In Re Luk Fai Holdings Co Ltd; Re Criteria Holdings Ltd [2023] HKCFI 2268, the Companies Judge, Hon Linda Chan J, clarified the Court’s approach to the valuation of shares in the context of buy-out relief arising from unfair prejudice petitions. The decision provides welcome guidance on the question of whether and to what extent, in the context of assessing the fair market value of shares of a company holding real property, the court should deduct notional expenses which would have to be incurred in a hypothetical sale of the real properties held by the company. This question has hitherto never been considered by the Hong Kong courts.
The case concerned a dispute between 3 camps of siblings (namely the Stephen Parties, the Simon Parties and the 3 Luk Brothers) over the affairs of two family companies (Luk Fai and Criteria) and their respective subsidiaries, which were mostly property holding companies. At the 2nd CMC of the petitions, following the guidance of her Ladyship in Re Top “E” Trading (HK) Company Ltd [2021] HKCFI 3572 §26, the parties reached agreement for the 3 Luk Brothers to buy out the Stephen Parties’ shares at a valuation to be determined by the Court, by reference to the valuation of a single joint expert (SJE), adjustments to be made as a result of the Court’s findings on certain issues with financial ramifications, and cross-examination of the SJE and submissions at trial.
The Judge reviewed the principles regarding the proper approach to valuation of a company in the context of an unfair prejudice petition. In particular, the Court has a wide discretion to do what is fair and equitable between the parties, and the requirement of fairness applies to the choice of valuation methodology, valuation assumptions and directions. Further, where an SJE is appointed to determine the valuation, the Court would be slow to intervene on matters of opinion, though it does not take a blinkered approach.
Having accepted the SJE’s opinion that the property holding companies should be valued on an asset approach (as opposed to a market approach), the Judge considered the issue of whether, on an asset approach, the realisation costs or expenses on a hypothetical sale of the real properties should be deducted in the valuation exercise, which is an issue that had not been previously considered in this jurisdiction. In doing so, her Ladyship analysed a number of English authorities including Goldstein v Levy Gee [2003] PNLR 35, Shah v Shah [2011] EWHC 1902 (Ch) and Re Annacott Holdings Ltd [2013] 2 BCLC 46. Given that the value of the companies was assessed on the basis that all of its real properties would be sold in a notional sale, her Ladyship concluded that it would be appropriate to deduct the notional expenses which the companies would have to pay in selling the properties.
Bernard Man SC, Danny Tang and Keith Chan, instructed by Jones Day, acted for the Stephen Parties. Eva Sit SC and Justin Ho, instructed by ONC Lawyers, acted for the 3 Luk Brothers. Laurence Li SC and Natalie So, instructed by Tai Tang & Chong, previously acted for the Simon Parties (before they discontinued their petitions).
For the full judgment, please view here.