[this is an expanded version of a case note first published on the APIEx LinkedIn page]

Background

Three sons (the Plaintiffs) sued their father in his capacity as the trustee of a testamentary trust created under the will of their paternal grandfather (the Father).  They said that their father concealed the existence of the trust from them for almost a decade – until they discovered its existence – and that he had failed to provide accurate accounts of the trust, commingled personal funds with trust funds, and mismanaged trust assets.

Notwithstanding the Father’s arguments that he had acted with “utmost honesty and in good faith” in the belief that he was acting in the interests of the beneficiaries, the Singapore High Court found that he had breached his duties.  In Bhojwani & Ors v Bhojwani [2024] SGHC 310, the Court ordered his replacement as trustee, rejected claims for the reimbursement of expenses, and made orders by which he was required to compensate the trust by:

• 5m for the wrongful conversion of a “Founder’s Share” with special legal rights into an ordinary share in the same company.
• 5m and SGD$1.84m for the wrongful sale of shares in two companies to his brothers at undervalue.
• An amount to be later determined for realising shares in three struck off companies at undervalue.

The determination of those orders required to Court to assess the competing opinions of two expert valuers.

The expert valuation evidence

The Founder’s Share

The Plaintiffs’ expert valued the Founder’s Share on the relevant date at SGD9,522,732, and the value of an ordinary share at SGD6.02.

The Father’s expert said that there were restrictions on the ability to exercise those special legal rights, and so he valued the Founder’s share at SGD3.95 – consistent with his valuation of ordinary shares.  Notably, his original report did not include a valuation on the alternate basis that there was no restriction on the exercise of the special legal rights (the Alternate Basis).

The Court found the supposed restriction on the special legal rights was an “erroneous basis for valuation,” and a legal question that was outside a valuer’s expertise.

In a later joint expert report the Father’s expert added a table to an appendix to the joint expert report, which appeared to provide a valuation on the Alternate Basis.  The Court held that the supplemental Alternate Basis valuation was inadmissible in the absence of fair notice to the plaintiffs, but regardless, it would not have accorded much weight to the figure because there was little information about how the valuation had been determined, which meant that the Court was unable undertake a proper assessment of the expert’s opinion.

Valuation of the shares in the two Live Companies

The Plaintiffs’ expert assessed the valuation of an ordinary share in the first company at the relevant date as SGD25.55, whereas the Father’s expert determined the value at SGD12.56 after applying a “discount for lack of control” (DLOC) and a “discount for lack of marketability” (DLOM).

The Court determined a transaction with a “typical market participant” was not the relevant comparison in the circumstances.  For that reason, it held that it was not appropriate to apply a DLOC or a DLOM, and so it adopted the Plaintiffs’ expert valuation.

The Plaintiffs’ expert assessed the second company as a going concern, and used a market-based approach to arrive at a per-share value at the relevant date of SGD1,845,000.  The Father’s expert treated the company as a “Special Asset Vehicle,” deploying a net Asset Value approach adjusted for a DLOC, to arrive at a per-share value of SGD10,766.

The Court held that a going concern basis was appropriate, and preferred the approach of the Father’s expert.

Valuation of the three struck off companies

The Plaintiffs’ expert assessed the value of the three struck off companies on a “Fair Market Value” basis as defined by the International Valuation Standards, expressing his opinion on the amount which a buyer would be willing to pay to receive his assessment of the return of capital from the three struck off companies.

The Father’s expert argued that a Fair Market approach could not be used because such returns of capital were not exposed on the open market for market participants, and so there was no relevant information that could be used for such a calculation.

The Court accepted the Plaintiffs’ expert opinion that it was possible “to estimate a hypothetical value of such returns” noting that the Father’s expert had not “provided any reasoned explanation as to why it is impossible to estimate” those amounts.  The Court accepted the valuation of the Plaintiffs’ expert, applied at the date of strike off – which was to be later adjusted for the actual returns, once that information was available.