Share Valuation for Oppressed Minority Shareholder
by Lavinia Kumaraendran ~ 30 August 2018
Do you own shares in a company? If yes, how many shares do you own? Less than 50%? Then you are a minority shareholder. In the corporate sphere, the majority rule allows majority shareholders to make key decisions in the company. Decisions made by the majority shareholders can, at times, be oppressive towards minority shareholders, and such oppression may affect the share ownership of minority shareholders adversely or otherwise. Where the majority rule is abused, Oppressed Minority Shareholders (OMS) may be able to seek court intervention for relief.
Prior to the commencement of the Companies Act 2016, the OMS could petition for a buyout order under s.181(1) and s.181(2) of the Companies Act 1965. Section 346 of the Companies Act 2016 replaces s.181 of the 1965 Act. Although the OMS is merely looking to obtain a buyout order, it is worth noting that the court has a wide discretion in granting any remedy to bring an end to the oppressive conduct. In cases of buy-out order, similarly, the judge is not bound by strict rules, be it account or business, as long as the value is one he considers fair and proper in the circumstances. That is the overriding consideration that the Court will consider. The case of Karen Thomas v Santi a/p Supramaniam & Anor in Malaysia sets out the guiding principles. This view is shared by both the Singaporean Court of Appeal (CoA) and the English CoA. Generally, two questions arise when the Court decides to make a buyout order namely,
- By what ways are the shares to be valued?
- What is the relevant date to determine the value of the shares?
The court has a wide discretion in granting any remedy to bring an end to the oppressive conduct.
There is no general rule on the date at which the shares are to be valued. Does the valuation have to be current or retrospective, or even prospective? Cases appear to suggest that the overriding requirement is that the valuation must be fair on the facts and circumstances.
Date on which petition is made
The date of valuation is of great significance because it may substantially affect the valuation awarded for the OMS’s shares. The values of the OMS may have increased after the petition date or diminished considerably as a consequence of the unfair prejudice. It was held in an English case that the correct starting point should be the date of the petition. This is primarily because “it is the date on which the petitioner elects to treat the unfair conduct of the majority as in effect destroying the basis on which he agreed to continue to be a shareholder and to look to his shares for his proper reward from participation in a join undertaking”.
Similarly, the India Company Law Board also consistently uses the date on which a petition is filed as the date of valuation. Even when it is impractical to prepare a balance-sheet on particular date, the case of Nikhil Rubbers Private Ltd shows that the date of annual balance-sheet would be used as the date of valuation if it is proximate to the date of petition.
Date before the petition is made
The argument to the converse is that there are situations where the date for valuation other than the date of the purchase order was chosen because fairness to one side or another requires as such. The basis or premise would be to consider whether the unfairly prejudicial conduct has affected the share value, taking a date earlier than that of the petition would then be justifiable.
A classic example of backdating valuation is the case of Re OC (Transport) Services Ltd. The valuation was held to be on the date where the shares were allotted because the subsequent participation of another company as a shareholder may have affected the value of the shares. Similarly, in the Federal Court of Australia, in Dynasty v Coombs, the valuation was ordered at the date of the oppression. 
Date on which buyout order is made
Although Re London School of Electronics held that there is no general rule on the valuation date, Nourse J pointed out that “an interest in a going concern ought to be valued at the date on which it is ordered to be purchased”.
However, this may not be allowed if the increase in value of the shares after the petition is made is attributable exclusively to the efforts of the majority, as is the case in Re London School.
Ultimately the discretion that lies with the Judge must always be with regard to all relevant facts and circumstances. The crux of the question and the prevailing factor to be considered seems to be when it is fair to value the shares of the OMS. Therefore, it can be asked whether it would be fair to value the shares on any latter dates. This is particularly so when the company of the OMS in question has no Net Tangible Assets and it is not profitable at the time when his complain was made. In this instance, the buyout order would be in his favour if the date of valuation is to be deferred to consider future profitability arising from the business of the company instead. By merely taking into account the current financial situation of the business, based on its latest Financial Audited Statements of the Company, the OMS would not be able to value his shares at a value he perceives as fair. His argument is that, had he not been oppressed by the majority, he would be able to enjoy the future growth and earnings of the company, which would significantly increase the value of his shares.
The crux of the question and the prevailing factor to be considered seems to be when it is fair to value the shares of the Oppressed Minority Shareholder
There are also instances when although the oppressive conduct took place earlier and thereafter the company was left valueless, it will only then be fair to take the date of the petition as the date of the valuation instead.
Problems that may arise if valuation date taken to be a subsequent date
In Re Clearsprings Management Ltd, it was held that it is unlikely that the court would allow the valuation date to be deferred because the company’s future profitability is dependent on some uncertain future events. The case of Profinance also emphasizes that it is important for the valuation date to be close to the actual sale date to reflect the actual value of the shares.
Despite that, it is worth noting that the judges in two English cases mentioned that it will only be fair the shares are to be valued on a willing buyer & willing seller basis. It could be argued that a willing buyer would not only look at the current value of the shares, but also the potential profitability of the business which would ultimately lead to future value appreciation. Another instance would be that the future profitability of the Company may consider new contracts the Company enters into without the involvement of the OMS. So the question arises then as to why the OMS must benefit from the revenue and profit derived from a contract without his participation and upon his exit.
As this is concerned with the way shares are to be valued, the following discussion will look into the method of valuing shares.
Method of valuation
The fact that the OMS’s company has little to no Net Tangible Assets is not fatal to the OMS’s claim. In a Malaysian case concerning a sale of shares by enforcing the pre-emption clause (not under s.181 of the 1965 Act), the judge held that ‘in any event fair value must surely be the sum of the net tangible asset value and the net value of the intangibles.’ The value of intangibles may be worth much more than the tangible asset. There is an English case that allowed the inclusion of goodwill which is intangible asset, in the process of valuing the shares of an OMS.
This case also leads us to the method of valuing shares. This case endorsed the method of multiplying profits using the Profit/Earning ratio. This allows the valuer to consider not only the current value of the shares, but also its potential or future appreciation in value. In Re Bird Precision, it was decided that in cases where company has small asset base but huge earnings and considerable goodwill, and when there are no true comparable, or where no or low dividends are distributed, an approach based on the Profit/Earnings Ratio is appropriate. The first step is to identify the maintainable’ profit and then multiplying it by a P/E ratio (representing the yield which a purchaser on a willing buyer willing seller basis would expect on his investment).
This approach was also adopted in the case of Buckingham v Francis. It was held that, for the purposes of valuing the shares of a private company as a going concern when the company has high returns but little or no assets, the value of the company is the capitalised sum representing the assessment of future profits after making no allowance for risks. Therefore, the assessment of future profits can be made on a ‘best guess’ basis, allowing for risks but without either undue caution or exaggeration, and a price/earnings ratio can then be chosen on the basis of the figure for future profits. In another English case where the company had very little tangible asset, the judge upheld the valuers’ view that the correct approach is to multiply maintainable profits by a price/earnings ratio. Similarly, as held in Parkinson v Eurofinance Group Ltd & Ors, the process of valuing the shares of a profitable company involves prediction of future earnings and capitalising the predictable earnings at a fair capitalisation rate.
In India, the High Court in Rakhra Sports (P) Ltd v Khairatilal Rakhra referred to the Bird Precision case and held, “under certain circumstances the maintainable future profits method would be the most appropriate method”. This was a company which had no substantial assets to apply the “break-up value profit”. The decision also shows that the estimated profit is to be a pre-tax profit, to which an appropriate multiplier is to be applied. The Singaporean Court of Appeal took the similar approach in Dickson Investment case that the valuation on the basis of capitalisation of future maintainable earnings was appropriate when valuing the company as a going concern.
It should also be noted that the court once held that the valuation process should not include any future earnings which are exclusively attributable to the buyers’ or majority’s effort. What if it is not ‘exclusively’ attributable to the majority’s effort? It could be due to be the minority’s effort prior to his departure. However, companies in those case were profitable at the time of the OMS’s petitions. The issue arises when the OMS’s company business appears to be unprofitable. It might prove to be difficult when persuading the court to adopt this approach.
The court once held that the valuation process should not include any future earnings which are exclusively attributable to the buyers’ or majority’s effort.
In ordering valuation for the purposes of a buyout, Courts can also order adjustments to be made during the valuation as if no oppressive conduct has taken place. This may include:
- Adding back to the assets, company monies taken out without proper justification;
- Adjusting valuation upwards by adding back loss of income through failure to pay dividends or loss of salary through employment;
- Adding back losses made by the company due to misconduct.
If the judge refuses to value the OMS’s shares based on predictions, the OMS could claim for damages. Although an award of damages is not included under s.346(2) of the 2016 Act, the Federal Court has the power to make such order if it is in the view that such order can remedy the matter complained of. In Toralf Mueller v Alcim Holding Sdn Bhd, the complaint was awarded compensatory damages in respect of all loss suffered.