The judgment is notable as it is the first detailed BVI decision that deals with the valuation of real estate-holding companies in Hong Kong in unfair prejudice proceedings and the question of whether a minority discount should be applied in a non-quasi partnership case.

In 2014, the Claimants, three of seven siblings, jointly commenced unfair prejudice proceedings against their brother (Lawrence) and JFM. The proceedings were bifurcated and structured in phases:

• In 2016, the BVI Court found in favour of the Claimants on all aspects of their claim and granted them the relief sought, including a buyout.
• On appeal by Lawrence, in 2017 the Eastern Caribbean Court of Appeal set aside the buyout order but otherwise upheld all findings of Lawrence’s unfairly prejudicial conduct and the other discrete remedies granted to the Claimants.
• In 2021, the Claimants appealed successfully to the Privy Council, which reinstated the buyout order, concluding the liability phase of proceedings (see our blog on the judgment here).
• In 2022, at the first stage of the valuation phase, the BVI Court (i) fixed the valuation date, (ii) determined the share entitlement of each Claimant, and (iii) decided that certain contested claims should be excluded as assets of JFM for the purpose of valuing JFM’s shares.

The matter then proceeded to trial before Justice Mangatal, where the principal issue for determination was the fair value of the Claimants’ shares as at the valuation date. The Court was concerned with two main issues: first, which expert’s valuation was to be preferred, and second, whether a minority discount should be applied in valuing the Claimants’ shareholdings.

Property valuation methodology

On the first issue, both share valuation and property valuation experts were instructed, but by the time of trial the only dispute concerned the property valuations of Kyoto Plaza, the most valuable real estate in JFM’s portfolio:

• The experts adopted different methodologies, leading to differing valuations. The Claimants’ expert relied primarily on an income approach, with a market approach used as a cross-check, producing valuations of HK$1.44 billion (income approach) and HK$1.40 billion (market approach). Lawrence’s expert, by contrast, relied exclusively on the market approach and arrived at a lower valuation of HK$1.27 billion.
• The Claimants argued that Lawrence’s expert erred in failing to apply the income approach or, at the very least, an alternative method as a cross-check. They contended that best practice, informed by the International Valuation Standards (IVS), required the income approach where the property’s critical attribute was its income-generating ability from a market participant perspective.
• Lawrence disagreed, arguing that in Hong Kong commercial real estate is valued both for capital appreciation and income-generation, such that the income-producing ability of Kyoto Plaza was not a critical element, and therefore did not mandate the application of the income approach. Lawrence also argued that there were insufficient reliable rental comparables to support a meaningful income approach adopted by the Claimants.
• The difference between the experts’ market approach valuations turned largely on their treatment of ground-floor units (in particular a unit with an unusual layout) and their selection of comparables and adjustments for factors such as location and age.
• Ultimately, the Court preferred the evidence of the Claimants’ expert, finding that it better complied with the IVS, particularly IVS 105, which emphasises the income approach for income-generating properties. In doing so, the Court implicitly accepted, without elaboration, that Kyoto Plaza’s income-producing potential was a critical element of its value thus justifying the application of the income approach. While the Court accepted the primacy of the income approach, the judgment does not contain any detailed technical explanation of how the Claimants’ expert applied the income approach (eg rent assumptions or yield selection) or why the Court was satisfied that reliable rental comparables existed to support the Claimants’ income approach despite Lawrence’s objections.

Minority discount

The second issue concerned whether a minority discount should be applied:

• The parties agreed that there was no prior BVI authority and that the Court could adopt either the obiter approach in Strahan v Wilcock, which suggests a minority discount should ordinarily apply unless exceptional circumstances exist, or the approach in a line of English first-instance authorities holding that there is no presumption in favour of a discount.
• Justice Mangatal accepted the Claimants’ submissions that a presumption of discount would reward the wrongdoer and incentivise oppressive conduct. She held that: (i) even in non-quasi partnership cases, the general rule is that no minority discount should be applied, (ii) it is only in exceptional cases that such a discount should be brought into play and (iii) that such circumstances might include cases where the minority shareholder acquired the shares at a discount, or otherwise acted in a manner justifying their exclusion from the company.
• On the facts, the Court found that the longstanding non-payment of dividends since 1994 pointed strongly against applying any discount, and therefore valued the shares on a pro rata basis.

• Primacy of the income approach to property valuation: The Court held that where a property’s value lies in its income-producing potential, the international standard (namely, IVS 105) requires application of the income approach. Experts who fail to use it, or at least to deploy it as a cross-check, risk having their evidence rejected.
• No minority discount save in exceptional cases: The Court confirmed that even in non-quasi partnership cases, there is no general presumption in favour of a minority discount. Such discounts will be confined to rare cases (such as shares acquired at a discount), with the default position being full pro rata valuation.
• Consistency with Commonwealth case law: The Court noted that its ruling against the presumption of a minority discount was in line with numerous Commonwealth authorities.