SHAREHOLDER DISPUTES Oppression, Buy-Out Orders, Share/Business Valuation
Our directors explore both the legal and technical aspects of shareholder oppression claims and business/share valuations.
Section 216 of the Companies Act (Cap 50) (“the Act”) provides an avenue for a minority shareholder who has been “suffering” at the hands of the controlling majority to seek redress.
Such specific remedies available to a “suffering” minority shareholder are listed at Section 216(2) of the Act, including; to compel a share buy-out, provide that the company be wound up, etc.
Who May Apply for Relief?
A shareholder with less than 50% shareholding in the company is naturally understood to be a “minority” shareholder entitled to file a minority oppression lawsuit.
However, the Singapore Court of Appeal clarified in Ng Kek Wee v Sim City Technology Ltd [2014] 4 SLR 723 that majority shareholders are not precluded from applying under Section 216.
The Court of Appeal explained that “the touchstone is not whether the claimant is a minority shareholder of the company in question, but whether he lacks the power to stop the allegedly oppressive acts. Section 216(1) of the Companies Act states only that “any member…of a company” may bring an action for relief under that provision; there is no further requirement that only members who are minority shareholders are so entitled.”
However, the Court of Appeal also cautioned that “It would be contrary to the purpose and intent of s 216 of the Companies Act to permit a shareholder to seek relief where he possesses the power to exercise self-help by taking control of the company and bringing to an end the prejudicial state of affairs”. It is always a question of fact whether in a particular case a shareholder claiming relief ought to be considered to lack control over the affairs of the company.
What Constitutes “Oppressive” / “Unfair” Conduct?
Section 216 provides a remedy for a wrong suffered in the shareholder’s personal capacity. The individual shareholder sues in his own right to protect his interests as a shareholder of the company. Of course, the conduct complained of must relate to the affairs of the company.
Whilst the local Courts used to rely on four different tests to establish “oppression”; i.e. (1) oppression, (2) disregard of interests, (3) unfair discrimination and (4) prejudice, Lim Kok Wah and others v Lim Boh Yong and others and other matters [2015] 5 SLR 307 has explained that “There is … little utility in reading the four limbs disjunctively and attempting to draw a distinction between each limb.”
The litmus test of “commercial unfairness” involves a consideration of whether there has been a “visible departure from the standards of fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect”.
Remedies for a Minority Shareholder
In deciding what relief to grant to an aggrieved minority shareholder, the Court exercises its discretion “with a view to bringing to an end or remedying the matters complained of”.
Section 216(2) of the Act provides a list of such possible remedies:-
a) direct or prohibit any act or cancel or vary any transaction or resolution;
b) regulate the conduct of the affairs of the company in future;
c) authorise civil proceedings to be brought in the name of or on behalf of the company by such person or persons and on such terms as the Court may direct;
d) provide for the purchase of the shares or debentures of the company by other members or holders of debentures of the company or by the company itself;
e) in the case of a purchase of shares by the company provide for a reduction accordingly of the company’s capital; or
f) provide that the company be wound up.
Buy-Out Order
Generally, in deciding what relief to grant to an aggrieved minority shareholder, the Court exercises its discretion “with a view to bringing to an end or remedying the matters complained of”.
A buy-out order is often regarded as the corporate equivalent of a divorce and, arguably, the most practical option to remedy the “unfairness” of a minority shareholder who has been “suffering” at the hands of the controlling majority.
The High Court’s observations in Leong Chee Kin (on behalf of himself and as a minority shareholder of Ideal Design Studio Pte Ltd) v Ideal Design Studio Pte Ltd and others [2017] SGHC 192 in deciding to grant a buy-out order provides a glimpse into the Court’s analysis when dealing with this particular remedy:-
“94 … In this case, it is patent that the parties’ relationship has broken down irretrievably such that they can no longer hold shares in the same company. The defendants no longer wish to have the plaintiff as a shareholder or a director of Ideal Design Studio. That is why they put pressure on him to sell his shares to them and why they removed him as a director when he refused … . By the same token, the plaintiff no longer wishes to be a shareholder of Ideal Design Studio. That is why he has commenced these proceedings asking, amongst other things, for the defendants to be ordered to buy his shares. Therefore, the most appropriate remedy is …. to have the defendants purchase the plaintiff’s shareholding in Ideal Design Studio.”
When the Court grapples with the question of how the aggrieved shareholder’s shares should be valued, “[I]t will usually be a matter of expert evidence which basis of valuation is the more appropriate one. Decided cases in this context offer only limited guidance, since cases turn on their facts and the expert evidence which happens to be adduced by the parties” (Robin Hollington Q.C., Hollington on Shareholders’ Rights (Sweet & Maxwell, 7th Ed, 2013).
Valuation approaches
There are three general valuation approaches, namely market, income, and cost approaches and the applicability and relevance of each approach may vary from case to case.
The market approach provides an indication of value by comparing the asset (e.g. shares and/or business) with identical or comparable assets for which price information is available. This approach typically involves the following steps:
a) identify and select comparables;
b)calculate valuation multiples of selected comparables, e.g. multiples of value to a financial performance metric (e.g. EBITDA); and
c) apply the comparable multiples to the relevant metric of the subject asset.
When it comes to the selection of comparables, one may consider the following:
a) historic transactions in the subject asset itself;
b) publicly traded comparable assets (e.g. shares of comparable public companies); and
c) historic transactions in comparable assets (e.g. acquisitions of shares in private companies).
The income approach provides an indication of value by converting future cash flows that the asset is expected to generate to a single current value.
Generally, all valuation methods under the income approach are based on discounting future cash flows to present value, i.e. they are variations of the discounted cash flow method (DCF). The key steps involved in the DCF valuation of a business are as follows:
a) prepare a forecast of cash flows that the business is expected to generate over an explicit period of time;
b) if appropriate, consider the cash flow assumptions after the explicit period, e.g. a constant perpetual growth rate;
c) determine the appropriate discount rate to be applied to future cash flows. The concept behind discounting future cash flows is that (i) $1 today is worth more than $1 tomorrow (i.e. time value of money); (ii) risk-free $1 is worth more than uncertain $1; and
d) convert the future cash flows into their net present value as at the valuation date.
The cost approach provides an indication of value using the economic principle that a buyer will pay no more for an asset than the cost to obtain an equivalent asset. In other words, the premise of the cost approach is that the cost of replacing an asset is a reasonable measure of the asset’s economic benefit, which may not necessarily hold.
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