Henderson J
Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 1 of 26 IN THE GRAND COURT OF THE CAYMAN ISLANDS 1 HOLDEN AT GEORGE TOWN, GRAND CAYMAN 2 3 CAUSE NO. 356 OF 2004 4 5 IN THE MATTER OF FORTUNA DEVELOPMENT CORPORATION 6 7 AND IN THE MATTER OF THE COMPANIES LAW (2004 REVISION) 8 9 Appearances: Mr. Richard Hacker Q.C. instructed by 10 Mr. Graeme Halkerston of Appleby for the Applicant 11 Mr. Stephen Phillips Q.C. instructed by Mr. Guy Locke and 12 Mr. Michael Makridakis of Walkers for the Respondent 13 14 Before: Hon. Justice Henderson 15 16 Heard: June 10 – 11, July 24, 2008 17 18 JUDGMENT 19 20 The parties are shareholders in the Respondent Fortuna Development Corporation 21 (“Fortuna”). When the relationship of trust and confidence between them foundered in 22 2004, the Petitioner Tempo Group Limited (“Tempo”) brought its Petition asking the 23 Court to wind up Fortuna. The parties then reached an agreement (“the Agreement”) to 24 pursue the mechanism described in O’Neill and another vs. Phillips and others [1999] 25 1 WLR 1092 (HL) with the intent that the majority would buy the minority shareholding. 26 An offer was made by the majority but refused. I am now asked to determine if the 27 Petition should be stayed or dismissed. 28 29 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 2 of 26 Procedural History 1 2 Tempo is a substantial minority shareholder in Fortuna, a quasi-partnership. Fortuna is a 3 substantial investment and holding company with subsidiaries conducting (through other 4 entities) business in Asia, including the operation of a power generation facility and land 5 development in and around Ho Chi Minh City, Vietnam. 6 7 The respondents New Frontier Development Corporation (“New Frontier”) and Wynner 8 Group Limited (“Wynner”) (collectively, “the Majority Shareholders”) own a majority of 9 the issued shares. Dr. Chen Ching Chih (“Dr. Chen”), Mr. Lawrence Ting Shin Li (now 10 deceased) (“Mr. Ting”), and Mr. Ferdinand Tsien Ping Lun (“Mr. Tsien”) (now deceased) 11 are the beneficial owners of Tempo, New Frontier and Wynner respectively. 12 13 Tempo issued its Petition on August 3, 2004 seeking the winding up of Fortuna on the 14 grounds that Mr. Ting and Mr. Tsien (and through them the Majority Shareholders) have 15 acted in an oppressive and prejudicial manner and in breach of their fiduciary duties 16 towards Tempo and Dr. Chen. The Petition alleges that amounts which total 17 US$20,000,000 were deducted from dividends declared by Fortuna to pay unexplained 18 “other expenses”, “extraordinary expenses” and “Northern Office expenses”. Dr. Chen 19 (who is a Director) demanded explanations repeatedly but without satisfaction. He says 20 he was told that some of the expenses were illegal and he should stop asking about them. 21 He was told that bribes had been paid to Vietnamese government officials and recorded 22 by Fortuna in its books as shareholders loans. When he demanded documentation, Gayle 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 3 of 26 Tsien, the Chief Financial Officer of Fortuna and Mr. Tsien’s daughter, said that most 1 such documentation had been destroyed. The Petition alleges that these explanations 2 (although amounting to an admission of unlawful conduct) were false; in fact, Mssrs. 3 Ting and Tsien misappropriated the money. It is alleged that, as the dispute grew, the 4 Majority Shareholders acted oppressively toward Tempo and Dr. Chen by witholding 5 information to which he is entitled and by manipulating an Extraordinary General 6 Meeting of Fortuna on June 22, 2004. 7 8 The Majority Shareholders deny these allegations. They say that there was an agreement 9 between the parties for borrowing from shareholders and making repayment to them. 10 The allegedly suspicious transactions were approved by all concerned. 11 12 On August 13, 2004 this Court appointed two Inspectors of Fortuna under section 64 of 13 the Companies Law (2004 Revision) to examine the affairs of the Company and assist the 14 Court in determining the validity of the allegations. The Majority Shareholders made an 15 offer to purchase Tempo’s shares, which was rejected, and then applied to strike out the 16 Petition. The parties then reached an Agreement which was embodied in a consent order 17 pronounced November 30, 2004. The order stayed the proceedings but directed that the 18 Inspectors continue their work. Attached to the order is a Schedule (“the Schedule”) 19 setting out an agreement of the parties upon a mechanism for bringing their troubled 20 relationship to an end. The Schedule reads, in part: 21 22 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 4 of 26 “1. New Frontier Development Corporation (New Frontier) and Wynner Group 1 Limited (Wynner) (or their nominees) offer to buy, in accordance with the 2 procedure set out in, and subject to, the terms set out below: 3 4 (a) the shares in the Company owned by Tempo Group Limited (Tempo); and 5 6 (b) that part of the shareholding in Bates Group Limited (Bates) owned by 7 Dr. Chen or his family. 8 9 excluding the shares which it has been agreed would be transferred to the order of 10 Mr. Albert Hsu. 11 12 (together the Chen Shareholding). 13
An independent valuer (the Valuer) will be appointed. … 14
The identity of the Valuer shall be agreed by the parties. … 15
The Valuer: 16 (a) will act as an expert and not as an arbitrator of a factual dispute; 17 (b) will be required to give its expert opinion on the market value of the 18 Company’s entire share capital. This is the price which in the Valuer’s 19 opinion it is reasonable to expect the Company to fetch if sold for cash in 20 the open market on the date in question (the Valuation) on a willing 21 seller/willing buyer basis and on the basis of a purchase in the manner set 22 out below; 23 24 (c) shall prepare the Valuation as at a date as close to the date of sale as is 25 reasonably possible; 26 27 (d) shall determine the value of each of the Company’s shares by dividing the 28 Valuation by the number of the Company’s shares in issue. The value of 29 any shareholding shall be determined by multiplying the number of shares 30 by the price for each share as determined above. For the avoidance of 31 doubt there shall be no minority discount applied to the Chen 32 Shareholding; 33 34 (e) shall have access to all of the books, records and documents in the 35 possession or control of the Company and such access to the sites, 36 premises, locations and places of business of the Company and its 37 subsidiaries, and businesses in Taiwan (which definition does not, for the 38 avoidance of doubt, extend to CT&D Taiwan) and Vietnam as the Valuer 39 shall think fit; 40 41 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 5 of 26 (f) shall take account of such facts and matters as the Valuer shall think fit for 1 the purpose of arriving at the Valuation, which matters may include the 2 long term nature of the Company’s investments in Vietnam and the risks 3 associated with investments of this nature, including change in law risk, 4 change in the regulatory environments applicable to the Company’s 5 investments, the Company’s ability to remit funds and applicable foreign 6 exchange regimes, the Company’s profitability and its access to sources of 7 funds and global regional trends affecting the demand for and yield of 8 projects of the type undertaken by the Company. However, the precise 9 method of valuation shall be a matter for the Valuer’s discretion and may 10 include such market testing as it considers would be of assistance. The 11 Valuer would also be permitted to appoint such independent specialist 12 advisers to assist it in the discharge of its duties as it considered 13 appropriate; and 14 15 (g) shall not take account of any purported restraints or restrictions on the 16 transferability of the Company’s shares as set out in the Company’s 17 Articles of Association.” 18 19 Timetable and submissions to the Valuer 20 2. The detailed procedure and timetable involved in the valuation process shall 21 be for the Valuer to decide. However, each of (1) Tempo and (2) New 22 Frontier and Wynner shall have an opportunity to make written 23 representations to the Valuer within a time to be decided by the Valuer, and 24 further shall have an opportunity to make written observations on the 25 representations of the other party within a time to be decided by the Valuer 26 and to make such other representations or observations that the Valuer may 27 think fit to allow. 28 29 Access to the Company’s books and records 30 3. New Frontier and Wynner will (as set out below) allow Tempo and Dr. Chen, 31 their advisers, valuers and agents access to all of the books, records and 32 documents in the possession or control of the Company other than materials 33 subject to litigation privilege or its equivalent in any other jurisdiction (the 34 Records) for the purpose of preparing Tempo’s and Dr. Chen’s written 35 representations and observations. 36 37 4. New Frontier and Wynner intend to establish one or more data rooms (at the 38 Company’s premises or otherwise). Pursuant to the terms of paragraphs 8 to 39 10 below, New Frontier and Wynner will ensure that Tempo and Dr. Chen are 40 provided with all relevant information which bears materially upon the value 41 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 6 of 26 of the Company in this data room or rooms. In particular, Tempo and Dr. 1 Chen will be allowed access to all those documents to which the Valuer has 2 access and to all other relevant documents which bear materially on the value 3 of the Company. 4 … 5
Wynner and New Frontier will, for a period of up to one month commencing 6 on a date to be agreed, allow Tempo and Dr. Chen and their representatives to 7 inspect the Records in the data room. 8 … 9 The Valuation 10 11
The Valuation: 12 (a) shall be communicated in writing but the Valuer is not required to give 13 reasons for the Valuation; and 14 15 (b) shall be final and binding on our respective clients. 16 … 17
Within 30 days of receipt of the Valuation Wynner and New Frontier will be 18 entitled to make an offer to purchase the Chen Shareholding at the Valuation 19 price (the New Frontier/Wynner Offer). If the New Frontier/Wynner Offer is 20 made, Tempo and Dr. Chen will confirm within 14 days of receipt of the New 21 Frontier/Wynner Offer whether they accept the New Frontier/Wynner Offer. 22 23
If Wynner and New Frontier do not make the New Frontier/Wynner Offer 24 within 30 days of receipt of the Valuation, Tempo and Dr. Chen will be 25 entitled within 60 days of the receipt of the Valuation to make an offer (the 26 Chen Offer) to purchase, at an amount equal to the Valuation price less 5 27 percent, the following: 28 29 (a) all the shares in the Company owned by New Frontier and Wynner; 30 and 31 (b) such of the shares in Bates as are held by or on behalf of the families 32 of Tsien Peng Lun or the late Ting Shan Li; 33 34 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 7 of 26 excluding the shares which it has been agreed would be transferred to the order of 1 Mr. Albert Hsu’s family (the New Frontier/Wynner interests). For the avoidance 2 of doubt, Wynner and New Frontier do not offer to buy the shares which Maxima 3 Resources Corporation holds in the Company. 4 5
Wynner and New Frontier will confirm within 14 days of receipt of the Chen 6 Offer whether they accept the Chen Offer. For the avoidance of doubt 7 Wynner’s and New Frontier’s acceptance of the Chen Offer is at their 8 complete discretion and they shall be under no obligation to accept the Chen 9 Offer. 10 11
The costs of the Valuer shall be borne by the Company. 12
The following cases will be stayed (with no order as to the costs of and 13 incidental to the application for the stay) for the period from the date of this 14 offer until the date of Completion inclusive and the parties agree immediately 15 to take all steps necessary to effect such stays: 16 17 (a) Cause Number 291 of 2004 in the Grand Court of the Cayman Islands; 18 (b) Cause number 323 of 2004 in the Grand Court of the Cayman Islands; 19 … 20
At Completion: 21 (e) the Petition and the application to appoint provisional liquidators will be 22 dismissed and the order made for the appointment of Inspectors 23 discharged, with orders that Wynner and New Frontier pay half of 24 Tempo’s reasonable costs of the Petition and the application to appoint 25 provisional liquidators, such costs to be taxed if not agreed; and 26 27 (f) the Company will pay the costs occasioned by the inspection process up 28 to and including the date of this Offer, those costs being the total sum of 29 Tempo’s and Dr. Chen’s costs in dealing with the Inspectors, the fees and 30 costs of the Inspectors themselves and the costs which Wynner and New 31 Frontier have incurred in relation to the inspection process (including but 32 not limited to compliance with Inspectors’ requests, preparation for and 33 attendance at interviews conducted by Inspectors and the costs of and 34 incidental to the application made by inspectors dated 28 September 35 2004), such costs to be taxed if not agreed. 36 … 37 The Agreement did not achieve its purpose. 38 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 8 of 26 1 On June 17, 2005 Ernst & Young Vietnam (“the Valuer”) was appointed as Valuer under 2 the Agreement. The Valuation Date was set at December 31, 2004. Data rooms were 3 opened on September 12, 2005 and the advisors to the parties were given access. The 4 process took longer than expected. By agreement of the parties and the Valuer, the 5 Valuation Date was changed to December 31, 2005. 6 7 On June 6, 2006 the Inspectors delivered their exhaustive report on the affairs and 8 records of Fortuna. They encountered considerable difficulty. Fortuna did not allow the 9 Inspectors to ask questions of employees outside of the formal examination process. 10 Questions had to be put in writing. Some of the responses were “minimal” (Inspectors’ 11 Report, p. 31) or “legalistic”. Fortuna did not volunteer information but produced only 12 what was requested. During formal examinations, some questions were objected to and 13 went unanswered. All of this is understandable in light of an ongoing criminal 14 investigation in Taipei into aspects of the Company’s affairs, but it prevented the 15 Inspectors from coming to firm conclusions about many of Tempo’s allegations. The 16 Inspectors’ Report is admissible as opinion evidence in this proceeding: Companies 17 Law (2007 Revision), s. 68. 18 19 Nevertheless, the Inspectors were able to reach conclusions which tend to support, 20 although they do not prove, the truth of the allegations in the Petition. The following are 21 representative of the Inspectors’ opinions: 22 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 9 of 26 The treatment of the “Northern Office” expenses in Fortuna’s books is not 1 consistent with the assertion by the Majority Shareholders that these are 2 shareholder loans to be repaid at a later date (Inspectors’ Report, p. 252); 3 4 Due to the absence of documents and information, the Inspectors cannot confirm 5 or deny that company funds were used to pay bribes but can say only that “funds 6 have left the [Fortuna] Group for unknown purposes” (ibid., p. 274); 7 8 There was no agreement to borrow money from Fortuna as alleged by the 9 Majority Shareholders (ibid., p. 275); 10 11 A lack of material disclosure in the 2004 Consolidated Financial Statements 12 “prevents users from obtaining a true and fair view of [Fortuna’s] financial 13 position” (ibid., p. 392); 14 15 At p. 438: 16 17 “However, of concern to the Inspectors are the significant inconsistencies 18 and non-disclosures in the reporting of the various financial transactions 19 made between FDC and its subsidiaries which are detailed above. 20 21 The Inspectors acknowledge that individually, these inconsistencies and 22 non-disclosures in financial reporting are not necessarily material and may 23 not affect the underlying principle that the Audited Financial Statements 24 give a “true and fair” view of (sic) financial position. However, when 25 considered collectively, the Inspectors are of the opinion that the various 26 inconsistencies and non-disclosure in financial reporting highlighted 27 amount to a material misstatement in the Audited Financial Statements of 28 the Group. As a result, the accurate reporting of the financial position of 29 FDC and its subsidiaries has been compromised to the extent that it may 30 not be possible for a user such as Dr. Chen to gain a ‘true and fair view’ of 31 the Financial Statements.” 32 33 The Report was not entirely one-sided; some of Dr. Chen’s allegations to the Inspectors 34 (which extended beyond those asserted in the Petition) were judged to be incorrect. 35 36 By August, 2006 the audited financial statements for the year ending December 31, 2005 37 were available. The parties made submissions in writing to the Valuer which they 38 exchanged on September 25, 2006 and submissions in reply, exchanged October 11, 39 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 10 of 26 2006. The” valuation period” commenced on November 30, 2006. On April 16, 2007 1 the Valuation was delivered to the Court. 2 3 Meanwhile, Tempo and Dr. Chen received some information from third parties which 4 caused them to question, somewhat belatedly, the independence of the Valuer. The 5 Agreement was for the appointment of an “independent” Valuer. On November 29, 2006 6 Tempo issued a Summons asserting that the Valuer lacked the degree of independence 7 contemplated by the Agreement and seeking a Declaration to that effect. The question 8 was one of substance. A number of undisclosed prior relationships of the Ernst & Young 9 partner with primary responsibility for the Valuation, of the engagement partner, and of a 10 Valuation team member with Fortuna subsidiaries were alleged. Directions were given 11 and evidence and skeleton arguments were exchanged. After a full hearing, I decided the 12 alleged lack of independence had not been made out and dismissed the application. My 13 Ruling was given September 17, 2007 (and amended on October 22, 2007). An appeal 14 by Tempo to the Court of Appeal was dismissed on December 6, 2007 (with Reasons 15 dated February 14, 2008). 16 17 The Valuation was delivered to the parties on October 17, 2007. The Majority 18 Shareholders then made, on November 14, 2007, an offer to purchase the Tempo shares 19 at the Valuation price. The offer was rejected after the time for acceptance had passed. 20 21 On January 10, 2008 Tempo applied for a Declaration that the Valuation was not as 22 contemplated by the Agreement as it was qualified, stale, and in any event not an 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 11 of 26 accurate reflection of the true market value of Fortuna. The Majority Shareholders 1 responded on January 31, 2008 by applying to strike out the Petition on the ground that a 2 reasonable offer had been made in accordance with the agreed procedure and, as a 3 consequence, continuation of the proceedings would amount to an abuse of process. 4 5 The Valuation finds that the market value of Fortuna’s entire share capital as at 6 December 31, 2005 is US $679,644,000. The Valuation also says: 7 “The opinions set out above have been arrived at subject to the following limiting 8 factor - 9 10 Our Valuation has been prepared having regard to the financial statements of the 11 Company as at 31 December 2005. We understand that there is a dispute in 12 relation to Shareholder Advance amounts and that the treatment of this amount is 13 subject to a decision of the Court. The impact to our Valuation and on the value 14 of each of the Company’s shares, as set out above, would need to be considered in 15 light of the Court’s decision.” 16 17 At the hearing of the applications for a Declaration that the Valuation was inadequate and 18 for the striking out of the Petition, Tempo announced an “open offer” to purchase the 19 majority shareholding on the basis of a valuation of Fortuna at US $1.2 billion and an 20 alternative offer to sell its interest at the same valuation. Its letter of June 12, 2008 21 “confirming” the terms of the offer was restricted to an offer by Tempo to purchase; its 22 alternative offer, to sell, had evaporated. The offer was not accepted. 23 24 Issues 25 26 The arguments pose the following questions: 27 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 12 of 26 1) Given the terms of the Agreement, was Tempo’s failure to accept the offer by the 1 Majority Shareholders unreasonable “by definition”? 2 3 2) Was the mechanism set out in the Agreement inappropriate in light of the 4 allegations (supported to some extent by the Inspectors’ Report) of fraud and 5 misappropriation? 6 7 3) Is the Valuation qualified to the extent that it falls outside the terms of the 8 Agreement? 9 10 4) Is the Valuation stale to the extent that it should not be relied upon? 11 5) In all of the circumstances, is Tempo’s refusal of the offer by the Majority 12 Shareholders unreasonable? 13 14 Law 15 16 The relationship between the Majority Shareholders and Tempo is characterized 17 accurately as a quasi-partnership. It is well established that a Petition for winding up 18 based upon oppression of the minority by the majority (which may, and often does, 19 include exclusion from the affairs of the company) cannot be allowed to proceed if the 20 majority has plainly made a reasonable offer to purchase the minority shareholding. The 21 Law Commission, in its Report on Shareholder Remedies (1997) (Law. Com. No. 246 at 22 pp. 30 - 37), recommended that in a private company in which substantially all the 23 members are directors (as in the present case) there should be a statutory presumption 24 that the removal of a shareholder as a director, or from substantially all his functions as a 25 director, is unfairly prejudicial conduct. In O’Neill, supra, Lord Hoffmann (with whom 26 the other sitting Law Lords agreed) observed that the recommendation did not differ 27 much from the present law (see, in this regard, the 1983 decision of Vinelott, J in Re a 28 Company [1983] 2 All ER 854 (Ch. D.)). He then said: 29 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 13 of 26 “But the unfairness does not lie in the exclusion alone but in exclusion without a 1 reasonable offer. If the respondent to a petition has plainly made a reasonable 2 offer, then the exclusion as such will not be unfairly prejudicial and he will be 3 entitled to have the petition struck out. It is therefore very important that 4 participants in such companies should be able to know what counts as a 5 reasonable offer. 6 7 In the first place, the offer must be to purchase the shares at a fair value. This will 8 ordinarily be a value representing an equivalent proportion of the total issued 9 share capital, that is, without a discount for its being a minority holding. The Law 10 Commission (paragraphs 3.57-62) has recommended a statutory presumption that 11 in cases to which the presumption of unfairly prejudicial conduct applies, the fair 12 value of the shares should be determined on a pro rata basis. This too reflects the 13 existing practice. This is not to say that there may not be cases in which it will be 14 fair to take a discounted value. But such cases will be based upon special 15 circumstances and it will seldom be possible for the court to say that an offer to 16 buy on a discounted basis is plainly reasonable, so that the petition should be 17 struck out. 18 19 Secondly, the value, if not agreed, should be determined by a competent expert. 20 The offer in this case to appoint an accountant agreed by the parties or in default 21 nominated by the President of the Institute of Chartered Accountants satisfied this 22 requirement. One would ordinarily expect the costs of the expert to be shared but 23 he should have the power to decide that they should be borne in some different 24 way. 25 26 Thirdly, the offer should be to have the value determined by the expert as an 27 expert. I do not think that the offer should provide for the full machinery of 28 arbitration or the half-way house of an expert who gives reasons. The objective 29 should be economy and expedition, even if this carries the possibility of a rough 30 edge for one side or the other (and both parties in this respect take the same risk) 31 compared with a more elaborate procedure. This is in accordance with the terms 32 of the draft Regulation 119: Exit Right recommended by the Law Commission: 33 see Appendix C to the report, p. 133. 34 35 Fourthly, the offer should, as in this case, provide for equality of arms between 36 the parties. Both should have the same right of access to information about the 37 company which bears upon the value of the shares and both should have the right 38 to make submissions to the expert, though the form (written or oral) which these 39 submissions may take should be left to the discretion of the expert himself. 40 41 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 14 of 26 Fifthly, there is the question of costs. In the present case, when the offer was 1 made after nearly three years of litigation, it could not serve as an independent 2 ground for dismissing the petition, on the assumption that it was otherwise well 3 founded, without an offer of costs. But this does not mean that payment of costs 4 need always be offered.” 5 6 Lord Millett put it slightly differently in CVC / Opportunity Equity Partners Limited and 7 another v. Almeida 2002 CILR 77 (PC): 8 9 “Their Lordships would wish to emphasize that this does not mean that a minority 10 shareholder can use the threat of winding-up proceedings in order to bring 11 pressure on the majority to yield to his demands, however unreasonable. As Re a 12 Company (No. 003843 of 1986) (2) demonstrates, the court will be astute to 13 prevent such conduct. In a case such as the present it would be an abuse of the 14 process of the court for a petitioner to commence or continue proceedings after he 15 had plainly received a fair offer for his shares. If he holds out for more, the 16 respondent can apply for the proceedings to be restrained or struck out. The court 17 is fully in control and will not allow its process to be abused.” 18 19 Whether the focus is placed upon the offeror (has it “plainly made a reasonable offer”, in 20 the words of Lord Hoffmann?) or upon the offeree (has it “plainly received a fair offer”, 21 in the words of Lord Millett?) is of little consequence. The offer must be fair and 22 reasonable, and plainly so. 23 24 The breakdown of a relationship between quasi-partners may be addressed in the articles 25 of the company, in which case the mechanism set out there is determinative. When (as 26 here) that is not the case, O’Neill provides a helpful mechanism for what is hoped will be 27 a just and speedy resolution of the dispute: 28 1) The offer must be to purchase the shares of the minority at a fair value which, in 29 the absence of special circumstances, means on a pro rata basis without any 30 discount for the fact it is a minority shareholding: see, on the subject of discounts: 31 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 15 of 26 In re Bird Precision Bellows Ltd. [1986] 1 Ch. 658 (CA); and In re London 1 School of Electronics Ltd. [1986] Ch. 211; 2 3 2) If not agreed, the value is to be determined by a competent expert (whose costs 4 are ordinarily shared); 5 6 3) The value should be determined by the expert “as an expert”, i.e., in a non- 7 speaking valuation; 8 9 4) Both parties should have the same degree of access to relevant information on 10 value and the same opportunity to make submissions to the expert; 11 12 5) Considerations of fairness may require that the majority include an offer to pay the 13 costs of the petition. 14 15 Once the court is satisfied that a plainly fair and reasonable offer has been made, the 16 petition is ordinarily stayed: Re a company (no. 003843 of 1986) [1987] BCLC 562 (Ch. 17 D.). The Majority Shareholders have asked that this Petition be struck out, an order 18 which should be granted only in “clear” cases (North Holdings Ltd. v. Southern Tropics 19 Ltd. and others [1999] 2 BCLC 625 (CA)). Again, little turns upon the distinction 20 between a stay and a striking out as either remedy must be founded upon a plainly fair 21 and reasonable offer. 22 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 16 of 26 The Agreement between the parties establishes a procedure which is indistinguishable 1 from the O’Neill mechanism except in one important way: neither party is obliged by its 2 terms to make an offer. Although the Valuation is said (in clause 11(b)) to be “final and 3 binding”, the Majority Shareholders are not obligated to make any offer at all: clause 13. 4 If they fail to do so within 30 days, Tempo is then entitled (but not required) to offer to 5 purchase the majority shareholding at the Valuation price less five percent: clause 14. 6 Despite these terms, the parties can have been in no doubt, when they entered into the 7 Agreement, that the fate of the Petition would almost certainly turn on whether an offer at 8 the Valuation price was made and accepted. In other words, the parties must necessarily 9 have contemplated that an offer at the Valuation price would likely be viewed as fair and 10 reasonable. 11 12 A valuation establishes the market value of a company’s shares as at a certain date. For 13 the most part, events occurring after that date cannot be relied upon to demonstrate that 14 the valuation, although it may represent the honestly held view of the valuer at the time, 15 is in fact unfair. The valuer may, if so advised, take into account some relevant events 16 occurring after the valuation date but the valuation itself may not be attacked on the 17 ground that the accuracy of the valuer’s opinion as to future earnings was not confirmed 18 by subsequent events: see Joiner & another v. George and others [2002] EWCA Civ 160 19 (CA); Jones and others v. Sherwood Computer Services PLC [1992] 1 WLR 277 (CA); 20 In Re London School of Electronics, supra. Indeed, absent fraud by the valuer or 21 something akin to it, it is not open to a party to seek to draw inferences about the valuer’s 22 methods or conclusions (assuming a non-speaking valuation) and argue that the resulting 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 17 of 26 valuation is unfair or unfairly arrived at: Morgan Sindall plc v. Sawston Farms (Cambs) 1 Ltd. [1999] 1 EGLR 90 (CA); Doughty Hanson & Co. Ltd. v. Roe [2007] EWHC 2212 2 (Ch.). The goal is to achieve a resolution of the impasse with expedition, and it is 3 recognized that the O’Neill procedure “carries the possibility of a rough edge for one side 4 or the other” (per Lord Hoffmann in O’Neill at p. 1107). His Lordship also observed 5 (ibid.) that both sides take the same risk. 6 7 Where the parties agree to be bound by the opinion of a valuer, the law will ordinarily 8 hold them to their bargain. In Campbell v. Edwards [1976] 1 WLR 403 (CA) Lord 9 Denning put it this way: 10 “In former times (when it was thought that the valuer was not liable for 11 negligence) the courts used to look for some way of upsetting a valuation which 12 was shown to be wholly erroneous. They used to say that it could be upset, not 13 only for fraud or collusion, but also on the ground of mistake: see for instance 14 what I said in Dean v. Prince [1954] Ch. 409, 427. But those cases have to be 15 reconsidered now. I did reconsider them in the Arenson case in this court: [1973] 16 Ch. 346, 363. I stand by what I there said. It is simply the law of contract. If two 17 persons agree that the price of property should be fixed by a valuer on whom they 18 agree, and he gives that valuation honestly and in good faith, they are bound by it. 19 Even if he has made a mistake they are still bound by it. The reason is because 20 they have agreed to be bound by it. If there were fraud or collusion, of course, it 21 would be very different. Fraud or collusion unravels everything.” 22 23 There are certain cases in which the O’Neill procedure may be inappropriate, particularly 24 where there have been fraudulent dealings by the majority which are difficult or 25 impossible to unravel. The accuracy and integrity of the books and records may have 26 been compromised. A reliable valuation may be impossible. There is nothing automatic 27 about this. In the past, judges have sometimes recognized the likely existence of fraud 28 and misappropriation but yet expected the valuer to take it into account and make 29 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 18 of 26 appropriate adjustments. Examples of this are found in Re a Company (no. 003843 of 1 1986) [1987] BCLC 562 (Ch. D.), per Lord Millett and in Re a Company no. 006834 of 2 1988 (1989) 5 BCC 218 (Ch. D.), per Hoffmann, J. 3 4 While the opinion of the valuer cannot be attacked directly, other considerations can 5 affect the question of whether an offer to purchase is, in all of the circumstances, one that 6 is plainly fair and reasonable. The conduct of the parties during the litigation, 7 particularly in relation to the making and refusing of offers, is relevant: O’Neill v. 8 Phillips, supra; In Re Bird Precision Bellows, supra; In Re London School of Electronics, 9 supra; Profinance Trust SA v. Gladstone [2001] EWCA Civ 1031 (CA). The court has a 10 power to award the equivalent of interest on the purchase price, but this power must be 11 exercised with great caution: Profinance, supra. 12 13 Analysis 14 15 1) Was Tempo’s failure to accept the offer unreasonable “by definition”? 16 17 The Petition should be stayed or dismissed if the Majority Shareholders have made an 18 offer to purchase the minority shareholding that is plainly fair and reasonable in all of the 19 circumstances. That is the general rule. 20 21 The most compelling circumstance here is the fact that the parties have agreed to a 22 Valuation process which they must have considered fair and reasonable. For the most 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 19 of 26 part, the Court will hold the parties to their bargain if the agreed process has been 1 followed. However, to characterize a failure to accept an offer in conformity with the 2 Valuation as unreasonable “by definition” tends to obscure the obligation to scrutinize the 3 circumstances. Fraud on the part of the valuer is one obvious exception to the general 4 rule. Misconduct by one of the parties during the course of the litigation may be another. 5 A failure to make appropriate disclosure of financial information to the minority would 6 be a third (although, in this case, that was provided for in the Agreement itself). 7 8 In addition, the Court must consider whether the essential elements of the Agreement 9 have been fulfilled. Here, it is said that the Valuation fails to satisfy the terms of the 10 Agreement in two important ways: first, it is qualified in a material way and is not an 11 unequivocal opinion on value at all; and, second, it is stale because it was not prepared 12 “as close to the date of sale as is reasonably possible”. I accept that each of these 13 objections must be considered; either would, if well founded, vitiate the Agreement and 14 provide a reasonable justification for refusal of the majority’s offer. The inquiry, though, 15 is conducted within a relatively narrow compass. Once it is seen that the agreed 16 mechanism has operated as contemplated by the parties and by the Court in November, 17 2004, there is little that can be said for a continuance of the Petition. 18 19 2) Was the mechanism in the Agreement inappropriate in light of the allegations 20 of fraud and misappropriation? 21 22 Lord Hoffmann’s description of the O’Neill procedure prescribes it for the “ordinary 23 case” of an “ordinary breakdown” of a quasi-partnership. Fraud and misappropriation 24 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 20 of 26 may, of course, erode the value of a company and may also make a valuer’s task difficult 1 or impossible. Several authorities warn that the O’Neill mechanism may well be 2 inappropriate in the case of bad faith or impropriety (O’Neill, supra, p. 102), breach of 3 fiduciary duty (North Holdings, supra), or misappropriation (Re Belfield Furnishings Ltd. 4 [2006] EWHC 183 (Ch.). There is a natural reluctance to force upon a minority 5 shareholder a valuation process to which he agreed before becoming aware of fraudulent 6 dealings which may affect both the value and the valuation adversely. The authorities 7 cited by Tempo in argument are examples of this. 8 9 In the present case, Tempo entered into the Agreement with its eyes open. It already had 10 knowledge of alleged acts of misappropriation, bribery, and destruction of documents. 11 One has only to refer to the Petition itself to appreciate the state of Tempo’s knowledge at 12 the time. Inspectors had been appointed by the Court at Tempo’s request; Tempo could 13 have insisted upon awaiting their report rather than adopting the (expensive and time- 14 consuming) O’Neill procedure, yet it agreed to a process designed to produce a “final and 15 binding” Valuation. It was advised by experienced commercial solicitors in the Cayman 16 Islands and abroad when it did so. From this, I draw the only reasonable inference: 17 Tempo accepted that the nature and scope of the improprieties underpinning its Petition 18 would not prevent a reliable Valuation. The Agreement cannot be read any other way. 19 20 There is nothing in the Inspectors’ Report which differs in any substantial way from the 21 sorts of allegations made by Tempo in August, 2004. Tempo will not have been 22 surprised by its content. I observe also that, well after the disclosure of the Inspectors’ 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 21 of 26 Report, Tempo felt able to make its own offer to purchase the shares of the majority. 1 There is no merit in the suggestion that the Court should, at this late date, conclude that 2 the agreed-to procedure was inappropriate from the beginning. 3 4 3) Is the Valuation qualified to an extent that it falls outside the terms of the 5 Agreement? 6 7 In its non-speaking Valuation, the Valuer set out what it described as a “limiting factor”: 8 “Our Valuation has been prepared having regard to the financial statements of the 9 Company as at 31 December 2005. We understand that there is a dispute in 10 relation to Shareholder Advance amounts and that the treatment of this amount is 11 subject to a decision of the Court. The impact to our Valuation and on the value 12 of each of the Company’s shares, as set out above, would need to be considered in 13 light of the Court’s decision.” 14 15 By the time it issued the Petition, Tempo had already (on June 17, 2004) commenced an 16 action for payment of the dividends it says it was owed. Clause 17 of the Schedule 17 contains an agreement that this action (and another) will be stayed until the Valuation had 18 been delivered and any resulting sale of shares has taken place. The intent of the parties 19 was to treat the issue of unpaid dividends as a separate, discrete claim which would be 20 unaffected by whatever value might be placed upon the shares. On November 22, 2004 a 21 submission to the Court by Tempo noted that the Inspectors’ Report would “assist the 22 parties in deciding whether or not the purchase price should bring into account the 23 misappropriated dividends”. I had the clear impression at the time that the parties were in 24 agreement as to how the dividend issue would be resolved: perhaps by agreement, after 25 the Inspectors had reported, and, if not, by reviving the dormant litigation. The Valuer 26 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 22 of 26 was not expected to resolve the issue. It was in this context that the Valuer was 1 instructed. 2 3 In their submission to the Valuer, the Majority Shareholders said this: 4 “Even taking the extreme case that all of Dr. Chen’s allegations were to be proved, 5 the impact would be that the Company would be obliged to reimburse Dr. Chen in the 6 sum of US $6.467 million (but would then seek reimbursement of equivalent amounts 7 from third parties). In valuation terms the issue is therefore neutral from the 8 perspective of the Company. The Company should have no ultimate liability on any 9 of these issues nor are its assets less than what they should be. All that in issue (sic) 10 is who is legally liable to repay the disputed amounts. Accordingly, the Majority 11 Shareholders consider these allegations should be treated as irrelevant to the 12 valuation.” 13 14 That submission was not contradicted by Tempo’s expert advisers on the Valuation and 15 appears to be correct. Moreover, it is very probable that the Valuation was conducted on 16 a discounted cash flow basis, an analysis which would be unaffected by the dividend 17 impropriety issue: see the evidence of Mark Bezant, C.A. 18 19 The “limiting factor” referred to in the Valuation is, in reality and viewed in context, no 20 more than an unfortunately worded reminder that the Valuer did not attempt to resolve 21 the dividend dispute and, as a consequence, anything owed to Tempo on that score is 22 additional to the amount it should be paid for its shares. The limiting factor does not state 23 that the Valuer would need to reconsider its analysis but only that the reader should keep 24 in mind that an additional dividend amount may be owed to Tempo. 25 26 These inferences lead to a conclusion that the so-called limiting factor does not mean, 27 and was not intended to mean, that the Valuer is uncertain of its Valuation. The case is 28 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 23 of 26 quite different from the only authority cited in support of Tempo’s submission. In 1 Shorrock Ltd. & another v. Meggitt plc [1991] BCC 471 (CA), the valuer said in its 2 certificate that “we were unable to determine the adequacy or otherwise” of a certain 3 provision in the accounts which amounted to one-third of the amount certified. The 4 Court of Appeal found that the certificate was not valid as the valuer was saying, in 5 effect, that it could not reach an opinion on the matter. Considered in its context, the 6 Valuation I am considering does assert a firm opinion on the value of Fortuna’s shares 7 coupled with a reminder that the dividend issue has yet to be resolved. 8 9 4 ) Is the Valuation stale to the extent that it should not be relied upon? 10 11 The parties agreed that the Valuer should prepare its Valuation “as at a date as close to 12 the date of sale as is reasonably possible”. The Valuation date was, by agreement, 13 December 31, 2005. The Valuation was delivered to the Court on April 16, 2007 but was 14 withheld from the parties while the question of the independence of the Valuer was 15 resolved in this Court. It was handed to the parties on October 17, 2007. The offer by 16 the Majority Shareholders to purchase at the Valuation price was delivered on November 17 14, 2007. 18 19 Tempo took the entirely reasonable position that the Valuer should take into account the 20 audited financial statements of Fortuna for the period ending on the Valuation Date. The 21 statements were received in August, 2006. There followed a period of several months 22 during which the parties sought additional information and made submissions. No fault 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 24 of 26 can be attributed to either party for this delay, which was reasonable in the circumstances. 1 A further six months of delay resulted from Tempo’s challenge to the independence of 2 the Valuer. Although there was some merit in its position, Tempo’s challenge failed. 3 The Valuation was released to the parties well before the Court of Appeal’s decision in 4 December, 2007. 5 6 In entering into their Agreement, the parties must have contemplated that a not 7 inconsiderable time would pass between the Valuation Date and the delivery of the 8 Valuer’s opinion. The hostility engendered by the extant litigation, which was obvious 9 from the outset, contributed to the delay. The desire to obtain extensive financial data, 10 consider it with expert advisors, and make submissions occupied more time than might 11 have been the case in a less hostile proceeding. In all of the circumstances, I cannot find 12 that reliance upon the Valuation to settle the dispute in November, 2007 would have been 13 unreasonable. As at the date of the majority’s offer to purchase, the Valuation cannot be 14 characterized as “stale”. To adopt the wording of the Agreement, the Valuation was as 15 timely as was “reasonably possible” in light of the desire for audited statements and 16 Tempo’s independence challenge. 17 18 The argument that the Valuation is stale can be understood in another sense also: that it 19 has been overtaken by events and no longer reflects a fair price. This aspect is 20 considered below. 21 22 5) Is Tempo’s refusal of the offer unreasonable? 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 25 of 26 1 Tempo’s final argument is that the offer has been rendered unreasonable by a dramatic 2 increase in value since the Valuation. It complains that the Majority Shareholders “have 3 made no concessions whatsoever to the passage of time”. There is evidence of a very 4 marked increase in land values in and around Ho Chi Minh City between the delivery of 5 the Valuation and the hearing in June, 2008: see Report of CB Richard Ellis. Since 6 much of Fortuna’s value derives from its inventory of land, I am invited to draw the 7 inference that there must have been a concomitant increase in the value of Fortuna’s 8 shares. The magnitude of the rise in land values is said to have exceeded anything which 9 the Valuer could have foreseen. 10 11 Tempo added some force to its submission under this head by making an unexpected 12 offer at the hearing in June, 2008 to purchase the majority shareholding on the basis of a 13 valuation of Fortuna at US $1.2 billion. It is not easy to assess the sincerity of this offer. 14 The original offer was to buy or sell at the US $1.2 billion valuation. Within days, the 15 offer to sell was taken off the table. The offer to buy was made on condition that a 16 number of potentially troublesome (albeit usual) warranties and representations were 17 made by the Majority Shareholders. Tempo offered to pay a “break fee” of 18 US$5,000,000 “in the event that [it] withdraws from the purchase without good cause”. 19 20 In any event, Tempo’s argument that the offer is now unreasonable because of a dramatic 21 increase in value is just the sort of argument both the O’Neill procedure and the 22 Agreement have been designed to avoid. This was a non-speaking Valuation which fixed 23 Judgment – In Re Fortuna Development Corporation Cause No. 356 of 2004 06.01.09 Page 26 of 26 the value as at a date agreed upon by the parties. The evidence about an increase in value 1 is an implicit attempt to draw back the curtain (see remarks of Robert Walker, J in 2 Morgan Sindall, supra, at p. 93) and examine the Valuer’s methods, assumptions, and 3 forecasts. It is not permissible. Inherent in the process is the risk that the value may rise 4 (as it appears to have done prior to June, 2008) or fall (as it may well have done since the 5 inception of the present global economic crisis). The Court should not be expected to 6 apply the wisdom of hindsight to appraise the Valuer’s opinion. Neither the change in 7 market conditions nor Tempo’s offer to purchase provide a sound basis for viewing the 8 offer in November, 2007 as unreasonable. 9 10 Conclusion 11 12 For these reasons, I have decided that the Majority Shareholders have made a reasonable 13 offer to purchase Tempo’s shares in Fortuna. It follows that Tempo is not without a 14 remedy in relation to the breakdown of its quasi-partnership. Accordingly, the Petition 15 for a winding up is stayed. 16 17 Dated this 6th day of January, 2009 18 19 20 Henderson, J. 21 Judge of the Grand Court 22