Poh Fu Tek and others v Lee Shung Guan and others

• Court: High Court (Singapore)
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 25 August 2017
• Neutral Citation: [2017] SGHC 212
• Citation: [2017] SGHC 212
• Published date: 31 July 2018
• Plaintiff Counsel: Ian Lim, Nicole Wee and Grace Chan (TSMP Law Corporation)
• Defendant Counsel: Simon Dominic Jones (Grays LLC)
• Docket Number: Suit No 387 of 2015
• Hearing Date: 05 October 2016,27 September 2016,06 October 2016,22 September 2016,04 October 2016,03 July 2017,20 September 2016,23 September 2016,20 February 2017,28 September 2016,21 September 2016,07 October 2016,29 September 2016
• Date: 25 August 2017
• Subject Matter: Civil procedure,minority shareholders,purchase of shares,Companies,oppression,offer to settle,valuation of shares,late offer

Vinodh Coomaraswamy J: Introduction

The plaintiffs bring this action against the first and second defendants seeking relief from oppression under s 216 of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”). The oppression is said to arise from the manner in which the first and second defendants have conducted the affairs of the third defendant, Biofuel Industries Pte Ltd (“Biofuel”). The plaintiffs claim that they are entitled to relief because the first and second defendants allotted shares in Biofuel to an entity related to the first defendant without giving the plaintiffs an opportunity to take up shares to avoid dilution of their shareholding. The result is that the plaintiffs’ minority shareholding in Biofuel has been diluted from 25% to under 3%.

As matters have turned out, there is no longer any real issue as to whether the plaintiffs are entitled to a remedy under s 216 or even as to the nature of the remedy. It is common ground that the plaintiffs were oppressed and that I should, as a result, order the first and second defendants to buy the plaintiffs’ shares in Biofuel. The only real issue which remains is the question of valuation. The plaintiffs say that their shares should be valued at $3.47 per share. The defendants say that the plaintiffs’ shares are effectively worthless.

Having considered and analysed the parties’ submissions and evidence, and in particular the expert evidence from both parties, I find that the value of the plaintiffs’ shares in Biofuel, rounded off to two decimal places, is $1.86 per share. The first and second defendant will therefore have to purchase the plaintiffs’ 1,666,667 shares in Biofuel at a total price of $3.1m, disregarding fractions of a dollar.

I have arrived at a value of $1.86 per share by taking the value ascribed to each share in Biofuel by the plaintiffs’ expert in his final report and making the adjustments to that value which I consider justified by the evidence, and in particular the evidence of the defendants’ expert. In brief, I have adjusted the plaintiffs’ expert’s value to take into account two risks which I find he failed to consider adequately. First, I have adjusted his value to take proper account of the risk that Biofuel may not be able to remain indefinitely at the premises from which it now conducts its key operations. Second, I have adjusted it to take proper account of the risk that Biofuel may not be able to continue its business relationship with a particular significant client in the Philippines. I have made these adjustments by modifying the discount rate and the discount factors applicable under the plaintiffs’ expert’s valuation.

I now set out the full reasons for my decision, beginning with the factual background to the parties’ dispute. This background will include only a summary of my findings on oppression. The details of the oppression have little consequence of the valuation exercise which is now the central issue before me.

Background

Biofuel’s business is collecting and processing wood waste. The first defendant is today Biofuel’s sole director and majority shareholder. However, Biofuel was initially a wholly-owned subsidiary of the second defendant (“Tenda”).¹ Tenda has, in turn, always been wholly owned and controlled by the first defendant’s family.²

The first and second plaintiffs made their investments in Biofuel by being allotted new shares in Biofuel.³ The result of these investments was that in 2014, just before the acts of oppression which triggered this action, Tenda held 75% of Biofuel and the plaintiffs held 25%. In early 2015, Tenda transferred all of its shares in Biofuel to the first defendant. The first defendant thereby became and remains to date the majority shareholder of Biofuel.

The circumstances in which the plaintiffs first invested in Biofuel are as follows. In 2007, Biofuel was in negotiations with a listed Indonesian company called PT Medco Energi Internasional Tbk (“PT Medco”) to agree the terms of a joint venture to build a biomass power plant in Singapore. At the same time, a creditor applied to wind up Biofuel based on an unpaid debt of about $1m. PT Medco required Biofuel to address the winding up application before any joint venture could proceed.

Biofuel was therefore looking for an investor to inject fresh capital to allow it to stave off the winding up application.⁴ The first and second plaintiffs were approached. They agreed to invest in Biofuel in the hope of a successful joint venture with PT Medco. In January 2008, they entered into a share subscription agreement under which each of them subscribed for 300,000 new shares in Biofuel at $1.67 per share. The share subscription agreement also included an anti-dilution clause. The concern at that time was that certain parties who were brokering Biofuel’s potential joint venture with PT Medco may be issued shares in Biofuel.⁵ Biofuel used the proceeds of the share subscription to repay the creditor who had applied to wind them up. The winding up application was withdrawn.

In February 2008, Biofuel ran into financial difficulties again. Biofuel solicited a further investment from the first and second plaintiffs.⁶ They were still concerned that their shares might be diluted. This time, the concern was that certain debts which Biofuel then owed Tenda might be converted to equity. The first defendant assured the first and second plaintiffs that this would not happen. As a result, they subscribed for a further 1,066,667 shares in Biofuel at $0.94 per share, yielding a total consideration of $1m. This time, they used the third plaintiff, Sino Bio Energy Pte Ltd (“Sino Bio”), as the vehicle to hold these additional 1,066,667 shares. The first and second plaintiffs were and remain equal shareholders of Sino Bio.

The global financial crisis in 2008 meant that Biofuel’s joint venture with PT Medco did not materialise. From 2008 to 2009, Biofuel faced further demands from creditors to repay substantial debts. The plaintiffs and Tenda extended loans to Biofuel to allow it to repay those debts. One of these loans was a loan of $1m pursuant to a convertible loan agreement (“CLA”) dated 25 November 2008. Under this agreement, Biofuel took on an express obligation to keep Sino Bio informed on a regular basis of Biofuel’s financial situation and business prospects. ⁷

The parties had an understanding that Tenda’s loan to Biofuel would not be converted to equity without the plaintiffs’ consent. This understanding is reflected in cl 4.1.2 of a Deed of Arrangement which the parties executed in July 2011.⁸ Additionally, Article 41 of Biofuel’s Articles of Association requires the first defendant, as a director of Biofuel, to notify the plaintiffs in writing of the opportunity to subscribe for more shares in Biofuel before any shares could be issued to Tenda.⁹ Biofuel expressly acknowledged that it owed this obligation to the plaintiffs in cl 3.1 of an agreement between Biofuel and Tenda dated 1 August 2014 which governed Biofuel’s issuance of 51m shares to Tenda.¹⁰

By virtue of these agreements and understandings, the plaintiffs had a legitimate expectation that: (a) they would be invited to participate in any new issue of shares in Biofuel; and (b) their shareholding would not be unfairly diluted. These expectations, taken together with the anti-dilution clauses in the first and second plaintiffs’ share subscription agreements, the first defendant’s oral assurances to the plaintiffs, and Biofuel’s obligations under the CLA dated 25 November 2008, subjected Biofuel to equitable considerations which made it unfair for those conducting its affairs – principally the first defendant – to rely on their strict legal powers and rights to defeat those expectations: Lim Kok Wah and others v Lim Boh Yong and others and other matters [2015] 5 SLR 307 at [102]. Yet, after Biofuel became profitable in 2012, the defendants did just that.

On 29 July 2014, an Extraordinary General Meeting (“EGM”) of Biofuel’s members took place. The purpose of the meeting was to discuss three resolutions which the first defendant had proposed.¹¹ One resolution was to approve a transfer of all of Tenda’s 75% shareholding in Biofuel to himself. Another resolution proposed to issue Tenda a substantial quantity of new shares by way of discharging the substantial debts owed by Biofuel to Tenda. The final resolution approved the impairment in Biofuel’s accounts of a number of its significant assets. The intended effect of the impairment was to depress Biofuel’s net asset value so as to maximise the number of new shares to be issued to Tenda in discharge of its debt.

Realising that their shares were about to be diluted, the plaintiffs offered to sell their 1,666,667 shares to the defendants for a total price of $2m (at $1.20 per share) before the resolutions were put to a vote.¹² The first defendant rejected this offer.

The first defendant, holding Tenda’s proxy, pushed the resolutions through.¹³ The dominant purpose in all this was to dilute the plaintiffs’ shareholding. While dilution is not in itself oppressive (Margaret Chew, Minority Shareholders’ Rights and Remedies (LexisNexis, 2nd ed, 2007) (“Margaret Chew”) at p 199), the plaintiffs had a legitimate expectation that their shares would not be diluted unfairly (see [13] above). The first defendant’s conduct breached this expectation. It therefore amounted to oppressive conduct within the meaning of s 216 of the Act: Re Cumana Ltd [1986] BCLC 430 at 435c; Over & Over Ltd v Bonvests Holdings Ltd and another [2010] 2 SLR 776 (“Over & Over”) at [76].

Significantly, there was no commercial justification for these transactions. The first defendant said at the EGM that the impairment of the assets and the debt-for-equity swap were needed to raise capital for an urgent redevelopment project to house Biofuel’s wood waste (“the Project”) to meet pollution control standards imposed by...