CHEN CHIU-MAN v. KING MACHINERY (TAIWAN) CO LTD AND OTHERS

HCMP 2214/2020

[2024] HKCFI 3640

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2214 OF 2020

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J U D G M E N T

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1.  This is the trial for determination of the value of the Petitioner’s shareholding in King Machinery (Taiwan) Co., Limited (台灣國祥股份有限公司) (“Company”).

2.  By petition presented on 30 November 2020 the petitioner, Ms Chen Chiu-Man (陳虬曼) (“Sister”), seeks an order against her brother, Mr Chen Tien-Lung (陳天龍) (“Brother”) and his vehicle, The Lombardy Evergreen T1 Trust (“Trust”) (together “Brother’s Camp”), requiring them to purchase her 38,500,000 shares (equivalent to 35% shareholding) in the Company (“Shares”).

3.  At the CMC before this Court on 22 April 2022, the parties through their respective counsel confirmed that an agreement had been reached whereby Brother’s Camp would, within 28 days after the court’s decision on valuation, jointly and severally purchase Sister’s shareholding in the Company at the value to be determined by the court on the following bases (“Agreed Bases”):

(1)  without any minority discount and, if so ordered by the court, with interest to be paid at such rate and for such period as the court sees fit;

(2)  valued on a going-concern basis, to be determined by the court as at the first day of the trial;

(3)  without taking into account Sister’s allegations set out in the petition; and

(4)  taking into account the following allegations raised by Brother’s Camp[1], all of which are denied by Sister:

(a)  Sister’s alleged receipt of additional dividends (Dividend Allegation);

(b)  Sister’s alleged misappropriation of the Company’s 9.26% shareholding in Zhejiang SinoKing Air-conditioning and Refrigeration Co., Limited (浙江思科制冷股份有限公司[2]), (“SinoKing”) (SinoKing Allegation); and

(c)  The freezing of the Company’s bank account (“TBB Account”) with Taiwan Business Bank (“TBB”) allegedly caused by Sister (TBB Allegation).

4.  Amongst the 3 allegations raised by Brother’s Camp:

(1)  The Dividend Allegation has been withdrawn by Brother’s Camp[3];

(2)  The SinoKing Allegation has been determined by the Taiwan High Court in the judgment dated 7 May 2024 (“Taiwan Judgment”) and the findings therein are binding upon Sister, Brother and the Company notwithstanding Sister’s application for permission to appeal against that Judgment to the Taiwan Supreme Court (“SC Appeal”); and

(3)  The TBB Allegation is no longer contested by Sister, as confirmed in her counsel’s Closing[4].

A.  FACTUAL BACKGROUND

5.  Unless otherwise stated, the following facts are taken from the Agreed Facts or facts which are not in dispute.

A1.  Company

6.  Brother and Sister came from the same family and their late father is Mr Chen Ho-Kuei (陳和貴) (“Father”)[5]. Father was the founder of the Company.

7.  The Company was incorporated under the former Companies Ordinance (Cap. 32) on 20 August 1997. It is an investment holding company and has not carried on any business in its own right[6].

8.  Until 3 July 2018, the Company held 6,759,289 shares in SinoKing, a company established in the Mainland in 2010 which engages in the business of manufacturing and trading of air-conditioning units[7].

9.  The Company holds 43% shareholding (“Shijiazhuang Shares”) in Shijiazhuang King Transportation Equipment Co., Limited (石家莊國祥運輸設備有限公司) (“Shijiazhuang”), a Mainland company engaging in the business of high-speed rail maintenance including maintenance of air-conditioning units install on such trains. Until 2017, the Company received regular payments of dividends from Shijiazhuang all of which was paid into the TBB Account[8].

10.  Until 4 January 2019, the Company had 3 shareholders: Father held 33,000,000 shares (30%); Brother held 38,500,000 shares (35%); and Sister held 38,500,000 shares (35%)[9].

11.  On 4 January 2019, 33,000,000 shares were transferred from Father to Brother. On 28 May 2019, Brother transferred all his shares to the Trust. Since then, the shareholding in the Company has not been changed[10].

12.  Father, Brother and Sister were appointed as directors of the Company sometime before 25 January 2019. Sister was removed as director on 6 November 2020[11] and Father passed away in January 2023.

13.  Despite his position as director, Brother was not involved in the management of the Company as he resided and worked in the United States. It was not until 2019 that Brother began to go to Taiwan and the Mainland regularly during which he would attend to the Company’s affairs.

A2.  Transfer of SinoKing Shares & Taiwan Judgment

14.  On 3 July 2018, the Company and Sister entered into a share transfer agreement whereby the Company agreed to transfer its 9.26% shares in SinoKing (“SinoKing Shares”) to Sister for no consideration. On 5 September 2018, the SinoKing Shares were transferred to Sister.[12]

15.  Between 1 August 2019 and 8 August 2023, Sister received dividends derived from the SinoKing Shares in the aggregate amount of RMB5,522,400[13] (“SinoKing Dividends”).

16.  On 13 April 2021, Brother procured the Company to commence an action in Taiwan District Court against Sister to set aside the transfer of the SinoKing Shares[14].

17.  On 5 August 2022, the Taiwan District Court handed down a judgment holding, inter alia, that the SinoKing Shares belonged to Father rather than the Company and dismissed the Company’s claim[15].

18.  On 29 August 2022, the Company appealed against the judgment[16].

19.  On 7 May 2024, the Taiwan High Court allowed the appeal, holding that (1) the SinoKing Shares belong to the Company; (2) Sister’s acquisition of the SinoKing Shares was “without a legal ground”; and (3) Sister must return the SinoKing Shares and the SinoKing Dividends to the Company (i.e. Taiwan Judgment)[17]. To-date, Sister has not returned the SinoKing Shares or the SinoKing Dividends to the Company.

A3.  Freezing of TBB Account

20.  On 25 January 2019, the Company passed a board resolution (said to have been signed by Father, Brother and Shi Junfeng) and a shareholder resolution authorizing the appointment of Brother as sole signatory and sole telephone contact person of the Company in relation to the TBB Account[18].

21.  On 21 February 2019, Brother informed TBB that he intended to attend its branch for the purpose of changing the authorized signatories of the TBB Account. On the same date, Sister through her legal representatives issued a letter to TBB stating that she disputed the validity of the change of authorized signatories of the TBB Account[19].

22.  On 28 March 2019, TBB informed the Company that it had suspended the TBB Account in light of the conflicting instructions received[20]. The balance in the TBB Account was US$5,643.01[21].

23.  On 31 January 2020, the Company passed another board resolution authorizing Brother to be the sole bank signatory[22].

24.  Between 7 September 2020 and 13 September 2021, Brother repeatedly requested Sister to provide information and documents to unfreeze the TBB Account and/or to change its authorized signatory[23].

25.  It was only until 18 January 2022 that Sister provided her latest identification documents to TBB for the purpose of TBB’s periodic due diligence. In her email to TBB, Sister stated that the provision of her identification documents should not be regarded as her consent to change the authorized signatory of the TBB Account[24].

26.  By letter dated 11 March 2022, TBB (through its solicitors) informed the Company that it would terminate the TBB Account with effect from 11 April 2022 on the grounds that (1) it had received inconsistent instructions from the Company. By 19 June 2019, it had already incurred no less than HK$107,017 in legal and miscellaneous expenses and the amount continued to increase; (2) it had not been provided with all the documents requested for the purpose of changing the authorized signatories; and (3) the Company had not paid the expenses incurred by TBB. TBB demanded the Company to pay HK$107,017 to cover its expenses[25].

27.  No payment was made by the Company. On 14 April 2022, the TBB Account was closed and the balance became zero[26], after TBB had applied the remaining balance (US$5,643.01) to pay part of the amount claimed. No further demand has been made by TBB for payment of the balance of the expenses claimed.

B.  ISSUES

28.  Pursuant to this Court’s directions, Sister appointed Mr William C.K. Sham (“Mr Sham”) of B.I. Appraisals Limited as her expert. Mr Sham produced 4 reports but he only relies on the last 2 reports (i.e. Sham’s Supp and Sham’s Updated), and the parts which he continues to rely on in these 2 reports have been identified:

(1)  The valuation report dated 18 January 2023;

(2)  The supplemental valuation report dated 24 July 2023;

(3)  The amended supplemental valuation report dated 15 April 2024 (“Sham’s Supp); and

(4)  The updated valuation report dated 8 August 2024 (“Sham’s Updated”).

29.  Brother’s Camp appointed Mr Xu Jianfu (“Mr Xu”) of China Alliance Appraisal Co., Ltd as their expert. Mr Xu made 3 reports but he only relies on the second and third reports (i.e. Xu’s Supp and Xu’s Updated) and the parts which he relies on have likewise been identified:

(1)  The valuation report dated 6 March 2023;

(2)  The second valuation report dated 11 March 2023 (“Xu’s Supp”); and

(3)  The supplemental analysis report dated 5 August 2024 (“Xu’s Updated”).

30.  It is common ground between the experts that:

(1)  The Asset-based approach (“Asset Approach”) is the most appropriate approach in assessing the value of the Company as it is not a trading company[27];

(2)  The Market-based approach (“Market Approach”) is the most appropriate approach in assessing the value of the Shijiazhuang Shares[28]; and

(3)  In assessing the equity value of the Company, it is appropriate to add the value of the various assets owned by the Company, as assessed by the court, taking into account the evidence of Mr Sham and Mr Xu.

31.  Subject to the SC Appeal, there is no dispute that the assets of the Company comprise:

(1)  the SinoKing Shares: Mr Sham assesses their value at RMB24,105,919[29] and Brother Camp agrees[30];

(2)  the SinoKing Dividends in the amount of RMB5,522,347[31];

(3)  the Shijiazhuang Shares; and

(4)  HK$107,017, being the amount claimed by TBB against the Company, which amount Sister does not take issue[32].

32.  There is a further issue which I shall refer to as Debt Issue:

(1)  Mr Sham considers that the HK$56,421,844 recorded as “amount due from shareholders” (“Debt”) in the audited financial statements of the Company for the year ended 31 December 2017 (“2017 AFS”) should be included as an asset of the Company[33].

(2)  There is no dispute that the “shareholders” referred to in the 2017 AFS was a reference to Father.

(3)  Brother takes issue with the inclusion of the Debt as an asset. He contends that after deducting the gifts made to Brother and Sister, the remaining value of Father’s estate is only NT$1,416,022 (~HK$339,845). There is no prospect of the Company being able to recover the Debt.

(4)  The issue is whether Mr Sham is right in including the Debt as an asset or whether it should be treated as having no value as contended by Brother.

33.  In his Closing, Mr Jose Maurellet SC (leading Mr Tom Ng), counsel for Sister, also asks for interest on the amount payable by Brother’s Camp to purchase the Shares. On the other hand, Mr Christopher Chain SC (leading Mr Michael Ng), counsel for Brother’s Camp, submits that no interest should be awarded to Sister. I shall refer to this as Interest Issue.

34.  Accordingly, the issues which require determination of the court are:

(1)  Whether in view of the SC Appeal, the value represented by the SinoKing Shares and the SinoKing Dividends (together “SinoKing Assets”) should be deducted from the buy-out price (as suggested by Brother’s Camp) or whether the amount should be paid into court pending determination of such appeal (as suggested by Sister) (SinoKing Issue);

(2)  Value of the Shijiazhuang Shares;

(3)  The Debt Issue; and

(4)  The Interest Issue.

35.  I consider these issues in turn.

B1.  SinoKing Issue

36.  The material facts regarding the ownership of the SinoKing Assets have already been decided by the Taiwan High Court which held, inter alia, that:

(1)  The SinoKing Shares were owned by the Company;

(2)  Sister’s acquisition of the SinoKing Shares is certainly without a legal ground; and

(3)  The Company’s claim that Sister shall transfer the SinoKing Assets to the Company is proper and should be granted.

37.  Mr Chain submits that in light of the Taiwan Judgment, Sister cannot be heard to challenge the Company’s ownership over the SinoKing Shares because:

(1)  The Taiwan Judgment became res judicata between the parties,[34] and its finality is not affected by the SC Appeal (Spencer Bower and Handley on Res Judicata, 6^th ed., §§2.33, 2.36, 5.19).

(2)  Sister’s suggestion that “Brother wishes to re-try this whole issue” is wrong.[35] Brother’s Camp simply invites this Court to adopt the findings in the Taiwan Judgment that the SinoKing Shares belong to the Company.

(3)  As Sister has not returned the SinoKing Assets to the Company, the court should direct her to return the SinoKing Shares to the Company and deduct the SinoKing Dividends, with interest, from the buy-out price.

(4)  Interest should be ordered at HSBC’s prime lending rate +1% from the date(s) Sister received the SinoKing Dividends until the payment of the buy-out price (Re Luk Fai Holdings Ltd [2023] HKCFI 2268 at §§86-89, 93).

38.  Mr Maurellet does not dispute that the Taiwan Judgment creates issue estoppel between the parties notwithstanding the SC Appeal. He submits that:

(1)  This is neither the forum nor the time to “enforce” the Taiwan Judgment.

(2)  Nevertheless, Sister is prepared to transfer the SinoKing Shares to the Company pending determination of the SC Appeal.

(3)  Any concern that Sister may not transfer the SinoKing Shares to the Company may be addressed by the court making a conditional buy-out order requiring Sister to make the transfer.

(4)  The court should assess the value of the Company and the buy-out price on 2 alternative bases: one on the basis that it owns the SinoKing Assets and the other without. The order will direct payment of the buy-out price exclusive of the SinoKing Assets (i.e. the lower price), with the difference between the price inclusive of SinoKing Assets and the price exclusive of SinoKing Assets (“Difference”) paid into court, subject to an undertaking given by Sister “to inform the Court within 7 days in writing if the SC Appeal is withdrawn, or to inform the Court of the result of the SC Appeal within 7 days after it is determined” (“Undertaking”).

(5)  As the Difference will not be released to Sister until the SC Appeal is withdrawn or determined, she has incentive to take reasonable steps (within the context of the Taiwan civil justice system) to duly prosecute the SC Appeal (if not withdrawn).

39.  In my judgment, the buy-out price should be assessed on the basis that the SinoKing Assets are assets of the Company and, therefore, should be taken into account in assessing the equity value of the Company:

(1)  This accords with the agreement of the parties that there should be a clean break, with Brother’s Camp buying out the Shares based on the value of the Company as assessed by the court.

(2)  The mere fact that Sister decided to pursue the SC Appeal does not alter the fact that the Taiwan Judgment and the findings therein are binding between the parties.

(3)  In any event, it does not seem to me that the mechanism suggested by Mr Maurellet, which involves the Difference be paid into court, would be of benefit to either party. As Sister will transfer the SinoKing Shares to the Company irrespective of the outcome of the SC Appeal, it is not necessary for the Difference to be paid into court. The payment of the Difference into court subject to the Undertaking may lead to further arguments and escalation of costs. There is a real likelihood of that happening in view of the history of the matter, which shows that the parties would go to great length to debate over administrative matter such as operation of the TBB Account.

40.  As for interest, I do not think that there is a proper basis for the court to award interest on the SinoKing Dividends against Sister for the following reasons:

(1)  Brother’s Camp has not in their POD pleaded that interest is payable on the SinoKing Dividends.

(2)  The transfer of the SinoKing Shares to Sister and the receipt of the SinoKing Dividends were done openly and with the knowledge of Father and Brother. There is no suggestion or finding that the transfer or receipt involved any breach of fiduciary duties on the part of Sister, which was the basis upon which the court awarded interest against the director who had acted in breach of his fiduciary duties in Re Luk Fai Holdings.

(3)  It was open to the Company to claim interest on the SinoKing Dividends in the Taiwan proceedings but it did not do so. I am unable to see how Brother, who is bound by the Taiwan Judgment, can ask this Court to order interest against Sister through the backdoor.

B2.  Value of Shijiazhuang Shares

41.  Mr Chain submits that there are 4 matters relating to the valuation of Shijiazhuang Shares which require determination of the court[36]:

(1)  Sister’s complaint about Shijiazhuang’s limited financial information (Limited Information);

(2)  The appropriate valuation date to be adopted (Valuation Date);

(3)  The appropriate discount for lack of marketability (“DLOM”) to be adopted (DLOM); and

(4)  The appropriate price to earnings (“P/E”) multiple to be adopted (P/E).

B2.1  Limited Information

42.  According to Brother, the Company was not able to obtain or disclose any financial statements of Shijiazhuang to any third party; and the only financial information available to the Company is the letter from Shijiazhuang dated 1 March 2023 which sets out the operating income, profits and net profits attributable to the shareholders for FY 2021 and the period from January to April 2022 (“Shijiazhuang Data”).

43.  Mr Maurellet in his Opening[37] makes extensive references to a valuation report prepared by Mr Xu back in August 2020 (“2020 Report”)[38] where he used the income (or discounted cash-flow) approach and the projected income of Shijiazhuang for the next 3 years to assess the value of Shijiazhuang, and assessed the value of the Shijiazhuang Shares as at 30 April 2020 at RMB509.55 million. He submits that the relevance of the 2020 Report are four-folds:

(1)  Credibility of Mr Xu: Back in 2020, Mr Xu had no difficulty in relying on projected income of Shijiazhuang to assess the value of the Shijiazhuang Shares. There is no reason why Mr Xu could not use the same approach to assess the value of the Shijiazhuang Shares based on the actual income of Shijiazhuang before April 2022. The change in approach on the part of Mr Xu is surprising and casts doubt on his credibility[39]. In addition, having previously acted on the instructions of Brother in 2020 affects the weight which the court should accord to Mr Xu’s view (Tang Ping-Choi v The Secretary for Transport [2004] 2 HKLRD 284 §38)[40].

(2)  Supports higher valuation: The court is entitled to take into account the valuation of RMB509.55 million in the 2020 Report, and prefers the higher valuation of Mr Sham (HK$266.9 million) to the lower valuation now provided by Mr Xu (RMB197.1 million)[41].

(3)  Admissibility: The 2020 Report should have been disclosed by Brother’s Camp as it was commissioned by the Company when it was under the control of Brother. It is plainly relevant to the valuation of the Shijiazhuang Shares. This was not done. In June 2024, Sister disclosed the 2020 Report and provided the same to Mr Sham and Mr Xu, and the parties had time to consider it before filing their updated reports in August 2024. However, Sister still suffers prejudice as she did not have the 3 annexures to the 2020 Report, which included the financial data of Shijiazhuang and the valuation of its service contract. For these reasons, the 2020 Report should be adduced as evidence in this trial[42].

(4)  Adverse inference: Brother has previously seen fit to withhold information on the basis of “state secrets”. Brother’s oral evidence is that he “still” has the information in relation to the 2020 Report. There is no reason why Brother could not provide the information/data he had, and/or to obtain the more updated figures. No legal opinion has been adduced by Brother to substantiate his bold assertion that he is prevented from doing so under PRC law, particularly when his oral evidence is that he has obtained PRC law opinion. While he is keen to downplay his access to the relevant data, he is forced to admit that he “helped” in getting the data for the preparation of the 2020 Report when confronted with the fact that the Report recorded that the data had been provided by the Company. An adverse inference should be drawn against Brother for his continuing failure to disclose that piece of evidence.

44.  I have no hesitation in rejecting Mr Maurellet’s submissions on the admissibility, support higher valuation and adverse inference points for the reasons explained in §§45-48 below.

45.  As submitted by Mr Chain, the correspondence show that between February 2023 and September 2024, Brother’s Camp had time and again invited Sister to cooperate in applying for Shijiazhuang’s financial information, all of which were ignored. In particular:

(1)  By letter dated 7 February 2023, Brother’s Camp told Sister that she served as a director and vice chairperson of Shijiazhuang, and could have applied for information from Shijiazhuang in accordance with the relevant requirements.

(2)  By letters dated 21 and 24 February 2023, Brother informed Sister that he had been told by Shijiazhuang that she had to apply to Mr Huang Fei (Manager of Shijiazhuang) for information or if she required disclosure or use of the financial information and documents of Shijiazhuang. This was followed by Brother’s proposal to make a joint application to Shijiazhuang on 28 February 2023.

(3)  Eventually, upon Brother’s application and without any assistance from Sister, Shijiazhuang agreed to provide the Shijiazhuang Data for the parties’ use in these proceedings.

(4)  It was only during the parties’ discussion on the preparation of updated valuation reports that by letter dated 26 June 2024, Sister attempted to adduce the 2020 Report by referring to the lack of financial information regarding Shijiazhuang.

(5)  It lies ill in Sister’s mouth to allude to any deliberate suppression of Shijiazhuang’s financial information by Brother’s Camp when it was her obstructive behaviour which led to the lack of sufficient financial information available for these proceedings.

46.  Mr Chain makes 2 further points:

(1)  Shijiazhuang has in its letter dated 1 March 2023 explained the reason why its financial information form part of its “core state secrets” and cannot be disclosed “without authorisation or made available to non-procurement parties”. The explanation corroborates with Brother’s oral testimony.

(2)  There was no deliberate suppression of documents. It is Brother and Mr Xu’s corroborating oral testimony that the financial information used for the preparation of the 2020 Report was directly provided by Shijiazhuang to Mr Xu. Mr Xu was given access as he is a CRRC recognised valuer. Sister has adduced no evidence to contradict such oral testimony.

(3)  It is highly unfair and prejudicial for Sister to complain about any limited availability of Shijiazhuang’s financial information by reference to the 2020 Report. This is not even an agreed or pleaded issue. Further, the 2020 Report is not properly adduced, and Brother’s Camp was deprived of a proper opportunity to adduce factual evidence pertaining to the preparation of the 2020 Report and PRC legal opinion on the status of Shijiazhuang’s financial information and its obligation to comply with the requirements to safeguard state secrets.

47.  I agree with the submissions of Mr Chain. The objective evidence shows that it was Sister’s own decision in not taking any step to apply for permission to have greater access to and use of the financial information of Shijiazhuang for the purpose of valuation of the Shijiazhuang Shares. The lack of financial information of Shijiazhuang, though undesirable, is the result of her own making.

48.  There is no basis for Sister to ask this Court to admit the 2020 Report as evidence:

(1)  The undisputed evidence shows that Sister has since June 2020 been provided with a copy of the 2020 Report. If she considered the 2020 Report or the 3 annexures should be admitted as evidence, she could have raised the point much earlier so that the issue could be properly debated and considered by the court. This was not done and no explanation has been proffered by Sister.

(2)  More importantly, the parties have dealt with valuation of the Shares in accordance with the court’s directions on adducing expert evidence on valuation. There is no reason why the court should allow Sister to depart from those directions and seek to adduce the 2020 Report as part of the evidence on valuation.

(3)  This is particularly so when no application has been made by Sister to adduce the 2020 Report as evidence.

49.  As regards credibility point, it is open to Sister to use the 2020 Report for the purpose of cross-examining Mr Xu which is what Mr Maurellet does during trial.

B2.2  Valuation Date

50.  Mr Chain submits that in the “unusual circumstances” of the present case where the Shijiazhuang Data is limited to FY 2021, the valuation conducted by Mr Xu in April 2022 would be “a more accurate reflection of Shijiazhuang’s present value”. Although it is not Mr Xu’s evidence that this Court should adopt a different valuation date than what was agreed, Mr Chain points to the “inherent difficulties and inaccuracies” in using the FY 2021 data to carry out a 2024 valuation in the evidence of Mr Xu and Mr Sham, and contends that “the valuation made on 22 April 2022 more accurately represents the value of the Shijiazhuang Shares as of the first day of the trial”[43].

51.  No matter how Mr Chain puts it, I am unable to see any basis to allow Brother’s Camp to depart from the Agreed Bases and contends that the value of Shijiazhuang Shares as at 22 April 2022 should be adopted as if it were the value as at the first day of trial.

B2.3  DLOM

52.  Both experts agree that there should be a DLOM to reflect the fact that the Shijiazhuang Shares represent a minority shareholding in Shijiazhuang. They derived at their respective DLOM based on data which are not specific to any particular business or industry. They differ on the rate of DLOM which should be applied:

Valuation Date	Mr Sham	Mr Xu
22 April 2022	20.6%	32.7%
10 July 2024	20.6%	30%

53.  Mr Maurellet submits that the use of multi-industry data is not ideal as it is not reflective of Shijiazhuang’s industry type. This is particularly so when the methodology to derive at the DLOM in the table in Xu’s Updated is flawed, given that the nature/characteristics of the 2,453 listed companies could not be the same as those of the 821 private companies. It would be wrong to infer the DLOM by comparing the respective P/E of those companies as it would be tantamount to comparing apples with oranges.

54.  Mr Chain submits that the court should reject Mr Sham’s opinion on DLOM for the following reasons:

(1)  Neither Sham’s Supp nor Sham’s Updated sheds any light as to how Mr Sham arrived at a 20.6% DLOM or why the rate remains unchanged despite the difference in the valuation dates in Sham’s Supp and Sham’s Updated.

(2)  Although Mr Sham admits under cross-admission that it was an omission to state the source of his DLOM, he is still confused about the source. His original answer is that the source of 20.6% was from “Duff and Phelps”. He later corrects his answer and says that it was from “Stout Restricted Stock Study 2023” which is not before the court. There is no way in which the court can determine whether rate adopted by Mr Sham is in fact correct and, if so, whether it is appropriate to adopt such rate by reference to the data and methodology used in “Stout Restricted Stock Study 2023”.

(3)  Even if correct, the rate does not address the specific marketability of private companies which operate in the Mainland.

55.  By contrast, Mr Xu’s methodology in coming up with his DLOM is much more scientific, fully explained, and hence preferable:

(1)  Mr Xu has identified the sources and materials he relied upon in his reports. He also produced the sources and materials for the court’s consideration and evaluation.

(2)  Mr Xu has shown the calculations of his DLOM. The DLOM of 32.7% (22 April 2022) and 30% (10 July 2024) are respectively based on:

(a)  A comparison of the average P/E multiple of all non-listed companies’ merger and acquisition cases (798 samples) and the average P/E multiple of listed companies (3,042 samples) in 2021[44]; and

(b)  A comparison between the average P/E multiple of all merger and acquisition cases of private companies (821 samples) and the average P/E multiple of listed companies (2,453 samples) in 2023[45].

56.  It is preferable to adopt the DLOM assessed by Mr Xu than that of Mr Sham. In addition to the reasons advanced by Mr Chain (which I agree), the methodology used by Mr Xu is the conventional method used for determining the rate of DLOM. It is based on publicly available information which can readily be verified by Mr Sham. The data used by Mr Xu are based on companies operating in the Mainland, which better reflect the market’s view on the DLOM applicable to the acquisition of a minority shareholding in a private company operating in the Mainland.

57.  I do not think that Mr Maurellet’s criticism is well founded.

(1)  It can be seen from the table in Xu’s Supp that in coming to his DLOM, Mr Xu considered the median P/E multiple of the sampled non-listed companies (23.03) and that of the sampled listed companies (36.43) in arriving at the DLOM of 32.7%.

(2)  The 32.7% DLOM was further adjusted to 30% in Xu’s Updated after taking into account the differences in the median P/E multiples of the sampled companies in 2021, 2022 and 2023.

58.  For the reasons set out above, I hold that the DLOM applicable to the Shijiazhuang Shares is 30%.

B2.4  P/E

59.  The P/E multiples assessed by Mr Sham and Mr Xu on the 2 valuation dates are as follows:

Valuation Date	Mr Sham	Mr Xu
22 April 2022	12.50	13.95
10 July 2024	16.94	15.23

60.  Mr Sham adopts 4 listed companies with similar business scope and operation as those of Shijiazhuang as comparables (“Sham’s Comparables”). These companies principally engage in manufacturing and maintenance of railway vehicles equipment in the Mainland and are profit making according to their latest published financial data[46].

61.  The market capitalisation, net profit, P/E multiple, and the adjusted P/E of Sham’s Comparables as at 10 July 2024, are as follows[47]:

Comparable	Market Capitalisation (US$ million)	Net Profits FY 2021 (US$ million)	P/E	Adjusted P/E
1	1,926.6	50.2	38.38	14.27
2	1,457.72	28.0	52.06	17.09
3	1,862.28	46.5	40.05	14.50
4	2,681.52	4.50	595.89	21.89
Average			16.94
Median			15.80

62.  The adjustments to the P/E multiples were made in accordance with the “Adjusting Guideline Multiples for Size”[48] to account for the difference in size (i.e. market capitalisation) between Sham’s Comparables and Shijiazhuang. This reflects the fact that investor would demand a higher risk premium (hence a lower P/E multiple) if the company concerned is small to compensate the additional risk involved in acquiring interest in a small company.

63.  Mr Sham adopts the average P/E multiple of Sham’s Comparables (16.94) as the appropriate P/E for the Shijiazhuang Shares.

64.  On the other hand, Mr Xu adopts 15.23 as the appropriate P/E multiple in this way:

(1)  He considers that Shijiazhuang falls within the Special Equipment Manufacturing Industry.

(2)  He reviews the P/E multiples of all companies in the same industry as listed in “Wind Software: CSRC Industry Classification – Special Equipment Manufacturing Industry” [49] and adopts their median P/E as the appropriate P/E on the valuation dates.

65.  In my view, the P/E multiple assessed by Mr Sham is more appropriate and I prefer it over that of the P/E multiple assessed by Mr Xu for the following reasons:

(1)  The scope of business of Sham’s Comparables is sufficiently similar to that of Shijiazhuang, which engages in the business of high-speed rail maintenance including maintenance of air-conditioning units on such trains in the Mainland [50]. This is fairly accepted by Mr Xu during his cross-examination.

(2)  The difference in size between Sham’s Comparables and that of Shijiazhuang has been taken into account by making adjustment as to size. The resulting average P/E multiple is a fairly representative of the P/E multiple which an investor will pay for acquiring a company like Shijiazhuang. Although Mr Chain makes much criticisms on Mr Sham’s inability to explain the precise adjustment made to each Comparable and how he came up with the adjusted P/E multiple, I do not think that it undermines the methodology and the accuracy of the adjusted P/E multiple as one cannot expect an expert to be able to come up with the precise calculation during cross-examination, particularly when no issue has been raised by Brother’s Camp prior to cross-examination.

(3)  As regards Mr Chain’s criticism that Mr Sham has excluded 2 comparables after they ceased to be profit-making, I do not think that it is right. As Mr Sham explains, it is only if a company is profit making that it can be used as a comparable for valuation using the Market Approach. In any event, there is no justification to use a loss-making company as a comparable when Shijiazhuang is a profit-making company.

(4)  By contrast, Xu’s Comparables include 400 companies many of which engage in very different industries such as medical, health, environmental, agricultural and bioengineering industries[51]. Mr Xu acknowledges that Xu’s Comparables are under “varied operating conditions”[52].

(5)  The median P/E multiple of 400 companies (i.e. Xu’s Comparables) across very different industries bears little resemblance to and is hardly reflective of the P/E multiple applicable to a company like Shijiazhuang.

66.  For the above reasons, I hold that the appropriate P/E multiple applicable to Shijiazhuang is 16.94.

B2.5  Conclusion on valuation of Shijiazhuang Shares

67.  According to the Shijiazhuang Data, the net profit after tax of Shijiazhuang for FY 2021 is RMB42,975,900. No other profit figure is available. Although the amount does not take into account the actual net profits of Shijiazhuang for the period from 1 January 2022 to the first day of the trial, which is not satisfactory, that is the result of the way the parties chose to deal with the matter.

68.  The fair market value of the Shijiazhuang Shares as at the first day of the trial is therefore RMB219,131,536 (~HK$235,566,401[53]) being RMB42,975,900 (net profit after tax) x 16.94 (P/E) x 70% (i.e. taking a DLOM of 30%) x 43%.

B3.  Debt Issue

69.  Mr Maurellet submits that the court should reject the contention of Brother’s Camp that the Debt is not recoverable given that it is raised very late:

(1)  The 2017 AFS was exhibited to Sister’s verifying affirmation filed on 7 December 2020. Brother’s Camp has more than 2 years to look into the genuineness as well as recoverability of the Debt.

(2)  Brother has been a director of the Company during that period. As a director, he was duty-bound to consider the issue as to the recoverability of the Debt and to ask Father for repayment if there was cause to believe that Father would not be able to repay the Debt, even if he did not have access to all the banking/auditing materials as he claimed. In other words, Brother has been obliged to consider, and should have already considered, the genuineness of the Debt, long before he filed his SWS on 11 August 2023.

(3)  It is clear from Brother’s SWS that he has failed to ask Father - all that he says in §7(d) of SWS is that Father never told him about the Debt.

(4)  Instead, Brother sees fit to belatedly raise this issue - after the fixing of the trial date and the passing of Father in January 2023. The delay is prejudicial to Sister as she has been deprived of the opportunity to obtain evidence from Father on the Debt, and no explanation for the delay has been provided by Brother’s Camp.

(5)  The lateness is particularly surprising when Mr Xu explains in his oral evidence that he did not deal with the Debt in any of his reports because Brother told him that the Debt did not exist. This means that, back in early 2023 (before Father’s passing on 17 January 2023) or even 2022, Brother already took the position that the Debt did not exist. It is most surprising that Brother did not raise this issue in his WS filed on 5 December 2022 or at the CMC on 28 February 2023.

(6)  In the circumstances, adverse inference should be drawn against Brother, not only on the issue of the existence of the Debt (which he belatedly raised in 2023 and then belatedly concedes at trial), but also on the recoverability of the Debt.

70.  In my view, while there has been inordinate delay in raising the Debt Issue, that is the result of the inaction of both parties, rather than that of Brother alone:

(1)  The Debt Issue does not feature in the petition or any of the pleadings filed. Nor does it form part of the Agreed Bases.

(2)  The only document relied upon by Sister in support of the Debt is the 2017 AFS, which was approved by the board and signed by Sister and Father on 15 August 2018. There is no evidence to suggest that Sister had taken any step to seek repayment of the Debt from Father before she was removed as a director on 6 November 2020. If Brother has acted in breach of his duty in seeking repayment from Father, the same can be said of Sister.

(3)  The question as to whether the Debt should be included as an asset of the Company first featured in Sham’s report dated 18 January 2023 where he included the Debt as an asset[54].

(4)  It is clear that Brother’s Camp does not accept that the Debt should be included as an asset in assessing the value of the Company as Mr Xu in his first report dated 6 March 2023 did not include the Debt as an asset of the Company. From that point onwards, it should have been clear to both parties that there is an issue as to whether the Debt should be regarded as an asset of the Company for the purpose of valuation. Yet neither party has done anything to deal with the Issue.

(5)  In his SWS filed on 11 August 2023, Brother’s Camp makes clear that they do not accept that the Debt should be included as an asset of the Company for the reasons stated. From that point onwards, Sister has had the opportunity to adduce evidence to show that the Debt is recoverable if she wished to do so.

71.  In any event, it is clear that the Debt is not recoverable and, therefore, should not be included as an asset of the Company for the following reasons:

(1)  The 2017 AFS shows the position of the Company as at 31 December 2017, more than 6 years before the date of valuation. It does not reflect the financial position of the Company as at the first day of trial.

(2)  The reliability of the 2017 AFS is questionable as the auditors have disclaimed their opinion on such AFS.

(3)  According to the 2 Estate Tax Exemption Certificates issued by the National Taxation Bureau of Taipei on 5 July 2024 and 9 August 2024, Father’s estate only has assets of NT$1,416,022 (~HK$339,845). Although the Certificates described the value of Father’s estate at NT$35,850,684 (~HK$8,604,000), the KMC Shares[55] valued at NT$28,244,662; and NT$6,190,000[56] should be excluded from the estate given that:

(a)  The KMC Shares were ordered to be delivered to Brother by the Taiwan Taipei District Court on 18 February 2021. The Certificate of Gift Tax Payment and Gift Tax Payment Notice dated 5 July 2024 shows that the tax payee of the KMC Shares had already been changed from Father to Brother, and Brother has fully paid the gift tax of NT$2,572,777 on 3 July 2024.

(b)  Similarly, the total sum of NT$6,190,000 was gifted to Sister within 2 years before Father passed away. There is no suggestion that Father’s estate has taken or will take action to recover the same from Sister.

(4)  As 2 out of the 3 beneficiaries of the estate, Sister and Brother must have been aware of the state of Father’s estate. If there was any inaccuracy in the Certificates, one would expect Sister to have raised the issue but she has not done so. The Certificates confirm that Father’s estate does not have the fund to repay the Debt even if it exists.

72.  For the above reasons, I hold that the Debt is not recoverable and should not be included as an asset of the Company.

B4.  Interest Issue

73.  Mr Maurellet submits that it is open to the court to award pre-judgment interest at P+1% from the date of the petition for the following reasons[57]:

(1)  Considerable time and costs have been wasted to deal with points previously raised but subsequently withdrawn by Brother’s Camp and/or points belatedly raised which could have and should have been raised earlier.

(2)  It is reasonable to compensate Sister for being kept out of her money which she should have received when she presented the petition in November 2020. This is consistent with the approach of the court in allowing interest to run on a date before the date of valuation, such as the earlier date of the buy-out order (Re Power Hong Kong Ltd [2023] 5 HKLRD 369, §§25-31).

(3)  Alternatively, the same reasoning would enable the award of pre-judgment interest as “a proxy to measure the increment in value of the outgoing shareholder’s investment in the company” (Re New Century Iatrical Inv Management Ltd [2020] 3 HKLRD 464, §58).

74.  Mr Chain does not dispute that the court has discretion under s.725(1) of the Companies Ordinance (Cap. 622) to award interest but submits that no interest should be awarded to Sister for the following reasons[58]:

(1)  The power to award interest should be exercised with great caution (Profinance Trust SA v Gladstone [2002] 1 WLR 1024, §32, per Robert Walker LJ).

(2)  As set out at §8.119 of Company Law in Hong Kong - Practice and Procedure 2023, “the interest factor is added to the value of the petitioner’s shareholding to arrive at a fair price which should be paid for his shares, to give monetary compensation for the injury done to the petitioner for not participating in the benefits enjoyed by the majority in the company as a consequence of the unfairly prejudicial conduct.”

(3)  Sister is the wrongdoer who has misappropriated the SinoKing Assets and caused the freezing of the TBB Account.

(4)  The Shares were only bought upon the agreement of Brother’s Camp.

(5)  This is not a case where Sister should be compensated by interest for suffering injury as a consequence of any unfairly prejudicial conduct.

75.  In my judgment, this is not a case where the court should award interest on the buy-out price payable for the Shares. The court has made no finding of unfair prejudice against Brother’s Camp. The buy-out order stems from the agreement of the parties which does not include any interest.

76.  In any event, the value of the Company is assessed as at the first day of the trial. Such valuation necessarily includes and reflects the current value of the Company including the period from the date the petition was presented. Fairness does not require the court to award interest on the buy-out price payable for the Shares.

C.  DISPOSITION AND COSTS

77.  The valuation of the Company and the Shares as at the first day of the trial is RMB248,865,702, details as follows:

Asset	Amount (RMB)
SinoKing Shares	24,105,919
SinoKing Dividends	5,522,347
Shijiazhuang Shares	219,131,536
TBB Account	105,900
Total	248,865,702
Shares (35%)	87,102,996

78.  The buy-out price payable by Brother’s Camp for the Shares is RMB81,474,749 (“Price”):

	Amount (RMB)
Shares	87,102,996
Less: TBB Account SinoKing Dividends	(105,900) (5,522,347)
Total	81,474,749

79.  Accordingly, I make an order that within 28 days after completion of the transfer of the SinoKing Shares from Sister to the Company, Brother’s Camp shall pay the Price to Sister, and Sister shall transfer the Shares to Brother and/or the Trust (as specified by Brother’s Camp). The payment and transfer should be effected on the same day unless the parties agree otherwise.

80.  If Sister succeeds in the SC Appeal, I would expect Brother’s Camp to pay an amount equivalent to the value of the SinoKing Shares (RMB 24,105,919) plus the SinoKing Dividends (RMB 5,522,347) to reflect the fact that she is the owner of SinoKing Assets. I give liberty to the parties to apply for further directions for this purpose.

81.  As for costs, I make a costs order nisi that there be no order as to costs.

(1)  It does not seem to me that either party may be regarded as the successful party.

(2)  Both sides have belatedly conceded on issues for which time and costs have been incurred unnecessarily.

(3)  In determining the value of the Company and the Shares, this Court has accepted the opinions expressed by Mr Sham and Mr Xu on different aspects.