Kiri Industries Ltd v Senda International Capital Ltd and another

• Jurisdiction: Singapore
• Judge: Kannan Ramesh J
• Judgment Date: 03 June 2021
• Neutral Citation: [2021] SGHC(I) 2
• Published date: 09 June 2021
• Docket Number: Suit No 4 of 2017
• Year: 2021
• Hearing Date: 16 March 2021
• Plaintiff Counsel: Dinesh Dhillon, Lim Dao Kai, Margaret Joan Ling, Dhivya Naidu and Serene Chee Yi Wen (Allen & Gledhill LLP)
• Defendant Counsel: Toh Kian Sing SC, Cheng Wai Yuen, Mark, Soh Yu Xian, Priscilla and Lim Wee Teck, Darren (Rajah & Tann Singapore LLP),Teng Po Yew (Drew & Napier LLC)
• Citation: [2021] SGHC(I) 2
• Court: International Commercial Court (Singapore)
• Subject Matter: Impact of expiration,Shares,Issue estoppel,Expiration,Valuation of shares,Patents and Inventions,Res Judicata,Companies

Kannan Ramesh J (delivering the judgment of the court): Introduction

On 21 December 2020, in Kiri Industries Ltd v Senda International Capital Ltd and another [2020] SGHC(I) 27 (the “Valuation Judgment”), we determined the interim valuation of DyStar Global Holdings (Singapore) Pte Ltd (“DyStar”). We indicated at [312] of the Valuation Judgment that nine adjustments needed to be made to the interim valuation of DyStar that we determined. In this Judgment, we address the nine adjustments. Where appropriate, we adopt the abbreviations and terms defined in the Valuation Judgment, as well as in our judgment in DyStar Global Holdings (Singapore) Pte Ltd v Kiri Industries Ltd and others and another suit [2018] 5 SLR 1 (the “Main Judgment”).

Background

The facts have been set out extensively in the Main Judgment delivered on 3 July 2018. We held that Senda International Capital Ltd (“Senda”) had engaged in instances of oppressive conduct against Kiri Industries Ltd (“Kiri”). Senda was ordered to purchase Kiri’s shares in DyStar. The valuation date was to be the date of judgment, ie, 3 July 2018. The valuation date was not challenged on appeal.

We provided an interim valuation of DyStar in the Valuation Judgment. We found DyStar’s equity value as at the valuation date to be US$1,636m, subject to the nine adjustments (the Valuation Judgment at [312]). The parties’ experts were directed to submit (a) a joint revised valuation of DyStar based on their assessment of the impact of the nine adjustments on our interim valuation of DyStar, and (b) a joint report setting out their points of agreement and disagreement with reasons for any disagreement if they were unable to reach consensus.

The parties’ experts were unable to agree on every point. On 25 January 2021, they submitted a joint expert report (“the Report”) addressing the nine adjustments. This was accompanied by a letter from Kiri seeking clarification on (a) pre-judgment interest and (b) the relief to which it would be entitled if Senda failed to comply with the buy-out order in the Main Judgment. We addressed the latter two issues in an oral judgment on 17 March 2021.

This Judgment addresses the effect of the nine adjustments on our interim valuation of DyStar.

Outstanding adjustments to be made to DyStar’s valuation

The Valuation Judgment identified the nine adjustments at [312]: (a) The notional licence fees for Longsheng’s use of the Patent and third-party licence fees collected by Longsheng ought to be incorporated into DyStar’s valuation, subject to the following amendments. (i) Mr Chan’s proposed US$473,744 notional licence fee must be amended to reflect a starting point of 2010 instead of 2013. The applicable tax rate should not be DyStar Germany’s, but that of DyStar’s instead. (ii) On the $13.5m of licence fees collected by Longsheng, the 5.33% interest added by Ms Harfouche must be revised. It should not be the interest rate prescribed for judgment sums, but ought instead to correspond to the interest that DyStar would have earned on the licence fees in the relevant years if it had duly received the same from Longsheng. The tax rate for the fees should be adjusted to correspond with DyStar’s historical tax rates. (b) The downstream financial impact on DyStar due to the Patent expiration must be deducted from Ms Harfouche’s computation of DyStar’s maintainable EBITDA. The Patent expiration would have an impact of US$6.5m as suggested by Mr Lie. (c) The downstream financial impact on DyStar due to the expiration of the Indigo 40% patents must be deducted from DyStar’s EBITDA. This risk event would have an impact of US$17.2m as suggested by Mr Lie. (d) A DLOM of 19% is to be applied to Kiri’s 37.57% share in DyStar. (e) A country risk premium of 1.6% is to be accounted for in DyStar’s cost of equity. That will increase DyStar’s WACC and result in a larger discount rate in the DCF approach. (f) The applicable tax rate for DyStar’s revenue ought to be 26.7% instead of 23%. (g) The tax rate for the 2015 and 2016 Longsheng Fees ought to be adjusted to match DyStar’s historical tax rates. We note that the Longsheng Fees for 2017 and 2018 have not been (and should not be) accounted for in Ms Harfouche’s valuation. (h) While the special incentive payment has been accounted for in Ms Harfouche’s valuation, adjustments to the applicable tax rate must be made. The applicable rate ought to be DyStar’s historical tax rate in 2014 when the special incentive payment was made. (i) The US$4m insurance pay-out must be incorporated into DyStar’s valuation. We will refer to the nine adjustments as Issues 1 to 9 respectively.

Issues 4 and 8 (on DLOM and the special incentive payment, respectively) are not in dispute. In the Report, the experts agreed on these issues and their joint position has been incorporated into our final valuation of DyStar.

The experts’ positions on the contested Issues

The experts’ positions on the adjustments that arose from the contested issues are set out in tables at pages 2 and 3 of the Report. Where there are discrepancies between the two experts’ tables, we have indicated below more precise figures (based on decimal points) or the figures that the parties have more consistently adopted in the Report.

Item	Kiri (US$ million)	Senda (US$ million)
Issue 1: Third-party licence fees	12.6 to DyStar’s adjusted EV	12.4 and (0.7) (audit fees) to DyStar’s adjusted EV
Issue 1: Notional licence fee	1.3 to DyStar’s adjusted EV	1.2 to DyStar’s adjusted EV
Issues 2 and 3: Expiration of the Patent and the Indigo 40% patents	(72.5) to DyStar’s EV	(228.8) to DyStar’s EV
Issue 5: Country risk premium	-	(271.3) to DyStar’s EV
Issue 6: Effective tax rate of 26.7%	-	(89.4) to DyStar’s EV
Issue 7: Longsheng Fees for 2015 and 2016 (incorporated as part of DyStar’s net financial debt post-adjustments for Oppressive Acts)	(68.5) to DyStar’s adjusted EV	(72.7) to DyStar’s adjusted EV
Issue 9: Insurance pay-out	4.6 to DyStar’s adjusted EV	4.0 to DyStar’s EV
Equity Value of DyStar following all adjustments	1,586	1,063
Kiri’s shareholding pre-DLOM	596	399
Kiri’s shareholding after applying the 19% DLOM	482.5	323

The foregoing table refers to “DyStar’s EV” and “DyStar’s adjusted EV”. The experts explained the difference between the two expressions: Adjustments to DyStar’s EV are made first. These are the adjustments to the DCF method used in Ms Harfouche’s valuation approach, and impact on matters such as DyStar’s cost of capital and maintainable EBITDA. These matters pertain to Issues 2 and 3 (the expiration of the Patent (Issue 2) and the Indigo 40% patents (Issue 3) which affects DyStar’s maintainable EBITDA), Issue 5 (the country risk premium which affects DyStar’s cost of capital) and Issue 6 (the effective tax rate for DyStar). Making these adjustments results in DyStar’s adjusted EV. The remaining adjustments, which relate to Issues 1, 7 and 9 and concern one-off events, are made to DyStar’s adjusted EV.

A final inconsequential divergence between the experts is not fully captured in the table. The experts disagree over whether the 19% DLOM (see [246] of the Valuation Judgment) is to be applied to the value of the equity/shareholding in DyStar before or after deriving the value of Kiri’s 37.57% shareholding. Senda favours the former and Kiri the latter. Despite the disagreement, both experts arrive at broadly the same outcome. Conceptually, we prefer Kiri’s approach (as reflected in the table above) of applying the 19% DLOM to Kiri’s minority share in DyStar. This is because, as held in the Valuation Judgment, the DLOM is a discount reflecting the lack of marketability of Kiri’s minority share. Having said that, we note that the outcome is not any different mathematically, even if Senda’s approach is adopted.

Issues

The following matters arise in relation to the seven issues on which there is no consensus between the experts: DyStar’s applicable historical tax rates. This concerns Issue 1 – on the notional licence fee and third-party licence fees collected by Longsheng – and Issue 7 – on the Longsheng Fees for 2015 and 2016. We directed these adjustments to be made at [193], [205], [276], [312(a)] and [312(g)] of the Valuation Judgment. The impact, if any, of the expiration of DyStar’s various patents. This concerns Issue 2 – on the Patent (ie, the Orange 288 patent) – and Issue 3 – on the Indigo 40% patents. We directed that the expiration of these patents be taken into account in DyStar’s maintainable EBITDA, at [212], [223], [312(b)] and [312(c)] of the Valuation Judgment. The impact, if any, of certain variables on the DCF method used by Ms Harfouche in her valuation. This concerns Issue 5 – on the country risk premium – and Issue 6 – on the effective tax rate to be applied to DyStar. We directed that these factors be considered by the experts at [250], [268], [312(e)] and [312(f)] of the Valuation Judgment. The insurance pay-out DyStar received in May and June 2019. This concerns Issue 9. We directed that this adjustment be made at [305] and [312(i)] of the Valuation Judgment.

Preliminary observations

In general, Ms Harfouche’s position in the Report on the seven disputed issues is well-reasoned and explained with reference to her valuation model and the relevant accounting principles. In assessing the views in the Report, it should be borne in mind that, in arriving at our interim valuation, we had accepted Ms Harfouche’s valuation model and methodology (see the Valuation Judgment at [45]–[156]). Accordingly, any impact of the nine adjustments must be assessed in the context of that model and methodology. Not to do so would be to (a) re-open the debate on the appropriate valuation methodology and...