Article: BVI consideration of minority discounts for share purchases in unfair prejudice claims
Malcolm Arthurs and Jaavonne Taylor provide an analysis of the Eastern Caribbean Supreme Court’s decision in Ming Sui Hun Ronald et al v JF Ming Inc et al (BVIHC(COM) 2022/0027) for The Company Lawyer.
By Malcolm Arthurs, Jaavonne Taylor
Abstract
- This article provides an analysis of the Eastern Caribbean Supreme Court’s decision in Ming Sui Hun Ronald et al v JF Ming Inc et al (BVIHC(COM) 2022/0027).
- It examines the Court’ s refusal to apply a minority discount when valuing shares for a buy-out remedy in an unfair prejudice petition. The article examines the divergence in English jurisprudence on the issue of minority discounts in non-quasi partnership companies and highlight’ s the BVI’s current alignment with a pro-minority shareholder , “fair value” principle.
- Ultimately the JF Ming Inc matter , which is currently the subject of an extant appeal, will provide crucial clarity on s.184I of the BVI Business Companies Act 2004, making the BVI an attractive jurisdiction for both minority and majority investors.
Introduction
The issue of whether a minority discount should be applied to the purchase price for shares subject to a buyout order in unfair prejudice claims, has generated a substantial amount of English jurisprudence but, until recently, none in the Eastern Caribbean. The Eastern Caribbean Supreme Court British Virgin Islands commercial claim BVIHC(COM) 53 of 2014 and 27 of 2022 Ming Sui Hun Ronald et al v JF Ming Inc et al (“JF Ming Inc”) changed this.
Factual circumstances in the JF Ming case
The JF Ming case spans a decades-long dispute between sibling shareholders in JF Ming Inc., a BVI business company holding valuable real estate in the Hong Kong commercial district. In the 1950s Ming John Fook (“John”) emigrated from China to Hong Kong and established a flourishing construction and property redevelopment company. In 1992 he incorporated JF Ming Inc in the Virgin Islands and transferred his businesses and assets to the company. Prior to his death in 1992, he allotted 1,000 JF Ming Inc shares to each of his seven children and secretly he allotted an additional 10,000 shares to one of his children, Lawrence Ming (“Lawrence”), making Lawrence the majority shareholder with a total of 11,000 shares.
Subsequent to John’s death, the relationship between Lawrence and his siblings became strained and in 2014, after litigation in Hong Kong ran its course, three siblings, Ronald Ming (“Ronald”), Bertha Shaw (“Bertha”) and Tong Ming (“Tong”) (the “Claimants”), brought unfair prejudice proceedings against Lawrence under s.184I of the BVI Business Companies Act.
At first instance Leon J bifurcated the matter and adjudicated liability first. Specifically, the court considered whether Lawrence’s refusal to provide company accounts to the minority shareholders was unfairly prejudicial. At first instance, Leon J held that this activity was unfairly prejudicial and he ordered a buyout of the minority shares. The Court of Appeal concluded that Lawrence’s actions were unfairly prejudicial but set aside the buyout order. The Privy Council, in a judgment delivered by Lord Briggs in January 2021, restored Leon J’s buyout order.
The matter moved to the second phase which was managed by Jack J, who set a valuation date of 31 March 2017, the accounting date closest to Leon J’s first instance judgment. Jack J also gave directions for a valuation trial which was thereafter conducted by Mangatal J.
The parties’ positions at trial
On the issue of minority discounts, the parties generally accepted that in quasi-partnerships there is a presumption against a discount, and shares should be valued on a pro-rata basis. Lord Hoffmann in O’Neill v Phillips [1999] 1 W.L.R. 1092; [1999] B.C.C. 600 HL, opined that this general rule should only be departed from in “special circumstances”.
The parties also accepted that in so far as non-quasi partnerships were concerned, the English authorities do not speak with one voice on the question of whether a discount should be applied to the share price in a buyout order.
Lawrence’s position
Lawrence’s counsel invited Mangatal J to adopt the view that in non-quasi-partnership companies, a discount should be applied to the petitioner’s shares to reflect the minority status of the shareholding. The core of this approach was referenced in comments from Arden LJ in Strahan v Wilcock [2006] EWCA Civ 13; [2006] 2 B.C.L.C. 555, in which she expressed the obiter view at [17] that “when the Court is considering the price to be paid for a petitioner’s shares under an order for purchase in unfair prejudice proceedings, exceptional circumstances must exist for the shares to be valued without a minority discount if the company is not a quasi-partnership” (emphasis added). Arden LJ left the matter open however and stated that it was “difficult to conceive of circumstances in which a non-discounted basis of valuation would be appropriate where there was unfair prejudice…but such a [quasi-partnership] relationship did not exist…[but] on this appeal I need not express a final view on what those circumstances might be.”
Lawrence’s counsel directed Mangatal J to authorities which applied the “exceptional circumstances” test, including Larvin v Phoenix Office Supplies Ltd [2002] EWCA Civ 1740; [2003] 1 B.C.L.C. 76, Irvine v Irvine [2006] EWHC 583 (Ch); [2007] 1 B.C.L.C. 445 (per Blackburne J), CF Booth Ltd, Re [2017] EWHC 457 (Ch) and Dinglis Properties Ltd, Re [2019] EWHC 1664 (Ch); [2019] Bus. L.R. 3100.
The position in Otello Corp ASA v Moore Freres and Co LLC [2020] EWHC 3261 (Ch) was also highlighted at [255] in which the court accepted that a central question was whether “… it is fair, in all the circumstances of the relevant case, for [a] minority discount to be reflected in the purchase price which the majority shareholder is required to pay.”
Ultimately however, Mangatal J was brought full circle to the Privy Council judgment in Shanda Games Ltd v Maso Capital Investments Ltd [2020] UKPC 2; [2020] B.C.C. 466 in which Arden LJ revisited Strahan v Wilcock [2006] EWCA Civ 13 with approval and stated at [42] that “the court should value the [petitioner’s] actual share [and] …. in the absence of some indication to the contrary, or special circumstances, the minority shareholders’ shares should be valued as a minority shareholding and not on a pro rata basis.”
The claimants’ position
Unsurprisingly, the Claimants suggested that a minority discount was inappropriate. Whilst it was acknowledged that the market value of minority shares would usually reflect a discount (as stated in Shanda Games), the Claimants focused on authorities which posited that this approach was not applicable where relief was granted against a majority shareholder who oppressed a minority.
The court was directed to Company (No.002612 of 1984), Re [1986] 2 B.C.C. 99453 (Re Cumana Limited), in which Vinelott J stated it would be “inequitable that a majority shareholder whose conduct was found to be unfairly prejudicial to a minority should be allowed to purchase at investment value shares which in his hands will have a higher value…”
The Claimants further suggested that petitioners were not strictly willing sellers as examined in Bird Precision Bellows Ltd, Re [1984] Ch. 419 at 439; [1984] 2 W.L.R. 869 by Nourse J who stated that, assuming “the unfair prejudice has made it no longer tolerable for him to retain his shares in the company a sale of the shares will be the only practical way out, short of a winding up.” In those circumstances, Nourse J believed it would be “most unfair” if the shares were sold at a “discounted price”.
More importantly, the Claimants directed the court to Sunrise Radio Limited [2009] EWHC 2893 (Ch); [2010] 1 B.C.L.C. 367 and Re Blue Index Limited [2014] EWHC 2680 (Ch). In Sunrise Radio, HHJ Purle QC noted at [297], after considering Strahan and Irvine, there was “no rule of universal application excluding an undiscounted valuation” in non-quasi partnership cases.
Robin Hollington KC sitting as a Deputy Judge in Re Blue Index went further and suggested at [26] that it would defeat the purpose of the oppression remedy if the “oppressing majority were routinely rewarded by the application of a minority discount.” The court therefore found that the “general rule” in non-quasi partnership cases is that there should be no minority discount for a minority shareholding unless the shares were acquired at a “discounted price”. The Claimants also referred to Re Addbins Ltd [2015] EWHC 3161 (Ch) and Re Lloyds Autobody Ringway Ltd [2018] EWHC 2336 (Ch), which followed Re Blue Index.
Judgment
In her November 2024 judgment, Mangatal J noted that since the issue of minority discounts was untouched in the BVI, she could consider but was not bound to follow any of the English cases.
The court opined that even in quasi-partnership cases the presumption against a discount was in fact only a presumption. Mangatal J also accepted the apparent conflict between the Strahan and Irvine line of cases and the Re Sunrise Radio and Re Blue Index line, but ultimately preferred the reasoning in the Sunrise Radio and Re Blue Index line of cases.
Specifically, Mangatal J embraced Re Blue Index and found that in non-quasi partnerships, a discount should generally not be applied unless circumstances warranted the discount.1 The court cited the acquisition of the shares at a discount and actions which would justify the minority’s exclusion from the company, as examples of appropriate circumstances to apply a discount.
Her Ladyship concluded that the assumption of a discount in unfair prejudice cases would reward the prejudicing party and incentivise prejudicial behaviour.
Applying these principles to the case, Mangatal J found that Lawrence’s failure to pay dividends to the shareholders since 1994 pointed “strongly” against ordering a minority discount. Additionally, the court decided that applying a minority discount would unjustly enrich Lawrence “significantly” because he would receive full ownership of a company that was intended to be shared with his siblings, by paying the market/discounted value of their shares.
