Shareholders' disputes, in some cases, are like a divorce. Business partners work for years together, and eventually build up a successful business empire, only to find that it is time to go separate ways. In the unfortunate event that the break-up is painful and shareholders have to proceed with unfair prejudice proceedings, what would be the relevant considerations during the process of valuation if a buy-out order is made in the Hong Kong court?
Would the date of valuation always be the date of the order? The date on which the court makes the buy-out order is only the starting point. In the interest of fairness, the court has a discretion to consider other possible dates. In the recent decision Vitaly Orlov v Magnus Leonard Roth and Three Towns Capital Ltd  (Re Three Towns), the court considered the following dates:
- The date of the buy-out order, being a date as close as possible to the actual sale (which is most likely the date in case the company in question is a dormant company);
- The date of the petition, being the date on which the petitioner elects to treat the unfair conduct as in effect destroying the basis on which he agrees to continue to be a shareholder;
- The date from which the petitioner is excluded from management; and
- The date of the cross petition, when it becomes open common ground for both parties that a buy-out can resolve the dispute.
The court took the following factors into account and decided that the date of the cross petition was the reference point of the date of valuation:
- what unfairly prejudicial conduct has occurred;
- whose conduct it was; and
- when it occurred.
In fact, the parties already agreed that one would buy out the other before the trial commenced. That was also one of the fact-specific factors affecting how the court determined the date of valuation. The reason for the parties to fight the proceedings all the way was because they could not agree on the basis of valuation in view of the complained-about conduct.
Approach of valuation In respect of valuation of a shareholding in a private company, the starting point is the value of the company as a whole. It is not based on a notional sale of the outgoing shareholder's share to the continuing shareholders. It is based on a notional sale of the business as a whole to an outsider purchaser (as per Lord Millett in CVC v Demarco  at paragraphs 41-42 and 45, which is frequently cited in Hong Kong).
Previously published in In-House Lawyers' Autumn 2019 issue.
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