Decision of Kannan Ramesh J, Roger Giles IJ and Anselmo Reyes IJ (delivered by Justice Ramesh)

Outcome: SICC provides interim valuation of DyStar Global Holdings (Singapore) Pte Ltd subject to further adjustments to be made by parties’ valuation experts.

Pertinent and significant points of the judgment

• The SICC’s approach to share valuation in a share buyout
• The significance of the valuation date in share valuation proceedings
• The admissibility of market and broker reports in share valuation proceedings
• The method of assessment of damages for breach of a covenant restricting the use of intellectual property
• The application of a discount for lack of marketability in share valuation proceedings

Background facts

• In DyStar Global Holdings (Singapore) Pte Ltd v Kiri Industries and others and another suit [2018] 5 SLR 1 (the “Main Judgment”), the SICC held that Senda International Capital Ltd (“Senda”) had engaged in instances of oppressive conduct against Kiri Industries Ltd (“Kiri”). Senda was thus ordered to purchase Kiri’s shares in DyStar Global Holdings (Singapore) Pte Ltd (“DyStar”), their joint venture. Kiri’s shares were to be valued as at 3 July 2018 (“the valuation date”). The findings in relation to oppression in the Main Judgment were upheld on appeal in Senda International Capital Ltd v Kiri Industries Ltd and others and another appeal [2019] 2 SLR 1 (the “CA Main Judgment”). The finding on the valuation date was not challenged on appeal by either party.

  In Kiri Idustries Ltd v Senda International Capital Ltd and another [2019] 4 SLR 1 (the “12 March 2019 Judgment”), it was held, inter alia, that no minority discount for lack of control (“DLOC”) should be applied to the valuation of Kiri’s shareholding in DyStar. In Senda International Capital Ltd v Kiri Industries Ltd and others [2020] 2 SLR 1 (the “12 February 2020 CA Judgment”), the Court of Appeal upheld the SICC’s decision on DLOC in the 12 March 2019 Judgment.

  The most recent tranche of proceedings concerned the valuation of DyStar and Kiri’s shares in DyStar (“the valuation proceedings”). Kiri and Senda engaged valuation experts to assist in the valuation proceedings. Kiri engaged one expert, Ms Roula Harfouche (“Ms Harfouche”). Senda engaged several experts; their principal expert was Mr Lie Kok Keong (“Mr Lie”). The experts canvassed extensive evidence in the form of various reports and oral testimony at trial.

  In valuing DyStar, Ms Harfouche and Mr Lie both applied the discounted cash flow method (“DCF method”) and the market approach, albeit in different manners. In conducting her valuation, Ms Harfouche relied primarily on independent market and broker reports. These were reports on companies similar to DyStar in terms of business conducted, revenue figures and other financial metrics such as earnings before interest, tax, depreciation and amortisation (“EBITDA”). Mr Lie relied instead on a set of forecasts prepared by DyStar’s management (“the April 2019 Forecasts”) and a financial model that purportedly updated the April 2019 Forecasts (“the February 2020 Model”).

  Using their respective approaches, Ms Harfouche and Mr Lie arrived at different valuations of DyStar. The divergence was a result of not only the experts’ applications of their respective valuation approaches, but also the significance each expert ascribed to various events, transactions and other factors that affected DyStar’s valuation.

• The first category of events was described as the “Five Risk Events”.

• The first event was an explosion at DyStar’s dye synthesis plant in Nanjing, China (“the Nanjing plant”), on 23 February 2018. This resulted in the closure of the Nanjing plant.
• The second event was the closure of DyStar’s dye finishing plant in Wuxi, China (“the Wuxi plant”), due to plans to redevelop the land on which the Wuxi plant was located. The Chinese authorities’ intention to acquire the land was made known to DyStar in 2014.
• The third event was the alleged closure of DyStar’s plant in Ankleshwar, India (“the Ankleshwar plant”) pursuant to a notice from the Gujarat Pollution Control Board (“GPCB”).
• The fourth event was the expiration of DyStar’s patent over “Orange 288” dyes (“the Patent”). Also relevant in this regard were the exploitation of the Patent by Zhejiang Longsheng Group Co, Ltd (“Longsheng”). Longsheng used the Patent to produce dyes, and earned licence fees from third parties. These acts were held to be oppressive in the Main Judgment, and the SICC held at [191] that Longsheng would in the ordinary course of things have to pay for the use of the Patent.
• The fifth event was the expiration of DyStar’s patents over “Indigo 40% solution” dyes (“the Indigo 40% patents”).

The second category of events and/or factors pertained to the experts’ applications of the DCF method.

• The first factor was whether a discount for lack of marketability (“DLOM”) should be applied to Kiri’s minority share in DyStar.
• The second factor was whether two factors affecting DyStar’s cost of equity should be applied to DyStar’s valuation. These were, namely, the country risk premium and the size premium.
• The third factor was the applicable tax rate that ought to be applied to DyStar’s revenue.
  

The third category of events included several one-off events or transactions involving DyStar that allegedly affected DyStar’s valuation.

• The first set of transactions comprised the fees paid to Longsheng by DyStar for Longsheng’s provision of services to DyStar (“the Longsheng Fees”). These fell into two categories: the Longsheng Fees for 2015 and 2016, and the Longsheng Fees for 2017 and 2018. The former were dealt with in the Main Judgment. Specifically, in the Main Judgment at [281(b)], the SICC held that the Longsheng Fees for 2015 and 2016 were to be incorporated into DyStar’s valuation.
• The next transaction was the provision of a special incentive payment worth US$2m to one Ruan Weixiang (the “special incentive payment”). The SICC held in the Main Judgment at [281(b)] that this was an act of oppression, and the payment was to be incorporated into DyStar’s valuation.
• The next set of transactions comprised several other acts which were found to be oppressive in the Main Judgment. These were the “Related Party Loans”, the “Cash-pooling Arrangement” and the “Longsheng Financing Concept”. The SICC held at [281(b)] of the Main Judgment that the value of these transactions was to be incorporated into DyStar’s valuation.
• The next transaction was an insurance pay-out that DyStar received in May and June 2019.
• The final category of events were three events that occurred after the valuation date, namely, (a) tax adjustments in Osaka, Japan, which affected DyStar’s subsidiary in Japan; (b) additional corporate tax liability and penalties imposed on DyStar’s subsidiary in Italy; and (c) two actions commenced by Kiri against DyStar in India (“the India litigation”) (collectively, the “three post-valuation date events”).

The Court’s decision

Two main questions arose in the valuation proceedings. First, which expert’s general approach to valuation should be adopted. Second, how the aforementioned events, transactions and factors would affect, if at all, DyStar’s valuation.

The valuation date was of critical importance. Only events that occurred before the valuation date, and events occurring after the valuation date that were foreseeable as at the valuation date, could be taken into account in DyStar’s valuation. Considerations of fairness and justice are taken into account when the court determines a valuation date. Once the valuation date is fixed, there is no further room to take into account post-valuation date events that were not foreseeable as at the valuation date (at [26], [28]–[33]). Senda did not challenge, on appeal, the valuation date as determined in the Main Judgment. It was precluded from challenging the same in the valuation proceedings (at [34]).

Ms Harfouche’s approach to valuation was to be preferred. Ms Harfouche adopted an amalgamation of the DCF method and the market approach. She first obtained separate valuations of DyStar using each approach, before computing a single final valuation by aggregating the results of the DCF method and market approach.

In applying these two approaches, Ms Harfouche relied on market data, in the form of independent market and broker reports, on companies that were similar to DyStar in terms of revenue, business conducted and other financial metrics. These were appropriate companies to use as bases of comparison (at [55]). Ms Harfouche applied detailed and considered criteria in selecting the companies, and provided clear explanations for her calculations. The reports she relied on were also largely from reputable sources, and corroborated by other market reports, some of which were cited by Senda (at [52]). These rendered her valuation of DyStar credible and reasonable. Ms Harfouche’s amalgamation of her two approaches was also sound. Ms Harfouche did not prefer the approach that rendered a higher valuation range (ie, the DCF method), but instead arrived at an aggregated figure using both approaches. This figure broadly corresponded with DyStar’s actual financial figures for financial year (“FY”) 2018 and 2019 (at [77], [78]).

Ms Harfouche could not be faulted for using external market data in the form of market and broker reports. Her reliance on these reports was occasioned by Senda’s breach of its disclosure obligations (at [43], [46]). Senda failed to disclose DyStar’s key financial documents for the relevant years (at [42]). Ms Harfouche therefore had no choice but to rely on the said reports, as she had no access to DyStar’s historical financial data.

Senda objected to the admissibility of the reports relied on by Ms Harfouche on the basis that these reports were hearsay. This objection could not be sustained. The reports were not inadmissible hearsay evidence (at [80]). Kannan Ramesh J and Anselmo Reyes IJ were of the view that the reports constituted general and not specific hearsay, to which the hearsay rule did not apply with full rigour (at [85]–[91]). Ms Harfouche adduced these reports as proof of market opinion and not proof of the underlying facts behind these reports. The reports relied on by Ms Harfouche were customarily used in valuation work; they were admissible as a matter of necessity and logistical practicality (at [87], [101]). Any issues with the reliability of the market reports would be resolved as a matter of the weight to be ascribed to the evidence (at [92], [97], [98]). Roger Giles IJ was of the view that the reports were specific hearsay, but fell within the exceptions in ss 32(1)(b)(iii) and 32(1)(b)(iv) of the Evidence Act (Cap 97, 1997 Rev Ed), ie, the business records exception (at [105]–[115]). The reports relied on by Ms Harfouche were made by their authors in the ordinary course of their entity’s business of generating such reports and publishing them to the corporate investment industry. They were hence admissible on this basis. Kiri failed to provide the requisite notice of intention to introduce hearsay evidence, but that failure should be cured under O 2 of the Rules of Court (Cap 322, R 5, 2014 Rev Ed) (at [117]–[124]).

Mr Lie’s valuation was rejected. Mr Lie relied heavily, if not entirely, on the April 2019 Forecasts and the February 2020 Model. The April 2019 Forecasts were unsupported by underlying financial documents. They were overly pessimistic and failed to consider sensible upsides. Further, the circumstances of the preparation of the April 2019 Forecasts suggested that these were not financial forecasts prepared in the ordinary course of business, but forecasts made with the valuation proceedings in mind. The disruption scenario proposed in the April 2019 Forecasts involving Lonsen-Kiri Chemical Industries Ltd was unrealistic and commercially not sensible. These shortcomings showed that the April 2019 Forecasts were unreliable and skewed (at [138]–150]). The same criticisms could be made of the February 2020 Model. While purporting to build on the April 2019 Forecasts, no financial documents were disclosed supporting the figures in the February 2020 Model. It was accordingly rejected as well (at [151]–[154]).

Ms Harfouche was therefore correct not to take into account the April 2019 Forecasts and the February 2020 Model (at [155]). Based on Ms Harfouche’s final valuation, DyStar’s equity value was US$1,636m as at the valuation date, excluding the 2017 and 2018 Longsheng Fees, and the benefit/licence fees earned by Longsheng from the Patent (at [156]). Ms Harfouche’s figure, however, had to be adjusted for the various events, transactions and other factors.

While the closure of the Nanjing plant was foreseeable as at the valuation date, there was concrete evidence of sufficient contingency measures put into place by DyStar. These contingency measures were effected to ameliorate any potentially deleterious effects that the closure of the Nanjing plant would have had on DyStar’s valuation, both in the short-term and the long-term (at [159]–[161]). These included tolling arrangements for the outsourcing of production to third parties.

Similarly, the closure of the Wuxi plant, while foreseeable as at the valuation date, did not affect DyStar’s valuation. There was concrete evidence that contingency measures had been put in place. Production at the Wuxi plant was to be relocated to separate plants in Cilegon and other locations designated by DyStar (at [167]). Any negative effects on DyStar’s valuation would have been ameliorated by the contingency measures.

It was not foreseeable as at the valuation date that the Ankleshwar plant would be permanently closed. While DyStar had received a closure notice from the GPCB due to issues concerning compliance with India’s pollution legislation, DyStar had taken steps to comply with the regulations. A subsequent notice was issued after the valuation date, where DyStar was informed of a need to upgrade its facilities; this was not foreseeable (at [173]). In any event, there was no reason to believe that the Ankleshwar plant could not be reopened and remain open (at [172], [174], [176]). This event thus did not affect DyStar’s valuation.

As stated in the Main Judgment at [191], the Patent was a DyStar asset and Longsheng as a separate entity would in the ordinary course of things have to pay for the use of the Patent. It did not, and DyStar had to be compensated accordingly. For Longsheng’s use of the Patent to produce dyes, the appropriate form of compensation was a notional licence fee, ie, how much Longsheng would have had to pay DyStar in order to obtain DyStar’s consent for Longsheng to produce dyes under the Patent (at [180], [183]). This notional licence fee was to be incorporated into DyStar’s valuation. An account of profits was not the appropriate remedy, because DyStar was in no position to use the Patent to produce dyes. Longsheng was able to produce dyes using the Patent because it possessed infrastructural capabilities that DyStar lacked. DyStar would never have been able to make such profits with its existing resources (at [186]). The third-party licence fees collected by Longsheng from sub-licensees of the Patent also had to be incorporated into DyStar’s valuation. Longsheng was not entitled to earn or retain such fees (at [198]).

The expiration of the Patent would have negative downstream effects on DyStar’s valuation, because it was a valuable asset as demonstrated by Longsheng’s ability to profit from the Patent (at [210]). Unlike the case for the Nanjing, Wuxi and Ankleshwar plants, there was no evidence of concrete contingency measures in place to ameliorate the effects of the expiration of the Patent. As such, DyStar’s maintainable EBITDA would be affected (at [213]).

Similarly, there was insufficient evidence of contingency measures in place with respect to the expiration of the Indigo 40% patents. Cogent evidence was provided showing that the expiration of the patents would have negative effects on DyStar’s valuation (at [215], [216], [218]). Therefore, the expiration of these patents would also cause a fall in DyStar’s maintainable EBITDA (at [221]).

A DLOM ought to apply to Kiri’s minority share in DyStar. This is a discount that reflected the lack of marketability of Kiri’s shares due to these being shares in a private, not publicly listed, company. Case law makes it clear that the relative illiquidity of such shares warrants a DLOM. Kiri could not point to any exceptional circumstances warranting a non-application of DLOM (at [229]–[240]).

A country risk premium had to be imposed. DyStar conducted its business in multiple jurisdictions. This averaged out, but did not nullify, the country-specific risk present in each jurisdiction (at [248], [249]). On the other hand, a size premium was inappropriate. DyStar stood as an industry leader amongst its peers. It had a substantial revenue of over US$1bn a year (at [255]). This was not the sort of “small and risky” company that called for the application of a size premium.

Mr Lie’s proposed applicable tax rate on DyStar’s revenue was accepted. The disparity in the experts’ numbers was a product of an erroneous deduction by Ms Harfouche (at [266]–[268]). Ms Harfouche also conceded that she lacked expertise in tax.

The parties agreed that, as directed in the Main Judgment, the Longsheng Fees for 2015 and 2016 had to be incorporated into DyStar’s valuation (at [271]). Ms Harfouche’s calculation of the Longsheng Fees for 2015 and 2016 was preferred, as she correctly took into account the time value of money and the impact on DyStar’s valuation (ie, on DyStar’s EBITDA) (at [274], [275]). The court disagreed with Ms Harfouche on the applicable tax rate; this ought to have been DyStar’s historical, not contemporary, tax rates (at [276]).

The Longsheng Fees for 2017 and 2018 were not to be incorporated into DyStar’s valuation. These fees were paid in different circumstances compared to the Longsheng Fees for 2015 and 2016. The DyStar board, including Kiri’s directors on the board, were apprised of the 2017 and 2018 Longsheng Fees (at [279]–[281]). Kiri wrongly argued that these fees were not commercially justified. The 2017 and 2018 Longsheng Fees were paid for services that DyStar required and benefitted from (at [283]). While calling for a tender for other contractors would have been preferable, Kiri did not show that the failure to do so was commercially unfair; there was no evidence that the same range and quality of services could have been provided by another contractor (at [286]).

As per the Main Judgment at [281(b)], the special incentive payment to Ruan, and the losses occasioned to DyStar due to the Related Party Loans, the Cash-pooling Arrangement and the Longsheng Financing Concept, had to be incorporated back into DyStar’s valuation. The sole area of dispute was quantum. Ms Harfouche’s calculations were preferred, because she correctly calculated the cost savings (on inter alia interest) that DyStar would have enjoyed but for these oppressive transactions (at [292], [296], [297], [300]). The only adjustment to be made was to Ms Harfouche’s proposed tax rate for the special incentive payment (at [293]).

The insurance pay-out to DyStar in May and June 2019 had to be incorporated into DyStar’s valuation. The relevant sums were in fact paid to DyStar. It was foreseeable as at the valuation date that DyStar would receive such sums, because it made the insurance claim prior to the valuation date (at [302], [303]).

The three post-valuation date events were not to be taken into account in DyStar’s valuation. All three events took place after the valuation date and were not foreseeable as at the valuation date (at [310]).

As some of the adjustments to Ms Harfouche’s US$1,636m valuation required technical calculations, the court ordered the parties’ experts to provide their conclusions on these issues.

This summary is provided to assist in the understanding of the Court’s judgment. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s judgment.

Version No 1: 21 Dec 2020 (09:51 hrs)