4.4.7.1 What is the 'fair value'?

S. 996 provides that the court may order the purchase of the shares of any members of the company by other members or by the company itself. Nothing is said about how to decide the price of the shares; no guidelines for valuation methods are provided. In case law, the practice is that under the oppression remedy in the US, the minority shareholders must be bought out at fair value of the shares and "what is fair may often be generally predicated in regard to matters of common occurrence, it can never be conclusively judged in regard to a particular case until the facts are known."1 As in America, therefore, the rule of thumb is that the value should be fair and assessed on a case by case basis. Different kinds of companies require different valuation methods, and even in the same company, the valuation methods can vary at different times. For instance, in Bennett v. Bennett,2 different methods were applied in different periods. In June 1997, the company was valued by calculating the value of its eamings value, and in February 2000, the court used a combination of the net book assets and the adjusted earnings with a multiplier of 6. In a word, there are plenty methods to arrive at a 'fair value', but one cannot tell which one will best reflect the true value of the shares.

The issue of valuation methods has been, introduced and discussed to some extent in Chapter 3, together with cases. According to case studies, the approaches adopted in the UK for this remedy are similar to those in the US. Since valuation itself is an extremely complicated issue which could not be extensively addressed in this paper, without expanding on any specific cases as in Chapter 3, in this chapter the most frequently used methods are briefly summarized: 1) market value. This method is used by public companies. The shares of close companies are not traded publicly, so this method cannot help in valuing them, 2) net asset value. As introduced in the US part, net asset value means value as a going concern, which includes both tangible and intangible assets, such as goodwill and credit of the company,3 3) discounted cash flow (DCF). Each valuation method has its weakness and strengths. None can be considered the best one. But the discounted cash flow method is frequently used worldwide. This method was introduced in Chapter 3, so lines are saved here, 4) capitalized earnings (earnings value). In this method, the stock price is calculated by dividing net earnings by an estimated ratio. The net earnings can be a simple average or a weighted average. In Bennett v. Bennett, the court proposed to assess the net eamings by referring to the annual accounts for December 1997, 1996 and 1995 applying a weighting factor of 3:2:1.4 If necessary, the net earnings may also be adjusted, as figures from the accounts may not always reflect the company's true profitability. In Bennett v. Bennett, experts from both sides agreed that it was necessary to make adjustments to the net earnings of Abtech in order to arrive at an adjusted profit and then apply a multiplier to the adjusted figUre.5 The adjustments in this case included a management charge, management fee receivable, depreciation, expenses re-charge, ban interest and so 0116 The ratio can be derived by various methods. One is the reciprocal of the P/E ratio, which was introduced in Chapter 3. It can also be derived from the company's experience based on its past projects. Where the business is well established and reaps profits in a stable stream, the capitalized earnings method can function quite well. For a newly started business, however, where the earnings maybe zero or even negative, it is not appropriate to use this method. So, again, the nature of the company and the specific situations in every case decide which method should be employed, 5) comparative corporations. In valuing the shares, a comparison with comparable companies is helpful to some extent. For instance, in the above-mentioned capitalized earnings method, to arrive at a fair value, a suitable P/E ratio can often be applied in a comparison with companies in the same industry or sector. The prices of similar companies which have been taken over recently may also serve as a parameter, 6) combination of methods. In practice, it is not uncommon for courts or experts to choose a few valuation methods and average them to achieve a fair value of the shares.7 Unless the company plans to liquidate shortly after the litigation, the liquidation value method, namely, the value of the equity when the assets of the company are sold, is not recommended in this remedy.

The same as in valuation onder the oppression remedy, damages are included in calculating the value of the corporation.8 The damages due to the misconduct should be considered in adjusting the value of the company because the minority's leaving at undervalue will be an incentive for the majority to oppress the minorities.9 As stated, "It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is, in effect, money compensation for the injury done to them; but I see no objection to this. The section gives a large discretion to the court, and it is well exercised in making an oppressor make compensation to those who have suffered at his hands."10 The doctrine is that the corporation should be valued as if the unfairly prejudicial conduct has had never happened.11 Broadly speaking, the actual approach is that the court usually first estimates the amount of damages, and if the method adopted requires using the earning ability of the company or the assets of the company, damages are added back to the earnings or assets before the calculation.12

In both the appraisal remedy and the oppression/ unfair prejudice remedy, the court plays a significant role in the valuation proces s, and for the comparison in the Chinese chapter, the role of the court in the valuation is discussed in this section as well. From the case law in the UK and US, with the assistance of both parties' experts, the court is required to arrive at the fair value itself with the discretion to decide the valuation methods and detail statistics.13 In day-today practice, the valuation is a matter for experts. If both sides choose the same valuation methods, the court usually will not direct the parties to an alternative. But there are several functions the court should fulfil and not leave solely in the hands of the experts. Firstly, when there are different valuation methods, it is the court's task to decide on the valuation method. Secondly, when misconduct and damages are involved, the court is obliged to assess and determine the inequitable behaviour, and then call in the experts to make adjustments to eliminate any adverse effects on the value of the shares. Thirdly, other issues, such as fixing the date of the valuation and determining whether a minority discount should be applied, are also at the discretion of the court. The following parts will discuss these two issues consecutively.