shareholders’ shares under Buyout Order treated as sale between willing seller and willing buyer
For the purposes of ascertaining whether the relevant discounts ought to apply, the Court of Appeal found that the minority shareholders should be regarded as willing sellers.
The court decided that a shareholder should only be regarded as an unwilling seller if his minority interests have been unfairly prejudiced by the conduct of the majority thereby making it no longer tolerable for him to retain his interest in the company. The court rejected the minority shareholders’ argument that they were unwilling sellers and that the sale of their shares to the majority shareholders should not be considered an agreed sale. The court held that by entering into the Consent Order, the minority shareholders agreed they were no longer willing to remain as shareholders with the majority, and it was within contemplation that the court could order the minority shareholders to sell out their shareholding despite their preference to the contrary.
Discount for lack of control to apply
The Court of Appeal decided that a minority discount for lack of control ought to apply in the valuation of the minority shareholders’ shares where the minority shareholders were regarded as willing sellers. The court noted that the minority shareholders elected not to pursue the oppression action and that the Consent Order was a freely negotiated transaction. Further, the majority shareholders were not a concrete bloc that would always invariably vote in support of one another, and it did not appear that the sale of the minority shareholding would lead to any of the other shareholders consolidating control of the Samwoh Group.
Independent valuer to decide whether discount to apply for lack of marketability
The Court of Appeal observed that since there was no finding of minority oppression, the only way out for the minority shareholders would be through the established processes for the sale of shares under the company’s articles, which invariably contain restrictions on the transfer of shares. Such restrictions would give rise to a lack of marketability in general. Noting that the issue of whether there was a lack of marketability was industry specific, the court accordingly decided that the independent valuer was to decide whether to apply a discount for lack of marketability for the minority shares.
Court of Appeal’s minority decision
The minority of the Court of Appeal, in a decision delivered by Justice Belinda Ang, decided otherwise and upheld the decision of the High Court that no minority discount should be imposed (“minority decision”).
The minority decision emphasised that the court should arrive at a valuation of shares that reflects what is fair, just and equitable between parties and on an examination of the factual circumstances, found that fairness between the parties would be a pro rata valuation of the shares without any discount despite the fact that the shares represented a minority holding.
The minority decision also expressed doubt about the contention that case authorities stand for the proposition that the court may derive its power to make a buyout order solely from parties’ consent and questioned the court’s jurisdiction to make buyout orders outside the scope of section 216 of the Companies Act.