Category Archives: Case Studies

Case Studies

Court case offers insights for valuation proceedings

In a court case involving two chemical manufacturers in their ownership of a shared venture, the judgment’s preference for certain valuation methods sets a precedent for future valuation experts to follow.

Background                                                      

In DyStar Global Holdings (Singapore) Pte Ltd v Kiri Industries and others and another suit [2018] 5 SLR 1 (the “Main Judgment”), the SICC ruled that Senda International Capital Ltd (“Senda”) purchase Kiri Industries LTD’s (“Kiri”) shares in their shared venture, DyStar Global Holdings (Singapore) Pte Ltd. The SICC held that Senda has engaged in instances of oppressive conduct against Kiri. Kiri’s shares were valued as of 3 July 2018 (“the valuation date”).

In Kiri Industries Ltd v Senda International Capital Ltd and another [2019] 4 SLR 1 (the “12 March 2019 Judgment”), the court ruled that no minority discount for lack of control (“DLOC”) should be applied to the valuation of Kiri’s shareholding of DyStar.

The most recent proceeding involved the valuation of DyStar and Kiri’s shares in DyStar (“the valuation proceedings”).  Senda and Kiri engaged separate valuation experts to assist in the valuation process.

The experts utilized different approaches to valuation and arrived at different valuations. This divergence was a result of not only the different methodology applied, but also the significance they appointed to particular events. These include a category of occurrences known in the judicial proceedings as “Five Risk Events, and one-off events and transactions affecting DyStar’s valuation.

Judgment and learning points

The methodology used and valuation proposed by the expert appointed by Kiri was preferred to Senda’s. Reviewing their merits proves useful for other valuation experts. 

The valuation date is very important

Only events that occurred before the valuation date and, more interestingly, events occurring after the valuation date that were foreseeable as of the valuation date were to be taken in the valuation proceedings. For instance, an insurance pay-out in May and June 2019 had to be incorporated into DyStar’s valuation as they were foreseeable as at the valuation date.

Interestingly, the closure of a DyStar plant in Ankleshwar, India due to a notice by the state pollution control board before the valuation date did not affect the valuation. This is because it was judged that there was a subsequent notice issued after the valuation date. Hence, as the entirety of notices was not foreseeable before the valuation date, the closure was not included.

Reliance on market data is preferable

Kiri’s valuation experts relied on market data in the form of independent market and broker reports comparable to similar companies in terms of operation, revenue and market share.  This approach was praised by the judges as Senda failed to disclose some of DyStar’s key financial documents for the relevant years. 

They also relied on data from credible, peer-reviewed, and reputable sources, some of which were also used by Senda.

In addition to the valuation produced from the market approach, the expert also presented an alternative figure using the Discounted Cash Flow (DCF) method. Then, these values were aggregated into a single final valuation. This approach was praised for its commitment to accuracy.

Discounts and risk premium should be considered

A discount for the lack of marketability (DLOM) was applied to Kiri’s minority share as a reflection of the lack of marketability. This was the case as the company was privately-owned and not publicly-listed.

Also, a country risk premium was imposed on DyStar as it did business in multiple jurisdictions. This reflects the country-specific risks that come with such a vast multi-state operation.

All in all, the judgment sided Kiri’s valuation expert’s method and the sum of US$1,636m, but ruled that this required some minor technical calculations

About GAO Advisors

The insights provided in this case have been a feature of GAO’s valuation process.

GAO Advisors is a corporate financial advisory firm that provides strategy advice, transaction structuring, and valuation services.

It has acted as an Expert Valuation Witness to several seminal cases including  UTJ v UTK [2019] SGHCF 6, where it produced credible, fair and comprehensive assessments of the matters dealt with in its valuation reports. GAO provided an aggregated value from an amalgamation of two different methods for the asset valuation process. These valuation reports allowed the Court to arrive at a more just and equitable means of dividing matrimonial assets between the Parties.

Other cases include:

  • Valuation of a family textiles business in which patriarchs were seeking to claw-back over $10 million in fraudulent withdrawals by next-generation family members.
  • Valuation of damages in a High Court case where over 125 club members, in one of the largest representative action suits in Singapore, acted against the club owner for breach of contract and the torts of deceit and negligence.
Case Studies

GAO Expert Valuation Report Refines Accounts and Capital Flow of Company

In a dispute between two Singaporean parties in a manufacturing venture in China, GAO Advisors prepared expert valuations and produced a comprehensive capital flow methodology to refine the venture’s accounts and to assess the efficacy of claims made.

Background                                                     

The two parties were ex-classmates from secondary school, and in 2005 the Plaintiff hired the Defendant as the managing director in his company which he expanded to China in 1999. The Defendant took over operations of the China-incorporated company, which existed as eight separate corporate entities (“the Companies”) to disperse revenue and qualify as a small-scale taxpayer in China’s Value Added Tax (VAT) system.

The Defendant oversaw operations until his resignation in 2013. In that time, his primary responsibility was the management of the Companies’ monies. Thus, he was in charge of the company seals, which were necessary for the withdrawal of monies from their bank accounts. Upon his resignation, the Defendant gave the Plaintiff notice that business operations have ceased two months earlier, and informed of a self-procured division methodology of the remaining assets. He also withdrew a certain percentage of the assets as severance.

The Plaintiff disagreed with the amount withdrawn and appointed GAO to produce an investigative report for the Companies’ accounts and assess the Defendant’s methodology.

The Challenge

The Companies’ mode of operation posed a significant hurdle in the valuation process. The sole provider of capital for business operations was the Plaintiff’s parent company. Hence, the capital flow, as per standard protocol, followed the Companies’ bank accounts to the Defendant’s to the Plaintiff’s.

The existence of multiple bank accounts at each level of capital flow, the inconsistency in in-voice submission for bookkeeping purposes (many handwritten), and preference for cash dealings for ease of trade meant tracking and assessing capital flow was a challenge.

GAO’s Method

In tracking the Companies’ capital movement, GAO set out the following scope of work:

  • To engage in meetings and discussions with relevant stakeholders namely the two parties, the Companies’ bookkeepers, suppliers, and clients;
  • To review all the available records of the Companies’ capital movement in the relevant period including bank documents and financial records;
  • To review correspondence between the Plaintiff and the Defendant, as well as their suppliers and clients, to understand their personal and business relationship;
  • To ascertain the amount of monies withdrawn by the Defendant from the Companies’ bank accounts.

Impact

GAO produced two estimations for the monies in question, by taking two approaches to ensure fairness. These approaches include:

  1. Deducting the estimated amount the Defendant has withdrawn from the Companies’ accounts the (i) amount he had returned to the Plaintiff and (ii) the percentage of the Companies’ profit he was entitled to, as per his severance rights discussed earlier with the Plaintiff;
  2. Taking the splits of assets stated by the Defendant in his resignation letter.

With both approaches, GAO concluded that there were discrepancies between what the Defendant claimed was allegedly entitled to the Plaintiff and what the Plaintiff received. In short, the amount withdrawn by the Defendant was found to be overvalued than his entitled sum.

The refinement of accounts through GAO’s manual and machine tracing and forensic accounting methodology led to the submission of an amended SOC, leading to a consent judgment.

About GAO Advisors

GAO Advisors is a corporate financial advisory firm that provides strategy advice, transaction structuring and valuation services. It has acted as an Expert Valuation Witness to a number of matrimonial cases including  UTJ v UTK [2019] SGHCF 6, where it produced credible, fair and comprehensive assessments of the matters dealt with in its valuation reports. These valuation reports allowed the Court to arrive at a more just and equitable means of dividing matrimonial assets between the Parties. Other cases include:

  • Valuation of a family textiles business in which patriarchs were seeking to claw-back over $10 million in fraudulent withdrawals by next-generation family members.
  • Valuation of damages in a High Court case where over 125 club members, in one of the largest representative action suits in Singapore, acted against the club owner for breach of contract and the torts of deceit and negligence.

GAO Advisors’ data-driven approach to its operations and experienced team of valuation professionals sets it apart from its competitors.