Court Case On Share Valuation Of Unquoted Companies (6 October 2009)
This is a very good court case on share valuation of unquoted companies. A detail and thorough discussion on methods to be used and choice of methods preferred depending on circumstances of each valuation case:
Case: Kua Kok Kim & Ors v. Ernst & Young (sued as a firm) Suit No. 193 of 1997.
Court: High Court of Singapore
Date of judgment delivered: 31 December 1999.
Representation: Michael Khoo SC (Josephine Low with him; of Michael Khoo & Partners) for the plaintiffs. Devinder Rai (Marlene Rasanayagam with him; of Harry Elias & Partners) for the defendants.
Judge delivering judgment: GP Selvam J.
Held: Application dismissed
1. The defendants in the case constitute a well-known firm of certified public accountants.
2. The plaintiffs’ purpose in this action was to recover from the defendants some $1,279,929.70 or $1,392,864.60 as damages.
3. The basis of the claim in essence was an exercise of breach of professional duty to exercise reasonable skill and care in the valuation of shares.
4. The central fact of the plaintiffs’ case was that the defendants valued a block of shares in a company owned by the plaintiffs at $2.15 per share. A valuer engaged by them valued between $3.17 and $3.26 each. The higher values were placed by a firm of accountants – KPMG Peat Marwick.
5. The company whose shares were the subject of valuation was called Chong Lee Seng Company Ltd (“the company”).
6. In 1989, the plaintiffs in this case (there were eight of them including a limited company) filed a petition to wind-up the company on the ground of minority oppression. The petition was not proceeded with as there was an out of court settlement. The essence of the settlement was that the plaintiffs would sell their shares to the other shareholders at a price determined by the defendants on the basis of a fair value as at 31 July 1989. It was agreed that the valuation should not take into account the existence of any legal proceedings between the shareholders or any previous offers by any of the parties pertaining to the sale and purchase of the shares. By the terms of their engagement the defendants were not required to furnish any reasons for their valuation but to merely state what, in their opinion, was the fair value of each share. In short they wanted a non-speaking award.
7. The shares, in number 1,254,833, constituted 10.56% of the issued and paid up capital of the company. They represented an uninlfluential minority. Needless to say, the shares were unquoted in the Stock Exchange.
8. The person in the defendants’ firm who did the valuation was Ong Yew Huat (“Ong”). He said that after the commission he collated and reviewed information and material which would assist him in carrying out the valuation task. Then, one of his staff, by name Thosmas Teo, prepared a Summary Memorandum (“the memo”. The memo was dated 2 April 1993. It is appropriate and necessary to set out the full text of the memo:
We have been engaged jointly by Mr Kuah Kok Kim (‘KKK’) and Mr Lau Kiat Bin (‘LKB’) to determine a fair value for the shares of certain minority shareholders representing 10.56% interest in CLLS as at 31 July 1989.
In accordance to their instruction, dated 28 January 1993 (attached in Appendix 1A and 1B) our valuation should not take into account:
i. The existence of any legal proceedings between the shareholders and the directors/shareholders of the CLLS; or
ii. Any previous offers by the parties or any of them pertaining to the sale and purchase of the said shares.
We have considered the following valuation bases:
i. Discounting dividend flow or dividends basis;
ii. Orderly realisation of assets or net tangible assets basis; and
3. Dividend basis
The investment value of uninfluential minority shareholdings may be best determined by the future stream of dividends they expect to receive and the expected or required rate of return applied to those dividends. The formula to be applied is:
Share value = Gross dividend per share + rate of return
CLLS has a good track record of dividend payout over the last five years. It has paid gross dividends of 5 cents in 1987, 10 cents from 1988 to 1990 and 12 cents in 1991. The future stream of gross dividends is expected to be maintainable at a constant rate of 12 cents per annum having regard to future prospect. Please refer to Appendix 2.
The investors’ required rate of return is normally bench-marked on a so-called risk-free long term (say 1 year) rate plus a premium determined by the riskiness of the investment and the lack of liquidity. Typical risk-free rates would be the gross redemption yield on long term Government Securities and interest rates on long-term fixed deposits. As at 31 July 1989, these are as follows:
|i. 12 mths||Fixed deposits interest rate||Banks||4.60%|
|ii. 12 mths||Fixed deposits interest rate||Finance Companies||5.04%|
|iii. 5 years||Gross redemption yield||Government Securities||5.15%|
The above information has been extracted from the MAS monthly statistical bulletin December 1989 issue. Please refer to Appendix 3A & 3B for further details.
If we take the average risk-free rate to be 5%, the value of minority shareholdings in an unlisted company would be $2.40 per share. However, one would expect the investors to impute a risk premium and require a rate of return that is higher than the risk-free rate for their investment. On this view, the maximum value of the minority shareholdings should not exceed $2.40 per share.
On the assumption that the investors’ required rate of return is 6.00% per annum and at an expected constant gross dividend of 12 cents, we are of the view that the value of the minority shares would be $2.00 per share using the dividend basis of valuation.
4. Net tangible assets (‘NTA’) basis
Uninfluential minority shareholdings should normally not be valued on an net tangible assets basis since the holder in not in a position to reach those assets. However, we have intended to use it as a secondary basis to cross-check the value derive from the primary dividend basis. The audited consolidated balance sheets from 1987 to 1991, summarized in Appendix 4, show that the net tangible assets per share as at 31 July 1989 is $2.11.
Without applying the lack of liquidity as a depreciatory factor, the NTA is say $2.10.
5. Price-earning (‘PE’) basis
The price-earning basis is normally used to value controlling interests or majority shareholdings in which the shareholder may have such control as to distribute all the earnings by way of dividends should he so wish. Again, we have intended to use it only as a secondary basis to cross-check the value derive from the primary dividend basis. The PE formula is as follows:
Share value = Earnings per share X PE multiple
(Earnings are define by net profits after tax & minority interests)
The audited consolidated profit and loss statements from 1987 to 1991, summarised in Appendix 2, shows the average maintainable earnings of the Group to be approximately $3.2 million, or equivalent to 27 cents per share.
In arriving at a average market PE ratio, we referred to the PEs of companies listed in the secondary board of the Singapore Stock Exchange. The average price earning ratio of these companies as at 31 July 1989 was 9.72. Extracts if the price earning ratios from the SES Journal August 1989 issue of SESDAQ companies have been included in Appendix 5.
Before applying a discounting factor for reason of lack of liquidity, the capitalised earnings price is $2.62.
Minority shareholders in an unlisted company suffer considerably from lack of marketability of their holding and for this reason, discount must be at their greatest for the 10.56% uninfluential shareholding. It may vary between 20% to over 50% for such holding.
6. Other share transfers
We noted from the share register of CLLS that some shares held by minority shareholders were sold to external parties in two separate share transfers in 1991 after CLLS became a public company in 1990. The purchase considerations in these two instances were $2.30 and $2.00 respectively.
Having regard to the value arrived at using the dividend basis and taking into consideration other matters set out above, we are of the opinion that the fair value of the minority shares as at 31 July 1989 is $2.15 per share.”
9. By way of gilding the Lily Ong said this in his affidavid evidence:
“12. In carrying out the share valuation, we considered and applied the following valuation bases (as shown in pages 14-16 of the SRM):
i. Primary basis
a) Discounting Dividend Flow or Dividend Basis
We chose the dividend basis because the investment value of uninfluential minority shareholdings may (in our view) be best determined by the future stream of dividends they expect to receive from the said shares in CLLS and the expected or required rate of return from other unquoted equity investments applied to those dividends. The investor’s required rate of return is normally bench-marked on a so-called risk-free long term (say 1 year) rate plus a premium determined by the riskiness of the investment and the lack of liquidity. Typical risk free rates would be the gross redemption yield on long-term Government Securities or interest rates on long-term fixed deposits.
ii. Secondary bases
b) Net Tangible Assets Basis
Uninfluential minority shareholdings should not (in our view) normally be valued on a tangible assets basis since the holder is not in a position to influence the realisation of those assets. However, we used this basis as a secondary basis to cross-check the value derived from the primary dividend basis.
c) Price Earnings Basis
The price-earning basis is (in our view) normally also used to value controlling interests or majority shareholdings in which the shareholder may have such control as to distribute all the earnings by way of dividends should he so wish. We used this basis only as a secondary basis to cross-check the value derived from the dividend basis. In arriving at an average market price-earning ratio, we referred to the price earnings of companies listed in the secondary board of the Singapore Stock Exchange.
13. We also noted from the share register of CLLS that some shares held by minority shareholders were sold to external parties on two separate transfers in 1991 after CLLS became a public company in 1990. The purchase consideration in these two instances were $2.30 and $2.00 respectively.
14. The valuation, in my judgement, did reflect the fair value of the shares as at 31 July 1989.”
10. By way of over-egging the pudding, the defendants called an expert witness from England. He was John Magill, a member of Deloitte & Touche Board of Partners (UK) since 1954. His opinion was set out in the form of a report. He set out his conclusions in these words:
“Conclusions on valuation
4.23 the use of dividend yield, which I consider the most appropriate method, indicates a valuation of shares in Chong Lee, as at 31 July 1989, of between $1,61 and $2.25 per share. The use of the PER, which I consider to be a useful cross-check, indicate a valuation of shares in Chong Lee, as at 31 July 1989, of between $2.12 and $2.96 per share.
4.24 Both these valuation ranges are reached using a discount of 30 to 50%. If the discounts of 40% to 63% are applied, as indicated by the studies in the United States (referred to at paragraph 3.27), the dividend yield range would be from $1.91 to $1.93 and the PER range would be from $1.56 to $2.52.
4.25 As I have mentioned earlier in this report, valuing shares in an unlisted company is an inexact science requiring much use of judgment; I have already expressed my preference for the use of the dividend yield resulting in a valuation of between $1.61 and $2.25. The cross-check from the use of the PER suggests a fair value at the higher end of the dividend yield range.
4.26 the E&Y valuation of $2.15 is at the higher end of my range and so I consider it to be reasonable.”
The plaintiffs’ case
11. That being the case of the defendants, I now turn to the plaintiffs’ case. They asserted that the defendants failed, refused or neglected to value the shares with reasonable skill and care. Alternatively, it was asserted that they failed to take care or exercise reasonable professional skill in carrying out their duties. They also relied on the doctrine of res ipso loquitur. If the doctrine applied at all, it meant that the value of $2.15 by itself proved that the defendants were in breach of their duty or negligent. That would mean that the plaintiffs’ subjective assertion suffice as sufficient proof. In his case it has no justification in law. The plaintiffs had to demystify their case in clear terms.
12. The plaintiffs then purported to give particulars of their assertions. In some respects, these particulars were as hazy as they could be. They lacked clarity. The particulars they gave were as follows:
“(a) Failing to take all material factors into consideration when valuing the said shares;
(b) Failing to adopt the correct method of valuation, alternatively failing to apply the method of valuation correctly;
(c) Failing to observe the fact that the company’s was a going concern and to value the company’s shares properly on that basis;
(d) Further or in the alternative, failing to observe or consider that it was inappropriate to base the earnings ratio valuation based on SESDAQ companies whose business are different from that of the company;
(e) Failing to observe or to consider that it was inappropriate to base their price earnings ratio valuation based on the average price earnings ratio of listed SESDAQ companies in preference to listed Mainboard companies;
(f) Further or in the alternative, failing to observe or to consider the fact that the company was at all material times a private company, alternatively not a company listed on the Stock Exchange and that in all the circumstances, it was inappropriate to base their price earnings ratio valuation based on the average price earnings ratio of already listed SESDAQ or other listed mainboard companies rather than on the price earnings ratios of companies at the floatation stage or pre-listing stage of their shares;
(g) In the circumstances, failing to exercise reasonable care and professional skill in carrying out the valuation and making the report;
(h) Further or in the alternative, as regards their valuation on the dividends basis, failing to observe or to consider that in relation to the fact that investment in shares is fundamentally different from investment in fixed deposits and that a higher yield compensates for the absence of any gain on the underlying principal in the latter case whereas in the former, a lower yield is acceptable since it is compensated by a potential appreciation in the underlying principal; and
(i) Failing in all circumstances to apply a benchmark return rate of return which was based on yields that could reasonably have been achieved if the investment had been in shares of similar companies of yields from a similar type of investment.”
13. The defendants asked the plaintiffs to improve on the particulars but the plaintiffs could not do very much . In response to a request for further particular’s, the plaintiffs gave this revealing answer:
“The proper method or methods for valuing the said shares would be based on either the Earnings Basis or Dividend Yield Basis.”
This plainly meant that either one of the methods can be used. One is not subordinate to the other.
14. The above two bases were expanded as follows:
“(i) Under the Earnings Basis, the maintainable level of post tax earnings of the Company and its subsidiaries will be used. To this earnings, the appropriated factor (known as price earnings ratio) would be applied in arriving at the value of the shares in the Company. On the basis of the maintainable post tax earnings of $3.444 million and net price earnings ratio of 10.92, the shares in the company are valued at approximately $37.61 million or $3.17 per share.
(ii) Under the Dividend Yield Basis, this method involves looking at the dividends the shareholders who are investors in the company can look to receiving on a regular basis as a return on the investments. This basis determines the principal amount this is required to be invested such that the returns to the shareholders remain unchanged had they invested the proceeds from the sale in other types of similar investments. Considering the dividend payments paid by the company from 1987 to 1991, the maintainable level of dividends would be 10% gross per annum. With shares having a nominal value of $1 per share, the gross dividend yield from investing in the company is therefore 10%. Comparing the gross dividend yield of the Initial Public Offerings (IPO) during the period from July 1989 to July 1990 which ranged from 1% to 4.1% giving an overall average of about 2.15%. As the company is an unlisted company, a discount factor of 30% would be applied to the average gross yield of about 3.07%. Taking the gross market yield of 3.07% and the actual gross yield of 10% for investment in the Company, the shares of the Company would be valued at $3.26 per share.”
15. The plaintiffs were asked to state the material factors to be taken into consideration when valuing the shares. The material factors enumerated by them were as follows:
“(a) With regard to the earnings basis,
(i) The maintainable level of post tax earnings of the company and its subsidiaries
(ii) The audited earnings of the company and its subsidiaries for the financial years 1987 to 1990
(iii) The price earnings ration applicable to the company
(iv) The price earnings ratio of Main Board companies achieved for their Initial Public Offerings during the period after 31st July 1989 and to 31st July 1990 which ranged from 11.2 to 61.9
(v) Notwithstanding the fact that the company is unlisted, the P/E ratios of IPOs in the Main Board provide a reasonable basis for determining the average P/E ratio with an appropriate discount.
(b) With regard to the dividend yield basis, the factors are
(i) The dividend payments of the company for the period 1987 to 1991
(ii) The maintainable levels of dividends of 10% gross per annum
(iii) The gross dividend yield from investing in the company
(iv) The gross dividend yield of the IPOs during the period from July 1989 to July 1990 ranging from 1% to 4% giving an overall average of about 2.15% and adjusted by a discount factor to take into account the fact that the company is not listed.”
16. The particulars set out in the statement of claim were based on a report and affidavit of Ng Boon Yew of KPMG Peat Marwick who was called as an expert witness to assist the plaintiffs. It is unnecessary to quote his report extensively. In his affidavit he said, among other things, “as far as I can determine from the working papers that I have been given it does not appear to me that the defendants have applied either the Earnings Basis or the Dividend Yield Basis when in my view those would be the appropriate methods of valuation that should have been applied.” This assertion was the pith and substance of the plaintiffs’ pleaded case.
17. The value of $3.17 arrived at by Ng Boon Yew on earnings basis gave $1.02 more than the fair value formed by the defendants, $2.15 that is. This was an increase of 47%. The value of $3.26 on dividend basis gave something more than that – namely $1.11 each share or 52%.
18. My task in this case was to determine whether the plaintiffs assertions bear the light of law. I shall therefore state the appropriate law. It is settled law that the valuation whether it is a speaking or non-speaking valuation, the valuer has to attain the requisite standard of care of an ordinary competent valuer. He must exercise reasonable care and skill. Hence, the valuer can be sued in tort or contract if he fails to reach the standard demanded of him in valuing the shares. Halsbury’s Laws of England, 4th Edition, vol. 33, para. 623 states the following propositions of law:
“Proposition 1 – A professional is required to meet the standard of the ordinary skilled man exercising and professing to have the special skill in question.
Proposition 2 – An error of judgment will not amount to negligence unless it is one that would not have been made by a reasonably competent professional with the standard and type of skill of the defendant, acting with ordinary care.
Proposition 3 – Where there are differing and well established professional schools of thought on an issue, a professional will not be regarded as negligent in following on rather that another even if the outcome suggests that the wrong choice was made.”
The following propositions supply gloss to the above:
“Proposition 4 – The test is the standard of the ordinary skilled man exercising and professing to have that special skill. A man need not possess the highest expert skill at the risk of being found negligent. It is well established law that it is sufficient if he exercises the ordinary skill of an ordinary competent man exercising that particular art: Bolam v Friern Hospital Management Committee  1 WLR 582 at 586 per McNair.
Proposition 5 – Where a plaintiffs claim is based on an allegation that the fully considered decision of a professional in the field of his special skill is negligent, it is not sufficient for the plaintiff to show that there is a body of competent opinion which considers that that decision is wrong if there also exists a body of professional opinion, equally competent, which supports the decision as being reasonable in the circumstances. It has to be recognised that differences of opinion and practice exist in any profession and that there is seldom any one answer exclusive of all other’s to problems of professional judgment and therefore although the court might prefer one body of opinion to the other that is not a basis for a conclusion that there has been negligence on the part of a defendant professional. See Maynard v West Midlands Regional Health Authority  All ER 635.
Proposition 6 – In carrying out the duty the standard of sill and care reasonably to be expected of a valuer allows for differing views, or even a wrong view, without the valuer holding that view necessarily being held liable for breach of duty. Valuation is not an exact science and pre-eminently involves an exercise of opinion and judgment which by its very nature might be fallible. See Luxmoore-May v Messenger May Baverstock  1 All ER 1067.
Proposition 7 – Valuation is not an exact science, it involves questions of judgment on which experts may differ without forfeiting their claim to professional competence. The fact that a judge may think one approach better that another is therefore irrelevant. The issue is not whether expert’s valuation is right, in the sense of being the figure which a judge after hearing the evidence would determine. It is whether he has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in this profession. [Emphasis added] See Bolam v Friern Hospital Management Committee  1 WLR 582 and Zubaida v Hargraves  1 EGLR 127.”
19. I shall now set out the accepted principles on fair value as seen by the accounting profession. C.G. Glover, who is considered an authority on valuation of shares, says in Valuation of Unquoted Companies, 2nd Edition, p. 29:
“The fair value concept is frequently encountered in the share transfer provisions of private companies articles of association. These often provide that in specified instances shares shall be transferred at the fair value determined by the company’s auditors. Sometimes shareholders enter into side agreements governing the disposal of shares and these, too, may contain pre-emption rights stipulating a fair value to be determined by a nominated expert valuer. The fair values thus determined are generally expressed to be binding on the parties. It is not surprising, therefore, that dissatisfied vendors and purchasers have on occasion resorted to litigation in order to overturn the fair value award. Despite, this, there seems to be very little guidance from the legal cases as to what constitutes fair value, the Courts main concern being to define the rights of the parties and the liability of the independent valuer must judge what is fair, and provided his judgment is arrived at honestly and not negligently, it should stand.
For the reader who is seeking guidance on this point the author can therefore do no more than give his own personal view, based on experience, as to what constitutes fair value. First, fair value is distinct from market value. Were it not, the articles of association or other legal agreement would stipulate market value as this is the more generally recognised value concept. Second, the essence of the fair value concept is the desire to be equitable to both parties. It recognizes that the transaction is not in the open market. Buyer and seller have been brought together by the operation of a legally binding agreement in a way which excludes other potential buyers and sellers. Thus, the buyer has not been able to shop around for the lowest price nor has the seller been able to hold out for the highest price. In these circumstances, the fair value must take into account as a minimum requirement what the seller gives up in value and what the buyer acquires in value through the transaction. The valuer must therefore assess the owner value of the shares to both vendor and purchaser.”
At p. 34 he adds:
“Generalisations are dangerous and particularly so in the art of valuation. There are no rules determining fair value. The concept imposes considerable demands on the valuer. Not only is he required to exercise his valuation skills, lie is also to employ them in a way which ensures justice between buyer and seller. One valuer’s concept of fairness may differ from another.”
20. The short lesson to cull from the above is that the formative process of valuation involves two principal elements. Application of the normatives which is an objective process. Then comes forming an opinion or placing a dollar value which is a subjective process. A court of law entrusted with tasking of determining whether a professional is negligent or in breach of duty to exercise due skill and care should never be trapped into a nit-picking exercise.
21. By their pleaded case, the plaintiffs conceded that the dividend yield method was an accepted and appropriate method to determine the fair value of the plaintiffs’ shares – that is, 10.56% of the total shares. The other permitted method was earnings method. It was not their pleaded case that one method was subordinate to the other. The defendants used two other methods for counter-checking.
22. At the trial. However, the plaintiffs attempted to shift their position. Their counsel said: “using the dividend basis in this particular exercise is wrong. The P/E basis should be the correct basis.” In view of the concession in the pleading this was an untenable new stand. However, it was not pressed on at the trial. “There is no dispute about the correctness of the criteria. The question is whether the criteria was applied correctly”, said counsel for the plaintiffs. I therefore reject that part of the plaintiffs; case that a wrong method was used. In the result the plaintiffs were confined to contend that the right method was applied wrongly in the sense that accepted routes were not followed as stated in Proposition 7 set out in 18 above.
23. Apart from the above, I hold that the earning basis is inappropriate to determine the fair value of the 10.56% minority shares in question. In this regard, I accept the evidence of the defendants’ withnesses, Ong Yew Huat and John Magill, that the earnings basis is the appropriate method when shares which represent and controlling interest are being value. This view is confirmed by C.G. Glover at p.215:
“The earning basis is required for valuing controlling interests. The reason for this is quite simple…… The nature of a share changes fundamentally, as far as valuation is concerned, when the shareholding becomes big enough to confer control. Before the point is reached, the doctrine that a shareholder is not a part owner the company’s business undertaking accords with – indeed determines the commercial reality. Such shareholder must be content with what dividends the directors see fit to declare. Once control is obtained, however, the shareholder may distribute all the profits by way of dividend, should he so wish.”
The defendants were not valuing a controlling interest.
24. I shall note here that the plaintiffs in their submissions stated that the dividend flow basis used by the defendants “is generally used to value small parcel of shares that did not give control to the purchaser”. In support they cited Holt v. Inland Revenue Commissioners  2 All ER 1499. There is however no law which says that this method cannot be used for ascertaining fair market value before placing a fair value. In this case the block of shares that was being sold was a small minority parcel and the indication at the relevant time was that all the other shareholders taken together were the buyers. They already had a huge majority of 89.44%.
25. The plaintiffs at the trial attempted to advance another unpleaded case – that the valuation done by the defendants was an open market value. This, they said, was discernible from the working papers. I could not find no such evidence. On the other hand all the evidence adduced before me affirmed that the dividend yield method was used to determine fair value. All the evidence adduced before me showed clearly that the valuer appreciated the fact that lie was placing a “fair value” of a 10.56% minority interest and not the shares of the company in the abstract. Furthermore, the evidence clearly established clearly that the valuer proceeded on the basis that the company was a going concern. He, of course, had to determine the value of the shares first and then proceed to determine the fair value.
26. In the cross-examination, counsel for the plaintiffs, put to Ong that what he did was a desk top valuation. This was denied flatly by Ong and rightly so. There was abundant evidence to show that the correct method was used and conceded by the plaintiffs.
27. This brings me to the plaintiffs’ point that the method was applied wrongly. The high-water mark of their case on this point was the evidence of their expert – Ng Boon Yew. He did his valuation in his own way and arrived at the value of $3.26. It was somewhat bizarre that the plaintiffs placed great importance on Ng Boon Yew’s valuation because they rightly said in their submission that “the valuation that is to be determined by the court is not that done by KPMG Peat Marwick (plaintiffs’ experts) or Mr Magill, (the defendants’ expert witness) but the valuation done by the defendants” To sustain their case the plaintiffs had to show that the defendants did something which no competent valuer or specialist valuer would have done. The plaintiffs did not even attempt to do this. Instead they attempted to dogmatize Ng Lye Huat’s route as the correct route as though he had the last word on it. The defendants’ valuation was supported by authorities and their expert witness who proved to be more competent and knowledgeable than the plaintiffs’ expert witness. Ng Boon Yew lacked the qualities of credibility and competence. Their case in effect was that the valuation by KPMG Peat Marwick was the right valuation. This approach was against Proposition 7 stated above and I was compelled to reject it.
28. I hold that the plaintiffs’ approach was erroneous and unsupported by the law. It was conceded that the correct method or formula as used by the defendants. Then there was the question of applying the formula by introducing variables and estimates. The plaintiffs’ expert and the defendants used different variables. As to one factor, namely selection of an appropriate rate of return, the defendants used the risk free rates of return. This was advocated by C.G. Glover. Next there was the discount factor. The plaintiffs applied a flat 30% whereas common practice allowed a range going up to 50%. Inevitably, therefore, the three valuers came up with three different valuations. This established that the formative process of valuation involving, several variables, alternatives and estimates would never result in a single common fair value. This conclusion equally applied to the dividend basis as well as the earnings basis.
Flaws in plaintiffs’ case
29. I shall now set out some egregious flaws in the plaintiffs’ case. These were all due to their expert witness, Ng Boon Yew.
(i) In extracting the numbers in connection with the calculation of the dividend basis Ng Boon Yew made an extraction error. The error resulted in a loss of 44 cents per share to his clients, the plaintiffs ($3.26 – $2.82). In absolute terms this was $552,126.52 which is some 40% of the plaintiffs’ claim based on the dividend basis. This was not an attractive proposition for the plaintiffs to adhere to.
(ii) Ng Boon Yew’s initial position was that both the earning basis and the dividend basis were equally applicable to his valuation and that the defendants had not used either. Later he shifted his ground and said that the earnings basis should be the primary basis. The accepted opinion in the profession was radically different. It was succinctly and accurately stated by the defendants’ expert witness as follows: “Minority should be valued on a dividends basis; majority on a price earnings basis. So for a start, usually in a private company, valuation on a dividend basis because the minority only gets dividends; can’t get hold of earnings. .. It cannot be right to use P/E basis to value a minority holding at fair value. What I do agree is that in my mind, I would look at the fair market value of 10% holding in an unlisted company like this at the lower end and possibly even the lowest end of my range of $1.61 to $2.25. The reason why I think that $2.15 of Ernst & Young is reasonable is because it has been pulled up to take into account the buyer.” This made very good sense and I accepted it without reservation. Quite shockingly Ng Boon Yew had not appreciated this elementary principle.
(iii) It was not difficult to perceive a hidden agenda for Ng Boon Yew’s line of thought. He had been engaged by the plaintiffs and he knew that his report would be used to launch an attack on the defendants. Unlike the defendants who had to balance the interests of both parties Ng Boon Yew owed a duty to only one party. After the discovery of the extraction error, the dividend basis of the claim was reduced from $3.26 to $2.82. That was 44 cents each share or $555,126 in total. This meant that, if the Court accepts the dividend basis the increase would be 67 cents per share ($2.82 – $2.15 = 67 cents) or an increase by 31%. This was not an attractive proposition. Hence the shift in stand to make the earnings basis the primary basis.
(iv) In Ng Boon Yew’s view the sale of the 10.56% shares was a sale from a one minority group to another minority interest with the result that the latter would be converted into a majority interest. At the time the valuation was undertaken there was no indication as to who would buy how many. On the other hand the indication was that all the remaining interests, that is the 89.44% shareholders, would be the buyers. To quote John Magill again, “All the authorities refer to valuing minorities and majorities on a different basis. I cannot see how a 2% shareholding with no influence can be valued on the same basis as one might a 95% shareholding. The discounts may be different. You do fair market values and then try to reach fair value from that. But I believe you would have much more weight on the dividend basis because these are minority shareholders and all they get is dividends”. This was the main point which made me infer that Ng Boon Yew took a partisan position in favour of his clients. It is possible lie might have taken that position unconsciously.
(v) Then there was the discount factor. John Magill said in evidence: “Then you have discounts because these shares aren’t marketable and in my opinion, I would probably give a larger discount for the minority than I would give for the majority”. The witness added that in the U.K. there was a range to choose from is well established. Ng Boon Yew was aware of this and in fact in one case he had applied 50%. For the purpose of this case he applied a flat 30%. He became dogmatic in this case and applied the lower level of the range. This was yet another instance of a partisan propensity in a matter where one is considering fair value which involves balancing the interests of both parties.
30. On the whole the plaintiffs’ case was long on pedantic fault-finding but short on essential points. This was due to their reliance on Ng Boon Yew who failed to act in accordance with established principles and practice.
31. I therefore concluded that when all the evidence and the principles of law and the methods of valuation were considered, the plaintiffs’ case proved to be thinner than the spider’s line. They failed to prove negligence or breach of duty on the part of the defendants because they could not establish errors of principle on the part of the defendants. The weight of evidence adduced by the defendants showed that they acted within accepted principles and parameters. Accordingly, their claim was dismissed.