LEHMAN & CO MANAGEMENT LTD v. EFFISCIENT LTD AND ANOTHER

FAMV No. 36 of 2013

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 36 OF 2013 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL

FROM CACV NO. 272 OF 2011)

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D E T E R M I N A T I O N

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Mr Justice Fok PJ :

1. The applicant seeks leave to appeal against the judgment and order of the Court of Appeal[1] whereby, save to a limited extent, the Court of Appeal dismissed its appeal against the judgments of Harris J on liability and quantum[2] in respect of a petition brought by it against the respondent under section 168A of the Companies Ordinance (Cap.32) and a cross-petition under the same provision brought by the respondent against it, both in respect of LehmanBrown Limited (the Company).

2. It is contended on behalf of the applicant that leave to appeal lies as of right under section 22(1)(a) of the Hong Kong Court of Final Appeal Ordinance (Cap.484).

3. The order sought to be appealed was a buy-out order in respect of, and determination of the fair value of, the applicant’s share in the Company made on the respondent’s section 168A cross-petition and is clearly an unliquidated claim. As the applicant accepts, this is therefore not within the first limb of section 22(1)(a). 

4. However, nor is the proposed appeal within the second limb of that section, as was contended by Mr Barrie Barlow SC on behalf of the applicant. Even assuming the applicant’s claim can be characterised as proprietary in nature, it is plain that the immediacy requirement[3] is not satisfied.  Assuming in favour of the applicant that its appeal were to be allowed against the valuation of its share in the Company by the courts below and Harris J’s determination of that value (upheld by the Court of Appeal) set aside, the proper fair value of that share would remain to be determined by a further quantification exercise.

5. It is additionally and alternatively contended on behalf of the applicant that the proposed appeal raises questions of great general and public importance so that leave should be granted under section 22(1)(b) of the Hong Kong Court of Final Appeal Ordinance.

6. The notice of application identifies three questions said to be of great general and public importance.  In his submissions, Mr Barlow made it clear that the second question identified there, concerning the principles governing the valuation process, is the principal focus of the proposed appeal and that the other two questions are subsidiary to or parasitic upon the first.

7. We do not consider a question of general principle arises in respect of the second question.  The issues argued before Harris J and in the Court of Appeal concerning the fair value to be attributed to the applicant’s share in the Company focused on the valuation methodology adopted by the Court appointed expert, Mr Yeo.  Contrary to Mr Barlow’s submissions, a buy-out order under section 168A is not properly to be regarded as a forfeiture provision. Instead, after such an order is made, the Court simply embarks on an exercise to determine the fair value of the shareholding ordered to be bought out.  The Judge noted that counsel for the applicant below (not Mr Barlow) did not take issue with the basis of the valuation exercise contained in the draft order sought by the respondent.  Instead, at the quantum hearing and on appeal to the Court of Appeal, Mr Barlow’s complaint was that Mr Yeo had misunderstood the order.  The resolution of that issue was purely fact-sensitive.

8. Mr Barlow’s submissions on this application instead laid emphasis on a different point in respect of the second question, namely, whether Mr Yeo’s approach, supported by the Court of Appeal, was inconsistent with that laid down by the Privy Council in CVC/Opportunity Equity Partners Ltd and another v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108 at §37 and the decision of Rogers JA (sitting as an additional Judge of the Court of First Instance) in Koy Holdings Corp v Spider Knitters Ltd & Another [1998] 1 HKLRD 788 at p.791B.  In particular, the complaint is that Mr Yeo’s valuation methodology did not value the Company on a going concern basis.  This, too, is fact-sensitive but, in any event, is demonstrably not supportable in the light of Mr Yeo’s evidence that his market approach (which involved applying an appropriate price/earnings ratio as a multiplier to the Company’s earnings) was an earnings based approach and did take into account the future profitability of the Company and the fact that it would continue as a going concern.  As such, there is no inconsistency between the Court of Appeal’s judgment in this case and the decisions in CVC/Opportunity Equity Partners Ltd and Koy Holdings Corp.

9. A different point made by Mr Barlow, which only emerged in a footnote to his written reply points served before the hearing, was that Mr Yeo’s valuation could not be a proper fair valuation since it was lower than the liquidation or net asset value of the Company.  Reliance was placed on §38 of the Privy Council’s opinion (delivered by Lord Millett) in CVC/Opportunity Equity Partners Ltd in support of this argument.

10. There are difficulties with this argument.  Notwithstanding that the point was alluded to in the notice of appeal below, it does not appear to have been the focus of oral submissions either before Harris J during the quantum hearing or the Court of Appeal.  Nor were we shown any transcript references showing this point as having been put to Mr Yeo by way of challenge to his valuation of the Company.  Had the point been expressly argued, one might have expected to see reference to it in the judgments below and the fact that there is none suggests it was not a point advanced with any vigour.  More importantly, it is not clear that the point is properly supported by evidence.  The assertion that the figure of total capital and reserves of the Company of US$3.057m taken from the Company’s audited accounts for 2010 is the liquidation or net asset value of the Company is open to question since it is not clear this takes the Company’s liabilities into account.  But in any event, Mr Yeo’s evidence was that he also used the asset-based approach, which indicated the fair market value based on adjusting the Company’s asset and liability balances to their fair market value equivalents, as a cross-check of his market approach and that the two approaches produced consistent results.

11. Accordingly, we are not satisfied that the second question identified in the notice of application raises any point of general principle rather than one dependent on the facts of this particular case.

12. The first and third questions being subsidiary, they can be addressed more briefly.  The first question seeks to contend that board exclusion of a shareholder in a two-shareholder company, in breach of a shareholder’s agreement, must always constitute unfair prejudice under section 168A and that Harris J’s and the Court of Appeal’s decisions in the present case to the contrary are in conflict with Lord Hoffmann’s speech in O’Neill v Phillips [1999] 1 WLR 1092.

13. The question of whether conduct of one shareholder is unfairly prejudicial to another is pre-eminently fact-sensitive and, in the present case, it was the Judge’s conclusion that the respondent’s behaviour, whilst prejudicial towards the applicant was not unfairly prejudicial.  We are therefore not satisfied the proposed first question raises a question of general principle.  Further, the first question is, in any event, inconsistent with the applicant’s concession on appeal that Harris J correctly ordered a sale of its share in the Company to the respondent.  Contrary to Mr Barlow’s contention in his skeleton argument, there is no interplay here between the jurisdiction to wind up on the just and equitable ground and section 168A because the applicant’s claim under section 177(1)(f) of Cap.32 was deleted by amendment prior to trial.

14. The third question seeks to contend that relief under section 168A is equitable relief and is therefore conditional upon the recipient’s conscionable conduct.  It is the applicant’s argument that the decisions of the courts below in this case are an endorsement of the respondent’s unconscionable conduct in seeking damages against the applicant in related defamation proceedings based on an entirely different, and much higher, expert valuation of the Company.

15. We do not consider the third question to raise any point of general principle.  The value of the Company having been determined in the context of the section 168A proceedings on the basis adopted by Mr Yeo may or may not impact on the respondent’s ability to recover damages in the defamation proceedings on the different and higher basis of valuation adopted by the respondent’s expert in those other proceedings.  The question is essentially fact-sensitive.

16. In the circumstances, we dismiss the application for leave to appeal with costs to the respondent.