Shareholder Minority Oppression – Remedy – Share Buy-Out & Valuation
Published on 1st March, 2019 by Mark Lee
Minority Oppression – Remedy – Share Buy-Out & Valuation
Share Buy-Out; Section 216(2)(d) of the Companies Act
One of Many Remedies
In our previous article, we explored Section 216 of the Companies Act (Cap 50) (“the Act”); which provides an avenue for a minority shareholder who has been “suffering” at the hands of the controlling majority to seek redress.
In this installment, we will take you through one such order / remedy that the Court may make once it is established that a minority shareholder has indeed been unfairly treated – an order for the purchase of shares by the members or by the company itself. Simply, the Court may order the “misbehaving” shareholders to buy-out the shares of the aggrieved shareholder.
Rationale for a 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. Like an estranged married couple, if the majority and minority shareholders cannot get along, anything short of a clean break between the parties will likely lead to further disputes.
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  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 by his shares. Therefore, the most appropriate remedy is to have the defendants purchase the plaintiff’s shareholding in Ideal Design Studio.”
How will the aggrieved shareholder’s shares be valued and by who?
A few general principles must be borne in mind when the Court grapples with the question of how the aggrieved shareholder’s shares should be valued:-
a) Where a buy-out is the remedy sought under s 216(2)(d) of the Act, the Courts have a very wide discretion to value the shares at a fair and just price, taking into account all the circumstances of the case (Margaret Chew, Minority Shareholders’ Rights and Remedies (LexisNexis, 2nd Ed, 2007) at p. 242).
b) The Court is not bound by strict accounting principles or business rules but may order that the shares be attributed a value that it considers fair and just in the circumstances (Yeo Hung Khiang v Dickson Investment (Singapore) Pte Ltd and others  1 SLR(R) 773 (CA) at ).
c) “[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) at para 8-136).
d) Frequently, it will be appropriate for the valuation experts to undertake valuation on different bases, for example by way of comparison (Minority Shareholders: Law, Practice and Procedure (Oxford University Press, 5th Ed) at para 6.316).
e) Other issues that typically will be considered / discussed to ascertain a fair value of the shares, include;
The date of valuation (e.g. date upon which the oppressive act occurred, date of petition, or date of the buy-order order).
Whether the value of the shares ought to be subject to a discount to reflect the minority nature of the shareholding.
Whether the value of the shares should be adjusted upwards to take into account the effect of oppressive conduct.
Whether parties are able to agree to an independent valuer. (Lim Swee Khiang and another v Borden Co (Pte) Ltd and others  4 SLR(R) 745 (CA) at ).
Methods of Valuation (non-exhuastive)
a) Net Asset Value Method; as this method does not reflect the future earning potential of the company, it is usually more useful in valuing a company with readily realisable assets but which is carrying on a loss-making business (Margaret Chew, at p. 244; Hollington on Shareholders’ Rights, at para 8-140).
b) Earnings Basis; This is a common method of valuation where the emphasis is on the future earnings of the company. This method involves estimating (i) future maintainable earnings; and (ii) a multiple (reflecting risk and potential growth) which is used to convert the earnings to a present value.
c) Dividend Yield Method; A capitalised maintainable dividends valuation method involves estimating the flow of dividends which the company is expected to pay in the future and multiplying that by an appropriate capitalisation rate. This method may not be appropriate where the company has no regular policy of paying dividends or where no dividend payment is likely.
d) Discounted Cash Flow Method; This involves estimating anticipated cash flows in future periods, which are converted to a present value using a discount rate that reflects the anticipated risk of generating those cash flows.
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