Kiri succeeds in appeal before Singapore Court of Appeal in landmark decision on applicability of discount for lack of marketability in a minority oppression action

8 July 2022

On 6 July 2022, the Singapore Court of Appeal in Kiri Industries Ltd v Senda International Capital Ltd & Anor [2022] SGCA(I) 5 allowed Kiri Industries Limited’s (“Kiri”) appeal that a discount for lack of marketability (“DLOM”) should not apply to the valuation of Kiri’s shareholding in its joint venture vehicle, DyStar Global Holdings (Singapore) Pte Ltd (“DyStar”). This is the first time the Singapore court has clarified and authoritatively decided the law on the applicability of a DLOM where a minority shareholder’s shares are valued pursuant to a buyout order made in a minority oppression action. As the Court of Appeal observed in the judgment, there was “a lack of a clear path of principle on the existing state of the authorities” in this area of law.

Allen & Gledhill Partners Dinesh Dhillon, Lim Dao Kai and Margaret Joan Ling acted for Kiri, the successful party in the appeal.

Background

This matter relates to the longstanding litigation between Kiri and Senda International Capital Limited (“Senda”). The majority shareholder in DyStar, Senda was a vehicle through which Zhejiang Longsheng Group Co Ltd (“Longsheng”) made investments.

In 2018, the Singapore International Commercial Court (“SICC”) found that Senda was liable for oppressive conduct against Kiri and made a buyout order. An article on the primary 2018 judgment relating to the finding of minority oppression is available here.

Kiri’s shares in DyStar were subsequently valued at US$481.6 million in a judgment by the SICC in 2021. In particular, the SICC held that a DLOM of 19% should apply to the valuation of Kiri’s shareholding in DyStar. The SICC was of the opinion that a DLOM should apply as a starting point where a private company was being valued unless exceptional circumstances could be shown. This was because market participants would pay less for shares in a private company, which were illiquid. An article on the 2021 judgment regarding the valuation of Kiri’s shares is available here.

Kiri and Senda both appealed to the Court of Appeal against various aspects of the SICC’s valuation judgment. In this regard, Kiri appealed against, inter alia, the SICC’s finding that a DLOM should apply to the valuation of Kiri’s shares in DyStar, as well as the calculation of the notional licence fee which represented the benefit derived by Longsheng from the use of the “O288 Patent” and was to be written back into the value of DyStar.

Court of Appeal’s decision on DLOM

In arriving at its decision, the Court of Appeal considered jurisprudence from the US, UK, Ireland, Australia, and Canada in addition to Singapore. The Court of Appeal stated that there is a vital distinction between the general criterion of fairness which the courts must apply in shaping any orders made under section 216(2) of the Companies Act 1967 (“Act”) and the valuation test of “fair market value” which a valuer may be required to apply. The general rubric of fairness which informs the exercise of the discretion under section 216(2) of the Act would readily lead the court to conclude that a limitation to “fair market value”, assessed in the hypothetical context of willing buyers and sellers, would not be fair. It was thus appropriate that, in making a buyout order and referring the question of valuation to an independent expert, the court should first determine whether it is appropriate to order a DLOM. The answer to the question responds to a broader principle than the quantification of the discounts, which is properly within the sphere of the experts. The court should not substitute the judgment of the valuer for the judgment which the court has to make in determining whether the application of a DLOM is fair or not.

The Court of Appeal agreed with Kiri’s submissions that the reprehensible conduct on the part of Senda, and the fact that Senda would gain total control of DyStar as a result of the buyout order, should not enable Senda to gain the benefit of a discount on the basis that it might wish to on-sell Kiri’s minority shareholding to another party, where the price might be affected by their marketability.

The effect of the Court of Appeal’s judgment is that the value of Kiri’s shareholding in DyStar would increase by at least 19% (for disapplication of the DLOM). In this regard, Kiri’s shares in DyStar were previously valued at US$481.6 million by the SICC.

Other matters

Kiri was also successful on its appeal regarding the quantum of the notional licence fee. Before the SICC, Kiri had made extensive submissions (which the SICC accepted) on the under-disclosure by Senda on the quantities of products that Longsheng had produced using the O288 Patent. However, in calculating the notional licence fee, the SICC had relied on figures put forth by Senda because there was no evidence on exactly how severe the under-disclosure by Senda was.

The Court of Appeal considered that this issue could not be disposed of simply on the application of a burden of proof, where that burden operated to the disadvantage of Kiri because of the apparent under-disclosure of Senda. Thus, the Court of Appeal remitted this matter to the SICC for determination on the best evidence available to it.

Kiri also successfully defended itself against Senda’s appeals, with the Court of Appeal dismissing the entirety of Senda’s appeals, which comprised five out of the 11 appeal issues that the Court of Appeal had to consider. Senda was ordered to pay Kiri total costs of S$227,623.46 (inclusive of disbursements) for the appeals.

Reference materials

The judgment is available on the Singapore Judiciary website www.judiciary.gov.sg.