WONG MAN YIN v. RICACORP PROPERTIES LTD AND OTHERS

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REASONS FOR DECISION

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1. I have before me three applications in these related proceedings: by the respondents for directions consequent upon my judgment in HCMP 1571 of 2000, and for an order in the same proceedings that the petitioner pay one third of the respondents' costs, and by the plaintiff in HCA 6260 of 1997 that the 1st and 2nd defendants pay the plaintiff's costs of that action. I reserved my decision as to the matters in HCMP 1571 of 2000, but made an order, which was not opposed, in favour of the plaintiff in HCA 6260 of 1997 as to their costs of that action up 26 January 2000, but excluding any costs of this hearing.

2. In HCMP 1571 of 2000, the petitioner sought relief under section 168A of the Companies Ordinance, Cap 32, and, in my judgment handed down on 22 June 2001, I ordered that the 2nd and 3rd respondents purchase his shares. The first matter I must accordingly deal with is the valuation of those shares and the basis upon which it should be conducted.

3. The reasons for my judgment were that the affairs of the company were conducted in a way unfairly prejudicial to the interests of the petitioner, Mr Wong, in respect of the excessive remuneration of directors, failure to pay dividends, and failure to comply with company and statutory regulations. Clearly at least the former two reasons will be relevant to the valuation. As to that valuation, the matters for which directions are now necessary are: by whom it will be conducted; the basis of that valuation, whether on net asset value, or as a going concern; the date at which the shares should be valued; the amount of the excessive directors' remuneration which should be written back in; whether the allotment of shares to the respondents on 24 March 2000 should be taken into account in calculating the petitioner's shareholding; whether there should be a discount for a minority shareholding; and the rate of interest on the sum payable and the date from which it is to run. I will deal with these points in turn.

Conduct of valuation

4. In his submissions to me, Mr Chan for the respondents has proposed that the Court assess the value of the shares according to the valuation set out in his written submission. While this has the benefit of finality and a saving of costs, it may well be too simplistic an approach to what is a complex calculation. It is based purely on a net asset value together with a sum added in to reflect the excess of directors' remuneration. For reasons which appear below I am not satisfied that this is the correct formula to be applied, and am accordingly of the view that this needs to be considered from an expert accounting point of view.

5. The only question is whether there should be one valuer appointed by the Court, or one for each party with further hearings to determine any conflict between them. The obvious disadvantage in the latter course is the length of time these proceedings will continue and the additional costs which will be incurred. It seems to me that the appointment of a single valuer, whose only duty is to report to the Court, will be both time and cost effective, and fair to both sides.

6. I accordingly accede to the request of the petitioner that the valuation should be carried out by an independent chartered accountant as may mutually agreed between the parties within 21 days from the date of handing down this decision, and failing agreement, to be appointed by the President for the time being of the Hong Kong Society of Accountants upon the application of either party.

Basis of valuation

7. The simple choice here is between net asset value at a particular date, plus an amount written back in to reflect the excessive fees paid to the respondent directors, or a valuation of the company on a going concern basis. In short an asset basis or an earnings basis.

8. Where, as here, the company is a going concern, there is some support for the view that it should be valued on an earnings basis. In his work on Minority Shareholders' Rights, Robin Hollington QC states that the earnings basis is usually more appropriate where the company is a going concern, saying, at paragraph 4-119, that the simplest and most common method of calculation is derived from the estimation of two key ingredients:

"(1) the maintainable level of profits of the company after tax; and

(2) the yield that a prospective purchaser would expect in making the investment."

9. This approach was also followed by Rogers JA in Koy Holdings Corp v Spider Knitters Ltd and anor [1998] 1 HKLRD 788, where he says at page 790:

"If a purchase of shares were to be ordered under s.168A(2)(c) the valuation of the shares of the company can be awarded on a going concern basis as between a willing buyer and willing seller, without regard to the fact that the shareholding in question is a minority shareholding.

It has been suggested to me that a likely quantification of that amount is possibly parlous since it is often in the hands of accountants who are not overly generous in estimating the value of a company. Be that as it may, the value of a company (as) a going concern seems to me to have to take into account its potential earning power and it is often on a basis of a multiple of its present earnings."

10. While I am aware that there is a history of irregular profits, and some losses, and that allotments have been made on the basis of net asset value, the company here is certainly a going concern and this basis is clearly the most appropriate, but I also agree with Mr Chow for the petitioner that the valuer should have regard to all matters, including assets, profitability and future prospects, as well as goodwill, for which the petitioner paid a premium when he purchased the shares.

Date of valuation

11. The usual date for valuation of shares in a case such as this is the date of petition, this being, as Le Pichon J said in Re Tai Lap Investment Co. Ltd [1998] 4 HKC 438, with the later approval of the Court of Appeal, a convenient date, and the point in time when the petitioner crystallised his position in claiming to be entitled to cease association with, or participation in the company. This has since been followed in similar cases and I can see no good reason to depart from it now.

Calculation of the excessive directors' remuneration

12. The parties are not in dispute that an amount to reflect the excessive remuneration the respondent directors paid to themselves should be added back in to the valuation of the assets of the company. The only dispute is as to how to calculate that sum.

13. The starting point must be the agreement between the parties as to what was to be the remuneration of the directors. This agreement was reached on 2 September 1995 at a meeting of the three, Mr Wong, Mr Law and Mr Tam. There it was decided that the salaries of all three would be $60,000.00 a month and a bonus of 20% of the (intended) Group's net profit before dividend distribution which was to be shared equally between the three directors. It is apparent from this that each director was entitled, in addition to the $60,000.00 a month, to a third share of the 20% of the net profits. Of the calculations produced for this hearing by counsel, I accordingly accept that of Mr Chow for the petitioner as being correct, in that it identifies the proper remuneration to have been paid to Mr Law and Mr Tam as two thirds of the 20% of the profits. Mr Chan has made a further calculation based on payments for a 13th month. I can see no logical reason for this and no evidence that such was actually intended. I therefore find that the sum to be added back for the excess payments to be as Mr Chow calculates, namely $30,320,603.00.

Allotment of shares on 24 March 2000

14. In the course of 1995 and 1996, following extraordinary general meetings, a number of allotments of shares were made, and taken up by Mr Law and Mr Tam. These were the subject of HCA 6260 of 1997 and, by an interlocutory judgment dated 12 January 2000, were declared null and void. Meanwhile, of course, Mr Law and Mr Tam had paid for those shares, and the payments were treated as loans to the company, although they waived part of what they claimed was their full entitlement to interest. In order to restore the position, a further EGM was held on 9 March 2000 at which it was resolved to offer a rights issue of 40,000,000 shares to existing shareholders on the basis of four rights shares for each share then held at a par value of $1.00 plus a premium to make the total equivalent to the net asset worth of each share, the par value being payable no later than 23 March 2000 and the premium within 14 days of issue of a notice demanding payment. Mr Law and Mr Tam took up their entitlement, and paid the par value, and, at a directors' meeting on 24 March 2000, allotted these shares to themselves, as well as those not taken up by the petitioner and the other shareholders. At that date, the premium had not yet been calculated and paid, nor had the issue price of the additional shares declined by the other shareholders and allotted to Mr Law and Mr Tam. The petition was filed that day.

15. It is the petitioner's case that the shares should be valued on the basis of his original shareholding which represented about 30% of the total, and equal to that of the respondents. Mr Chan, however, says that it was the respondents who injected capital into the company in the previous years enabling larger profits to be made when the property market was booming, and the petitioner should not benefit from this, or alternatively the respondents should receive proper interest on that capital as if it had been a loan at market rates.

16. I think the correct approach here is to look at the reality of the situation as at 24 March 2000. This was that about two thirds of the rights issue had been taken up by, and allotted to, Mr Law and Mr Tam, but only partly paid for. As to the balance of the shares allotted to them at the meeting that day, there is no evidence that those were paid for at all until later. I accordingly consider that it would be artificial to allow any of those shares to be taken into account, where they had been allotted but not fully paid for. Doing so would further prejudice the petitioner as the matters of which he complained, and which I found to have been justified complaints, occurred while he was still a 30% shareholder, and it seems less than just to now value his shares as some 6% of the whole.

17. I appreciate that this may not work fully in his favour, as prior to 24 March 2000 the value of the company will be affected by the capital injected by the respondents being treated as a loan, but after that as part of the increased capital. This is, however, a risk that Mr Chow says that the petitioner is prepared to take, and it seems to me to be the logical basis of valuation.

18. I would only add that, as the money put into the company prior to that is to be treated as a loan, the valuer should also take into account in his valuation interest which ought to have been paid at a proper market rate on that loan, rather than the actual rate the respondents charged to the company.

Minority shareholding

19. Mr Chan submits that there should be a discount to reflect the petitioner's minority shareholding. I have to say at the outset that I do not agree with this proposition. The general principle is that, in the case of a private company, a valuation order should not provide for any discount, although, as Mr Hollington at paragraph 4-121 of Minority Shareholders' Rights, in the real world the actual value of a minority shareholding in an unquoted private company is usually less than its pro rata value. On the authorities, the principle is clearly based on such a company being run as a quasi partnership, unless the shareholding had originally been purchased at a discount to reflect the minority shareholding, which is not the case here, and not purely as an investment.

20. It is contended by Mr Chan that this was not a quasi partnership as the petitioner had effectively ended his participation in the company and concentrated his efforts solely on his original company Capital Property Consultants Ltd. But this again is to ignore the reality of the situation. The intention of the scheme devised by the three parties here was that their two companies should be run together, indeed, they anticipated that it would be renamed as a group company, with all three being directors and shareholders of both companies, regardless of which attracted their main efforts. To that extent, it clearly was a quasi partnership and the general principle must apply.

Interest

21. There clearly should be an order for interest to reflect the fact that the petitioner has been kept out of his money since the date of the petition. In Re Tai Lap Investment Co. Ltd, Le Pichon J awarded interest at a flat rate of 10%, although there is no explanation as to how she arrived at that figure, and the same figure was used by me in Lau Yuk Chuen v. Gauss Electronics Co. Ltd and ors [1999] HKEC 735. However, I cannot ignore the fact that, certainly in the last few months, there has been a rapid decline in interest rates, and a flat rate here would not accordingly be appropriate. I think a fair rate is 1% over HSBC prime rate from time to time from date of petition to the date hereof and at judgment rate thereafter.

22. I leave it to the parties to draw up an appropriate order for my approval, with, of course, liberty to apply.

COSTS

23. The final matter is that of costs of these proceedings. Mr Chan has pointed out that the petitioner was only successful on three of the issues he raised at trial, and on two of the prayers of the petition. He claims that those matters on which the petitioner failed took up a large proportion of the hearing, and as a result, he should be deprived of his costs, and pay one third of the respondents' costs. Mr Chow submits that the usual rule should apply, that a successful party should not in the normal course of events be deprived of his costs.

24. In these proceedings the petitioner has succeeded to the extent that he has the result he principally sought, namely a buy out order. While it is true that in a number of issues raised by him I have not found in his favour, he is still a successful party having recovered the remedy he sought. It is trite law that any party who recovers more than nominal damages, or at least a substantial part of what he seeks, should have his costs as against the other party in the absence of very unusual circumstances or evidence that he has deliberately wasted time and costs by raising a large number of issues which had no hope of success. This is not such a case, and I see no reason why the usual order should not apply.

25. I confirm my order nisi as to costs, and dismiss the respondents' summons with costs to the petitioner. I also order that the costs of the summons for further directions be to the petitioner.