Multi-best Enterprises Ltd v. Luk Fai Holdings Company Ltd and Others

HCMP 909/2021

[2023] HKCFI 2268

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 909 OF 2021

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HCMP 302/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 302 OF 2022

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J U D G M E N T

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1.There are before the court 2 petitions presented by the petitioners under s.724 of the Companies Ordinance (Cap 622) (“CO”) seeking buy-out relief against the respondents on the ground that the affairs of the companies concerned have been conducted in an unfairly prejudicial manner:

(1)  The first petition in HCMP 909/2021 in respect of Luk Fai Holdings Company Limited (陸輝集團有限公司) (“LFH”) was presented on 29 June 2021 (as amended on 26 July 2022) (“LFH Petition”).

(2)  The second petition in HCMP 302/2022 in respect of Criteria Holdings Ltd (“Criteria”) was presented on 31 March 2022 (as amended on 26 July 2022) (“Criteria Petition”).

2.Except LFH and Criteria which are named as 1^st respondent, the parties to the Petitions are brothers of the Luk family and their respective corporate vehicles[1]:

(1)  HCMP 909/2021 (LFH):

Party	Name	Owner
Shareholder
Petitioner	Multi-Best Enterprises Ltd (“Multi-Best”)	Luk Kuen Fai, Stephen （陸權輝） (“Stephen”)
2nd Respondent	High Technologies Ltd	Luk Yuen Fai, Vincent （陸源輝）  (“Vincent”)
3rd Respondent	Holy Smart Ltd	Luk Liu Fai, Simon （陸燎輝） (“Simon”)
4th Respondent	Trade Best Holdings Ltd	Vincent
5th Respondent	Union View Ltd	Luk Kam Fai, Kenneth （陸錦輝） (“Kenneth”)
Director
6th Respondent	Luk Sing Fai, John （陸星輝）(“John”)	--
7th Respondent	Simon	--
8th Respondent	Vincent	--
9th Respondent	Kenneth	--

(2)  HCMP 302/2022 (Criteria):

Party	Shareholder	Shareholding
Petitioner	Stephen	19%
2nd Respondent	Simon	22%
3rd Respondent	Vincent	39%
4th Respondent	Kenneth	20%

3.It is common ground that each of the owner listed above is the alter ego of his corporate vehicle and the parties are divided into 3 camps.  For ease of reference, the parties are referred to as follows:

(1)  “Stephen Parties” for Stephen and Multi-Best;

(2)  “Simon Parties” for Simon and his corporate vehicle; and

(3)  “LBs” (i.e. 3 Luk brothers) for Vincent, Kenneth, John and their respective corporate vehicles. 

4.Although Criteria is a company incorporated in the BVI, it is not in dispute that Criteria has established a place of business in Hong Kong and hence is a “non-Hong Kong company” to which s.724 of the CO applies.

5.It is Stephen Parties’ case[2] that LFH and Criteria are quasi partnership between the 5 brothers and that their affairs have been conducted in a manner unfairly prejudicial to their interests and/or in a manner that has caused the breakdown in trust and confidence between the brothers in that:

(1)  Stephen Parties have been excluded from the management of “LFH Group” (as defined in §11 below) and “Criteria Group” (as defined in §12 below) including their board meetings and general meetings (Exclusion from Management Issue);

(2)  Stephen Parties have not received any dividends from the companies other than HK$2 million paid by Unity Star in 2014 (No Dividend Issue);

(3)  Simon, Vincent and Kenneth received excessive remuneration in the form of salary and other non-monetary benefits whereas Stephen never received any salary from any family companies (Excessive Remuneration Issue);

(4)  Stephen Parties have not received full disclosure of financial statements, accounts, minutes or other company records in respect of the companies within LFH Group and Criteria Group despite repeated requests (Incomplete Financial Information Issue);

(5)  There has been serious mis-management of Wah Hing (as defined in §11(1) below) in particular by Vincent, which resulted in loss of Rolex’s dealership and substantial loss of revenue (Mis-management Issue); and

(6)  There has been self-dealing in respect of 2 office premises and a carpark space owned by LFH’s subsidiaries which have been occupied by Vincent and Kenneth without paying rent or obtaining the consent of Stephen Parties (Self-Dealing Issue). 

A.  FACTUAL BACKGROUND

6.The following facts are taken from the Joint Facts and Joint Chronology prepared by counsel or facts which are not in dispute. 

7.The late Luk Chiu Bong (陸朝邦) (“Father”) was the patriarch and head of the Luk family.  He had 5 surviving sons and 4 daughters.  Stephen is the eldest surviving son and is now 77 years old.  John, Simon, Vincent and Kenneth are the second, third, fourth and youngest sons of Father.   

A1.  Genesis of family companies

8.In 1940s, Father began to carry on business of selling watches.  On 24 January 1961, he founded a company for his watch business, which became known as Wah Hing Watch (HK) Company Limited (華興鐘錶 (香港) 有限公司) (“Old Wah Hing”). 

9.Father applied the profits generated from the watch business to acquire real properties in Hong Kong, Canada and the USA, most of which were let out for rental income.  In turn, the rental income was applied to acquire more real properties.  

A2.  LFH and Criteria

10.In 1999, Father (with the assistance of Simon) set up a new corporate structure for the family business and assets in Hong Kong.  This resulted in LFH and Criteria becoming the parent companies of 5 newly incorporated wholly owned subsidiaries (described in §§11-12 below).  These subsidiaries took over the watch business and real estate properties then held by 5 predecessor companies (including Old Wah Hing), and the predecessor companies were either dissolved in 2018 or became dormant. Following the restructuring:

(1)  In respect of LFH, each of the 5 sons was given 20% shareholding held through his corporate vehicles (as described in §2 above); and

(2)  In respect of Criteria, Simon was given 22% shareholding, each of Vincent and Kenneth was given 20% while Stephen and John was given 19% each.   

11.LFH was incorporated in Hong Kong on 22 September 1999.  It is an investment holding company and does not carry on any business in its own right.  LFH holds all the issued shares in 4 subsidiaries, all of which are incorporated in Hong Kong (collectively “LFH’s Subsidiaries”, and together with LFH “LFH Group”):

(1)  Wah Hing Watch Company Limited (華興鐘錶行有限公司) (“Wah Hing”), a trading company which owns and operates the watch business and was an authorised dealer of Rolex’s watches until March 2017.

(2)  LF Investment Company Limited (陸輝有限公司) (formerly known as Luk Fai Investment (HK) Company Limited) (“LFI”), which owns 8 real estate properties in West Kowloon.

(3)  LMB Investment Company Limited (陸萬標有限公司) (formerly known as Luk Man Biu Investment (HK) Company Limited) (“LMB”), which owns 13 real estate properties in Yau Ma Tei, Kowloon.

(4)  LWH Investment Company Limited (陸華興有限公司) (formerly known as Luk Wah Hing Investment (HK) Company Limited) (“LWH”), which owns 38 real properties of which 36 are in the same commercial building in North Point and the other 2 are in West Kowloon.

12.Criteria Holdings Limited (“Criteria”) was incorporated in the BVI on 19 December 1996.  Criteria holds 99.99% of the issued shares in Unity Star Investments Limited (源星投資有限公司) (“Unity Star”), a Hong Kong company incorporated on 18 December 1996 which owns 6 retail shops in Tsim Sha Tsui (together “Criteria Group”).

A3.  Management of family companies

13.The Luk family has interests in 2 other companies incorporated in Canada and the USA which hold interests in real properties in Toronto and the USA.  

14.In 1966, Stephen left Hong Kong to study in Canada and has since 1970 settled in the US.  In 1967, John left Hong Kong to study in Canada and has since settled there.

15.Until 1990s when their families emigrated to Canada, Simon, Vincent and Kenneth were based in Hong Kong.  After their emigration, Simon, Kenneth and Vincent continued to travel regularly to Hong Kong to look after the family businesses.  In 1998, Kenneth returned to Hong Kong and has remained since then.

16.The 5 brothers were appointed as directors of all the family companies from the dates of their incorporation[3] and had different responsibilities in that: 

(1)  Simon took over some day-to-day operational responsibilities at Old Wah Hing;

(2)  Simon, Vincent and Kenneth took up the day-to-day operational duties in respect of the watch business and the real properties in Hong Kong;

(3)  John took over the day-to-day operational duties in respect of the real property in Canada; and

(4)  Stephen took up the day-to-day operational duties in respect of the properties in the USA.   

A4.  Dispute between 5 brothers

17.On 7 March 2000, John transferred all his interests in LFH to Vincent. 

18.In November 2001, Father passed away.  Since then and until March 2015, Simon had assumed control over LFH Group and Criteria Group.

19.In around 2011, Vincent and Kenneth became dissatisfied with Simon’s control over LFH Group and Criteria Group and suspected that there had been misapplication of funds.  The matters were discussed at the meeting held on 8 June 2011 between Stephen (and his son, Brian), Vincent and John but no agreement was reached. 

20.On 17 February 2014, Stephen and John were appointed as directors of LFH.

21.In early 2015, there was a change in the management of the family companies in that:

(1)  At the general meeting of LFH held on 27 February 2015, Simon was not re-elected as director;

(2)  On 5 March 2015, Simon was removed as a director of Criteria;

(3)  On 5 March 2015, John was appointed as a director of all the subsidiaries of LFH and Criteria; and

(4)  Vincent took over the management of LFH Group and Criteria Group, and assisted by Kenneth and John. 

22.On 23 October 2015, Horace Man-kit Ho, a certified public accountant and the proprietor of Zhen Hui Certified Public Accountants (“Zhen Hui”), produced a finalised “Report on the Forensic Examination of the Financial Transactions of Luk Fai Holdings Company Limited and its Four Subsidiaries” (“Forensic Report”) which concluded that from 31 March 2012 to 31 March 2014, Simon had misappropriated HK$31,096,354.23 (“HK$31m”) from LFH Group.

23.Of the HK$31m, around HK$15 million was recorded as due from Simon in the audited financial statements[4] (“AFS”) of LFH’s subsidiaries and the consolidated AFS of LFH Group. 

24.On 30 October 2020, John transferred all his shares in Criteria to Vincent.  On 25 February 2021, John resigned as director of Criteria and was replaced by Pang Chi Wah (the husband of Tammy Luk, the 4^th daughter of Father). 

A5.  HK$2m Payments

25.Although substantial profits had been generated by each of the subsidiaries in Hong Kong, no dividend was declared or paid to LFH and Criteria.  Consequently, neither LFH nor Criteria was able to declare or pay any dividends to the shareholders. 

26.At the meeting between the 5 brothers held on 12 or 13 March 2014, Simon proposed to pay HK$2 million to each of them as “dividend”.  The proposal had the support of Stephen but not LBs.  This was followed by Unity Star issuing cheques of HK$2 million to each of LBs and Simon and remitting the same amount to Stephen’s bank account in August and September 2014 (collectively “HK$2m Payments”).  LBs returned the cheques issued to them to Unity Star. 

27.The HK$2m Payments were not authorised by the board of Unity Star but were the subject matters of discussion between the 5 brothers in that:

(1)  Vincent once proposed by his email dated 30 November 2014 that Unity Star pay an interim dividend of HK$1,000 per share for the year 2014 and invited his brothers to vote on the proposal, but no resolution was passed;and

(2)  At the board meeting of Unity Star held on 27 January 2015, LBs maintained that the HK$2m Payments were unauthorised and it was decided that HK$2 million be recorded as due from each of Simon and Stephen to Unity Star.

A6.  Directors’ remuneration and benefits

28.From 2001 to 2015, Simon was paid director’s remuneration in the amount of HK$800,000 per annum.

29.From 2001, Vincent and Kenneth were paid director’s remuneration in the following amounts every year:

(1)  Around HK$400,000 from July 1999 to 31 March 2006;

(2)  HK$500,000 from 1 April 2006 to 31 March 2011;

(3)  HK$776,000 and HK$740,000 respectively from 1 April 2011 to 31 March 2012;

(4)  HK$876,000 and HK$840,000 respectively from 1 April 2012 to 31 March 2016;

(5)  HK$1,839,500 and HK$1,603,500 in FY2017;

(6)  HK$1,974,000 and HK$1,718,000 in FY2018;

(7)  HK$1,968,000 and HK$1,748,000 in FY2019;

(8)  HK$1,824,500 and HK$1,592,500 in FY2020;

(9)  HK$1,378,000 and HK$1,248,000 in FY2021; and

(10)  HK$1,522,000 and HK$1,104,000 in FY2022.

30.In addition, Vincent and Kenneth received reimbursements from LFH for their airfares and meals.  Although Stephen Parties also point to the use of membership of Yau Yat Chuen Garden City Club by Simon, Vincent and Kenneth, the membership in fact belongs to Simon, Vincent and Kenneth. 

A7.  Amount due from Simon

31.According to the AFS of Unity Star, the following interest free-loans were advanced to Simon:

Year ended	Amount due from directors (HK$)
	Simon	Simon, Vincent, Kenneth
31/3/2014	$914,024	$10,003,000
31/3/2015	$2,914,024	$10,003,000
31/3/2016	$10,411,834	--
31/3/2017	$10,411,834	--
31/3/2018	$10,411,834	--
31/3/2019	$10,411,834	--
31/3/2020	$10,411,834	--

32.Although the directors listed for the years ended 31 March 2014 and 2015 were Simon, Vincent and Kenneth, it is not in dispute that the amounts recorded as due were used by Simon alone.  Since 2016, the AFS of Unity Star have been rectified to reflect the fact that the amount was due from Simon alone. 

A8.  Use of 6B Property, 19B Property & Carpark

33.The office premises at Flat B, 6/F, 383 Shanghai Street, Kowloon owned by LMB (“6B Property”) was from April 2008 to March 2015 occupied by Vincent for his personal use.  Thereafter and until June 2021, half of 6B Property was used by Vincent while the other half was used as accounting office of Wah Hing.  Vincent continued to use the premises until November 2021.  No rent was paid for the period used by Vincent.

34.Another office premises at Flat B, 19/F, 383 Shanghai Street owned by LMB (“19B Property”) has since March 2021 been occupied by Kenneth without paying rent.

35.Carpark #23, 117-121 Argyle Street owned by LFI (“Carpark”) has been used by the directors (other than Stephen) to park the car owned by the family companies. 

B.  PROCEDURAL HISTORY

B1.  Petitions

36.On 29 June 2021, Multi-Best presented the LFH Petition. 

37.On 10 August 2021, Stephen presented a winding-up petition in HCCW 293/2021 seeking to wind up Criteria on the “just and equitable” ground. 

38.On 15 December 2021, Simon’s corporate vehicle presented a winding-up petition in HCCW 478/2021 seeking buy-out relief alternatively, winding-up relief in respect of LFH on the ground that its affairs have been conducted by LBs in an unfairly prejudicial manner (“Simon’s LFH Petition”).   

39.On 26 April 2022, Simon presented a winding-up petition in HCCW 131/2022 seeking buy out relief alternatively, winding-up relief in respect of Criteria on the ground that its affairs have been conducted by LBs in an unfairly prejudicial manner (“Simon’s Criteria Petition”). 

B2.  LBs’ Case

40.In their Composite Points of Defence filed on 17 December 2021 in respect of LFH Petition and Criteria Petition, LBs:

(1)  Admitted that LFH Group and Criteria Group are family companies founded by Father, but denied all the allegations of unfair prejudice complained of by Stephen Parties;

(2)  Averred that Simon had misappropriated HK$31m from LFH Group, relying on the Forensic Report and the AFS of Unity Star from 2016 which recorded the amount owed by Simon (Misappropriation Issue)[5];

(3)  On Self-Dealing Issue, (a) the use of 6B Property and 19B Property was orally approved by LMB’s board and without any objection from Stephen; and (b) the Carpark was until early 2015 used by Simon exclusively and, thereafter, was used to park company owned vehicles ;

(4)  On Excessive Remuneration Issue, Vincent and Kenneth admitted that they (and Simon) had received remuneration in the amounts stated in §28 above and reimbursements of expenses from LFH and Criteria, but the amounts paid were based on their respective contributions to the companies; and

(5)  The HK$2m Payments were not authorised by the board of Unity Star or Criteria, and Stephen and Simon are liable to repay the same (HK$2m Payments Issue).

B3.  Appointment of SJE

41.At the first CMC of the 3 petitions[6] on 21 January 2022:

(1)  The parties confirmed the fact that Criteria had established a place of business in Hong Kong, whereupon leave was given to Stephen to re-constitute HCCW 293/2021 as the Criteria Petition (which became HCMP 302/2022). 

(2)  Leave was given to the respondents to make consequential amendments to their composite points of defence together with directions on discovery and exchange of witness statements. 

(3)  The parties had considered Re Top “E” Trading (HK) Company Limited [2021] HKCFI 3572, §§27-28, 35-37 regarding the approach to achieve a buy-out agreement and very sensibly confirmed their agreement that (a) there should be a valuation of LFH and Criteria on going concern basis; and (b) the date of valuation should be the date of the order to be made by the court[7]. 

(4)  Directions were given on the appointment of a single joint expert (“SJE”) to conduct a valuation of the fair market values of LFH and Criteria on the bases discussed in §37(2) of Re Top “E” namely: (a) the parties are required to give unrestricted access of the books and records in their respective possession, custody or power to the SJE if so requires, (b) the parties have equal opportunity to make submissions to the SJE, (c) the parties have the right to cross-examine the SJE and make submissions to the court if they do not agree with the opinions of the SJE.   

42.Based on the proposals put forward by the parties, this Court appointed Mr Cosimo Borrelli as the SJE. Thereafter, the parties provided the SJE with all the books and records and representations regarding the matters which they considered relevant to the valuation of LFH and Criteria.   

B4.  1^st Report of SJE

43.On 15 June 2022, Mr Borrelli produced his report (“1^st Report”) and his opinions may be summarised as follows. 

44.First, the value of the real properties held by LFH Group and Criteria Group were recorded in their AFS at costs less accumulated depreciation (“Carrying Costs”), which do not reflect the market values of the properties.  The SJE therefore assessed the market value of each real property using direct comparison approach which involved the following steps:

(1)  Identified the transaction prices of 3 comparable properties (i.e. properties of similar nature and in the same or similar location as the subject property);

(2)  Calculated the unit price of 3 comparables and arrived at an average unit price; and

(3)  Multiplied the size of each property by the average unit price of comparables.  

45.Second, the real properties held by LFH Group and Criteria Group generally performed better than the market in Hong Kong, both in terms of vacancy rates and the rental income generated.

46.Third, the asset-based valuation approach (“Asset Approach”):

(1)  Measures the value of a business based on the difference between the value of its assets and liabilities, as no rational investor will pay more for purchasing a company’s assets than the cost of purchasing the same assets of similar economic utility;

(2)  Usually applies to value an investment holding company, a property holding company or a business which relies heavily on its tangible assets; and

(3)  Is the appropriate and reliable approach in assessing the fair market values of (a) LFH and Criteria which are investment holding companies; (b) LMB, LFI, LWH and Unity Star which are property holding companies; and (c) Wah Hing which has since 2018 been operating at a loss, such that its value is represented by the value of its assets.

47.Fourth, the market valuation approach (“Market Approach”) determines the value of a company by (a) comparing LFH and Criteria with comparable companies which engage in similar business and operations; (b) adopting a suitable multiple to reflect the ongoing business; and (c) determining what adjustments and discounts should be made to reflect the difference between the comparables and LFH and Criteria.  Using this Approach, the SJE:

(1)  Identified 3 listed companies in Hong Kong which engage in similar business as LFH Group and Criteria Group namely, Pioneer Global Group Ltd (“Pioneer”), Zhongchang International Holdings Group Ltd (“Zhongchang”) and Wing Lee Property Investments Ltd (“Wing Lee”);

(2)  Calculated the enterprise value (“EV”) of the comparables based on their market capitalisations (i.e. issued shares x trading prices of shares), which are HK$3,286,916,771 (Pioneer), HK$1,020,448,174 (Zhongchang) and HK$217,504,061 (Wing Lee);

(3)  Divided the EV of each comparable by its average sales (most of which represented their rental income) and arrived at EV/Sales multiple of 11.73x (Pioneer), 25.82x (Zhongchang) and 7.06x (Wing Lee), and an average multiple of 14.87x;

(4)  Adjusted the average multiple by (a) applying a 35% discount for lack of marketability to reflect the difference between the comparables (being listed companies) and LFH and Criteria (being private companies); and (b) a control premium of 28.3% to reflect the fact that upon purchasing Stephen Parties’ shares, LBs would acquire control over LFH and Criteria (“Adjusted Multiple”);

(5)  Calculated the estimated rental income of LFH Group and Criteria Group by adding (a) their average rental income for the past 3 years; (b) the notional rental income of those properties occupied by LFH Group, Vincent and Kenneth based on market rent of similar properties (“Total Income”); and

(6)  Arrived at the market values of LFH Group and Criteria Group by multiplying the Adjusted Multiple by their respective Total Income. 

48.Fifth, the write-off of Wah Hing’s inventories in the amount of HK$27,606,236 during the year ended 31 March 2022 (“Subject Inventories”), as approved by LBs qua directors in April 2022, was reinstated to the extent of 85% (equivalent to HK$23,465,300) (“Reinstated Inventories”).

49.Sixth, the SJE considers the Asset Approach is more appropriate and preferable in assessing the fair market values of LFH Group and Criteria Group on going concern basis. 

(1)  For each subsidiary, the fair market value is calculated as: total market values of all real properties less their corresponding Carrying Costs plus book value of the other assets recorded in the AFS, and less book value of the  liabilities recorded in the AFS. 

(2)  The fair market values of LFH Group and Criteria Group is calculated in the same way save that the assets and liabilities are those recorded in the consolidated AFS of each Group.

50.As at 31 March 2022, the fair market values of the subsidiaries and of LFH Group and Criteria Group are:

Company	Asset Approach (HK$)	Market Approach (HK$)
LMB	124,910,689	80,732,208
LFI	122,703,455	51,081,592
LWH	438,352,497	145,332,896
Wah Hing	75,166,135	75,166,135
LFH Group	863,863,953	455,044,008
Unity Star	62,732,867	60,318,785
Criteria Group	141,757,740	139,343,658

B5.  Undertaking to buy-out Stephen Parties

51.The parties substantially complied with the court’s directions and exchanged their witness statements on 11 July 2022.   

52.At the 2^nd CMC on 21 July 2022, this Court indicated the preliminary observations on the issues then raised by the parties in the 4 petitions[8]:

(1)  It is most unlikely that the court would grant the winding-up relief sought by Simon Parties given the very substantial assets owned by LFH and Criteria and the prejudice to all the shareholders if the companies were wound up;

(2)  The Mis-management Issue is at the highest a management issue, and neither LBs nor Simon can be blamed for the loss of Rolex’s dealership; and

(3)  Although LBs sought leave to adduce expert evidence to deal with the alleged further misappropriation of assets by Simon prior to the period covered by the Forensic Report, it was not necessary for LBs to pursue the complaint at that stage given that the Misappropriation Issue had already been raised by LBs, both as a defence to Simon Parties’ petition and as a matter which requires an adjustment to the valuation of LFH.  If there were further misappropriation of assets which Simon needs to account for, the matter could be dealt with after Simon Parties succeed in establishing unfair prejudice.  For these reasons, the summonses for leave to adduce expert evidence were dismissed with costs.

53.Having taken into account the above preliminary observations, the parties very sensibly agreed to narrow the issues in that:

(1)  LBs agreed to purchase the shares held by Stephen Parties in LFH and Criteria on the bases recorded in the “Undertaking” (as defined in §54 below).  This obviates the need for the court to determine (a) the Exclusion from Management Issue; (b) the No Dividend Issue; and (c) the Incomplete Financial Information Issue, all of which are relevant to the question whether LBs should be ordered to buy out Stephen Parties but have no financial ramifications on the valuation of LFH and Criteria;

(2)  Stephen Parties abandoned the Mis-Management Issue and  only pursue the Self-Dealing Issue; and

(3)  Simon Parties abandoned the winding-up relief sought in their petitions in respect of LFH and Criteria.

54.The agreement reached between the parties was recorded as an undertaking in the following terms:

“the parties undertaking to the Court and to each other that [the LBs] shall purchase the shares in [LFH] held by [Multi-Best] and the shares in [Criteria] held by [Stephen] at their respective valuations as determined by the Court following the trial of the issues set out in paragraph 1 below, and that the parties shall be bound by such determination” (“Undertaking”)

55.The issues requiring determination at trial (as stated in §1 of the Order) are:

(1)  Issues which may have financial ramifications on the valuation of the shares of Stephen Parties namely, (a) the HK$2m Payments Issue; (b) the Excessive Remuneration Issue; (c) the Misappropriation Issue; and (d) the Self-Dealing Issue;

(2)  The proper valuation of Stephen Parties’ shares in LFH and Criteria, taking into account (a) the 1^st Report, as updated by the SJE as at the date of judgment; (b) any adjustments to be made to the valuation of Stephen Parties’ shares by reason of the 4 Issues described in sub-§(1) above; and (c) cross-examination of SJE and submissions of the parties at trial.  For this purpose, Stephen Parties’ shares shall be valued as at the date of judgment, on the basis that LFH and Criteria are going concerns, and without any minority discount;

(3)  The allegations of unfair prejudice in Simon Parties’ petitions; and

(4)  If any of the complaints of unfair prejudice in Simon Parties’ petitions are established, whether the respondents named therein should be ordered to purchase the shares held by Simon Parties and the proper valuation of such shares.

56.As Simon Parties no longer seek winding-up relief against LFH and Criteria, leave was given to them to transfer and re-constitute their petitions as HCMP 1121/2022 (replacing HCCW 478/2021) and HCMP 1151/2022 (replacing HCCW 131/2022). 

57.Directions were given for the SJE to prepare an additional report in respect of his determination on the adjustments required to be made to the valuation having regard to the representations submitted by all parties in respect of the Self-Dealing Issue.

58.On the basis of the above issues, the trial of the 4 petitions was set down to commence on 1 August 2023 with 15 days reserved. 

B6.  2^nd Report of SJE

59.In his additional report dated 20 September 2022 (“2^nd Report”), Mr Borrelli considered the notional rental income which would have been generated by the 6B Property, the 19B Property and the Carpark during the periods used by Vincent and Kenneth and concluded that:

(1)  The notional rental income is unlikely to have any impact on the fair market values of LFH and Criteria using the Asset Approach; and

(2)  As Property 6B had since 18 November 2021 been let to a tenant and the rent was lower than the notional rental income adopted by the SJE using the Market Approach, the fair market value of LFH as at 31 March 2022 would be reduced from HK$455,044,008 (stated in the 1^st Report) to HK$454,994,877. 

B7.  3^rd Report of SJE

60.The SJE prepared an updated report dated 7 July 2023 on the valuation of LFH and Criteria (“3^rd Report”) in which he concluded that the fair market values of the subsidiaries and of LFH Group and Criteria Group as at 31 March 2023 are:

Company	Asset Approach (HK$)	Market Approach (HK$)
LMB	150,967,556	81,254,883
LFI	122,404,197	52,148,057
LWH	446,632,739	148,446,431
Wah Hing	72,287,319	72,287,319
LFH Group	894,784,787	456,629,666
Unity Star	62,278,191	43,210,849
Criteria Group	62,565,652	43,498,310

61.The SJE remains of the view that the Asset Approach is the more appropriate and preferable approach in assessing the fair market values of LFH Group and Criteria Group, given that:

(1)  Real estate properties in Hong Kong are relatively liquid and marketable and their market values are therefore a more reliable estimate of the values which potential buyers are willing to pay for the properties; and

(2)  There is no good reason to expect the owners of the companies holding real properties in Hong Kong would be willing to offer a price materially more or less than the market value of the properties held when they sell the companies.

B8.  Dismissal of Simon Parties’ petitions

62.By summonses issued on 27 June 2023, Simon Parties sought leave to discontinue their petitions on the grounds that the litigation had caused “significant rifts” in Simon’s immediate family especially following the allegations made by LBs against Simon’s personal life, and he had wanted but failed to reach a settlement with LBs.  Simon did not want to pursue the litigation any further and asked to be excused from trial, despite being reminded by this Court that:

(1)  the Misappropriation Issue is directed against him;

(2)  the witness statements filed by Simon Parties are not admissible if Simon does not give evidence at trial; and

(3)  Simons Parties remain parties to the LFH Petition and the Criteria Petition and the findings to be made by the court will be binding upon them. 

63.After hearing the submissions of the parties at the hearing on 19 July 2023, I dismissed the petitions presented by Simon Parties.  As no exceptional circumstances were demonstrated as to why costs should not follow the event, the costs of and occasioned by their petitions were ordered to be paid by Simon Parties to Stephen Parties and LBs, to be taxed if not agreed. 

B9.  4^th Report of SJE

64.With a view to shortening the time required for cross-examination,  Stephen Parties and LBs provided their opening submissions to the SJE so that he could provide his opinions in advance of the trial on:

(1)  The impact of the Misappropriation Issue and the Self-Dealing Issue on the valuation of LFH Group;

(2)  The impact on the valuation of Criteria Group if the “amount due to shareholder” (i.e. Criteria) recorded in Unity Star’s AFS for 2021, 2022 and 2023[9] was understated by HK$378,681 owing to exchange rate difference (“Exchange Rate Difference”);

(3)  The contentions of LBs regarding the following issues in relation to valuation of LFH Group and Criteria Group:

(a)  The proper approach in assessing the fair market values of LFH Group and Criteria Group is the Market Approach (Valuation Methodology Issue);

(b)  There is no proper basis to reverse the Subject Inventories (Write-off Issue); and

(c)  In respect of the Market Approach:

(i)   the SJE should not adopt the average multiple of the 3 comparables, but should adopt the multiple of Wing Lee (Multiple Issue); and

(ii)  the SJE should not adopt a control premium of 28.7% but should adopt a control premium of 26.3% which is the rate applicable to Hong Kong companies (Control Premium Issue).

65.In the Written Reply of Cosimo Borrelli dated 31 July 2023 (“4^th Report”), the SJE opines that:

(1)  If HK$31m was misappropriated and the amount is recoverable by LFH Group:

(a)  the valuation of LFH Group will increase by HK$31,096,354 under Asset Approach or HK$28,329,175 under Market Approach, if HK$31m was not recorded as due from Simon in the AFS;

(b)  the valuation of LFH Group will increase by HK$15,689,353 under Asset Approach or HK$14,293,200 under Market Approach, if HK$15,407,001 was recorded as due from Simon in the AFS; 

(2)  If rental income of HK$1,351,587.50 is recoverable by LMB in respect of 6B Property and 19B Property, the valuation of LFH Group will increase by HK$1,351,588 under Asset Approach;

(3)  The Exchange Rate Difference will reduce the valuation of Criteria Group by HK$378,681 under either Approach; and   

(4)  His view on the valuation issues remain unchanged.

B10.   Further concessions and agreement

66.In their written Opening, Stephen Parties confirm that:

(1)  In view of the relatively insignificant financial implications, they no longer pursue (a) the HK$2m Payments Issue; (b) the Excessive Remuneration Issue; and (c) the Self-Dealing Issue insofar as it relates to the Carpark; and

(2)  They agree with the opinions of the SJE as stated in the 1^st to 4^th Reports.

67.Further, by joint letter dated 31 July 2023, Stephen Parties and LBs informed the court that they had reached a settlement on the Self-Dealing Issue on the terms that LBs shall pay HK$270,317.50 to Stephen Parties and there be no order as to costs in relation to the Issue.

C.  ISSUES   

68.Taking into account the concessions and agreement of the parties, the issues requiring determination of the court are:

(1)  The Misappropriation Issue;

(2)  The HK$2m Payments Issue;

(3)  The Valuation Methodology Issue;

(4)  The Write-off Issue;

(5)  The Multiple Issue; and

(6)  The Control Premium Issue. 

69.In addition, this Court raises the following issues for the parties’ consideration:

(1)  If the Misappropriation Issue is established, whether interest is recoverable from Simon in respect of the HK$31m or any part thereof (Interest Issue); and

(2)  Whether in determining the price payable for Stephen Parties’ shares, the court should deduct the notional expenses which would have to be incurred by the property holding subsidiaries (i.e. LFI, LMB, LWH and Criteria) when selling their real properties in the market (Expenses Issue). 

70.I consider these issues in turn.

C1.  Misappropriation Issue

71.The Misappropriation Issue is raised by LBs against Simon.  LBs’ case is straight forward.  They rely on the Forensic Report, which contents and exhibits (including all cheques signed by Simon whereby funds of LFH’s subsidiaries were withdrawn) show that during the period from 31 March 2012 to 31 March 2014, an aggregate amount of HK$31,096,354.23 were either paid to Simon or for Simon’s use or were related to him. They fall into 3 categories:

(1)  Cash and cheques drawn by Simon from the subsidiaries’ bank accounts to himself and/or parties unrelated to LFH or Criteria, less the amounts which Simon paid back to the subsidiaries (“Net Drawings”)[10];

(2)  Unauthorised expenses including entertainment expenses and rental payments for “directors’ quarters”, which had never been approved by the board (“Unauthorised Expenses”)[11]; and

(3)  Discrepancies between the net amounts of cash receipts deposited into the bank accounts and the corresponding accounting entries in the subsidiaries’ books which cannot be explained by documentary evidence (“Cash Discrepancies”).

72.After giving credit for the expenses which had been properly authorised, the net amount which Simon has to account to LFH’s subsidiaries is as follows:

	Year ended 31/3/2013 (HK$)	Year ended 31/3/2014 (HK$)	Total (HK$)
Net Drawings	15,195,977.82	10,905,038.85	26,101,016.67
Cash Discrepancies	3,701,833.79	1,863,901.89	5,565,735.68
Unauthorised Expenses	726,240.00	1,365,583.20	2,091,823.20
Authorised expenses	(2,258,529.90)	(403,691.42)	(2,662,221.32)
	17,365,521.89	13,730,832.67	31,096,354.23

73.It is LBs’ case that in authorising the Net Drawings and Unauthorised Expenses and allowing the Cash Discrepancies to take place, Simon acted in breach of his fiduciary duties owed to LFH’s subsidiaries and is liable to compensate those subsidiaries for the HK$31m misappropriated.  It is the unchallenged evidence of Vincent that despite repeated demands made of Simon, he failed to repay the amounts misappropriated to LFH Group[12].

74.Ms Eva Sit SC (leading Mr Justin Ho and Ms Tiffany Yau) submits that as a matter of law, the giving away of company assets by a director for no consideration is prima facie a use of powers for improper purpose.  Once a prima facie case is shown that the director has acted in breach of fiduciary duty in misapplying company assets, the evidential burden shifts to the director to demonstrate the proprietary of the transaction (Bishopsgate Investment Management Ltd v Maxwell (No 2) [1994] 1 All ER 261, 265d-f, 269d-e).  I agree.

75.In the present case, the Forensic Report establishes a prima facie case of misappropriation of HK$31m by Simon.  Simon decided not to give evidence or make submissions to displace the prima facie case of misappropriation.  In the absence of any defence to the claim, I find that Simon has misappropriated HK$31m from LFH’s subsidiaries and is liable to account the same to the subsidiaries concerned.  The question of whether Simon is liable to pay interest on HK$31m is discussed in Section C2 below. 

76.I turn to consider what adjustment should be made to the valuation of LFH Group in light of the finding on Misappropriation Issue.  Adjustment to valuation is necessary given that:

(1)  The SJE has relied on the values of assets recorded in the AFS of LFH’s subsidiaries when determining the fair market value of LFH Group. 

(2)  The court’s finding on the Misappropriation Issue creates an issue estoppel against and also in favour of Simon.  He cannot deny liability to compensate LFH’s subsidiaries for the HK$31m misappropriated (together with any interest which he is liable to pay as a matter of law) when called upon by those subsidiaries to do so. 

(3)  If and to the extent that the amounts recoverable from Simon were not reflected in the AFS of LFH’s subsidiaries, such amounts should be added to the fair market value of LFH Group. 

77.Ms Sit draws to the court’s attention that in the AFS of the subsidiaries and of LFH Group for the year ended 31 March 2016 (i.e. the first AFS after the Forensic Report), a total amount of HK$15,455,007 was recorded as “amount due from a related party”:

Company	Amount (HK$)	Note in AFS
LFI	596,000	Note 9
LMB	1,387,751	Note 10
LWH	6,452,306	Note 10
Wah Hing	7,018,950	Note 11
LFH Group	15,455,007	Note 9

78.In Note 9 to LFH Group’s AFS for 2016, it described the “amount due from a related party” as due from Simon; is “unsecured and repayable on demand”; “interest on the amount due is subject to be determined by the current Board of Directors”; and “the management has yet not determined if it is necessary to address any adjustments to opening balance as at 1 April 2013” (stated at HK$15,433,285). 

79.In LFH Group’s AFS for 2021, a slightly lower amount of  HK$15,407,001 was recorded as due from Simon and the descriptions in Note 10 are the same as those in the AFS for 2016. 

80.Mr Bernard Man SC (leading Mr Danny Tang and Mr Keith Chan), counsel for Stephen Parties, accepts that HK$15,407,001 of Simon’s misappropriation had been reflected in the AFS of LFH’s subsidiaries and the consolidated AFS of LFH Group.  He also agrees with the opinion of the SJE that there should be an upward adjustment of HK$15,689,353 to the fair market value of LFH Group under the Asset Approach as stated in §6 of the 4^th Report (see §65(1)(b) above). 

81.Accordingly, subject to the Interest Issue, the fair value of LFH Group should be adjusted upward by  HK$15,689,353 under Asset Approach or HK$14,293,200 under Market Approach.

C2.  Interest Issue

82.The Interest Issue was raised by this Court during opening submissions of the parties on 1 August 2023. 

83.On 2 August 2023, the parties sought the opinion from SJE as to what would be the amount of interest and adjustment (if any) to the valuation of LFH Group on the bases that (1) HK$31m is recoverable from Simon and HK$15,407,001 had been recorded in the AFS of LFH’s subsidiaries; and (2) interest is at 1% above the prevailing prime lending rate of HSBC, to be calculated on simple interest or compound interest at monthly, quarterly, bi-annual and yearly rest. 

84.The SJE produced his Further Written Reply dated 3 August 2023 (“5^th Report”).  In summary, the amounts of interest on the HK$31m and the corresponding upward adjustments to the valuation are as follows:

Interest calculation	Amount (HK$)	Asset Approach (HK$)	Market Approach (HK$)
Compound monthly rest	24,459,401	+40,148,754	+36,576,026
Compound Quarterly rest	24,297,256	+39,986,609	+36,428,310
Compound Bi-annual rest	24,058,685	+39,748,039	+36,210,970
Compound Yearly rest	23,618,486	+39,307,839	+35,809,942
Simple	18,091,582	+33,780,935	+30,744,862

85.Although Simon Parties elected not to attend trial.  Their solicitors have been copied on all relevant correspondence relating to the Interest Issue and the 5^th Report.  Further, Stephen Parties’ solicitors (Jones Day) wrote to Simon Parties’ solicitors on 7 August 2023 specifically informing them that[13] Simon Parties may attend the trial on 9 August 2023 to make submissions on interest, if they so wish.

86.The approach of the court in awarding interest where a fiduciary is found to have misappropriated funds is well-established.  As submitted by Mr Man:

(1)  Compound interest may be appropriate where the trustee or fiduciary has misappropriated funds which the court assumes would have been used by him to earn profits and, instead of ordering an account of those profits, orders him to pay compound interest on the sum extracted (Libertarian Investments Ltd v Hall(2013) 16 HKCFAR 681, §142, per Ribeiro PJ; China Everbright-IHD Pacific Ltd v Ch’ng Poh (2002) 5 HKCFAR 630, §59). 

(2)  In any award of compound interest, the power to fix the rests is discretionary – thus, the court can order yearly, quarterly or monthly rests (China Everbright, §62).[14]

(3)  In China Everbright, the CFA accepted that the conventional interest rate in Hong Kong was not yearly rests (as more usually encountered in the English authorities) but monthly rests (§60).  In that case, the court held that the purpose to which the money was put by the appellant was far from clear; there was no evidence of what profits if any were made; and if the appellant was not able to make use of the diverted money to purchase the shares, he would have had to borrow a similar amount. That would have involved charges of compound interest on monthly rests, which upon that basis the appellant may be fairly presumed to have made (§62).

87.Mr Man submits that if the court finds against Simon on the Misappropriation Issue:

(1)  On the foregoing principles (which are well-established and must be taken to be known by Simon) Simon should be liable to pay compound interest.  There is nothing in the evidence which militates against an assumption that Simon used those misappropriated sums to make a gain or profit (including by e.g. using those sums to pay off debts or expenses of family members or others); and when he refused to attend this trial, the court is entitled to make every assumption against the party whose conduct has deprived it of necessary evidence (Libertarian, §174).  If Simon had not misappropriated the sum, he would have had to borrow a similar amount from commercial lenders, which would have involved charges of compound interest on monthly rests (China Everbright, §62).  Accordingly, it would be appropriate for Simon to be liable for compound interest, on monthly rests. 

(2)  Alternatively, if the court considers compound interest inappropriate, at the very least Simon should be liable for simple interest at a rate of prime + 1% under the usual principles. 

88.Ms Sit acknowledges that in general, compound interest may be appropriate where the fiduciary has misappropriated funds which the court assumes would have been used by him to earn profits (Libertarian §142), whether or not such an award will be made is in the court’s discretion, taking into account the particular facts and findings in that case.  In the present case, the court should not make a finding on interest, compound or otherwise, for the following reasons:

(1)  While Simon is a respondent to the petitions and the complaint of misappropriation has been raised by LBs, the fact remains that no order will be made by the court for Simon to repay the sums misappropriated to LFH’s subsidiaries as Stephen never sought such an order.  In other words, this is not the forum or the occasion where Simon’s liability to pay will be crystallized in a court order, such as to call for an award of interest; and

(2)  There will be no prejudice to Stephen Parties, as LBs confirm that they will not be seeking interest against Simon in any intended claim if the court so finds. 

89.In response, Mr Man submits that the fact that Stephen Parties have not in the petitions claimed interest against Simon does not change the position:

(1)  In Re Wing Kai Investment Co Ltd [2011] 2 HKLRD 272[15], §4, Harris J held that a petition presented under s.168A[16] is not a pleading, the court can make an award of interest if it considers it appropriate and fair under the wide powers given by s.168A or make an order for a valuation of shares which includes an element of interest to reflect the fact that the respondent has been found liable to account to the company for the sums misappropriated (Re Wing Kai, §§4-7, per Harris J; citing Hollington on Shareholders’ Rights, 5^th ed., §§8-24 to 8-30).  On the fact, the petitioner claimed, in the prayer, interest and an account of profits made by the 1^st respondent as a consequence of breach of fiduciary duty.

(2)  In the present case, the Misappropriation Issue was raised by LBs as a matter which should be taken into account in the valuation of LFH Group.  Since the valuation exercise is to achieve fairness between Stephen Parties and LBs, the court should give effect to all legal consequences flowing from the court’s finding on the Misappropriation Issue. 

(3)  There is no surprise or unfairness to Simon.  He was aware of the Misappropriation Issue and the Interest Issue and decided not to make any submissions on either Issue.  If Simon attended the trial and made submissions on the Interest Issue, the court would conclude that he is liable to pay compound interest on the HK$31m.  He cannot benefit from his decision in not attending the trial.   

90.I agree with Mr Man’s submissions.  The question whether Simon should be required to pay interest on the HK$31m misappropriated was well known to Simon, given that:

(1)  In every AFS of LFH from 2016 specifically the note dealing with the “amount due from a related party”, it was stated that the directors had not determined interest on the amount due; and

(2)  LBs raised the Misappropriation Issue as a matter which has financial ramification on, and should be taken into account in, the valuation of LFH Group.  Simon was aware of the allegations made by LBs and has had the benefit of legal advice all along;

(3)  In the prayers of the petitions in respect of LFH[17] and Criteria[18], Stephen Parties claimed “an order for compound interest on all negative impact on [LFH’s / Criteria’s] financial position at 8% with quarterly rests, or interest on such basis, at such rate and rest and for such period as the Court thinks fit, in respect of the amounts payable to the Petitioner”; and

(4)  Simon Parties’ solicitors were copied to all the correspondence relating to the Interest Issue including the instructions to SJE and the 5^th Report, and were informed by Stephen Parties’ solicitors that they could attend trial and make submissions on the Interest Issue. 

91.In the circumstances, Simon must be taken as having knowledge of all the legal consequences of the court finding against him on the Misappropriation Issue.  One such consequence is that LFH’s subsidiaries are entitled to recover the HK$31m misappropriated together with compound interest.  Simon decided not to make any submissions on the Interest Issue.  I do not see why the court should not make any finding on the Interest Issue. 

92.The course suggested by LBs is neither nor fair nor appropriate:

(1)  It would mean that LFH’s subsidiaries and Simon may have to litigate the Interest Issue in another forum, assuming issue estoppel does not apply to them. 

(2)  The interest payable on the HK$31m misappropriated would not be reflected in the valuation of LFH Group and hence the price payable for Multi-Best’s shares in LFH.  As Multi-Best will cease to be shareholder after completion of the buy-out, it would effectively be deprived of the right to share in the interest recoverable by LFH’s subsidiaries. 

(3)  There is no suggestion that LFH’s subsidiaries or LBs would be prejudiced by the court’s finding on Interest Issue and the consequential adjustment to the valuation of LFH Group. This is unsurprising as LFH’s subsidiaries can look to Simon Parties’ shares in LFH and Criteria (which are very valuable assets) if and insofar as Simon does not pay the amount due.

93.As Simon has misappropriated HK$31m from LFH’s subsidiaries as I so find, there is no reason why he should not be required  to pay compound interest on the amount misappropriated.  I agree with Mr Man that in the absence of any evidence on Simon’s financial position, it  is appropriate for the court to order compound interest with quarterly rest at HSBC’s prime lending rate +1% on the amounts misappropriated from LFH’s subsidiaries, from 31 March 2014[19] to the date of this judgment.  Thereafter, simple interest is payable at judgment rate.   

94.According to the 5^th Report, by 31 August 2023, the interest payable by Simon on the foregoing bases is HK$24,297,256.  As the period covered is very close to the date of this judgment, it is just to adopt HK$24,297,256 as the adjustment to be added to the fair market value of LFH Group. 

C3.  HK$2m Payments Issue

95.It is not in dispute that the HK$2m Payments were not authorised by the board of Unity Star, and Simon and Stephen are liable to return the same to Unity Star.  The only question is how the amount should be returned to Unity Star. 

96.Ms Sit proposes that HK$2m is to be deducted from the purchase price payable for Stephen Parties’ shares, upon LBs’ undertaking to pay the same to Unity Star.  Mr Man does not oppose the proposal. 

97.Therefore, subject to LBs giving an undertaking to the court to pay HK$2m to Unity Star within 7 days of completion of the buy-out, the price payable by LBs for Stephen Parties’ shares is to be reduced by HK$2 million. 

C4.  Valuation Methodology Issue

98.I shall first deal with the approach of the court in dealing with valuation of a company in the context of an unfair prejudice petition.

99.First, in valuing a company and hence the price of the shares to be acquired from a shareholder, the overriding consideration is fairness as between the parties.  The court has a wide discretion to do what is fair and equitable between the parties in the circumstances of the case (Re New Century Iatrical Inv. Management Ltd [2020] HKCA 481,§§29-30). 

100.Second, the requirement of fairness applies to the choice of valuation methodology, valuation assumptions and directions (Re Annacott Holdings Ltd[2013] 2 BCLC 46, §4; Re Yung Kee Holdings Ltd [2014] 2 HKC 556 (CA), §§145-147).

101.Third, in deciding which is the fair basis of valuation, the court takes into account all the circumstances.  These include:

(1)  Where a company is a going concern, the more appropriate basis of valuation is usually the earnings basis, which is derived from an estimation of (a) the maintainable level of profits of the company and (b) the yield that a prospective purchaser would expect in making the investment.  It is difficult to see any justification for adopting the break-up or liquidation basis of valuation (Re Top “E”, citing Hollington,§8-47; CVC/Opportunity Equity Partners Ltd & Anor v Demarco Almeida[2002] 2 BCLC 108 (PC), §38). 

(2)  When arriving at a fair value in the absence of a market, it is necessary to assume that the notional sale is taking place between the actual participants in the transaction, since the whole purpose of valuation is to be fair as between the parties (Parkinson v Eurofinance Group Ltd[2001] 1 BCLC 720,§98); and

(3)  The history of the events in issue in the litigation (Re Annacott Holdings, §4).

102.Fourth, where as here a SJE is appointed for the purpose of determining the value of the company and hence the price of the shares to be purchased by one shareholder from the other and the parties have not agreed to be bound by the valuation, the court would be slow to intervene on matters of opinion (as opposed to fact or law).  This does not mean that the court has to take a blinkered approach and simply accept the valuation made by the SJE.  Where a party has identified the points and explained the bases upon which he takes issue with the SJE’s opinion, and the party has been given the opportunity to put the points to the SJE, the court would consider those points (Re Top “E”, §§50-51). 

103.Ms Sit emphasizes that LBs are clearly not the “wrongdoers” as all the issues raised by Stephen Parties are either not pursued as a result of the Undertaking or abandoned at trial.  By agreeing to buy out Stephen Parties’ shares without any discount, LBs have conferred additional benefit on Stephen. These are not in dispute but do not assist determination of the real issue, which is whether the Asset Approach is fair in the circumstances of this case to which I now turn.

104.Mr Man submits that it is the unchallenged evidence of the SJE that the Asset Approach is his preferable approach.  What approach should be used to value the companies is plainly a matter of valuation.  The SJE has provided detailed and reasoned views for his preferred approach (set out in §46 above). He also provided further reasons in his 4^th Report as to why he remains of the view the Asset Approach is the more reliable and appropriate approach in valuing LFH Group and Criteria Group as follows:

(1)  The earnings basis is not always appropriate when there is a more reliable and better regarded basis of valuation.  For example, the earnings basis is rarely a substitute where the underlying business or assets of the company can be readily marketed and sold in an open market – as is the case for real estate in Hong Kong;

(2)  While LFH Group and Criteria Group may not have sold any real properties historically, they may do so in future, especially in circumstances where there may be changes – such as changes in shareholders; and

(3)  Any consideration as to whether LBs will be able to sell their shares in LFH Group and Criteria Group at the same values is not relevant for the purpose of determining the fair market values of LFH Group and Criteria Group on going concern basis as it falls outside the valuation directions given by the court.  

105.Ms Sit submits that the Market Approach is the more appropriate methodology in the circumstances of the present case because:

(1)  The SJE’s preference, based solely on objective factors and on the assumption of dealing with independent third parties, cannot be determinative;

(2)  The SJE should ask whether the value attributed to Stephen Parties’ shares is a value which can equally be achieved by LBs.  If the value is not something which LBs can ever achieve (because they will not be selling all of the properties to achieve that value), then ordering LBs to buy out at that value will mean that Stephen Parties obtain a windfall at the expense of LBs (Re Annacott Holdings, §§11, 14);

(3)  In Yung Kee, the Court of Appeal upheld the judge’s holding that the valuation of Yung Kee Building should be based on its actual use and subject to existing tenancies, and the valuer was directed to ignore the possibility of the property being let to a non-restaurant tenant who would be willing to offer substantially higher levels of rental than a restaurant operator (§§144-151); and

(4)  Save for a few disposals forced upon the subsidiaries, the real properties have always been used to generate rental income and never been sold.  There is no suggestion that LBs will change the way in which the properties have been used.  Thus, while in theory one may say that the properties have a market value based on Asset Approach, in reality that will not happen.

106.In my judgment, there is no proper basis to challenge the SJE’s opinion that the Asset Approach is the more appropriate methodology in valuing LFH Group and Criteria Group.   

107.First, the arguments advanced by Ms Sit go against the very basis upon which the SJE was required to carry out the valuation:

(1)  As stated in §41(4) above, the valuation directions were given by this Court at the 1^st CMC.  Those directions required the SJE to conduct a valuation of the “fair market value” of LFH and Criteria.

(2)  The SJE adopted the “fair market value” as defined in International Valuation Standards (“IVS”)[20] which states:

“1. The Organisation for Economic Co-operation and Development (OECD) defines ‘fair market value’ as the price a willing buyer would pay a willing seller in a transaction in open market.

2. For United States tax purposes, Regulation §20.2031-1 states: ‘The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts”.

(3)  The definition mandates the SJE to assess the “fair market value” as the price a “willing buyer” would pay and a “willing seller” would sell in open market, neither being under any compulsion to buy or sell.  This necessarily requires the valuer to assume that there would be a notional sale of LFH and Criteria in the open market.  On that basis, the SJE assessed the fair market values of LFH and Criteria using Asset Approach and gave reasons as to why he considered such approach to be more appropriate in the 1^st Report. 

(4)  It was only after the parties had considered the 1^st Report that they reached the agreement recorded in the Undertaking.   

108.Second, I do not think that Yung Kee supports LBs’ argument.  In Yung Kee, the Court of Appeal rejected the petitioner’s (appellant’s) challenge on the valuation of Yung Kee Building for the following reasons: (1) Both the petitioner and the 1^st respondent sought to buy out the shares held by the other, and both had expressed their intention to carry on the business of Yung Kee Restaurant should they end up as the owner of the Company (ultimate holding company of the group); and (2) the Restaurant was valued on the basis that it would continue to operate at Yung Kee Building, rather than having to operate in another premises and pay a different rent (§§147-148).  It is therefore an instance where the court considered it fair, for the purpose of valuation, to give effect to the common ground between the parties.  It does not support LBs’ contention that the valuation of LFH and Criteria should be based on the existing business of the companies and the properties held by the subsidiaries. 

109.Third, the reasons given by the SJE as to why he considers the Asset Approach is more appropriate in assessing the fair market values of LFH and Criteria (as stated in §§46, 104 above) are impeccable.  Indeed, this Court is not aware of any unfair prejudice petition where the court considered that the fair market value of an investment holding company which in turn hold a number of property holding companies should not be valued on the basis of a notional transaction between a willing buyer and a willing seller in the open market.  LBs have not referred the court to any authority which contradicts this view. 

110.Lastly, the SJE’s opinion that the Market Approach is inappropriate is amply justified, having regard to the following matters:

(1)  As submitted by Mr Man, the fact that LBs cross-examine the SJE at length on the inappropriateness of Pioneer and Zhongchang being used as comparables underscores the unreliability of Market Approach.  As the SJE explains in his oral evidence, the difference between the comparables and LFH/Criteria was one of the reasons why he did not favour the Market Approach; as it was difficult to find exact comparables, and the comparables were limited to listed companies which had published their results.

(2)  The multiples of the comparables are determined by their market capitalisations and sales (i.e. revenue). The market capitalisation of the comparable depends on the number of shares issued and the trading price of the shares on the date of valuation, neither of them has a direct bearing on the fair market value of the company.  Moreover, the trading price of the shares is heavily influenced by the state of the stock market on the date of valuation, which may or may not be reflective of the fair market value of the comparable. 

(3)  The SJE has explained why he chose the 3 comparables and adopted an average multiple under the Market Approach in his 1^st Report, the 3^rd Report and §§47-50 of his 4^th Report.  However, other than identifying the differences between some of the real properties held by Pioneer and Zhongchang, and the similarity between some of the properties held by Wing Lee and those of LFH/Criteria, it has not been demonstrated by LBs as to why it was inappropriate for the SJE to have adopted an average multiple.  I do not see how LBs can cherry pick one out of the 3 multiples and contend that the SJE must apply that multiple in calculating the fair market value of LFH and Criteria.

C5.  Write-off Issue

111.The SJE noted that in the AFS of Wah Hing for year ended 31 March 2022, the value of all the 1,418 watches in the inventories was written down to the value of HK$1 each, and the amount written off was HK$27,606,236 (i.e. Subject Inventories). 

112.The SJE gave the following reasons for reversing the Subject Inventories to the extent of 85% for valuation purpose:

(1)  The high end, pre-owned or vintage watches industry is expected to improve, consistent with the published research;

(2)  Amongst the Subject Inventories, the top 10 watches (by value) are still listed for sale at luxury watch trading or digital information platforms.  They account for 86% of the value of the Subject Inventories; and

(3)  It is unusual for a company engaging in watch business to write off inventories in excess of 400% of the carrying value of the inventories sold during the same year.  The listed companies engaging in similar business[21] only had write-off of 0-2% of the carrying value of the inventories sold in the past 2 years.

113.LBs have disclosed 2 emails from Andy Lau (a dealer in watches) dated 5 and 15 August 2022 informing Vincent that there were buyers for the Subject Inventories on terms that there will be  reduction to the offer price for any watches that are not in good condition and HK$500 for each missing or damaged box (together “Offers”):

(1)  In the first offer, the 2 buyers offered to purchase 1,195 (out of 1,418) watches for HK$11,711,000; and

(2)  In the second offer, the buyer offered to purchase all the 1,418 watches for HK$11,680,000.

114.After considering LBs’ criticism[22] that no explanation has been provided for reversing 85% of the Subject Inventories and the Offers received by Wah Hing, in his 4^th Report the SJE maintains that it is appropriate to reinstate 85% of the Subject Inventories for the following reasons:

(1)  The value of the Subject Inventories written off in 2022 (which is over 400% of the carrying amount of inventories sold during FY 2022 and 72% of FY2021 ending balance) is substantially more than those of the HKEx listed companies with similar business, which was only from 0-2%;

(2)  There is reliable evidence that the Subject Inventories have a value exceeding their costs (referred to in his 1^st Report); and

(3)  The information available in respect of the Offers is limited and not sufficient to warrant any change in his opinion. 

115.During cross-examination, Vincent maintains that LBs’ decision in writing off the Subject Inventories was well founded, having regard to the following matters:

(1)  The past practice of Wah Hing in writing off its inventories once every 5-6 years;

(2)  The auditor’s advice to the effect that Wah Hing did not have to write-off its inventories every year, and should follow the past practice in dealing with write-off of inventories; and

(3)  The unsatisfactory state of the Subject Inventories, with some (unspecified) watches out of date and/or damaged. 

116.Under cross-examination, Vincent does not accept that the reason he rejected the Offers was because he considered the value of the Subject Inventories exceeds the prices offered.  Kenneth and John essentially support Vincent’s decision and have no independent view on the matter. 

117.I agree with Mr Man that LBs’ decision in writing off the entire Subject Inventories was not made bona fide, but was motivated by their desire to suppress the value of Wah Hing and hence the price payable for Multi-Best’s shares in LFH, having regard to the following matters:

(1)  Vincent’s suggestion that the Subject Inventories have no value because they could not be sold at the shop cannot be accepted.  It does not sit well with the fact that (a) Andy Lau made the Offers to purchase the Subject Inventories, and (b) the top 10 brands are still being sold at the trading platforms identified by the SJE. 

(2)  When asked by this Court as to how much he thinks the Subject Inventories worth today, Vincent says it would not be higher than the Offers.  This cannot be true, because (as puts to him) if that were true, Vincent would have accepted the Offers, or at least indicated an interest in taking the Offers.  Instead, Vincent did not accept the Offers and asked Andy Lau to offer a higher price.  And when Andy Lau did not do so, Vincent did not even follow up the matter. 

(3)  Although Vincent suggests that he did not accept the Offers because he thought the price would be reduced owing to damage or scratches etc. in the Subject Inventories.  That cannot be the true reason for rejecting the Offers.  As Vincent accepts in answer to the questions posed by this Court, he was kept informed by the staff, and had a fairly good idea, about the condition of the Subject Inventories.  He must have at least a general idea of the extent of damage or missing box and hence the final price to be received by Wah Hing from selling the Subject Inventories.  In any event, this suggestion only emerges for the first time during cross-examination.  There is no evidence to suggest that this was the reason he gave for rejecting the Offers. 

(4)  As Vincent accepts during cross-examination, the decision to write off the Subject Inventories (representing 80.9%[23] of the inventories held by Wah Hing at the beginning of the financial year) was unprecedented in the history of Wah Hing.  Prior to that, the amounts of inventories written-off were  HK$665,237 (for 2010) and HK$812,570 (for 2016).

(5)  There is no evidence to suggest that there was any change in the state of the Subject Inventories or the business of Wah Hing which warranted LBs deciding to write off the Subject Inventories.  Under cross-examination, Vincent is compelled to accept that the Subject Inventories worth at least the prices offered by Andy Lau less the deduction for damage and missing box, although he refuses to give his true view on their value. 

(6)  Vincent gives some reasons as to why he disagrees with the opinion of the SJE viz, (a) the fact that some of the brands are listed for sale at trading platforms and most of the selling prices are higher than their carrying cost in Wah Hing’s AFS, that does not mean that the watches can be sold, and (b) one of the brands sells very slow with less than 10 pieces per year.  However, these are not justifications for writing off the carrying value of those watches, let alone the entire Subject Inventories.   

(7)  In the circumstances, the only inference which can be drawn is that the decision of LBs in writing off the Subject Inventories in Wah Hing’s AFS for 2022 was motivated by their desire to suppress the value of Wah Hing and hence the price payable for Multi-Best’s shares in LFH. 

118.In her closing submissions, Ms Sit contends that the value attributed to the Subject Inventories should be HK$11,680,000 for the following reasons:

(1)  There is no suggestion that the Offers were not genuine.  The fact that Vincent did not accept the Offers does not affect the relevance of the Offers;

(2)  The reversal of 85% of the Subject Inventories is without proper factual foundation as the SJE has no expertise or industry knowledge on watches, and the reversal of 85% value was a “healthy guess” by him.  None of the 3 reasons relied on by the SJE is valid in that:

(a)  The large volume of write-off does not provide any information one way or the other;

(b)  The online materials reviewed by the SJE only provide information without any price or at most the offer price of certain watches; and

(c)  The SJE’s 0-2% write-off in respect of the 3 comparables reviewed by him could not be justified: (a) Asia Commercial does not show that figure; (b) Oriental Watch does not show what is the amount written off; (c) Dickson is not a correct comparable since it is a luxury goods retail business.  Although the SJE seeks to justify the 0-2% write-off based on his experience in valuing luxury goods business, but that is a different business and cannot readily be transposed to Wah Hing. 

119.I disagree.  It is not LBs’ case that the Subject Inventories have a value of HK$11,680,000.  This is reinforced by the fact that LBs have not reversed the Subject Inventories in Wah Hing’s AFS for 2023, whether in the amount of HK$11,680,000 or any amount. Instead, LBs decided not to adduce any evidence on what they say is the true value of the Subject Inventories. 

120.The court is left with the expert evidence of the SJE and the reasons given by him as to why he considers that 85% of the Subject Inventories should be reversed.

121.Mr Man submits that the SJE’s evidence should be accepted for the following reasons:

(1)  The SJE has provided clear reasons for his decision to restore 85% of the Subject Inventories, amply backed up by research cited in his 3^rd Report and 4^th Report.  Vincent himself admits that the factual matters in §110.2.2 of the 3^rd Report[24] are correct, and that figures set out in the 4^th Report at §61 (as well as the comparison between the inventory costs and retail price) are correct.

(2)  As the SJE explains under cross-examination, the reversal of 85% of the Subject Inventories already leaves a healthy buffer.  Other companies engaging in similar business typically only write off 0-2% of the carrying amount of the inventories sold, whereas the write-off of the Subject Inventories amounts to over 400% of the carrying cost of the inventories sold by Wah Hing during the same year.  Even if one has regard to the written-off inventories as a percentage of the total amount of inventories (as opposed to the carrying cost sold during one financial year), the percentage for other comparable companies is only around 6%.[25]

(3)  Further, as the SJE explains, in his experience, the 0-2% figure is typical for the luxury goods industry, and in the present case, “what’s glaring is that a wholesale writing off of that magnitude is highly unusual and needs a closer inspection”.

(4)  It does not assist LBs to contend that the online platforms only contained listings but not concluded sales (such that they are  not evidence of the watches’ value).  As the SJE explains in cross-examination, where there were multiple platforms on which the randomly selected watches out of the Subject Inventories were listed for sale, this constituted reliable evidence[26] that those inventories were not worth zero.  In any event, the SJE already allowed a much greater write-off (15%) than other similar luxury goods companies, which created a healthy buffer even if some of those watches were left unsold.  The SJE was fully entitled to make this accounting judgement.

(5)  Further, it is unfair for LBs to criticise the SJE for not taking into account the condition of the Subject Inventories, when they are in possession of the watches and information about their condition and state of repair, but they never provided them to the SJE.  The LBs knew the SJE’s view on reversing 85% of the Subject Inventories since the 1^st Report (15 June 2022).

(6)  Despite the varied challenges to the reversal of the Subject  Inventories, LBs never suggest that there was any damage to the Subject Inventories.  The suggestion only surfaces for the first time in Vincent’s cross-examination and is incredible.  Instead, LBs only told the SJE that the styles of the watches were outdated, they had not been sold for a long time and were obsolete[27].  Those considerations had already been taken into account and rejected by the SJE for the reasons stated in his 3^rd Report §110.2, which in the Stephen Parties’ submission are plainly correct.

122.In my view, the reasons given by the SJE are cogent reasons and are supported by objective evidence identified in his 3^rd and 4^th  Reports.  In addition to the reasons stated by Mr Man (which I agree), the reversal of 85% of the Subject Inventories is consistent with, and justified by, the fact that most of the top 10 brands watches (which account for 86% of the value of the Subject Inventories), are selling at the prices higher than their carrying costs in Wah Hing’s AFS.  Indeed, as the SJE explains in answer to the question posed by this Court, the value of the top 10 brands should be higher than the prices listed in the trading platforms reviewed by him as they are brand new watches, rather than second hand or vintage watches sold or listed in the trading platforms.

123.For the above reasons, I hold that the SJE’s opinion in reversing 85% of the Subject Inventories is justified and should be accepted. 

C6.  Multiple Issue and Control Premium Issue

124.In view of my holding on the Valuation Methodology Issue, the Multiple Issue and Control Premium Issue do not arise.  For completeness, I will briefly explain why I do not consider LBs’ challenges on either issue to be well founded.

125.On the Multiple Issue, Ms Sit submits that the EV/Sales multiple is intended to reflect the enterprise value of the subject company based on market participants’ views of its business and prospects compared against the sales which it generates (3^rd Report §§98.2, 99).  However:

(1)  Of the 3 comparables, the SJE accepts that Zhongchang and Pioneer had different properties portfolios as compared to the property holding subsidiaries, and Wing Lee is more comparable to those subsidiaries in terms of market value and property profile.   

(2)  The difference between the 3 comparables in particular Zhongchang and Pioneer have not been reflected by way of adjustments. 

126.On the above premises, the EV/sale multiple of Wing Lee at 7.13x should be adopted. 

127.The contention ignores the fact that the rationale for choosing 3 comparables and to take their average multiples is to obtain a proxy of the market’s view on the values of the companies carrying on similar business as LFH and Criteria.  The rationale is not to find one comparable and uses its EV/Sales multiple to assess the value of LFH and Criteria (such approach would be unsatisfactory as the market capitalisation and hence the EV/Sales multiple of one listed company would in effect be determinative of the EV of the subject company).  

128.In any event, for the reasons stated in §110 above, I do not think that the SJE’s opinion in adopting an average multiple can be said to be incorrect or unjustified. 

129.As regards the Control Premium Issue, Ms Sit submits that the 26.3% (from Moore study[28]) which is specific to listed companies in Hong Kong (being the closest proxy to the companies in issue) should be adopted.  The SJE really has no answer to that, save to say he considers a control premium of 25-30% to be within range.  But there is no reason why where a Hong Kong-specific figure is available (which is also within range), that should not be adopted. 

130.I do not think that the criticism is justified. 

131.The full reasons for adopting a control premium of 28.7% can be found in §§105-106 of the 3^rd Report and §§51-56 of the 4^th Report.  This is the median control premium for the 4^th quarter of 2022 estimated by FactSet Mergerstat/BVR Control Premium Study, which he considers to be appropriate and reasonably reliable for the following reasons:

(1)  It includes 124 domestic and international acquisitions involving sale and purchase of 50.01% or more shareholding in a company or the buyer becoming a majority shareholder holding more than 50% shareholding after the acquisition.  These 124 acquisitions are relatively representative sample;

(2)  It is a readily available, well known and credible source of information which has been commonly used by valuers in considering control premium;

(3)  It reasonably reflects the different circumstances surrounding the shareholding structure of the comparables and those of LFH and Criteria and in particular, the listed comparables’ shareholders are unable to take actions which the majority shareholders of LFH and Criteria are able to do;

(4)  The control premium of the 124 companies surveyed ranged between -86.7% and 982.8% with an average of 48.2%.  Adopting a median 28.7% is a conservative premium which reduces the impact of the outliers whose control premiums are unlikely to be applicable to the usual case; and

(5)  The average control premium of 26.3% in Moore study is close to the control premium adopted by the SJE. 

132.There is no reason why the SJE has to adopt the average control premium of a study which only covered 6 valuation reports (with control premiums stated) when there is available a much more comprehensive study on control premium.

133.It follows that LBs’ challenge to the control premium adopted by the SJE also fails.

C7.  Expenses Issue

134.As far as counsel’s research goes, the issue does not appear to have been considered by the Hong Kong court in the context of an unfair prejudice petition. 

135.Mr Man relies on the SJE’s opinion that the assessment of fair market value of LFH Group and Criteria Group on going concern basis does not require deduction for realisation costs or expenses in relation to the real properties.  Even if the court considers that it is appropriate to deduct  the anticipated expenses of sale, it should only allow a portion of the following expenses:

(1)  The commissions payable to the estate agents, calculated at 1% of the market value of each property[29] as assessed by the SJE (“Commissions”); and

(2)  The legal expenses involved in selling each property, calculated at 0.5%[30] of the market value of each property as assessed by the SJE (“Legal Expenses”).  

136.Mr Man’s argument runs like this:

(1)  As the authorities (Goldstein v Levy Gee[2003] PNLR 35; Shah v Shah [2011] EWHC 1902 (Ch)) show, the court recognises that in valuing how much an asset is worth to the owner, just looking at how much the asset can fetch in a sale might not be complete, because expenses would have to be incurred in order to harvest that sale price.

(2)  However, it would be wrong just to deduct the entirety of the notional sale expenses - that would be to value the company on a break-up basis, and would ignore the fact that the company is not actually selling the asset, and has no plan to do so in the foreseeable future.  This is especially so when the subsidiaries had never sold any properties and LBs have made clear that they would continue to operate the companies in the same way. 

(3)  Shah v Shah is the most analogous authority.  The Judge considered it appropriate to have regard to the reality that the shares were being sold to D rather than in the open market, and there was no evidence from D that he intended to sell the properties (§51).  He considered that for one of the properties, 10% was the appropriate reduction, and for the other, 20% (§52).

(4)  Therefore, the court should only allow deduction of 10% of the anticipated notional expenses, that is, 0.15-0.5% of the market values of the properties. 

137.On the other hand, Ms Sit submits that the deduction of the entirety of the Commissions and Legal Expenses is wholly justified:

(1)  In Re Annacott Holdings, §25, which concerned an unfair prejudice petition, the English Court of Appeal held that there should be some allowance for the selling costs to reflect the fact that the company could never have realised any value from the properties without paying those costs, which the Judge found to be 1.5% of the proceeds of sale.   

(2)  Shav v Shah does not assist Stephen Parties.  In that case, the market value of the property in question was assessed on investment basis, not break-up basis (§§16, 21).  The opinion of the petitioner’s expert that there should be a deduction of 100% of the contingent tax liability and selling costs to be incurred by the company in selling the properties was effectively a break-up valuation of the company (§47), which the court found to be not appropriate (§51).   

138.In my judgment, in considering whether there should be any adjustment for expenses of sale, the court should have regard to the basis upon which the expert determines the fair market value of the company.  Where, as here, the expert assessed the fair market value of the company on the basis that all the real properties owned (whether by itself or through its subsidiaries) would be sold in a notional sale between a willing buyer and a willing seller in the open market, it would be appropriate to allow all the notional expenses which the company would have to pay in selling the properties.  This is consistent with the very basis (and assumption) upon which the company is valued.  It is also fair to the seller and buyer of the shares in the company.  This is because if the notional expenses are not deducted, the seller would in effect be able to benefit from a sale of all the properties by the company without having to bear the expenses which would have to be incurred by the company in such sale.   

139.In the present case, the SJE assessed the fair market values of LFH and Criteria on the basis that all the properties held by the subsidiaries would be sold in a notional sale between a willing buyer and a willing seller in the open market.  Consistent with this assumption, the court should recognise and allow an adjustment to reflect the notional expenses which would have to be incurred by the subsidiaries in selling all their properties in the notional sale. 

140.For completeness, I will deal with the other arguments advanced by Mr Man. 

141.The opinion of the SJE[31] does not assist Stephen Parties:

(1)  The SJE opines that the assessment of the fair market values of LFH and Criteria on going concern basis does not require any deduction for realisation costs or expenses in relation to the properties. 

(2)  The SJE goes on to say that “any allowance for such [realisation] costs will be made, in determining the net sale proceeds available to a seller – after a fair valuation is agreed”.  The SJE is not saying that no allowance needs to be made, but that adjustment should be made after the fair value is determined. 

(3)  The approach of the SJE is right, as the question whether any adjustment should be made to the fair market values of LFH and Criteria is a separate issue.  Indeed, this was how the experts (and the court) dealt with the issue in Shah v Shah (§§47-48).   

142.I do not think that the authorities cited by Mr Man support his arguments. 

143.In Shah v Shah, the market value of the properties were assessed on the basis that the company would be a going concern, not on a break-up basis (§§16, 21). 

(1)  The experts agreed that an adjustment should be made to the open market values of the company for the contingent tax liability in respect of the accrued capital gain should the property be sold, but they differed on the extent of discount that should be made (§§46-47). 

(2)  The expert for the petitioner opined that the full amount of tax liability and selling costs should be deducted which, as she accepted under cross-examination, was effectively a “break-up valuation” of the company.  The Judge did not accept her opinion as the value of the company was not assessed on a break-up basis (§§47, 51, 55). 

(3)  Shah v Shah is therefore a case where the court considered the question of adjustment on the same basis as how the experts assessed the fair market value of the company.  It is not an authority to show that as a matter of principle, the court would only allow a fraction of the notional expenses to be deducted by way of an adjustment to the fair market value. 

144.As for Goldstein, the auditor (D) was required to value the plaintiff’s shares as between a willing buyer and a willing seller, which postulates a hypothetical transaction (§78).  D applied a discount to reflect 100% of the contingent tax that would have to be paid on the disposal of the properties held by the company, notwithstanding its own qualification that in open market negotiations, some discount might be given for the deferred element of this tax liability (§100).

(1)  D said in evidence that although there were cases where the whole of contingently payable tax was reflected in the share price of the company, that was the exception rather than the rule.  In practice, it was likely that a discount on the percentage would have been negotiated in an open market sale of the company’s shares (§101).

(2)  D made a 100% deduction for tax liability on the basis that “a prospective buyer would seek a full discount”.  This was found to be negligent as a competent auditor carrying out a share valuation would ask the question “what the hypothetical buyer and seller would agree” (§102).

(3)  Both the hypothetical buyer and hypothetical seller are willing.  If the parties are of equal bargaining power, “they would meet in the middle and agree a deduction of 50% of the contingent tax liability” (§103).

(4)  Allowing the full amount of the tax contingently payable on a disposal of the company’s property assets is only appropriate if the company is being valued on a break-up basis (§104). 

(5)  Goldstein is another instance where the court had to consider the question whether the deduction for realisation costs made to the value of the shares was consistent with the approach for valuation of shares. 

145.In Goldstein, Lewison J explained the difference in liability for tax between a buyer acquiring the properties directly as opposed to acquiring the shares in the company:

“The rationale for such a deduction rests on the contrast between acquiring the properties directly and acquiring the shares. If a buyer were to acquire the properties, he would do so at their current values. The seller would pay tax on any capital gain. If the buyer subsequently sells a property, he will pay tax on any capital gain that has accrued during his ownership. But if the buyer acquires the shares instead, and the company subsequently sells a property, the company will pay tax on any capital gain that has accrued during its period of ownership; not merely the gain that has accrued since the change of ownership of the shares. The buyer of the shares could, however, avoid (or at least defer) paying that tax, either by not causing the company to sell the property at all, or by selling his shares rather than the property” (§98)

146.Although the above passage is concerned with the liability for tax, the consideration applies equally to other expenses of sale.  There is no reason why the outgoing shareholder should, on the one hand, be entitled to receive his proportionate share in the value of all the properties held by the company on the assumption that they would be sold, but without having to bear the corresponding expenses which would have to be incurred by the company in the same notional sale. 

147.For the above reasons, I hold that there should be an adjustment to the fair market values of LFH and Criteria by deducting 100% of the Commissions and the Legal Expenses. 

148.There is another issue regarding contingent liability for profits tax. This arises because the Carrying Costs of all the properties are much lower than their market values, such that the subsidiaries would realise a “gain on disposal of assets” as and when they sell the properties.   

149.Ms Sit submits that where the properties held by a company are valued on Asset Approach:

(1)  An adjustment should be made to reflect the contingent liability for corporation tax on the notional accrued gain (Re Annacott Holdings, §§16-18, 21; Shah v Shah §§46-52; Goldstein§§97-113).

(2)  It is unlikely that there should be a 100% contingent tax liability deduction (Shah v Shah §§49-50).

(3)  The extent of the discount depend on all the circumstances.  However, the consensus appears to be that there should be some recognition of the possibility of tax becoming payable, even where payment is actually a remote possibility, can be postponed indefinitely, or in any case not arise at all (Shah v Shah §48).

(4)  The rationale for such approach appears to be that the discount will factor in the different contingencies and possibilities which, given this is a notional sale, the court is not in a position to exhaustively identify and quantify.  Thus, the discount has been used to cater for possible tax relief that may reduce the amount of tax charged (Re Annacott Holdings §16); the possibility that tax may be deferred  or tax may not arise (Shah v Shah §48).

150.Ms Sit submits that there is no need for the court to determine the question whether profits tax would have been chargeable if all the properties held by the subsidiaries are disposed of. 

(1)  This is not how the issue has been dealt with in the authorities.  If the court can be satisfied that profits tax accruing is not fanciful in the circumstances of the hypothetical sale, then the court should make a deduction for contingent tax liability, suitably discounted. 

(2)  In the present case, it is not a remote or fanciful possibility that profits tax accruing, given that the subsidiaries are assumed to be disposing of all the properties in one go, but without putting themselves in liquidation.  In such circumstances, very real questions may be raised by the Inland Revenue Department, notwithstanding the absence of history of property disposal and the directors’ professed lack of intention to dispose, that given the objective fact of the wholesale disposal, such fact would likely override any proclaimed intention by the directors (which would likely be regarded as self-serving) to the contrary.

(3)  The court should allow a deduction, with 50% discount, to reflect any contingencies or uncertainties that Stephen Parties may advocate for profits tax to accrue. 

151.On the other hand, Mr Man submits that there should be no deduction for contingent profits tax at all, as LFH Group and Criteria Group would clearly not incur any liability for profits tax upon a hypothetical sale of their properties.  The principles are as follows:

(1)  S.14(1) of the Inland Revenue Ordinance (Cap. 112) (“IRO”) provides that “profits arising from the sale of capital assets” are exempt from profits tax.

(2)  The question of whether the sale of real property amounts to a sale of capital assets, rather than a sale in the course of trade or business, is a question of fact and degree to be answered on a consideration of all the circumstances.  It is essential that there must be an intention to trade.  The relevant time to consider intention is when the relevant asset is sold.  The intention then may be different to the intention when the asset was originally acquired; but if a change of intention is to be relied upon as the basis for a finding of an intention to trade, precision in the fact finding process is required (Church Body of Hong Kong Sheng Kung Hui v CIR(2016) 19 HKCFAR 54, §§43-47; Perfekta Enterprises Ltd v CIR(2019) 22 HKCFAR 203, §25.)

(3)  Nevertheless, the intention at the time of acquisition of an asset which was later sold at a profit is usually a very strong pointer (Sheng Kung Hui, §70).

(4)  In determining whether an activity amounts to trading, all the circumstances must be considered, and then a value judgment must be made as to whether this constitutes trading and whether the requisite intention to trade can be inferred.  The question is determined objectively.  The ‘badges of trade’ would be relevant in identifying whether there is an intention to trade at the relevant time (Sheng Kung Hui §§50-51).

(5)  As the Inland Revenue Board of Review held in D104/01 16 IRBRD 847, §54, “To hold a property for rental is an investment and is not a trade any more than holding a fixed deposit or a share portfolio is.  Furthermore, if there is a business of letting out properties, the properties are capital assets and not trading stocks.  Profits arising from sale of properties in these circumstances are not taxable”.

152.Mr Man submits that it is clear beyond doubt that profits tax would not be chargeable on the disposal of the properties held by the subsidiaries, given that:

(1)  Father used the profits of the watch business to invest in the properties, and such properties were regarded as assets of the family business.[32]  It is the LBs’ own case that “the properties were acquired to generate rental; the companies did not engage in property trading; and had never sold any property in the portfolio”; and that they “have been operating the family business and plainly intend to continue to operate it in this way”.[33]

(2)  In the AFS of LFH Group, the properties are categorised as “investment properties”, and “are held for earning rentals which meet the criteria as investment properties”.  This constitutes “primary direct evidence” of the taxpayer’s treatment of those properties as fixed assets (CIR v Quitsubdue Ltd[1999] 2 HKLRD 481, 486A). 

(3)  Likewise, the fact that the companies have attempted to claim depreciation in respect of the properties indicates that they are capital assets rather than trading stock (Chinachem Investment Co Ltd v CIR(HCIA 2/1985, 25 July 1986, p.35).  The companies in the present case have all claimed depreciation on their properties.

(4)  It is clear that the properties were acquired with the intention of being held as long-term investments to generate rental income.   

(5)  There is no basis for inferring that there would be any change in intention upon the hypothetical sale of the properties. This can be understood by reference to the ‘badges of trade’.[34]  In the real world, the hypothetical sale is a paradigmatic case where the sale of the properties would constitute sale of capital assets, which is specifically exempted from profits tax under s.14(1) of the IRO.

153.I set out the above arguments at some length to show that the issue whether there should be a deduction of more than 50% of profits tax contingently payable by the subsidiaries when they dispose of all the real properties (“Tax Issue”) is a complex issue which requires careful consideration by the court, possibly with the assistance of experts on tax law.  This is particularly so when the Expenses Issue, including the Tax Issue, was not raised by the parties but by the court. 

154.As this Court indicates in the course of the hearing, in fairness to the parties and to the court, the Tax Issue is not one which can or should be determined at this stage. However, the parties are keen to proceed with the buy-out, and there is no reason why the Tax Issue should delay the implementation of the buy-out as agreed between the parties. It seems to me that the fair values of LFH and Criteria and the price payable for Stephen Parties’ shares can be calculated on the basis that there is a 50% deduction for profits tax contingently payable by the subsidiaries which hold the properties.  Neither Mr Man nor Ms Sit expresses any objection to proceed with the buy-out on the basis that the Tax Issue is hived off.

C8.  Other Matters

155.Ms Sit asks for 90 days for LBs to complete the buy-out.  It seems to me that it is reasonable to give 90 days from the date of this Judgment for LBs to complete the purchase of Stephen Parties’ shares (“Completion Date”), having regard to the substantial amount payable to Stephen Parties and the need on the part of LBs to arrange finance to complete the purchase. 

156.Mr Man asks the court to order Criteria to repay a shareholder’s loan in the amount of US$2.2 million to Stephen so as to achieve a clean break between the parties.  LBs were fully aware of the issue as it was mentioned in the 1^st Report and in his Opening (§52).  As the loan is non-interest bearing, if and for so long as it remains unpaid, Stephen will be prejudiced. 

157.I can see the force of the submission, but I do not think that the court should make an order against Criteria at this stage.  I note that Criteria has substantial cash sitting in its bank accounts, which may be applied to repay the shareholder’s loan owed to each shareholder.  As this is a matter which will be dealt with by the parties as part of the buy-out of Stephen Parties’ shares, I will leave it to the parties to see if it can be dealt with consensually.  I give liberty to the parties to apply, should they encounter any difficulty in repaying the shareholder’s loans.

D.  DISPOSITION AND COSTS

158.For the reasons set out above, I hold that:

(1)  Simon has misappropriated HK$31,096,354.23 from LFH’s subsidiaries during the period from 31 March 2012 to 31 March 2014.  There should be an upward adjustment to the value of LFH Group by including the HK$31,096,354.23 misappropriated;

(2)  Simon is liable to pay interest in the aggregate amount of HK$24,297,256 to LFH’s subsidiaries up to the date of this Judgment and, thereafter, at judgment rate.  There should be an upward adjustment to the value of LFH Group by including HK$24,297,256 interest which Simon is liable to pay to LFH’s subsidiaries;

(3)  Subject to LBs giving an undertaking to the court to pay HK$2 million to Unity Star within 7 days of the Completion Date,  the price payable by LBs for Stephen Parties’ shares be reduced by HK$2 million;

(4)  Asset Approach is the appropriate methodology in assessing the fair market values of LFH Group and Criteria Group;

(5)  The SJE’s opinion in reversing 85% of the Subject Inventories in the AFS of Wah Hing for the year ended 31 March 2022 is justified;

(6)  There is no proper basis to challenge the SJE’s view on the Multiple Issue;

(7)  There is no proper basis to challenge the SJE’s view on the Control Premium Issue;

(8)  There should be downward adjustments to the value of LFH Group and Criteria Group by deducting 100% of the Commissions and Legal Expenses which would have to be paid by the subsidiaries in the notional sale of all their properties; and

(9)  There should be downward adjustments to the value of LFH Group and Criteria Group by deducting 50% of the profits tax contingently payable by the subsidiaries in selling their properties in the notional sale.  The deduction is without prejudice to Stephen Parties’ arguments on the Tax Issue.

159.The SJE is directed to calculate (1) the revised fair market values of LFH Group and Criteria Group as at the date of this Judgment by including all the adjustments described in the preceding paragraph (“Revised Market Values”); and (2) the price payable by LBs to Stephen Parties for their shares at 20% and 19% of the respective Revised Market Value of LFH and Criteria, and provide the same to the parties within 7 days of this Judgment.

160.I make the following directions on the buy-out:

(1)  The purchase of Stephen Parties’ shares in LFH and Criteria be completed within 90 days from the date of this Judgment (or any further time which may be agreed between them);

(2)  There be liberty to apply for further directions with regard to the implementation of the buy-out; and

(3)  There be liberty to the parties to apply for determination on the Tax Issue within 28 days from the date of this Judgment upon giving notice to the other parties and proposing directions on the further conduct of the proceedings for the purpose of determining the Tax Issue.

161.As for costs, I make a costs order nisi that each party is to bear its or his own costs (other than the costs already ordered) and the costs of the SJE be borne by LFH and Criteria for the following reasons:

(1)  There is no clear “winner” in the proceedings as between LBs and Stephen Parties in that (a) there is no finding of any wrongdoing against either parties; (b) the buy-out was one agreed between LBs and Stephen Parties; (c) Stephen Parties only abandoned the Self-Dealing Issue at the eve of the trial (such that it may be said that they should be liable to pay the costs wasted by such issue); and (d) LBs fail in the Market Approach Issue, the Multiple Issue, the Control Premium Issue and the Write-off Issue.

(2)  Simon Parties have already been ordered to pay the costs of and occasioned by the 2 petitions presented by them.  The issues raised in Simon Parties’ petitions overlap with the Misappropriation Issue raised by LBs in these proceedings.  It does not appear that LBs and Stephen Parties have incurred much additional costs in dealing with the Misappropriation Issue or the Interest Issue in these proceedings.  To the contrary, much time and costs have been saved by LBs and Stephen Parties as a result of Simon’s decision not to contest the Misappropriation Issue and the Interest Issue.   

(3)  The costs of the valuation has been paid by LFH and Criteria in the first instance.  This seems to be fair to all parties as they have participated in the valuation and the reports prepared by the SJE have been used by them for the purpose of trying to resolve their impasse.

Mr Bernard Man SC leading Mr Danny Tang and Mr Keith Chan, instructed by Jones Day, for the Petitioner in HCMP 909/2021 and HCMP 302/2022

Ms Eva Sit SC leading Mr Justin Ho and Ms Tiffany Yau, instructed by ONC Lawyers, for the 2^nd, 4^th – 6^th & 8^th – 9^th Respondents in HCMP 909/2021 and 3^rd - 4^th Respondents in HCMP 302/2022

Mr Lau Ka Kin, instructed by Tai Tang & Chong, for the 3^rd & 7^th Respondents in HCMP 909/2021 and 2^nd Respondent in HCMP 302/2022 (written submissions on costs only)

The 1^st Respondent in HCMP 909/2021 is not represented and absent

The 1^st Respondent in HCMP 302/2022 is not represented and absent