VITALY ORLOV v. MAGNUS LEONARD ROTH AND ANOTHER

HCMP 1331/2017

[2021] HKCFI 1705

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1331 OF 2017

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AND

HCMP 2753/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2753 OF 2017

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V A L U A T I O N

C O S T S   D E C I S I O N

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A.   Introduction

1.  These proceedings concerned what were effectively cross petitions relating to the 2^nd respondent company (“TTC”), where each petitioner – “Orlov” and “Roth” – were equal 50% shareholders, and where each accused the other of unfairly prejudicial conduct, and sought the relief of a buy-out order.

2.  In my Judgment after trial dated 28 August 2019 [2019] HKCFI 2120, I found that there had been various unfairly prejudicial conduct by both sides, though I also found that some of the criticisms made by both sides against the other were themselves unfair.

3.  As to relief, I ordered Roth to buy out Orlov. I gave liberty to apply as to the precise terms of the buy-out order, albeit only on the approach I directed within the Judgment.  The parties were unable to agree the terms of the Order to be made, so following a hearing on 31 December 2019 I settled the finalised form of the relevant Judgment and Order by my Ruling dated 23 January 2020 [2020] HKCFI 273.

4.  In that Ruling, I ordered Orlov’s 120,000 shares in TTC (“Shares”) to be valued by an independent valuer (“Valuer”).  The parties were unable to agree on the identity of the person to be appointed as Valuer, and I later appointed one from the four candidates put forward, two by each of Orlov and Roth.

5.  Unfortunately, a concern subsequently arose as to a potential conflict regarding the appointment of the Valuer chosen by me. The concern was that, in light of new information coming to light, there was a ‘reasonable apprehension of bias’.  In my Ruling dated 4 June 2020 [2020] HKCFI 1072, and albeit not without some reluctance, I held that that test had been satisfied, and the original appointment of the Valuer was rescinded with immediate effect.  I then appointed Ms Edwina Tam of Deloitte as the Valuer.

6.  Ms Tam provided her Valuation Report dated 11 February 2021, in which she valued the Shares at US$46,717,000. Neither party has disputed that Valuation.

7.  On 17 March 2021, I directed written submissions to be provided on the costs of the Valuation.  Those submissions have been filed on 31 March and 14 April 2021.  Mr William Wong SC, Mr Justin Lam and Ms Euchine Ng have written the submissions for Orlov, and Mr Christopher Chain has written the submissions for Roth.

8.  This is my Valuation Costs Decision.

B.   The Contest

9.  Orlov seeks the entirety of the costs of the Valuation exercise to be borne by Roth.

10.  Roth’s primary position is that Orlov should bear one third of Roth’s costs of the valuation exercise and that the costs of the Valuer and TTC should be borne two thirds by Orlov and one third by Roth (or such portions as the Court thinks just).  Roth’s fall-back position is that each party should bear their own costs of the Valuation exercise, and that the costs of the Valuer and TTC should be borne jointly and equally by Orlov and Roth.

C.   The Previous Costs Decision

11.  In the context of the argument about the costs of the Valuation ordered by me relating to the grant of the buy-out order, it is helpful to recall what I stated in my Ruling dated 23 January 2020 [2020] HKCFI 273, where I also dealt with the question of the costs of the petition and cross-petition.

12.  Whilst at §24, I stated that the costs argument there was reasonably finely balanced, I went on to reach a clear conclusion on the position after trial in the light of the findings made, not least when stepping back and looking at the big picture.  At §§26-32, I stated:

26.  By his petition, Orlov sought a specific relief that Roth should buy out his shares. As it happened, that form of relief was not actually controversial.  What was controversial was whether jurisdiction could be founded on findings to be made in the petition so as to permit a buyout order.  Roth opposed such findings, even in the face of the Seagroatt Order (which was at least highly likely to found jurisdiction for a buyout order), and his opposition was unsuccessful. The substance of the relief sought in the petition was granted to Orlov.  I accept that, but for the existence of the cross-petition, there would be no reason in the circumstances of this case to deprive Orlov of his costs of the petition.

27.  The question can then be asked what practical benefit was achieved from the cross-petition.  Of course, it is correct that I made findings in Roth’s favour that Orlov had also engaged in some unfairly prejudicial conduct.  But, other than perhaps as a matter of satisfaction, those findings led to no different relief.  Insofar as those findings were sought either to affect the valuation or to show that any prejudicial conduct by Roth was not unfair, that aim was not met.

28.  Whilst it is correct that I ordered the buyout on both petitions, I do not think that fact alone makes the cross-petition justifiable or necessary.  Indeed, I agree with Mr Wong that the fact that no different order was made as a result of the cross-petition identifies that its purpose was not achieved, and that in broad terms it was ultimately unnecessary.  Nevertheless, it of course added to the length and cost of the litigation.

29.  It also seems to me that it would have been possible for Roth to have accepted that there was a proper jurisdictional basis to found the buyout order which he agreed should be made, and to have retained the ability to argue for variations to valuation in the valuation process.  Assuming Roth would have then raised the same arguments, the assumption is that they would also have failed at that stage, and costs would likely have followed that event.  That they were instead raised through the process of the cross-petition ought not to change that analysis.

30.  Ultimately, I agree that the apparent purpose of the cross-petition – where Roth must necessarily assert it had some purpose beyond that already achieved by the petition – failed.  That some findings were made in favour of Roth on allegations made in the cross-petition, when those findings ultimately led to no different result than was achieved by the petition, does not seem to me to justify a different approach, even on some sort of issue-based division of costs.  I have considered, but in the exercise of my discretion reject, somehow dealing with the costs of the petition and the cross-petition so as to give rise to cross costs orders.  I do not think that would be in any way appropriate in the circumstances.

31.  I also take into account that at the trial, in Roth’s oral evidence, (a) he sought to raise an entirely new case that the MU was subject to some conflict-of-interest exception, or perhaps had even ceased to exist at all, which was contrary to his pleadings and witness statements and which was rejected, and, partly by that change of stance, (b) he in effect expressly accepted that he had deliberately excluded Orlov from various management and denied him documents and information.  Had those matters been pleaded, or even contained in the witness statements, there is little doubt that I would readily have found a jurisdictional basis for making the buyout order without the necessity to go through any trial.

32.  In the circumstances, and in the exercise of my discretion, I order Roth to pay Orlov’s costs of and incidental to the petition and the cross-petition, including the written submissions on costs, with certificate for two Counsel, to be taxed if not agreed and payable forthwith.  As to the time for payment, I see no reason why the payment of the costs should await the conclusion of the valuation process.

13.  As can be seen, I accepted amongst other things that: (1) the substance of the relief sought by Orlov in the petition was granted to him; (2) the relief was in no way varied by the existence of the cross-petition; (3) in so far as the cross-petition sought to affect any valuation process, it failed to do so; (4) the apparent purpose of the cross-petition was not met; so that (5) Roth was ordered to pay Orlov’s costs of and incidental to both the petition and the cross-petition.

D.   Applicable Principles

14.  It is trite that the Court has a wide discretion, to be exercised judicially, when dealing with matters of costs.

15.  Reference can usefully be made to RHC Order 62 rule 5, which identifies the various matters to be taken into account, as may be appropriate in the circumstances, when exercising the discretion as to costs.  Those matters include, amongst other things: the underlying objectives set out in Order 1A rule 1; written offers; the conduct of the parties, as elaborated at rule 5(2); and whether a party has succeeded on part of his case, even if he has not been wholly successful.

16.  In the particular context of unfair prejudice petitions leading to buy-out orders, courts have frequently awarded the costs of valuation to petitioners who had succeeded in obtaining buy-out relief.  The logic is that it is the establishment of unfair prejudice by the petitioner which leads to the buy-out order, and that ordinarily leads to an order that the costs of the proceedings are to be borne by the respondent against whom unfair prejudice conduct has been established, and that the costs of valuation are simply necessitated if there is to be implementation of the buy-out order.

17.  Of course, that position may not be appropriate in the particular circumstances of any individual case, and every case must be dealt with on its facts.  Thus, by way of example, if the valuation obtained is at a lower figure than the price previously offered by the respondent, it can be argued that the petitioner should have accepted the respondent’s proposal so that the costs of valuation should not be payable to the petitioner.

18.  Further, the logic identified above is readily applicable to a straightforward or typical shareholders’ dispute, where the petitioner seeks buy-out relief and the respondent denies the unfairly prejudicial conduct and contests the relief sought.  That logic may not apply in less straightforward or typical cases.  For example, in cases where the courts have recognised that the valuation exercise would be necessary even if there had been an amicable parting of the parties, or an agreed severance of their interests in the relevant company or companies, an equal sharing of costs of the valuation has been considered appropriate.

E.   The Argument

19.  Mr Wong argues that the starting position is one of the general principle that the costs of the Valuation should be considered as part of, and be treated in the same way as, the costs of the petition.  He then argues that, because the value of the Shares arrived at by the Valuer was considerably greater than the range of figures put forward by Roth, the only way in which the buy-out order could have been implemented for Orlov to obtain the value of US$46,717,000 for his Shares was by going through and completing the entire Valuation process.

20.  Mr Wong therefore argues that any consideration as to who was the “winner” of the Valuation is a red herring.  Mr Wong also points to the fact that the Valuation was at a figure significantly closer to Orlov’s previous open offer of US$49.5 million than to the range of figures between roughly US$32 million and US$36 million put forward by Roth.

21.  On the other hand, Mr Chain submits that there is no such general starting position, and this is much more a case where the Valuation would have been necessary.  On that basis, Mr Chain submits the real starting position is for each party to bear their own costs, and to bear the costs of the Valuer and TTC equally.  He relies on the existence of both the petition and cross-petition, leading to findings that (1) both parties at times had acted inappropriately and unfairly and (2) both parties have made criticisms of the other which criticisms were unfair.  So, Mr Chain suggests the key question to ask is whether, if at the time of the commencement of these proceedings the parties had simply preceded to part ways amicably, a full valuation exercise would have been necessary in any event.  He says the answer is a resounding “yes”.

22.  Mr Chain also points out that in the course of the valuation exercise Orlov argued that the valuation should be in the range between roughly US$81.5 million and US$84.75 million.  Thus, Mr Chain says the Valuation was closer to the range put forward by Roth than to that put forward by Orlov.  Therefore, whilst the Valuation exercise was necessary for the purposes of putting the buy-out order into effect, and the costs of the Valuer were a necessary expense, Mr Chain says that neither party could be regarded as the clear “winner” of the Valuation exercise.  Mr Chain argues that it is immaterial that the open offer was, broadly speaking, closer to the Valuer’s conclusion compared to the parties’ argued positions.  In any event Orlov failed to “beat” his open offer, so that it can be said that, in light of the adversarial positions, the open offer had no impact on the costs position.

23.  Mr Wong reminds me that, although the costs thrown away by the change of Valuer were dealt with in my previous decision, I have recognised that there may remain some elements of duplication following the appointment of Ms Tam as Valuer.  Mr Wong further seeks to place certain reliance on what he says is the undesirable, unsatisfactory and unreasonable conduct of Roth throughout the Valuation process, which is said to have given rise to unnecessary costs and delay in the Valuation process.  The unreasonable conduct is said to include (1) putting forward a supplemental witness statement, (2) curtailing or attempting to ‘cherry pick’ disclosure by or through TTC, and (3) submitting lengthy additional representations, most of which were not accepted by the Valuer.  All are said to be in grave departure from or breach of the Judgment Order.

24.  On the other side, Mr Chain argues that it was Orlov who unnecessarily escalated costs by (1) putting forward inflated figures which had to be dealt with specifically, and (2) introducing brand-new arguments in reply necessitating further representations.  Further, Mr Chain submits that the complaint about the supplemental witness statement was one of form rather than substance, the differing positions as regards TTC’s documents was within the typical range of disagreements in adversarial litigation, and Roth was fully entitled and justified in putting in further representations focusing on the procedural structure of the valuation exercise and the approach being put forward.

25.  Mr Wong’s response to that is to submit that Orlov’s further representations – following the initial round – were a direct and specific response to the approach taken by Roth in his initial representations, and that Roth insisted on making additional representations when the Valuer had made clear that she did not require further representations.  When further representations were ultimately allowed, they went far beyond the extent permitted by the Valuer.  Further, those representations were largely futile.

F.   The Analysis

26.  I mean no disrespect to Counsel if I do not here address in detail all of the arguments put forward by them, but I have weighed them all in the discretionary exercise.  My own analysis – briefly put – is as follows.

27.  First, I am not sure it is particularly helpful to try to identify any supposed starting position, and then to consider whether a departure from it can be justified.  Rather, in the present context at least, it seems to me right simply to look at and take into account all the particular circumstances of this case, weighing each point as seems appropriate in the discretionary mix, and identifying the conclusion to which that exercise leads.

28.  Amongst the matters to which I give more weight are the following:

(1)  though I do not think it necessary to make findings on the cross-allegations as to the conduct of the parties during the Valuation process, those cross-allegations themselves evidence that the Valuation process was conducted in a manner similar to the entirety of these proceedings, namely in a hard-fought, fully contested and extremely adversarial manner;

(2)  indeed, any historical review of the conduct of these proceedings leads almost inexorably to the conclusion that there would never have been an agreement between the parties as to Valuation;

(3)  hence, the Valuation – or some other valuation process – was almost certainly inevitable, and was almost certainly not going to be able to be conducted except on an extremely adversarial basis;

(4)  therefore, I do not think the Valuation was necessary or inevitable in the sense as might occur when a valuation takes place after an amicable severance of interests;

(5)  in reality, the Valuation process was itself a heavily contested part of the overall litigation;

(6)  it is correct that the Valuation was of a business structure of some range and complexity, but the Valuation process did not necessarily require the degree of adversarial conduct adopted by the parties (as reflected in the various correspondence, which I have been invited to read, annexed to the submissions);

(7)  the conduct of the Valuation process seems to me to reflect little effort on the part of either side to bring some sense of economy or proportionality to bear;

(8)  the Valuation reached by the Valuer was on the basis of a valuation method largely argued for by Orlov and argued against by Roth;

(9)  nevertheless, the Valuer appears to have accepted some of the representations from both sides;

(10)  the Valuer’s conclusion does reflect that the valuation figures argued for by Orlov were significantly too high;

(11)  on the other hand, the Valuer’s conclusion also reflects that the valuation figures argued for by Roth were too low;

(12)  whilst it can be said that Orlov did not “beat” his own open offer, that offer was not too far from the Valuation reached by the Valuer, and there was no counter-offer in a similar ‘ball-park’;

(13)  rather, Orlov certainly “beat” the valuation figures being put forward by Roth, and did so by a not inconsiderable margin (the Valuation figure of US$46,717,000 was an uplift of approximately 30% on even the high end of Roth’s bracket);

(14)  so there is real force in the point that the only way in which Orlov could have achieved that price for the buy-out of his Shares was to have proceeded with the Valuation.

G.   The Result

29.  In the overall exercise of my discretion, it seems to me that Roth should pay 80% of Orlov’s costs of the Valuation process and 80% of the costs of the Valuer.  Orlov should pay the other 20% of the costs of the Valuer.  The costs of TTC should be borne equally by the parties. All costs will be taxed if not agreed.

30.  I so order.

31.  As neither party has wholly succeeded in their suggested approach, I make no order as to the costs of this argument.