Koh Keng Chew and others v Liew Kit Fah and others

[2] The plaintiffs and the 1st to 6th defendants agreed on, and appointed, the independent valuer to determine the price of the plaintiffs’ shares. However, the parties could not agree on (a) the reference date for the valuation of the shares, (b) the framework for the valuation process and (c) whether the valuer should issue a reasoned valuation. On 23 January 2017, I gave certain directions as to the reference date for the valuation of the shares and the valuation process; I also decided against a reasoned valuation: Koh Keng Chew and others v Liew Kit Fah and others [2018] 3 SLR 312.

[3] Further disputes arose between the parties. The 1st to 6th defendants, as the purchasers, took the position that the value of the plaintiffs’ shares should be discounted for two reasons:

(a) the shares lack control because they are minority shares; and/or

(b) the shares lack marketability because, being shares in privately held companies, they are subject to share transfer restrictions.

The plaintiffs disagreed. The valuer requested the parties to obtain my directions as to whether any of the discounts should be applied to his valuation of the plaintiffs’ shares.

[4] On 5 July 2018, I directed that the value of the plaintiffs’ shares is not to be discounted for either of the above reasons. The 1st to 6th defendants have appealed against my decision.

[5] As a preliminary point, I note that the 1st to 6th defendants have used the expression “lack of marketability” to refer to the fact that the shares are subject to share transfer restrictions. It seems to me that the expression “lack of marketability” has a broader meaning. A lack of marketability suggests that it is more difficult to sell the shares. It is true that share transfer restrictions give rise to a lack of marketability in that such restrictions make it more difficult to sell the shares compared to, for example, listed shares. However, the lack of control can also give rise to a lack of marketability. It is more difficult to sell minority shares because such shares have no influence on the company or say in the management of the company. In these grounds of decision, I shall refer to the effect of share transfer restrictions as a “lack of free transferability”.

[6] An investor who takes up a minority shareholding in a privately held company does so knowing full well that he does not have the voting power to influence the management or direction of the company. He would have no legal remedies arising from the mere fact that the directors and/or the majority shareholders disagree with him. If, arising from such disagreement, he decides to exit his investment in the company, he would have to accept that his minority shares may not be as marketable as he would have liked and that the sale price that he can expect to get may be discounted for lack of control and lack of free transferability. He can, of course, also choose not to sell his shares. Either way, he has no legal remedy.

[10] In many cases, courts have expressly provided that a discount for minority shareholding should not be factored in the valuation: Minority Shareholders’ Rights at para 4.302 and the cases cited at footnote 873. In my view, there are good reasons for this.

[16] In my view, the above reasons apply with equal force to the question of a discount for lack of free transferability. Such a discount too cannot be considered just and equitable simply on the ground that it is common in transactions between willing sellers and willing buyers.

[20] For my part, I have no doubt that the mere fact that the case involves a quasi-partnership is not a determining factor as to the general applicability of a discount for a minority shareholding: see Re Blue Index at [24]–[25]. Re Blue Index was applied in Re Addbins Ltd; Ashdown v Griffin [2015] EWHC 3161 (Ch). In my view, the question remains whether applying a discount would be just and equitable on the facts. As a matter of principle, this question must apply equally to both quasi-partnership and non quasi-partnership cases.

[22] In conclusion, in my view,

(c) the party asserting that a discount should be applied has to show that applying the discount is just and equitable on the facts of the case;

(e) whether a case involves a quasi-partnership is not a determining factor as to the general applicability of a discount for a minority shareholding.

[23] The plaintiffs commenced this action under s 216 of the Act against the 1st to 6th defendants. Although the 1st to 6th defendants did not admit the plaintiffs’ allegations of oppressive conduct, they agreed with the plaintiffs that the relationship of mutual trust and confidence between the parties had broken down and that a parting of ways had become inevitable. The parties also agreed a buyout by one side was necessary and appropriate.

[27] The 1st to 6th defendants also argued, relying on Thio Syn Kym, that the question of whether a discount should be applied for lack of free transferability, should be left to the valuer to decide. I have explained my understanding of the decision in Thio Syn Kym in [18] above. More importantly, in the present case, the valuer had expressly requested the parties to seek the court’s directions as to whether discounts for lack of control and lack of free transferability should be applied. In my view, the approach taken by the valuer was correct. It is for the court to decide what is just and equitable. The 1st to 6th defendants did not show why it would be just and equitable to leave the question of a discount for lack of free transferability to the valuer.

[28] For the above reasons, I directed that discounts for lack of control and lack of free transferability were not to be applied to the valuation of the plaintiffs’ shares.