3 June 2021
Singapore International Commercial Court Suit No 4 of 2017 Kiri Industries Ltd v Senda International Capital Limited and another  SGHC(I) 2---------------------------------------------------------------------------------------------------------------------------Decision of Kannan Ramesh J, Roger Giles IJ and Anselmo Reyes IJ (delivered by Justice Ramesh)Outcome: SICC addresses outstanding issues relating to final valuation of DyStar Global Holdings (Singapore) Pte Ltd. Background factsIn DyStar Global Holdings (Singapore) Pte Ltd v Kiri Industries and others and another suit  5 SLR 1 (the “Main Judgment”), the SICC held that Senda International Capital Ltd (“Senda”) had engaged in instances of oppressive conduct against Kiri Industries Ltd (“Kiri”). Senda was thus ordered to purchase Kiri’s shares in DyStar Global Holdings (Singapore) Pte Ltd (“DyStar”), their joint venture. Kiri’s shares were to be valued as at 3 July 2018 (“the valuation date”). The findings in relation to oppression in the Main Judgment were upheld on appeal in Senda International Capital Ltd v Kiri Industries Ltd and others and another appeal  2 SLR 1. The valuation date was not challenged on appeal by either party. In Kiri Industries Ltd v Senda International Capital Ltd and another  4 SLR 1, it was held, amongst other things, that no minority discount for lack of control should be applied to the valuation of Kiri’s shares. On appeal, the Court of Appeal upheld this decision: Senda International Capital Ltd v Kiri Industries Ltd and others  2 SLR 1. Following further tranches of trial (“the valuation proceedings”), the SICC provided an interim valuation (“the Interim Valuation”) of DyStar in Kiri Industries Ltd v Senda International Capital Ltd and another  3 SLR 215 (the “Valuation Judgment”). Nine issues remained outstanding, concerning adjustments to be made to the Interim Valuation. In arriving at the Interim Valuation, the SICC generally accepted the approach and valuation model adopted by Kiri’s expert (“the Valuation Model”): the Valuation Judgment at –. The respective experts were directed to submit their views on these issues in a joint report, indicating any points of disagreement with reasons. The most recent tranche of proceedings concerned the nine issues. Two of the nine issues were agreed. These were the adjustments for the discount for lack of marketability of Kiri’s shares, and the special incentive payment made by DyStar. The experts submitted a joint report (“the Report”) setting out their views on the remaining seven issues. Two issues concerned the applicable historical tax rates for various sums that were taken into account in determining the Interim Valuation. These sums were:- The third-party licence fees that were collected by Zhejiang Longsheng Group Co, Ltd (“Longsheng”) and the notional licence fees that ought to have been paid for use of “Orange 288” dyes (“the Patent”). An issue also arose as to whether audit fees incurred by Longsheng when collecting the third-party licence fees should be taken into account in DyStar’s final valuation.- The fees paid by DyStar to Longsheng for services to DyStar (“the Longsheng Fees”).Two issues concerned the impact of the expiry of various patents on the Interim Valuation. These patents were:- the Patent; and- DyStar’s patents over “Indigo 40% solution” dyes (“the Indigo 40% patents”).Two issues concerned the adjustments, if any, for country risk premium and the effective tax rate of 26.7%, to the Discounted Cash Flow (“DCF”) component of the Valuation Model.The final issue was the impact on the Interim Valuation of the insurance pay-out received by DyStar in May and June 2019.The Court’s decision As stated above, the SICC accepted the Valuation Model. Accordingly, any impact of the nine issues must be assessed within the framework of the Valuation Model. There were three components to the applicable tax rates. First, DyStar’s actual historical tax rates ought to be applied. This was the effect of the SICC’s directions at  and  of the Valuation Judgment. Second, the effective tax rates of the DyStar group, and not the simple tax rate, ought to be applied. The effective tax rate was the appropriate metric, as it correctly accounted for the profit/loss of individual companies in the group in a given year. Third, DyStar’s group rate, and not the tax rates of the individual entities in the group, ought to be applied. The experts agreed that this was the effect of the SICC’s decision in the Valuation Judgment. The rates comprising these three components (“DyStar’s group rates”) were stated in a table (“Table A”) in the Report (at ), and were to be applied to all tax issues unless valid reasons for applying a different rate were provided (at ).The notional and third-party licence fees were to be taxed using DyStar’s group rates (at , , ). The experts, however, disagreed on the rates for 2010, 2012, 2018 and 2019.For 2010 and 2012, Kiri’s expert proposed a 0% tax rate instead of the negative rates stated in Table A, because “applying a negative effective tax rate would increase the notional licence fees after tax”. This position was to Kiri’s disadvantage. On the other hand, Senda’s expert proposed a 10% tax rate for 2010 and 2012 without providing an evidential basis to support the rate. The SICC accepted Kiri’s position of a 0% tax rate for 2010 and 2012 (at ).As regards 2018, Kiri’s expert was of the view that DyStar’s group rate of 45.5% stated in Table A should be disregarded as it was an “anomaly” occasioned by the explosion of DyStar’s plant in Nanjing. The SICC did not accept this view on the ground that “one-off events” could have also occurred in the other years in Table A. This could account for the fluctuation in DyStar’s group rates in Table A (at ).As regards 2019, the absence of evidence meant that the experts were not able to arrive at DyStar’s group rate for 2019. Senda’s expert proposed that DyStar’s group rate for 2018 (45.5%) be used as a proxy, but was not able to identify any event that would have had a similar pronounced impact on DyStar’s group rate for 2019. Accordingly, the fair and reasonable course was to apply the average of DyStar’s group rates, ie, 26.7% (at , ).The audit fees incurred by Longsheng when collecting the third-party licence fees should not be taken into account in DyStar’s final valuation (at , ). The point was res judicata. In arriving at the quantum of licence fees payable by Longsheng to DyStar, the SICC declined to include any line items apart from those specified in the Valuation Judgment at –. Further, as a matter of fairness, Senda ought not to be allowed to claim on Longsheng’s behalf expenses incurred during Longsheng’s wrongful exploitation of DyStar’s intellectual property (at ).The Longsheng Fees for 2015 and 2016 were to be taxed using DyStar’s group rates (at ). This was the position of Senda’s experts, which was preferred as a matter of consistency, given the SICC’s conclusion in the Valuation Judgment that DyStar’s group rates should be applied across all tax issues (at ). The position of Kiri’s expert that the individual entities’ tax rates should apply was inconsistent with the SICC’s conclusion in the Valuation Judgment that the applicable tax rates ought to be those of the group, not the individual entities (at ).On the issues concerning the expiry of various patents, Kiri was not allowed to challenge the finding in the Valuation Judgment that Eric Hopmann, CEO of the DyStar group, did not forecast an “immediate drop” in revenue due to the expiry of the Indigo 40% patents as the issue had been decided (at , ). Two issues remained. First, whether the expiry of the Patent and the Indigo 40% patents would have finite or perpetual impacts on DyStar. Second, how such finite or perpetual impacts should be quantified and incorporated in DyStar’s final valuation.The expiration of the relevant patents ought to have a finite impact (at ). The evidence did not support a perpetual impact and suggested the contrary (at ). As a matter of commercial and common sense, plans would have been formulated by the DyStar board to mitigate any losses arising from the expiration of the patents if they were commercially significant to DyStar.The SICC accepted the use of the DCF method by Kiri’s expert to assess the finite impact of the expiration of the patents on DyStar’s final valuation on the basis that only the DCF method was capable of making that assessment (at ). The SICC did not accept the approach of Senda’s expert as it was based on the assumption that the impact of the expiration of the patents was perpetual. An alternative approach based on a finite impact had not been proposed (at ). Kiri’s expert used a different approach to assess the effects of the country risk premium on the Interim Valuation (at ). However, the SICC found this to be explicable and acceptable as the country risk premium was already factored into the financials of the group of companies that was the basis of the Valuation Model. This approach was not applicable to the impact of the expiry of the patents. This was because the commercial importance of the patents was unique to DyStar and accordingly could only be assessed with reference to DyStar (at ).Kiri’s expert incorporated the effects of the country of risk premium and the 26.7% tax rate using the Valuation Model (at ). The SICC agreed with her as the Valuation Model was accepted in the Valuation Judgment (at ).On the other hand, Senda’s expert’s calculations on the country risk premium and 26.7% tax rate involved fresh DCF calculations. This did not accord with the SICC’s acceptance of the Valuation Model (at , , ).The net impact of the insurance pay-out to DyStar was US$4.6m. This amount ought to be incorporated into DyStar’s final valuation (at ). Kiri’s expert arrived at the sum of US$4.6m based on her updated calculations in the valuation proceedings, per the SICC’s direction at  of the Valuation Judgment (at ). Senda’s expert did not conform with the SICC’s direction, and instead proposed a flat US$4m figure, which was rejected (at ).The SICC ordered the parties’ experts to revert with a final value of Kiri’s shares in DyStar based on the conclusions above (at –).This summary is provided to assist in the understanding of the Court’s judgment. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s judgment.
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