Kho Long Huat v Jian Rong Engineering Pte Ltd

[1] The plaintiff, Kho Long Huat (“Kho”), commenced Companies Winding Up No 57 of 2019 (“CWU 57/2019”) to wind up the defendant, Jian Rong Engineering Pte Ltd (“the Company”). The Company’s business is to provide electrical works in the building and construction industry. There are three shareholders in the Company. Kho is a 40% shareholder of the Company while Wang Duan Gang (“Wang”) and Zhao Zhihua (“Zhao”) each holds 30% of the Company’s shares. Currently, Wang and Zhao are the only two directors of the Company. Until 16 August 2018, Kho was the Managing Director of the Company.

[4] On 29 March 2019, Kho commenced CWU 57/2019 to wind up the Company. Kho alleged that since the incorporation of the Company on 30 November 2011 he had played an active role in running the Company and the Company was managed like a quasi-partnership. Most of the projects secured by the Company were as a result of Kho’s efforts. The relationship between Kho and both Wang and Zhao turned sour in August 2018. Kho alleged that Wang and Zhao had, in breach of the Company’s Articles of Association, excluded him from the management and control of the Company when he was removed as the Managing Director. Thereafter, Kho further asserted that Wang and Zhao managed the Company in their personal interest as they hollowed out the Company’s assets for their personal gains. The Company, through Wang and Zhao, generally disputed these allegations. The Company further asserted that it was not just and equitable to wind up the Company which was a viable business and was successfully run and managed.

[7] And s 254(2A) of the Companies Act reads:

[8] In Ting Shwu Ping (administrator of the estate of Chng Koon Seng, deceased) v Scanone Pte Ltd and another appeal [2017] 1 SLR 95 (“Ting Shwu Ping”), the Court of Appeal held at [42] and [79] that:

[10] Further, I was of the view that the circumstances suggested that it would be more equitable to allow a buyout by Wang and Zhao of Kho’s shares in the Company. One of the reasons for this was because Wang and Zhao had indicated that the Company was successful and still a viable business. The parties were also agreeable to exploring the possibility of a Share Buyout. The parties, therefore, were given time to engage in negotiations with a view to reaching an amicable agreement on the terms of the Share Buyout.

[11] By 26 May 2020, the parties managed to reach an agreement on several terms, including that Wang and Zhao were to purchase Kho’s shares at a fair market value to be determined by an independent valuer. However, seven issues remained outstanding. These were:

(a) the approach that the independent valuer should take in valuing the shares, including the basis of valuation and whether the retention sums for the various projects undertaken by the Company should be taken into consideration;

(b) whether the independent valuer should apply a discount for lack of control and/or marketability in valuing the shares;

(c) whether the independent valuer should take into account any and all monies owing to Kho by the Company in valuing the shares;

(d) what information and documents should be made available to the independent valuer for the purpose of valuing the shares;

(e) who should bear the costs of the independent valuer;

(f) the timeline for completion of the Share Buyout and the consequences of non-payment for the shares; and

(g) the scope of the confidentiality clause, if any, that would apply to the final value of the shares, the independent valuer’s final valuation report (“the Final Valuation Report”) as well as the working documents and correspondence with the independent valuer.

[13] The issues that arose for my determination were:

[18] That in itself disposes of the Company’s application. However, for completeness, I also considered that even if such an understanding existed, the parties’ conduct towards the Share Buyout and the valuation of the shares was consistent with such an understanding. This was for two reasons. First, the parties had in fact engaged in negotiations and managed to agree on some aspects of the Share Buyout, despite Kho’s decision not to attempt mediation. The fact that the parties could not agree on all of the terms of the Share Buyout did not mean that Kho was acting in a hostile and uncompromising manner.

[24] In CVC/Opportunity Equity Partners Ltd and another v Demarco Almeida [2002] 2 BCLC 108 at [37], Lord Millett set out three possible bases for the valuation of minority shares:

[25] This passage has been cited by the Singapore High Court in Poh Fu Tek and others v Lee Shung Guan and others [2018] 4 SLR 425 (“Poh Fu Tek”) at [36] and Abhilash s/o Kunchian Krishnan v Yeo Hock Huat and another [2018] SGHC 107 at [28]. As Vinodh Coomaraswamy J explained in Poh Fu Tek at [37], Lord Millett’s first option describes the earnings basis of valuation, whereas Lord Millett’s third option describes the assets basis of valuation. It was apparent that Kho adopted Lord Millett’s first option, whereas the Company adopted Lord Millett’s third option.

[26] After considering the parties’ submissions, I found that the earnings basis was the fairest way to value the shares. It is well-established that the earnings basis is more appropriate where the company is a going concern. This is because the earnings basis reflects the future earnings potential of the company, whereas the assets basis does not (see Margaret Chew, Minority Shareholders’ Rights and Remedies (LexisNexis, 3rd Ed, 2017) at para 4.286). In Yeo Hung Khiang v Dickson Investment (Singapore) Pte Ltd and others [1999] 1 SLR(R) 773 (“Yeo Hung Khiang”), the Court of Appeal at [66] observed that:

[27] Similarly, Coomaraswamy J in Poh Fu Tek explained at [37] that:

[29] Here, it was not disputed that the Company was a going concern. Indeed, one of the reasons why I considered the Share Buyout more appropriate than a winding-up was precisely because the Company was still viable notwithstanding that the relationship between its shareholders had deteriorated (see Ting Shwu Ping ([8] supra) at [79]). Therefore, since the Company was a viable going concern, the earnings basis was better-suited to approximate the value of the Company and obtain a valuation that was fair as between the parties.

[30] I shall briefly address the arguments raised by the Company. First, the Company submitted that the earnings basis would put Kho in a better position than in a winding-up, which was the outcome he had originally sought. However, as I explained above at [19], one reason why a share buyout might be preferred over a winding-up is precisely because it would be more beneficial for all parties involved. In fact, the Share Buyout would also be more beneficial for Wang and Zhao as it meant that the Company could continue its business as a going concern, the profits of which would be enjoyed by Wang and Zhao as the Company’s only two shareholders. Counsel for the Company also submitted that the Company was being successfully run and managed by Wang and Zhao.

[31] Secondly, the Company submitted that the earnings approach was “imprecise and inherently speculative”. As such, it would result in the valuation outcome being “endlessly litigated”. This was entirely unmeritorious. As seen from the cases cited above, the earnings basis is an established basis of valuation and has been applied by the courts in numerous cases. There was no reason to suggest that it could not now be applied in this case.

[32] Finally, the Company submitted that the earnings basis might not be beneficial to Kho as it would have to include the decrease in earnings occasioned by the COVID-19 pandemic. In my view, which basis of valuation was more beneficial to either party was irrelevant; the question was which basis of valuation was fairer and more equitable as between both parties. For the reasons I have given above, the earnings approach was the fairer and more equitable basis of valuation.

[34] Kho’s position was that such retention sums should be taken into account as they formed part of the revenue from the Company’s projects and were the fruits of Kho’s labour. Kho contended that most of the Company’s projects were secured by him. In the oral submissions, the Company submitted that appropriate discounts should be applied to the retention sums to account for the uncertainty as to whether and how much of the retention sums would eventually be paid out. Therefore, the Company implicitly accepted that the retention sums should be taken into account in the valuation of the shares.

[35] Therefore, I held that the independent valuer should take into account the retention sums already vested in the Company as at 14 August 2018. This was fair because the general position in common law is that until such time when the retention sum is actually applied towards disbursing the main contractor for the rectification of defects, the property in the retention sum resides with the Company (see Law and Practice of Construction Contracts at para 8.068; Nam Fang Electrical Co Pte Ltd v City Developments Ltd [1996] 3 SLR(R) 298). In other words, the Company was already entitled to the retention sums although they had not yet been paid out. Therefore, it would be fair to take into account such retention sums in the valuation of the shares. As far as the valuation of these retention sums was concerned, including whether discounts should be applied, I held that this was a matter for the independent valuer’s discretion.

[36] I turn now to the second issue of whether the independent valuer should apply a discount to the value of the shares for lack of control and/or marketability. Unsurprisingly, Kho submitted that no discounts should be applied, whereas the Company submitted the opposite.

[37] The discounts for lack of control and/or marketability were defined by the Court of Appeal in Liew Kit Fah ([22] supra) at [45]–[46] as such:

[38] I shall first set out the principles governing the application of the discounts for lack of control and/or marketability. In Liew Kit Fah, the Court of Appeal at [29] and [48]–[49] considered that in determining whether the discounts should apply, the key issue was whether the seller could be treated as a “willing seller”:

[39] Based on the Court of Appeal’s reasoning, whether the seller should be treated as akin to a willing seller is closely-linked to whether it is fair and equitable to apply the discount for lack of control. Where the seller is akin to a willing seller, it would be fair, just and equitable to treat the transaction as similar to a typical voluntary commercial sale where such a discount is common and expected (see Liew Kit Fah at [47]). Conversely, where the seller is not akin to a willing seller, such as in cases of oppression under s 216 of the Companies Act, it would not be fair, just or equitable to apply a discount for lack of control because the unwilling seller had been deprived of the opportunity to sell on more beneficial terms, and it would effectively allow the party at fault to benefit from his own wrongful behaviour.

[40] Similar considerations apply to the discount for lack of marketability. In Poh Fu Tek ([25] supra) at [38], Coomaraswamy J observed that:

[41] The next question then is what amounts to an unwilling seller. In this respect, the Court of Appeal in Liew Kit Fah held at [34] that:

[42] Preliminarily, I dealt with the Company’s submission that “vastly different considerations apply” to a share buyout pursuant to s 254(2A) of the Companies Act as compared to that pursuant to s 216(2)(d) of the Companies Act. The Company further submitted that the discount for lack of control and/or marketability should only be applied where the grounds for oppression under s 216(1) of the Companies Act have been established.

[44] In this regard, none of the authorities laid down the general proposition that the applicability of the discounts is dependent on a finding of minority oppression. Rather, as I have explained above, the courts have made clear that the critical question is whether the seller should be treated as a willing or unwilling seller. This is in line with the rationale underlying the application of the discounts, which is to approximate the conditions of a typical voluntary commercial sale. While the cases in which the courts have not applied the discounts are often minority oppression cases, this was not because of the finding of minority oppression per se. Rather, because of the way in which the term “unwilling seller” has been defined (see [41] above), a finding of minority oppression will often lead to the conclusion that there has been some proven misconduct, thereby making the seller an unwilling one. Indeed, although there was no finding of minority oppression in Liew Kit Fah, the Court of Appeal did not stop there; it went further to analyse the issue of the seller’s willingness. This shows that the court can still decline to apply the discounts even if the case does not involve minority oppression under s 216 of the Companies Act. The ultimate question is whether the seller should be treated as a willing seller, such that it is fair and equitable to apply the discounts for lack of control and/or marketability.

[47] As the parties agreed that s 254(1)(f) of the Companies Act had been satisfied, there had been misconduct by Wang and Zhao. This made it intolerable for Kho to continue on as a shareholder of the Company. As such, Kho should not be treated as akin to a willing seller and the discounts for lack of control and/or marketability should not apply.

[48] In any case, even if Kho was treated as a willing seller, I was of the view that Wang and Zhao would obtain a collateral benefit from the Share Buyout which justified valuing Kho’s shares without any discounts. This was explained by the Court of Appeal in Liew Kit Fah at [50] as such:

[49] In evaluating the consolidation of control, the court will consider the number of shares as a percentage of the entire company’s shares. This is both in relation to the shares being sold, as well as the shares currently being held by the buyer prior to the share buyout. In Re Edwardian Group Ltd; Estera Trust (Jersey) Ltd and another v Singh and others [2018] EWHC 1715 (Ch), cited in Thio Syn Pyn v Thio Syn Kym Wendy and others and another appeal [2019] 1 SLR 1065 (“Thio Syn Pyn”) at [39], the English High Court observed at [639] that “a 2% shareholding will be considerably more valuable to an existing shareholder with 49% or 74% of a company’s shares than it will be to an outside investor”.

[50] In this case, treating Wang and Zhao as a collective bloc, the Share Buyout would enable them to consolidate their control of the Company as their shareholding would increase from 60% to 100%. This is a significant increase in control as it would give them complete control over the Company. It would enable them to pass special resolutions, thereby giving them the power to, for instance, alter the Company’s constitution and reduce the Company’s share capital (see Thio Syn Pyn at [38]; s 26(1) of the Companies Act; Art 42 of the Company’s Memorandum and Articles of Association). Even if one were to consider the benefits accruing to Wang and Zhao individually, the Share Buyout would allow each of them to increase their shareholding from 30% to 50%, giving each of them the ability to pass ordinary resolutions. This in turn meant that they could each, for instance, object to the issuance of shares, issue preference shares, increase the Company’s share capital, increase or decrease the number of directors and appoint or remove a director (see Arts 2, 3, 40(a), 67 and 69 of the Company’s Memorandum and Articles of Association).

[51] For the above reasons, I held that a discount for lack of control and/or marketability should not apply. Kho was not a willing seller and therefore the Share Buyout could not be treated as akin to a voluntary commercial transaction. Moreover, even if Kho was treated as a willing seller, the Share Buyout would provide collateral benefits to Wang and Zhao, either collectively or individually, therefore justifying Kho’s shares being valued without any discount. I should also mention that before Kho was unceremoniously ousted by Wang and Zhao, he was the Managing Director of the Company who had control of the Company which he alleged was managed in a quasi-partnership arrangement. Thus, to impose a discount for lack of control and/or marketability under these circumstances would not be fair and equitable.

[54] The fourth issue was what documents should be made available to the independent valuer for the purpose of valuing the shares. Kho proposed that “all the information and documents [should be] provided and made available to him including the financial statements and other financial/accounting records of the Company”. In contrast, the Company proposed that all “necessary documents and accounts (whether audited or unaudited) of the Company up to 14 August 2018 should be provided to the Valuer”.

[59] The sixth issue involved the timeline for completion of the Share Buyout and the consequences of non-payment by Wang and Zhao for Kho’s shares. The parties’ proposals in this regard were quite different.

[60] On one hand, Kho proposed that Wang and Zhao be given seven days from the release of the Final Valuation Report to inform Kho whether they were able to complete the Share Buyout within one month. If so, they were to make full payment to Kho within one month from the date they informed Kho that they were able to complete the Share Buyout and Kho would execute the transfer of the shares on the same day. Should Wang and Zhao inform Kho that they were unable to complete the Share Buyout or should they eventually be unable to make payment within one month, the Company was to be wound up.

[61] On the other hand, the Company proposed that instead of one month, Wang and Zhao be given one and a half months to complete the Share Buyout. Furthermore, the Company proposed that if Wang and Zhao were unable to complete the Share Buyout within one and a half months, they should be permitted to make payment via 12 equal monthly instalments, with the first instalment commencing one month after the date that they had informed Kho of their ability to complete the Share Buyout. Wang and Zhao should also be given a grace period of seven working days to make the payment for each instalment. Not only that, Kho was to execute the transfer of the shares to Wang and Zhao within seven working days of the receipt of the first monthly instalment. The Company submitted that its proposal was more realistic and would avoid the “overly drastic consequence” of a winding-up.

[62] Having considered the parties’ submissions, I held that Wang and Zhao were to notify Kho within seven days of the release of the Final Valuation Report whether they could complete the Share Buyout within two months. If so, they were to make full payment within two months of the date of notification, and Kho was to execute the transfer of the shares on the same day of the full payment. If Wang and Zhao informed Kho that they could not complete the Share Buyout within two months, or they were ultimately unable to make full payment within two months, the Company would be wound up.

[64] I also took my cue from other cases where the court had made similar orders. For example, in Over & Over Ltd v Bonvests Holdings Ltd and another [2010] 2 SLR 776, the Court of Appeal at [132] gave the respondent 14 days from the receipt of the valuation report to decide whether to purchase the appellant’s shares. If so, the purchase was to be completed within three months of such decision. If not, then the appellant could wind up the company.

[66] In my view, the terms contained in the clause proposed by the Company were much too broad. Any documents of the Company containing sensitive commercial information would already be confidential and thereby protected. This was an open court hearing and a matter of public record. Therefore, I held that no confidentiality clause was required.

[67] In summary, I decided as follows:

(b) Kho’s shares were to be valued on an earnings basis, and the independent valuer was to take into account the retention sums vested in the Company as at 14 August 2018 even if they had not yet been paid out to the Company.

(c) No discount for lack of control and/or marketability was to apply to the value of Kho’s shares.

(d) The independent valuer was to take into account any and all monies owing to Kho by the Company in valuing the shares in so far as such sums enhanced the value of the Company and thereby enhanced the value of Kho’s shares. These sums were not to be payable by Wang and Zhao over and above the value of Kho’s shares.

(e) The independent valuer shall have access to all information and documents he thought necessary to determine the value of the shares.

(f) The costs of the independent valuer would be borne by Kho, Wang and Zhao equally.

(g) Wang and Zhao would have seven days from the release of the Final Valuation Report to notify Kho whether they could complete the Share Buyout within two months. If so, they were to make full payment within two months of the date of notification, and Kho was to execute the transfer of the shares on the same day. If Wang and Zhao informed Kho that they could not complete the Share Buyout within two months, or they were ultimately unable to make full payment within two months, the Company would be wound up.

(h) No confidentiality clause was required.