Chow Wai Shing Daniel and Another v. Lu Ying
Read the full judgment text of HCMP 486/2017 on BabelCite. This High Court CFI judgment was delivered on 24 August 2020.
1. The Applicants (“ Trustees ”) seek an order that the disposal by Ding Yi ( “Bankrupt” ) of 400,000,000 ordinary shares in North Asia Strategic Holdings Limited (“ the Shares ”) to the Respondent on 31 March 2016 for a cash consideration of HK$30,000,000 ( “ the Disposal ”) be set aside on the ground that it constituted a transaction at an undervalue under section 49 of the Bankruptcy Ordinance, Cap 6 (“ the Ordinance ”).
Cited by 5 cases · Cites 2 cases
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HCMP 486/2017 [2020] HKCFI 2148 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 486 OF 2017 ____________
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_____________ Before: Hon Au-Yeung J in Court Dates of Hearing: 21-24 May 2019, 29-30 August 2019 Date of Judgment: 24 August 2020 ____________________ J U D G M E N T ____________________ Index F. Legal principles applicable to section 49 of the Ordinance G.Challenge as to expertise and experts’ approach J. Applicability of Fair Value issue L. Quantum of Fair Value issue M.Was the sale price substantially less than the Market Value or Fair Value of the Shares? 1.The Applicants (“Trustees”) seek an order that the disposal by Ding Yi (“Bankrupt”) of 400,000,000 ordinary shares in North Asia Strategic Holdings Limited (“the Shares”) to the Respondent on 31 March 2016 for a cash consideration of HK$30,000,000 (“the Disposal”) be set aside on the ground that it constituted a transaction at an undervalue under section 49 of the Bankruptcy Ordinance, Cap 6 (“the Ordinance”). 2.I gratefully adopt the undisputed facts helpfully summarized in the submission of Mr Ho SC (leading Mr Isaac Chan), counsel for the Applicants. 3.Before the Disposal:
4.NAS was a company listed on the Growth Enterprise Market in Hong Kong (“GEM”) at all material times. Its principal businesses were (i) trading of high technology electronics, such as surface mount technology, assembly equipment and the provision of related services such as installation, training, repair and maintenance; and (ii) provision of leasing finance to its customers for a wide array of assets. Until 4 November 2016, NAS was also engaged in provision of consulting services in mining exploration, exploitation and valuation services for merger and acquisition. As on 31 March 2016:
5.On 28 March 2016, an arbitration award was made against the Bankrupt for payment of USD33,350,000 plus interest. 6.On 30 March 2016:
7.On 31 March 2016:
8.As a result of the acquisition, Lu was obliged to present a general offer (“GO”) to all other shareholders to acquire their shares. On 18 April 2016, Lu and NAS jointly announced that Lu would make a GO to all other shareholders of NAS to acquire their shares at HK$0.075 per share. 9.About 6 weeks after the Disposal, on 10 May 2016, the Bankrupt petitioned for his own bankruptcy. 10.In the relevant circular dated 19 May 2016 discussing the GO, the Independent Financial Adviser noted, amongst others, that:
11.On 20 May 2016, both the Independent Board Committee of NAS and the Independent Financial Advisor made public announcements that Lu’s GO for HK$0.075 per share was not fair or reasonable and therefore not attractive. Eventually, only 47,818,132 shares in NAS were sold to Lu by other shareholders pursuant to the GO. 12.On 23 June 2016, Madam Zhang (who joined NAS in November 2014 as an Executive Director) was appointed to replace the Bankrupt as the Chairman of NAS and has stayed in that office ever since. 13.On the following day, ie 24 June 2016, the Bankrupt disposed of the remaining 2,445,296 shares in NAS by 10 transactions at an average price of HK$0.93553 per share. 14.On 11 October 2016, the Court granted an order for bankruptcy against the Bankrupt. His major asset at that time was a cash balance of HK$29,889,406.14 (which obviously was the consideration received from Lu for the Disposal). 15.On 25 November 2016, the Trustees were appointed as the trustees in bankruptcy for the estate of the Bankrupt pursuant to the resolutions passed at the general meeting of creditors. 16.On 3 March 2017, the Trustees commenced the present proceedings. 17.On 8 June 2017, the board of NAS declared a special dividend of HK$0.06 per ordinary share. The special dividends attributable to the Shares amounted to HK$24,000,000. 18.On 26 June 2017, Lu (i) confirmed to the Court that in the event that the Disposal is set aside, the Trustees are entitled to use the special dividends of HK$24,000,000 to set off against the HK$30,000,000 being the price for the Shares at the Disposal that the Trustees will have to return to Lu; and (ii) undertook to the Court that she would not take any steps whether directly or through agent, etc, to in any way dispose of or deal with or diminish the value or otherwise encumber or remove from Hong Kong any of the Shares until judgment in the present proceedings or further order of the Court. 19.Pursuant to the Order of the Court dated 6 March 2018, the parties’ respective experts have filed their respective expert reports on the following issues:
20.The expert for the Trustees was Mr Frank Yuen (“FY”) and that for Lu was Mr Charles Li (“CL”). The experts agreed on (i) the definition of Market Value; (ii) the fact that discount for illiquidity was only applicable for assessment of Market Value under Issue 1 but not Issues 2 to 4 (Note: CL subsequently resiled from this, see paragraphs 177-179 below); and (iii) the premise for valuing the Shares should be that NAS was a going-concern. They, however, disagreed on all other major aspects of each other’s opinions. 21.For Issue 1, the experts’ conclusions can be summarized as follows: Table 1 on Market Value
22.For Issues 2, 3(a), 3(b) and 4, both experts drew no distinction in terms of their conclusions, which can be summarized as follows: Table 2 on Fair Value
23.The experts’ differences thus stem from whether or not (1) “Control Premium” and (2) “Shell Premium” should be included, and their respective amount. 24.The experts differed in the selection of comparables and the method of analyzing the data selected. The Court has thus to determine which approach of the experts is to be preferred. 25.It is the Trustees case’s that the consideration for the Shares was not fairly negotiated and the Disposal was at an undervalue. The Bankrupt and Lu were mutually aware of or must have known each other’s identity and hence his/her respective shareholding in NAS throughout the entire transaction from negotiation to completion. It was readily inferable from all surrounding circumstances that the Disposal was not a normal transaction motivated by any commercial consideration. The Trustees submit that:
26.The Trustees seek to set aside the Disposal and ask for an account and payment of all benefits received in relation to the Shares from 31 March 2016 up to the date of the order pursuant to section 51A of the Ordinance. 27.Lu disputes the applicability of the Fair Value concept. She contends that the proper approach is to consider the Market Value, ie only Issue 1 for the experts. The Disposal was not at an undervalue:
28.Lu also contends that even if the Trustees are able to persuade the Court to take account of the Fair Value, the Trustees must demonstrate as a matter of fact that the Bankrupt was aware of:
29.Lu said that the Trustees would be unable to establish those facts as she did not know that the Bankrupt was the seller. She dealt with Mr Pun, the stockbroker conducting the Disposal, and did not liaise with the Bankrupt in relation to the Disposal. 30.Lu challenged the qualifications of FY as an expert. Each party also criticizes the approach of the opposite party’s expert in his sampling method and analyses of data obtained. 31.By the end of the trial, the issues boil down to the following:
F. LEGAL PRINCIPLES APPLICABLE TO SECTION 49 OF THE ORDINANCE 32.The Originating Summons expressly relies on section 49 of the Ordinance which provides that:
33.There is no dispute that the Disposal accrued within the “relevant time” of 2 years under section 51 of the Ordinance. It is thus not necessary to establish insolvency of the Bankrupt at the time of the Disposal before invoking section 49. 34.The value of an asset that is being offered for sale is, prima facie, not less than the amount that a reasonably well informed purchaser is prepared, in arm’s length negotiations, to pay for it. Where there is a market for assets of the type in question, in general the figure to be taken is the market value. See Phillips and anor v Brewin Dolphin Bell Lawrie Ltd and anor [2001] 1 WLR 143, at §30, Lord Scott; and Goode on Principles of Corporate Insolvency Law, 5th ed, 2018, §13-25. 35.Insofar as listed shares are concerned, this is not necessarily equated with the existing share price on the open stock market or the book value at any given time. Rather, in considering whether the transaction was at an undervalue, the Court forms a view as to the price which the asset would have fetched in the open market: National Westminster Bank plc v Jones and ors [2001] 1 BCLC 98 at §80, Neuberger J. 36.To establish “undervalue”, under section 49(3)(c):
Re MC Bacon Ltd [1990] BCLC 324 at 340g-h; Reid v Ramlort Ltd (No. 2) [2005] 1 BCLC 331 at §§102-104; and Delaney v Chen [2011] B.P.I.R. 39 at §§15-16, CA. 37.The above legal principles on deciding if there was an undervalue are not really disputed. What is disputed is whether or not the Court should ascribe any Fair Value or special value to the Shares. Mr Shieh SC (and Ms Rachel Lam SC), counsel for the Respondent, submits that the Court should not, otherwise it would be inconsistent with paragraphs 34-36 above. As a corollary, he queries the relevance of Lu’s existing shareholding in NAS or her increase in shareholding in NAS from 29.72% to 50.60% as a result of the Disposal when the proper test for ascertaining Market Value is applied. The issue of Fair Value will be separately dealt with in Section J below. G. CHALLENGE AS TO EXPERTISE AND EXPERTS’ APPROACH 38.This case relies heavily on expert evidence. CL was challenged as he based his opinion on “experience”. He claimed that he did not want to “cherry pick” but listed out all the data for the court. FY’s expertise was challenged because he did not have experience with valuation of shares of listed companies or application of the Takeovers Code. His qualitative analyses of data were criticized as being subjective. 39.Of course, an expert who has no knowledge or experience in a particular field is not qualified to give expert evidence. To give an extreme example, one cannot ask an expert in building construction to give evidence on configuration of a motor vehicle. 40.However, I do not think it can be disputed that an expert witness can give evidence as to facts, interpret the data, express his/her opinion on those facts or data, and rely on his experience in his discipline. He/she may draw on literature in his discipline. The Court will decide what weight should be attached to his/her opinion. See Kennedy v Cordia (Services) LLP (Scotland) [2016] UKSC 6, §§39-41, Lord Reed and Lord Hodge:
41.There can also be no doubt that the expert is entitled to express his opinion from his general experience. See English Exporters v Eldonwall Ltd [1973] 1 Ch 415 at 420D-421A, per Megarry J:
42.It is apparent from the citation in English Exporters that an expert witness cannot stop at saying “I have a lot of experience. This is my opinion.” When challenged as to his opinion, there are 2 minimum sources on which he should justify himself: (i) his first hand evidence in past transactions; and (ii) information or publication in his discipline. 43.CL’s expertise was in corporate finance (such as IPOs, take-overs) and had dealt with listing. However, as shall be demonstrated, when challenged, CL could not meet the requirements in paragraph 42. He adduced irrelevant evidence of facts, ie transactions that fell way outside a reasonable period of the Disposal. His “experience” was not supported by first hand evidence in past transactions or publication in his discipline. 44.Judging from his curriculum vitae and answers in cross-examination, FY was not a market participant, not an expert in the securities field and was not licensed by the SFC to advise on corporate finance. His expertise was in insolvency matters. 45.FY has done valuation of businesses and companies in shareholder disputes and divorce proceedings in Hong Kong and overseas jurisdictions. However, he has not identified the cases (probably due to privacy reasons). There was no specific mention of valuation of shares in listed companies or experience with application of the Takeovers Code. 46.Mr Shieh SC queries FY’s expertise since the subject matter of this case is the value of a listed company rather than private company. 47.In my view, FY is not any less an appropriate expert. Every expert will have his first experience with the court. In dealing with insolvency matters and valuation of private companies, one can reasonably expect FY to have knowledge of the Companies Ordinance and related codes or regulations. As will be demonstrated, even if this was FY’s first experience with valuation of shares of a listed company or application of the Takeovers Code, his opinion was well reasoned, rational and supported by relevant publications. 48.The difference between FY and CL was that when his opinion was challenged, FY backed his opinion up by data and reasons and left the Court to choose amongst the alternatives. CL effectively invited the Court to accept his word because that was his say-so, without evidence to show his first-hand experience or admissible data. At times, CL’s opinion was even contradicted by his own data. I do not favour CL’s approach. I prefer FY’s approach, subject to certain aspects that I expressly doubt or reject in the analyses below. 49.Counsel have made thorough analyses of the experts’ opinions and it is not necessary to set them out here in full. In the following analyses, I will just deal with the main arguments. H1. Principles agreed between the experts on Market Value 50.The definition of “Market Value” as set out in IVS 2013 and 2017 is the estimated amount for which an asset or liability should exchange:
51.For the purpose of assessing the Market Value:
H2. Parties’ respective case on Market Value 52.As can be gleaned from Table 1 above, the components of Market Value are in dispute (in descending order of significance):
53.FY based his valuation on the following factors:
54.CL based his valuation on the following factors:
H3. Illiquidity Discount 55.In selecting the comparables, both experts sought “off-exchange” transactions as it was recognized that for such a huge volume of shares, it was not practicable to sell them in the market. 56.FY had 5 transactions (of 5 listed companies) as comparables whereas CL had 11 (of 7 listed companies). 57.FY’s criteria (§172, FY Report) were as follows:
58.FY’s selected transactions disclosed a range of discounts from 6.4% to 19.6% with a median of 10.1%. He did qualitative analyses, having considered eg the annual returns, financial performance of the relevant company and suggested some factors causing the variation in percentages, before giving an opinion on the Illiquidity Discount as 10%. 59.On the other hand, CL started off with a view based on his “experience” that the discount for such minority and non-controlling block in a listed company with low liquidity would be in the region of 30% (§8.2.5, CL Report) and then proceeded to verify his view. 60.CL’s criteria for selecting comparables were as follows (§8.2.7, CL Report):
61.CL explained under cross-examination that he was to find relevant data in the market, which was then averaged to verify his view of 30% discount. It was not to find a company whose attributes were the closest possible match to NAS. 62.I find CL’s approach to be problematic for these reasons. 63.Firstly, CL’s starting premise based on experience carried the risk of bias. Contrary to the principle in paragraph 42 above, his report never gave any example of first-hand experience in past transactions or publications accepted in his discipline that supported the 30% discount. 64.Secondly, the dates on which the selected transactions took place were at least 6 months after the Disposal. The market did not have such information at the time of the Disposal. The selected transactions were irrelevant. If the 30% was based on experience, there should be abundant data before the Disposal Date in support. 65.CL explained that October 2016 was the earliest date for the search engine for the HKEX website but this explanation was starkly contradicted by FY’s search results. In fact, under cross-examination CL admitted that he could have applied different search criteria in the HKEX website to search for comparables before the Disposal date although such method would require more effort in studying the announcements to identify the relevant transactions. 66.In my view, it is not acceptable for an expert to adopt an irrelevant period for searching data simply because it was easier to search. This ground alone is sufficient to reject CL’s evidence on the Illiquidity Discount. 67.Thirdly, CL’s data did not support his experience of 30% discount. In 10 of his 11 selected transactions, the discounts ranged from 1% discount to 56%. One even had a premium of 10%. CL claimed that the respective discounts came up with an average of 32% (excluding the transaction with 10% premium) or 28% (including that transaction). 68.With respect, this average approach carried no weight because none of the 11 transactions carried a 30% discount. Only 3 out of 11 carried a discount of less than 5% variation from 30%. CL has not attempted to explain the wide range of discounts. 69.Among the 11 transactions, 3 involved Kwan On Holdings Ltd of which the share size ranged from 6.9% to just over 10%. The discounts were over 50% in all the 3 transactions. One could not help wonder what the problem of Kwan On was – to have sale and purchase of such substantial shareholdings in 2 months. CL has not begun to explain. 70.The 30% discount was also irreconcilable with the asset approach which CL mentioned in his report. He asserted that “it would be more prevalent for non-Hang Sang Index companies with smaller market capitalisation to have a larger discount of share price to the NAV per share than those [real estate developers] shown in Exhibit 11.3.7”. However, he had not given a single example in support. 71.This Court has specifically asked CL for the possible reasons for variation in discounts and why the discounts in his selected transactions were not the 30% that he advocated. CL admitted that each transaction had its unique features, for example, the seller wanted to sell urgently. And yet he admitted that he had never considered if there were unique features in any of those 11 selected transactions; he considered the job impossible (做唔到). 72.Fourthly, CL failed to distinguish between GEM and Main Board shares when selecting comparables. Even Lu’s witness, Pun, admitted that GEM shares were more difficult to sell. And yet in respect of the 11 transactions selected by CL, 10 were Main Board shares. CL’s explanation was that the Illiquidity Discount for GEM shares should be greater than for Main Board shares. However, this explanation was contrary to his own “experience” of 30%, which made no distinction between GEM and Main Board shares. In fact, the only GEM Board company amongst the 11 transactions showed a discount of 11% - which was not greater than the discount for Main Board shares (like Kwan On) and in fact supported FY’s opinion of 10% Illiquidity Discount. 73.Fifthly, the variation in block sizes was too great to be of meaningful comparison. CL's selected transactions involving block sizes ranging from 6.9% to 29.9% shareholding. Under cross-examination, he claimed that so long as the block size would not trigger a GO, no differentiation in block sizes was required. 74.I am unable to agree. There were only 2 out of 11 selected transactions involving a block size of 21.7% and 25.3% (ie within 5% variation from the size of the Shares. Those 2 transactions had a premium of 10% and discount of 46% respectively. CL has not explained the difference. 75.For the 5 reasons above, I reject CL’s opinion on the Illiquidity Discount as irrelevant, lacking rational bases and unreliable. 76.Insofar as FY’s selection criteria were concerned, Mr Shieh SC’s challenges were directed at:
77.In respect of the 1st challenge, I repeat my observations in Section G above. The challenge to FY’s expertise is unfounded. 78.In respect of the 2nd challenge, Mr Shieh SC contends that high concentration enquiry in itself was not uncommon and, unlike suspension from trading, was not an indication of irregularity in the listed company. He also points out that FY could not even define what constituted high concentration and was not even aware if SFC had issued guidelines on this aspect. 79.I am not persuaded by Mr Shieh SC’s argument. FY had cited the high concentration warning announcements of SFC, which referred to the possibility of a substantial fluctuation in the price of shares even with a small number of shares traded, given the high concentration of shareholding in a small number of shareholders. Shareholders and prospective investors were warned to exercise extreme caution. 80.A knowledgeable and prudent purchaser reading the announcement could reasonably take the view that the substantial fluctuation might reflect a distorted picture of the share price. FY’s view was no different. 81.FY had excluded one selected transaction in respect of sale of 22.62% in KSL Holdings at a discount of 87%. CL contended that, without KSL, the “average” discount in FY’s selected transactions would be 12%; but with KSL, it would be 25%. An 87% discount was way above even the highest discount of 56% in CL’s irrelevant data. I agree with FY that KSL Holdings should be excluded as an outlier. 82.Further, finding an “average” was not FY’s approach. Even if average was relevant, an “average” of FY’s selected transactions has meaning given the small range of discount (from 6.4% to 19.6% excluding the outlier). To the contrary, an “average” has little weight given the wide range (from 1% to 56%) in CL’s selected transactions. 83.In respect of the 3rd challenge as to qualitative analyses, CL criticized FY’s explanations for the variations in the Illiquidity Discount for FY’s selected transactions as “subjective”; the factors considered by FY were “judgmental in nature and [were] not supposed to form a part of the basis of assessment under Issue 1”. By not investigating the reasons behind the discount, CL claimed to have given more “objective” analyses. 84.Such criticism overlooked the fact that an expert’s opinion often required some judgment on his part, to assist the Court on areas within the expert’s expertise. It is of course always open to the Court to determine the weight to give to the expert’s judgment. 85.In §35 of the Joint Report, CL admitted that there were a number of contributing factors to form the bases and magnitude of discount and market norms. He explained market norms and time to sell but he did not list other contributing factors. 86.Mr Shieh SC conceded in his final submission that there was no direct correlation between the estimated time to sell and the level of discount. CL was not advocating a linear formula for calculation of Illiquidity Discount. With this concession, an “average” approach has simply ignored factors beyond illiquidity. 87.Following on from the 2 preceding paragraphs, the implication is that the purchasers and sellers in CL’s selected transactions were not acting knowledgeably or prudently and without compulsion. The discounts were totally arbitrary. 88.Applying paragraphs 40 and 41 above in Section G, CL had given factual evidence in the form of data but not opinion evidence as to how the data could be interpreted to assist the Court. 89.On the other hand, apart from giving data, FY had done more by giving opinion evidence on why the data appeared as it did. His explanations on the variation in discounts was not subjective. They were based on information in the public domain which told about possible motives of the purchaser and seller, business prospect, financial position of the relevant company, market sentiment, discount or premium of the trading price over NAV, and annual reports. (§§237-240, FY Report) 90.Further, FY explained under cross-examination that the substantial shareholder of a company would have more in depth understanding of the situation and performance of a company than the other investors. That could explain why a substantial shareholder would be prepared to accept a discount of various rates based on matters other than illiquidity, e.g. the poor or promising outlook of the business. This was just common sense and I agree. 91.The Trustees further submit that even if the market was fully aware of the actual situation and performance of a company, a substantial block of shares could still attract a greater discount. That was not because of illiquidity but the fact that the financial risk that the purchaser of a substantial stake in a poorly performing company would be far greater than a small investor who traded through the trading system. This was again common sense and I also agree. 92.It was also raised in cross-examination of FY, that the factors taken into account by him in his qualitative analyses “double-counted” the factors determining trading prices of shares and the only factor causing the discount was illiquidity. However, this line of cross-examination contradicted CL’s own admission in paragraph 85 above. 93.In summary, it could be seen that CL’s selection of comparables started on a wrong footing based on his alleged experience, picked a wrong period for comparison, failed to have regard to the GEM Board nature and block size of shares and hence put forth discounts without explaining the variations. Such an approach was plainly irrelevant and inadequate. 94.On the other hand, FY’s approach of selecting comparables was rational, related to the nature of NAS shares being GEM shares and the block size in question. His qualitative assessment gave the Court the proper perspective as to variations in discounts. FY’s approach was consistent with the agreed basis of assessing the Market Value, namely, that the purchaser and seller acted “knowledgeably”, prudently and without compulsion. I accept the FY’s approach as more principled and reliable to that of CL’s, notwithstanding the small sample size. I find the Illiquidity Discount to be 10%. H4. Swing Vote Premium 95.According to FY,
96.Swing Vote Premium is a novel concept in Hong Kong. FY based his opinion on 2 publications known as (i) “The Price of Control: An Empirical Investigation of the Control Premium in M&A Transactions, pre and post Financial Crisis of 2007/2008” by David Dietz in 2015 (“Dietz”);and (ii) “Mergerstat Control Premium Study” published by Factset Mergerstat, LLC (“Mergerstat”) setting out the empirical studies and statistics based on thousands of merger and acquisition transactions in various markets across the world (§§275-290, FY Report). 97.FY pointed out that at the time of the Disposal, the shareholding structure of NAS was as follows(FY Report, §69):
98.According to FY, with such a shareholding structure, the owner of the Shares (20.9%) would be able to yield influence over the management of NAS, as his/her inclination to vote on particular issues might be determinative of the outcome in the general meeting:
99.Having considered Dietz and Mergerstat, FY considered the Swing Vote Premium to be 15% of the Base Value. 100.Mr Ho SC submits that there was no evidence at the time of the Disposal that Lu would take such steps to increase her shareholding in order to counter the influence that the owner of the Shares could exert. There was no guarantee of success of the GO, and Conversion would require Lu to pay HK$0.25 per share, more than double the trading price. To suggest that Lu would take such steps instead of cooperating with the owner of the Shares was devoid of rational basis. 101.Mr Shieh SC disputes both the applicability of the Swing Vote Premium and the percentage on the following grounds:
102.With regard to ground (1), I do not think the novelty of a concept excludes its applicability. Much depends on the evidence led and how the concept is applied. As FY explained, whilst it might be difficult to sell a block of shares, it was equally difficult to buy. The Swing Vote Premium was thus looking at things more from the perspective of a purchaser. 103.With regard to ground (2), I do not think one can say definitively that a Swing Vote Premium cannot apply to a publicly listed company. Much depends on the shareholding structure. 104.With regard to grounds (3) and (4), I agree that in the absence of other pointers, mere evidence of the share structure is not sufficient to command a Swing Vote Premium. 105.By way of example, a swing vote may be useful where, eg there is a feud between 2 family groups of shareholders with equal shareholding and one group wants to the purchase the minority block of shares. There were no such pointers here. In fact, this view is consistent with the articles cited by FY, which all discussed solely held corporations and concentrated shareholdings. 106.Apparently, FY has assumed that the purchaser was someone other than Lu, and that purchaser would not vote in accordance with his/her own wish but would swing towards another shareholder. 107.If Lu were to be the purchaser, any “swing value” would immediately evaporate upon her purchase, as she would hold over 50%. It would not be necessary to carve out the Shares for any swing vote. This applied even if she were to purchase through a nominee, for her nominee would not swing to any side but to Lu’s. 108.Grounds (5) to (7) are irrelevant given my views on grounds (3) and (4). 109.However, just for the sake of completeness, one can refer to my view of Dietz and Mergerstat, discussed under Control Premium in Section L4. I find the 15% assessed by FY to lack rational basis. 110.In summary, although a Swing Vote Premium can exist in principle where there are pointers apart from the shareholding structure, having regard to my analyses on grounds (3) and (4), I am not satisfied that a Swing Vote Premium applied to this case. H5. Computation of the Market Value 111.CL did not adopt the close of trading price on the date of the Disposal or the 5-day average before that date. He chose to derive the Base Value by the “market approach” by applying a PE multiple of 14.66 to the average earning per share of NAS of HK$0.007, ie HK$0.103. He regarded that as “very close to the six month average market price of NAS of HK$0.116 per share”, and in fact very close to the Base Value chosen by FY plus the Swing Vote Premium, ie HK$0.112. 112.In other words, both experts agreed that the Illiquidity Discount should be applied to a value above the trading price of the Shares. 113.I have found the Illiquidity Discount to be 10%. The Swing Vote Premium did not apply. The computation of Market Value for the Shares sold as one lot, using the respective Base Value, is as follows: Table 1A on Market Value
J. APPLICABILITY OF FAIR VALUE ISSUE J1. Parties’ respective case 114.FY suggested that Fair Value was applicable to proceedings under section 49 of the Ordinance. There should be added to the purchase price the Control Premium (for acquiring absolute majority in NAS) and the Shell Premium (for the Hong Kong listing status of NAS). He based his valuation on Dietz and Mergerstat for the Control Premium. 115.CL disagreed that Fair Value applied. If it did apply, he opined that the Fair Value remained at or below the Market Value of HK$28,800,000 on the bases that:
J2. Meaning of Fair Value 116.Fair Value requires a valuation to take into account the special value of the particular asset to a special purchaser. It is not the same concept as fair value in accounting. It may not be the same as Market Value. 117.Fair Value is defined in IVS 2013 as follows:
118.The concept of Fair Value has received judicial recognition when the courts had to consider “the value … in money or money’s worth” in situations like the present:
119.The special value, which could take the form of a “ransom value” that the subject transaction could confer upon the counterparty. The transaction should be valued as a whole by taking into account instead of ignoring such ‘ransom value’ when assessing whether the transaction was at an undervalue. Otherwise it would “fly in the face of reality and common sense”: Agricultural Mortgage Corp Plc v Woodward[1994] BCC 688 (“Woodward”), at p.696H-p.697A, Sir Christopher Slade. 120.In Woodward, D1 fell into arrears with his mortgage before his bankruptcy. Shortly before the deadline he agreed with the plaintiff mortgagee for the arrears to be cleared, D1 granted to D2 (his wife) a long tenancy of the mortgaged property at full market rent. The value of the mortgaged property with vacant possession was over £1 million but, subject to tenancy, was less than £500,000. The mortgage was for £700,000. The judge held that the transaction was entered into by D1 for the purpose of prejudicing the interest of the plaintiff, which was not challenged. 121.The English Court of Appeal rejected D2’s argument that the only relevant value was the best market rent for the lease (which she had agreed to pay) and declined to look at the tenancy in isolation. The tenancy gave D2 the threefold benefits of safeguarding the family home, enabling her to acquire and carry on the family farming business and a surrender value which would place her in a ransom position as against the plaintiff. The Court of Appeal held that the transaction conferred on her significant enhanced benefits beyond the rights granted by the tenancy agreement itself for which enhanced benefits she did not pay. The tenancy agreement was held to be a transaction at undervalue and was set aside. 122.Another example of ransom value could be found in Margo Ann Freeguard v Royal Bank of Scotland P.L.C. [2005] EWHC 978 Ch. A mortgagee bank was found to be negligent in its exercise of power of sale by failing to sell a strip of land, which was the sole access to an adjacent field, at its ransom value to the owner of the adjacent field. The test to be applied was “the best price reasonably obtainable by a mortgagee”. 123.In Inland Revenue Commissioners v Clay[1914] 3 KB 466, the court had to deal with valuation of the property for sale, ie the amount which the land, “if sold at the time in the open market by a willing seller in its then condition, free from incumbrances, ... might be expected to realize”. (underline added) IRC v Clay was not an insolvency case. 124.The subject property had a special value to a special purchaser (trustees) who owned adjoining property and desired to extend their nursing home. The English Court of Appeal held that the fact that the immediately adjoining landowner(s) were likely to offer more than the property would be worth to anybody else was a fact which could not be disregarded (p472). The trustees actually paid an amount 33.3% above the provisional valuation and that was held to be the price that “might be expected to realize”. "Expected" referred to the expectations of properly qualified persons who had taken pains to inform themselves of all the particulars ascertainable about the property, its capabilities, the demand for it, and the likely buyers (at pp475-6). 125.In the context of companies, there were examples of taking into account strategic value of substantial shareholding in a company for assessing the Fair Value of the same. See Toll (FHL) Pty Limited v Prixcar Services Pty Ltd & ors (2007) 17 VR 632, involving a private joint venture company. Toll notified the company directors of disposal of its 33.3% shareholding. The dispute was over valuation. It was held that the notion of Fair Value of shares in joint venture company or closely held corporation necessarily imported the special value of the shares in the hands of another shareholder and that discounting for a minority shareholding was not “fair”. It was at least arguable that Toll’s shareholding might be of special strategic significance in terms of the votes required to pass special resolutions and because the ability to control Toll’s shareholding in the company carried with it the ability substantially to influence board decisions and, if aggregated with an existing shareholding, could lead to control. (at §§26, 27, 34 & 35) 126.In the light of these authorities as well as common sense, a transaction must be viewed as a whole. It would be ludicrous to ignore the special value that the subject transaction conferred upon the counterparty (ie in this case, Lu) for the purpose of s.49 of the Ordinance. In these authorities, knowledge of the seller that he could command a Fair Value was not necessary. Objective circumstances would speak for him. 127.Mr Shieh SC does not agree that any premium should be ascribed to an asset solely as a result of the identity of the purchaser or any inferences which the Trustees suggest should be made as to the lack of bona fides of the Disposal. He makes 3 points. 128.Firstly, “a comparison [had] to be made between the value obtained by the company for the transaction and the value of consideration provided by the company. Both values … must be considered from the company’s point of view.” Re MC Bacon Ltd at 340f‑g, wherein the Court had to consider undervalue under a provision similar to section 49 of the Ordinance. These principles were followed in Delaney v Chen. 129.Mr Ho SC submits that the ratio in MC Bacon was that creation of the security over the assets did not deplete them and therefore the owner did not suffer any loss. All that the owner suffered was the inability to apply the proceeds of sale of such assets otherwise than in satisfaction of the secured debt. The supposed requirement of making comparison from the company’s point of view was not part of the ratio in MC Bacon. 130.I do not agree with the last sentence in the preceding paragraph. Mr Shieh SC’s proposition in paragraph 128 was correct. 131.However, more importantly, Re MC Bacon Ltd was decided before the English Court of Appeal’s case of Woodward. In subsequent cases, the courts followed Woodward. 132.In Re Thoars (No. 2), Reid v Ramlort Ltd (No. 2)[2005] 1 BCLC 331, whilst applying the comparison principle set out in MC Bacon, Parker LJ expressly stated that Woodward was just such a case (§103, at p383). In Re Thoars, the impugned transaction was the declaration of a trust over an insurance policy by the deceased (who left an insolvent estate) in favour of one of his creditors. Under the policy a sum of £180,000 was payable on the death of the deceased, but the policy had a surrender value of £71. As consideration for the declaration of trust, the creditor paid the deceased £3,000. The trial judge set aside the declaration of trust for undervalue as the policy was worth at least £10,000 at the time of the declaration of trust, having regard to the deceased’s then state of health. 133.It was argued by the creditor that, absent direct evidence of the existence of a special purchaser for such policy, the value of such policy could only be the surrender value of such policy. The English Court of Appeal rejected such contention as it flew in the face of reality and common sense (§117, at p385), holding that, from the deceased’s point of view, there would be a significant pay-out under the policy upon his death. 134.Secondly, Mr Shieh SC tries to distinguish Woodward. He submits that Neill LJ made clear that the ransom value was not something which affected the calculation of the Market Value (at p698C-D) as D2 there was paying the full market rent. That judgment emphasized that the tenancy had the effect of diminishing the value of the estate, whereas there was no parallel of depletion of any asset in the estate in the present case. When one spoke of ransom value, one is talking about the position of the transferee squeezing benefit out of the other party (the plaintiff mortgagee in Woodward). There was no ransom in the present case as the Shares did not allow Lu to be in any kind of superior bargaining position as against the Bankrupt or any identifiable party. 135.With respect to Mr Shieh SC, citation from IVS 2013 in paragraph 117 above already stated that special value may not be the same as Market Value. The rental agreement in Woodward was at the best market rent. It was still regarded as undervalue having regard to all the circumstances. Ransom value or strategic value are just two forms of special value pointing to transacting at an undervalue. There can be other forms, like Margo Ann Freeguard and IRC v Clay. The lack of “ransom” in the present case did not matter. 136.Further, ransom value is not just about the transferee squeezing benefit from a counterparty. It equally applies to a transferor who could have but failed to squeeze benefit out of a sale, eg IRC v Clay. 137.Even applying Re MC Bacon, from the point of view of the bankrupt there, the outgoing value far exceeded the incoming value because of the benefits to the bankrupt’s wife. The Disposal in the present case was a one-off deal and, from the Bankrupt’s angle, it did deplete the Bankrupt’s estate because of the low sale price. 138.None of the authorities referred to by Mr Shieh SC have rejected the application of the Fair Value. I hold that if the purchaser and seller were aware of each other’s identity, or only one person’s identity was known to the other, to ignore the special value is to shut one’s eyes to reality. Woodward is good law. Fair Value does apply to the present case. 139.Thirdly, Mr Shieh SC submits that even if Fair Value is applicable, it should still be ignored unless the Court makes positive finding that Lu and the Bankrupt were mutually aware of each other during the negotiation for the Disposal. 140.Mr Ho SC disagrees. He refers to MacDonald v Hanselmann and IRC v Clay, above, and propounds that the key for considering the special value is whether it would be known to the public that a special purchaser was in existence. 141.I do not agree with the broad proposition of Mr Ho SC. In both of the cases that he cited, the purchasers were known to the sellers. I doubt if there could be a situation known to the public that a special purchaser was in existence but his/her identity was not known to or ascertainable by the seller. 142.Anyway, applying Mr Ho SC’s proposition to a hypothetical situation, the shareholding structure of NAS was a matter of public record. Lu could always be the hypothetical special purchaser who wanted to achieve over 50.6% control of NAS. It would mean that the Bankrupt could command a Fair Value regardless of whether Lu was the intended purchaser. An existing shareholder (apart from Lu) who would not actually be acquiring over 50% and who did not pay a Fair Value would face an allegation of undervalue. That could not be right. 143.I hold that the Bankrupt had to know the identity of Lu as a purchaser before Fair Value could apply to the Disposal. K. AWARENESS OF IDENTITY ISSUE 144.The Trustees have to establish that the Bankrupt was aware of the identity of Lu as the purchaser and her existing interest in NAS at the point of negotiation and agreement of the Disposal before Fair Value was engaged. 145.One Trustee, Lu and Pun have testified. The Bankrupt has not. The Trustees have not given evidence as to what enquiries they had made of him as to his state of knowledge. However, in my view, even if the Bankrupt had given a negative answer to the Awareness of Identity Issue, the Trustees were not obliged to accept his answer. 146.The Trustee’s evidence was based on documents and was not disputed. It gave the background of the case. I accept it. 147.With regard to the evidence of Lu and Pun, this was not a case that really turned on the Court’s view of a witness’ demeanour in the witness box but on the inherent logicalities (or lack of it) of their evidence having regard to contemporaneous documents and circumstances. 148.The evidence of Lu, in summary, was that the Disposal was a “blind sale”, ie neither she nor the Bankrupt were aware of each other being the purchaser and seller of the Shares respectively. Her knowledge of the availability of the Shares and its purchase occurred within a day. Her evidence is summarized in paragraphs 149-164 below. 149.Lu first met the Bankrupt in Shanghai in 2014. She later acquired Convertible Bonds from Million Land Ltd, which was holding 269,058,296 shares in NAS in 2014. She built up 29.12% shareholding in NAS and surpassed the Bankrupt as the largest shareholder of NAS in about a year’s time. Her acquisition was said to be motivated by the acquisition price on each occasion being lower than the price of the Convertible Bonds and not because of the Bankrupt. On her 2 acquisitions from Million Land, Lu used the broker firm Orient Patron Securities Limited, the same firm involved in the Disposal. 150.Lu claimed not to have paid attention to the overall percentage she was holding. Despite being the single largest shareholder of NAS since June 2015, she has never been appointed as a director of NAS, even after purchase of the Shares. She felt it better to leave the management to the board as she was not proficient in English and was not familiar with regulations governing listed companies. She accepted in cross-examination that she knew the Bankrupt and his wife were the executive directors of NAS, and the Bankrupt was the Chairman of the board. 151.Lu was instead appointed as a representative of the Shanghai office of one of NAS’ subsidiary, the function of which was to raise capital. She was also appointed as a director of another subsidiary of NAS. She initially claimed that it was the Company which appointed her but admitted in cross-examination that it was the Bankrupt who appointed her to both positions. She plainly wanted to distance the Bankrupt from her. 152.Lu claimed to have first learnt of the availability of the Shares on 31 March 2016, the same day that she struck the deal. It was at the time she signed transfer documents that she knew that the Bankrupt was the seller. 153.The credibility of Lu was important. She was not cross-examined as to her knowledge of the Bankrupt’s state of mind, whether the Bankrupt knew her identity and the level of her shareholding at the time of the Disposal. However, when assessing her credibility, one should not lose sight of the big picture at the time of the Disposal. 154.On the Bankrupt’s side:
155.The Disposal completely lacked commercial sense from the Bankrupt’s point of view. Viewed in the light of the arbitration award and the petition for his own bankruptcy shortly after the Disposal, it was plain that the Bankrupt had no genuine commercial motive over the sale but to strip himself of a major asset and to strip the Company of cash upon a declaration of dividend. It was further to inhibit the Trustees from assuming the capacity of shareholders of NAS and investigate into affairs of NAS to maximize recovery on behalf of the Bankrupt’s estate. 156.On Lu’s side, she claimed:
157.It was inherently improbable that a knowledgeable investor in GEM shares, trading at those volumes, would have consistently ignored the percentage of her own shareholding and the shareholding structure of NAS. If Lu had so trusted the Bankrupt and his wife, she would not have omitted to find out that he was once the largest shareholder and person in real control of NAS. 158.It was also unimaginable that the Bankrupt or NAS had never informed Lu of the fact that she was the largest shareholder and the percentage of her shareholding, particularly since there was a statutory obligation in making disclosure of interest when the shareholding exceeded a certain percentage. 159.More incredible was Lu’s response at the time of the purchase. She vacillated between being told by Pun before and after signing the transfer documents but settled with the version of being told after the signing. When Pun told her that she would own over 50% shares in NAS and had to make a GO, the only reasonable realization must be that she was acquiring from a major shareholder, the Bankrupt. 160.When the Chairman of the board was disposing of his shareholding, Lu’s only reasonable reaction must be to contact him immediately to find out the reason for the Disposal, to see if NAS was in a crisis or to find out if her trust in the Bankrupt was misplaced. Lu did not and her explanation was that “their personal relationship was not that close” and she was not nosy. Why she would relate a question of potential business crisis with just personal relationship was inexplicable. 161.Further, Lu’s obligation to make a general offer was a serious matter, requiring about HK$70 million to acquire the rest of the shareholding. When Pun reminded her to make a GO, she immediately replied “OKOK” without any need for clarification or any time to think. She was plainly aware of the meaning of a GO and the financial obligation involved. It was incredible that she denied knowledge of the percentage of her shareholding. 162.Lu purported to paint a picture that she was totally isolated from the management of NAS and she was perfectly comfortable with that. Again, with investment in over 50% shareholding, that picture totally lacked commercial sense. 163.By the Disposal, Lu would have acquired just over 50% and hence would have control over the NAS’ cash. Simply by declaring a dividend, the cash she could have obtained would have been sufficient for her to meet the cost of the acquisition and/or any GO price. The dividend declared in 2017 soon after the acquisition represented 80% of her purchase price. 164.In summary, the Disposal was not negotiated. There was no due diligence done. The Disposal was concluded in one day by a few telephone conversations between Pun and Lu. In such a bulk purchase of shares, Lu did not even know that she had to make a GO until Pun told her about it. She readily accepted it by saying “OKOK” without considering her means and how to do the GO. I only need to state these to reject Lu’s evidence as a fairy tale. I find her to be incredible and reject her version. 165.As for Pun, a witness on subpoena, he was a broker with no particular connection with the Bankrupt or Lu. He appeared to be an independent witness with no interest in the outcome of this case. 166.According to Pun, he was instructed by the Bankrupt to find a purchaser. The Bankrupt did not name Lu. Pun discovered by reference to the contacts and records in his office that Lu held NAS shares. She was the 3rd of 3 potential purchasers whom Pun had contacted. He did not try to find a 4th potential purchaser because he thought that GEM board stock was illiquid and there could be a lot of fraud in it. So if someone was willing to make an offer for such a big lot, it was already a good outcome. 167.Pun has produced “official” telephone records of his brokerage company. The records suffered from the following inadequacy:
The official telephone records produced were plainly incomplete whether Lu or Pun’s evidence is to be accepted. 168.Mr Shieh SC suggests that there is no reason to doubt Pun’s evidence because the way Pun went about contacting potential clients was inherently inconsistent with the suggestion that there was a sham/dishonest arrangement between the Bankrupt and Lu. It was not suggested to him in cross-examination that it was a sham or that the Bankrupt “instructed” him to “find” the “correct” purchaser. 169.I do not consider such “instruction” to Pun to be a necessary element in the context of this case. As Pun testified, people who purchased GEM shares were few. It was only natural that he would make inquiries of past clients who had purchased NAS shares and it would not be difficult to get to Lu eventually and get at the “right” price that the Bankrupt would want to “sell” and Lu would want to “buy”. 170.On such evidence, Mr Shieh SC submits that there is no direct evidence of the Bankrupt’s state of mind and knowledge. The Trustees do not found their case on the lesser accusation that the Bankrupt must have deduced on his own volition that Lu was the purchaser and knew of her existing level of shareholding of NAS. The Trustees’ case is premised on an inference that the Bankrupt must have known the identity of Lu as purchaser and there was a prior arrangement between the Bankrupt and Lu over the Disposal. It was to create a sham that they did not know each other’s identity as seller and purchaser, which was denied by Lu. 171.Although the standard of proof that the Trustees have to meet is one of balance of probabilities, the more serious the allegation the less likely it is that the event occurred and hence the stronger and more cogent should be the evidence to overcome the unlikelihood of what is alleged and thus to prove it. This does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at §625. 172.The Court is faced with a choice between: (i) Lu’s version, purportedly supported by Pun as an independent witness, that the Disposal was in accordance with her ongoing acquisition of NAS shares at a price she desired; and (ii) a serious assertion of effectively a sham arrangement which, if accepted, would deprive her of a whole block of NAS shares and hence majority interest. 173.Considering all the circumstances, to suggest that it was a blind sale of the Shares without any contact between Lu and the Bankrupt simply defied commercial sense and logic. Viewing the evidence of Lu and Pun in its entirety against the contemporaneous circumstances, Lu knew or would reasonably have known that the seller was the Bankrupt (see in particular paragraph 159 above). 174.It was also an irresistible inference that being in charge of the management and in view of paragraph 154 above, the Bankrupt knew Lu’s continued interest in building up her shareholding and that she was the purchaser at or before the Disposal. The sale and purchase could not have gone through without the Bankrupt and Lu knowing each other being involved. Pun’s involvement could not give the contrived Disposal any credence of an arms-length transaction. I hold that the Bankrupt was aware of the identity of the purchaser being Lu. L. QUANTUM OF FAIR VALUE ISSUE L1. Fair Value and Illiquidity Discount 175.There is dispute as to components of the Fair Value. Initially, the dispute was over the Control Premium and Shell Premium. A new dispute arose in the course of oral evidence as to whether Illiquidity Discount was necessary to the concept of Fair Value. 176.In the Joint Report, both FY and CL unequivocally agreed that:
177.Nevertheless, in his examination-in-chief, CL suggested that there was a typo in the statement quoted above. The correct statement should be “that it is not necessary to apply a further discount for illiquidity in Issues 2 to 4.” 178.I cannot accept that there was a typo. The statement was in an agreed joint report. To add the word “further” would render the meaning of the first part of the statement that an Illiquidity Discount is necessary “only” when assessing the market value under Issue 1 meaningless. 179.I find that CL was withdrawing his agreement to the statement in the witness box. It was too late to do so as FY was deprived of the opportunity to provide data and give an opinion that CL got it wrong. 180.Illiquidity Discount is about “cost of buyer’s remorse: it is the cost of reversing an asset trade almost instantaneously after you made the trade” (§163, FY Report). “Fair Value is about the fair price between an identified buyer and identified seller as the asset has special value to that buyer and not any other buyer in the market. It is not about “buyer’s remorse” at all and so Illiquidity Discount does not apply to Fair Value. 181.Accordingly, I shall act on the agreed statement cited in paragraph 176 above as representing the correct position. L2. Fair Value and Control Premium 182.The key issue in the dispute over Fair Value of the Shares is the meaning of “control” in the context of NAS. 183.FY considered that upon acquisition of the Shares, Lu would own 50.6% shareholding in NAS. He regarded such combined shareholding as controlling shareholding which would give Lu the following rights:
184.CL disagreed for the following reasons:
185.With regard to the 1st reason, according to the Takeovers Code:
186.With regard to the 2nd reason, since there was a requirement of public float of 25%, a person who held 30% may not have actual control of the listed company, as the rest of the 45% could be held singly or jointly by shareholders who held more than 30%. 187.What CL failed to mention was that under the Takeovers Code, 2 categories of shareholders had to make a general offer to acquire the shares of all the other shareholders:
188.The rationale for the Creeper’s Zone was that:
189.It was therefore plain that the Takeovers Code recognized that there was a category of shareholders who would want to increase his/her shareholding beyond 30%. 190.With regard to the 3rd reason, Conversion was not economically advantageous to Lu compared to purchase of the Shares because:
191.Accordingly, Lu had gained actual control over NAS by purchasing the Shares at a much lower cost than if she had opted for Conversion. 192.With regard to the 4th reason, CL was not entirely correct. As will be seen from his own comparables, there were purchasers of block shares who had minority shareholding in hand at the time of purchase. (See paragraphs 200(2), 203-204 below.) 193.In summary, having regard to the rights which Lu might acquire on gaining over 50% shareholding and that none of the 4 reasons can withstand scrutiny, I agree with FY that, in principle, Lu should have paid a Control Premium. 194.I now proceed to compare the approaches of CL and FY over selection of comparables for the Control Premium. L3. Comparables for Control Premium selected by CL 195.CL put forth 55 mandatory GOs in 2017 as comparables. The price for the GO (“GO Price”) was supposed to be the price for the relevant transaction. He compared the GO Price to the trading prices of the relevant shares on the last trading day, and the average trading prices of 5, 10 and 30 trading days prior to the relevant transactions. 196.CL found that, rather than a Control Premium, there was a Control Discount of an average of 11.95% to the last trading day price. There were 15 GEM Board transactions after taking out the Main Board transactions. Out of the 15, the result was that 8 transactions were at a discount and 7 were at a premium. Therefore, Mr Shieh SC submits that a Control Premium was not the norm. 197.One notes immediately that the selected transactions were 9 to 21 months after the Disposal. They were irrelevant as comparables as the information was not known to the market at the time of the Disposal and would not reflect market sentiments. CL put forth the same explanation as for the selected transactions on Illiquidity Discount. He did not deny during cross-examination that it was possible to find data for a relevant period by using a better, but more time-consuming, way. I repeat my views in paragraphs 65-66 above and reject his 55 selected transactions as irrelevant. 198.In any case, the 55 selected transactions (Exh A-1) were not useful as comparables. I can do no better than using Mr Ho SC’s figures. 199.Firstly, 40 out of the 55 selected transactions were in relation to Main Board companies, which were different in nature and had different investors to NAS listed on the GEM Board. 200.Secondly, the way CL treated the prices on the last trading day and prices on the 30th and 180th day before the relevant selected transaction or announcement with the actual purchase price was unreasonable and produced distorted figures.
201.Thirdly, as noted by Mr Ho SC, the NAV and profits of the companies in those 29 discount transactions were ignored.
202.On Mr Ho SC’s analyses, it can be seen that 51 of the 55 selected transactions in fact carried a premium over the last trading day or 30-day trading price, or a premium over NAV. CL gave no explanation in contradiction. 203.Fourthly, there was no evidence to support CL’s proposition that a premium was “generally attached only in a clean, one shot acquisition of over 50% interest, not an acquisition of a minority block.” (§87, Joint Report). 204.In fact, some purchasers had zero shareholding in hand while 12 out of 55 had less than 10% before they acquired control. See paragraph 200(2) above. 205.Accordingly, if the 55 selected transactions of CL were held to be relevant, they actually supported the existence of the Control Premium propounded by FY. L4. Comparables for Control Premium provided by FY 206.FY was unable to find empirical data on Control Premium in relation to share transactions of private or listed companies in Hong Kong. He had resorted to data in Dietz and Mergerstat,which FY claimed to be well accepted by many valuers and experts. Based on that data, FY suggested a Control Premium of 30%. 207.CL disputed the relevance of Dietz and Mergerstat as referring to the USA market where listing rules did not provide for mandatory GOs and there was no requirement for minimum public float. Different jurisdictions may have different thresholds for controlling interest (eg 30% in Hong Kong but 50% in USA). 208.Dietz contained 19 years of data on worldwide transactions covering USA and Canada, Europe, Asia Pacific, Africa, Middle East, Latin America and the Caribbean. 209.I agree with Mr Shieh SC’s observations:
210.For unknown reasons, FY had not utilized the methodology described in Dietz to run his own study of the Hong Kong market to ascertain the Control Premium. 211.As for Mergerstat, the data covered the 3rd quarter of 2016 and was relevant.
212.FY had not distilled from Dietz or Mergerstat the industries similar to NAS’. Both studies merely set out the data without qualitative analyses as what FY did for the Illiquidity Discount. Given the multiple variations, factors, countries and industries studied, it was meaningless to apply the mean or average figures in Dietz or Mergerstat to the Disposal. 213.FY contended that there should be a Control Premium in this case having regard to the cash-rich position of NAS and its NAV. The over 50% shareholding allowed Lu to utilize the cash immediately. The declaration of dividend of HK$0.06 per share in June 2017 was an example. The dividend attributable to the Shares amounted to HK$24,000,000, effectively reimbursing Lu 80% for the consideration for purchase of the Shares. 214.If Lu were to wind up NAS, her 50.6% shareholding would give her substantial support to secure a special resolution. She could then realize at least HK$ 0.222 per share, being the net current asset value and more than double the trading price. If the shell of a listed company was worth something, she could get even more. (See under Section L5 on Shell Premium below). 215.Having regard to the various advantages that Lu could obtain by purchasing the Shares instead of Conversion, FY made an educated guess of 30% of the Base Value for the Control Premium. 216.Paragraphs 213-215 are all relevant factors. However, even though I am satisfied that a Control Premium should apply, using Dietz and Mergerstat as points of reference to fix the level of Control Premium is unsafe and unsound. L5. Fair Value and Shell Premium 217.The listed status of a company is an asset with a value: Re Hua Han Health Industry Holdings Limited[2019] HKCA 906. The Court of Appeal expressly held that:
218.The existence of a Shell Premium has been recognized by the market and regulators. According to a letter of the Hong Kong Stock Exchange dated June 2016 and updated in April 2018, cited by FY, HKEX noted “a number of listed issuers where their controlling shareholders either changed or had gradually sold down their interests shortly after the regulatory lockup period following listing. One explanation for that phenomenon was the perceived premium attached to the listing status of such issuers rather than the existence of premium attached to the listing status of a company listed in Hong Kong.” 219.This view was also shared by various publications and newspaper articles cited in §§294-304 of FY Report. 220.Mr Shieh SC submits that:
221.With regard to point (1) of Mr Shieh SC’s submission, sale as a shell is a reasonable opportunity open to the purchaser. One can assume in a commercial world that the purchaser seeks to maximize his profits. Whether the purchaser realizes that he/she has this opportunity or does want to sell is not relevant to determination of the issue of Shell Premium. 222.With regard to point (2), Mr Shieh SC’s submission is contradicted by FY’s selected transactions. There were companies which continued with its business after the relevant takeover; whilst others developed a new line of business. (See paragraph 234 below.) They appeared able to surmount regulatory hurdles. 223.With regard to point (3), Mr Shieh SC’s submission is contradicted by CL’s selected transactions. There were purchasers with prior shareholding; there were those with none. 224.With regard to point (4), I prefer CL’s formulation of the issue to Mr Shieh SC’s. The question is not whether a premium should be attached to a block of shares which would, in itself, give the intended purchaser controlling interest. Rather, the question is whether a premium should be attached to a block of shares if, after acquiring such block, the intended purchaser’s shareholding would increase to over 50%. 225.In Mr Shieh SC’s example, if the purchaser already holds 49% shareholding and still wants to acquire more, it begs the question why. If the purchaser is not confident that he can move the shareholders to pass a resolution on a major issue, eg to sell the Company as a shell, I do not see why he should not pay a Shell Premium to acquire the additional 2%. 226.With regard to point (5), Mr Shieh SC appears to be correct. If so, the Shell Premium should be even higher in this case, ie HK$350,000,000. What FY did was to work out the NAV plus Shell Premium in this case and pro-rated the Shell Premium having regard to the volume of the Shares. He had ignored the Control Premium when assessing the Shell Premium (§387, FY Report). This computation was of more advantage to Lu. It reflected the fact that she would only become a 50.6% shareholder and that the Bankrupt could hardly charge a Shell Premium if the purchaser were a different person without a shareholding that could make up to over 50% after the purchase. 227.With regard to point (6), as acknowledged by FY, listed companies rarely trade at exactly the NAV. CL simply could not give a reason why, if the Shell Premium was already embedded in the market price of the shares of a company, someone in his comparables were still willing to pay a price much higher (or lower, in his own examples) than that market price to increase their shareholding to over 50%. 228.FY compiled the data with qualitative analyses. It was a question of weight. CL could not explain why there was a substantial premium over the NAV in the 4 transactions selected by FY. 229.With regard to point (7), I respectfully differ from Mr Shieh SC’s view. Market Value is for purchase of shares, whether as a block or individual shares. Shell Premium is for purchase of a company. Accordingly, it is the worth of the company as a whole, reflected in its NAV that is important. Computation of the unit price per share is merely for comparison to the Market Value or trading price. 230.With regard to point (8), whether the transaction would fall foul of section 49 of the Ordinance depends how “fully and properly negotiated” the deal was. A sale that may bring shareholding to over 50% can objectively command a Control Premium or Shell Premium and it applies whether or not the seller or buyer was subjectively aware of it. That may explain why FY testified that the Control Premium and Shell Premium represented a “range” and he refused to choose between the two. If one were to apply the test in Woodward, looking at things from the angle of the Bankrupt, the outgoing value to the purchaser would greatly exceed the incoming value (without a Control Premium or Shell Premium). 231.I am of the view that a Shell Premium should be included in deciding the Fair Value of the Shares. 232.As to quantum, FY has tried to ascertain the Shell Premium from 5 transactions selected with the following criteria:
233.FY noted that the Shell Premium would not be disclosed in publicly available documents. He therefore calculated the difference between the transaction price and the NAV of the company shown in the latest annual report and the share price on the date of the transaction. 234.Again, FY did a qualitative analyses of the data obtained. His findings, as summarized by Mr Ho SC, were as follows:
235.The Shell Premium, as found by FY, ranged from HK$215 million to HK$570 million. Excluding the one with HK$570 million, the average Shell Premium was about HK$350,000,000, in line with the figures set out in media reports, especially the article by Bloomberg. FY’s opinion on the Shell Premium was a reasoned one and not an arbitrary figure plucked from the news and articles with bias. I accept FY’s opinion. 236.I find the Shell Premium to be HK$350 million instead of the price being $40,908,000 for the Market Value with a pro-rated Shell Premium of $243,000,000 added to it. 237.The computation of the Fair Value is as follows: Table 2A on Fair Value
M. WAS THE SALE PRICE SUBSTANTIALLY LESS THAN THE MARKET VALUE OR FAIR VALUE OF THE SHARES? 238.Comparing the price of HK$30,000,000 and the computation in Table 1A (paragraph 113), Shares were sold at HK$5,064,000 or HK$7,080,000 below Market Value, whether one took FY or CL’s Base Value.The Disposal should be set aside for being at a substantial (as opposed to negligible) undervalue. This alone is sufficient to grant the Trustees’ application under section 49 of the Ordinance. 239.As for Fair Value, the Shell Premium, not paid, was in the amount of HK$350,000,000. Even taking the more generous computation of FY at $243,000,000, the Disposal should still be set aside for undervalue. 240.The Market Value of a substantial lot of shares should take into account the Illiquidity Discount. If there are pointers other than the shareholding structure, one may take into account a Swing Vote Premium but I find that there were no such pointers in this case. I find the Market Value to be HK$35,064,000 to HK$37,080,000. 241.Fair Value can apply to the assessment of undervalue under section 49 of the Ordinance if an asset is of special value to a purchaser and it is established that the purchaser and seller were aware of each other’s identity or only one of them was aware of the other’s identity. 242.In this case, I find that the Bankrupt must have known the identity of Lu as purchaser, and Lu knew or would reasonably have known that the seller was the Bankrupt. The Shares were of a special value to Lu as it brought her shareholding up to 50.6% to achieve control over NAS. She should have paid a Shell Premium of HK$350,000,000. 243.This case relied heavily on expert evidence. An expert should not take a subjective view based on “experience” that could not be supported by objective data, first-hand experience or publications in his discipline. He should take care to select comparables for a relevant and reasonable period and properly define the characteristics for comparison. He should explain why variations appeared in the comparables instead of just giving the statistical picture. CL’s approach has failed in these respects. 244.FY’s approach on the Illiquidity Discount and Shell Premium was a principled approach. His data covered a relevant and reasonable period with well-defined characteristics for comparison. His lack of experience on valuation of listed companies has not shown him to be inadequate or compromised his objectivity. I accept his valuation on the Base Value, Illiquidity Discount and Shell Premium. 245.As for the Swing Vote Premium, it can exist in principle. However, just the shareholding structure without other pointers (such as a feud between 2 groups of shareholders) is not sufficient to found a Swing Vote Premium. 246.As for Control Premium, reliance on worldwide data in Dietz and Mergerstat that covered a wide variety of countries and industries and without taking into account negative premium is not satisfactory. The Court is unable to fix the percentage for a Control Premium, except to say that it should be something in between the Market Value and the Shell Premium. 247.Having regard to the above analyses, in particular Section M, I hold that the Disposal was at an undervalue whether only Market Value applied or Fair Value applied as well. 248.I therefore order as follows:
249.I thank counsel for their great assistance.
Mr Ambrose Ho, SC and Mr Isaac Chan, instructed by King & Wood Mallesons, for the Applicants Mr Paul Shieh, SC and Ms Rachel Lam, SC, instructed by Haldanes, for the Respondent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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