Koh Keng Chew and others v Liew Kit Fah and others

• Jurisdiction: Singapore
• Judge: Chua Lee Ming J
• Judgment Date: 28 November 2018
• Neutral Citation: [2018] SGHC 262
• Court: High Court (Singapore)
• Docket Number: Suit No 125 of 2014
• Published date: 12 December 2019
• Year: 2018
• Hearing Date: 05 July 2018,16 April 2018
• Plaintiff Counsel: Lim Wei Lee and Daniel Tan Shi Min (WongPartnership LLP)
• Defendant Counsel: Patrick Ang, Jared Kok and Chai Wei Han (Rajah & Tann Singapore LLP)
• Subject Matter: Companies,Oppression,Minority shareholders,Valuation of shares,Discount on minority shares
• Citation: [2018] SGHC 262

Chua Lee Ming J: Introduction

The plaintiffs hold 28.125% of the shares in the 7th to 16th defendants. They brought this action under s 216 of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”) against the 1st to 6th defendants, who hold the remaining 71.875% of the shares. On 29 July 2016, I delivered my judgment in which I gave an order for the 1st to 6th defendants to purchase the shares of the plaintiffs in the 7th to 16th defendants: Koh Keng Chew and others v Liew Kit Fah and others [2016] 4 SLR 1208.

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.

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: the shares lack control because they are minority shares; and/or 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.

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.

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”.

The law

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.

However, if he can establish one or more of the grounds set out in s 216(1) of the Act, then the remedies under s 216(2) are available to him. The grounds under s 216(1) are, generally speaking, oppression, disregard of interests, unfair discrimination and prejudice. Under s 216(2), the Court is empowered to “make such order as it thinks fit” with a view to bringing to an end or remedying the matters complained of.

One of the remedies that is commonly sought is a buyout order under which the delinquent shareholder (or the company) may be ordered to purchase the innocent shareholder’s shares. Unsurprisingly, the typical innocent shareholder is a minority shareholder since the majority shareholder has the voting power to effect change in the company.

It is well established that in making a buyout order under s 216(2) of the Act, the court has a wide and unfettered discretion to reach a just and equitable result: Margaret Chew, Minority Shareholders’ Rights and Remedies (LexisNexis, 3rd Ed, 2017) (“Minority Shareholders’ Rights”) at para 4.303. See, also, Hans Tjio, Pearlie Koh & Lee Pey Woan, Corporate Law (Academy Publishing, 2015) at para 11.095. With respect to the price of the shares, the role of the court is “merely to determine a price that is fair and just in the particular circumstances of the case”: Yeo Hung Khiang v Dickson Investment (Singapore) Pte Ltd and others [1999] 1 SLR(R) 773 at [72]. Whether or not a discount is to be factored into the valuation would therefore depend on the court’s assessment of the relative equities of the case: Minority Shareholders’ Rights at para 4.304.

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.

First and foremost, where a buyout order has been made under s 216(2), fixing the price for the shares pro rata, according to the value of all the shares in the company as a whole, is generally fair: see In re Bird Precision Bellows Ltd [1984] 1 Ch 419 (“In re Bird”) at 430; O’Neill v Phillips [1999] 1 WLR 1092 at 1107D–E. As a starting point, this makes good sense. The buyout order is a...