Rights of small-time investors in start-ups

Buyout valuations are often contentious for the involved disputing parties. This concern is especially relevant in the start-up scene where the lack of a public market prevents minority shareholders from being able to promptly exit their investments at fair value.

With minority shareholders usually seeking to exit the business at some point in time, shareholder disputes typically revolve around the expected value of the business. The lack of access to an independent valuation source often leaves minority investors at the mercy of majority shareholders.Undoubtedly this begs the question, what really is the fair value of a business?

What is fair value?

Even in public markets, the notion of fair value is one that is often contested by the controlling party and the involved minority parties. The delisting of LTC Corp at S$0.925 per share required extending the acceptance period numerous times before finally crossing the 90% acceptance threshold on Feb 1, 2019. For certain minority shareholders, the offer of $0.925 per share represented too significant a discount from LTC’s revalued net tangible asset value of (RNTA) of S$1.66 for them to readily accept the offer.

In Thio Syn Kym Wendy and others v Thio Syn Pyn and another appeal [2018] SGHC 54, the fickle nature of valuation reared its head again when attempting to determine the value of the minority stakes held by the 3 siblings. Court determination of the value of the shares in MDI was necessarily concluded as a result of this proceedings. On the one hand, the plaintiffs argued for a valuation between S$1,197.6m and S$1,295.2m for MDI, as provided by Ernst & Young LLP (“E&Y”) while the defendants instead argued for a valuation in the region of S$400m. Ultimately, a further appeal to the Court of Appeal was dismissed with the Court of Appeal choosing to uphold the High Court’s

decision of not applying a discount to the value of the business.

Similarly, in Singapore’s leading case of Over and Over v Bonvests Holdings Ltd [2010] SGCA 7, minority shareholders Over & Over (O&O) was victim to repeated instances of minority oppression that saw the Sianandar family repeatedly abuse its majority position to push through business decisions that were not in line with the interests of the minority shareholders. Pursuant to s216(2)(d) of the Companies Act, O&O was then permitted to realise the value of its investment through the appointment of an independent valuer to assess the value of the disputed company on the basis of the fair market value of its assets. Bonvests was subsequently required to decide if it would be willing to purchase the entire shareholding of O&O on the basis of this valuation.

Diversity of opinion

Undoubtedly, the idea of fair value is one that has been demonstrated to be difficult to pin down. If anything, more second opinions and independent valuations of business have to be encouraged to properly ascertain what fair value really entails. Obtaining an independent valuation or valuations, and doing so early, would quickly allow both parties to set realistic expectations of how much a business is truly worth.

LTC Corp to suspend trading from Feb 1, delist as exit offer crosses 90% threshold [Business Times]

3 siblings sue their 2 brothers and mum over 'minority oppression' [The Straits Times]