Dilemma in Valuation – Takeaways from First Buy-out Order under Section 214 of SFO

In the first buy-out order granted under a section 214 petition by the SFC, the Court of First Instance (Linda Chan J) gave guidance on principles of valuation in SFC v Sound Global [2025] HKCFI 2052.  The Court overcame the difficulty in valuation by adopting a date of valuation which pre-dated the petition, being the last trading price of a former listed company.

By a judgment after trial in SFC v Sound Global [2022] HKCFI 3025, the Court found against Mr Wen, chairman and majority shareholder of a former listed company, that he orchestrated a fraudulent scheme for inflating the subsidiaries’ bank balances.  The Court ordered Mr Wen to make an offer to purchase the shares held by the other members of the Company at the price to be determined by the court.

The issue of price, including the valuation date, is hotly contested, and expert evidence has been filed by both sides.

The Court addressed the following:

• Whether the Court should adopt HK$2.98 as the price, which was the closing price of the company’s shares on the last trading date in 2016
• Whether the price should be valued instead as at the date of Judgment, alternatively the date of the petition or amended petition
• Whether downward adjustments to the price should be made to account for (i) the market factor since last trading date and (ii) the distress factor resulting from the company’s financial issues, suspension and subsequent delisting
• Whether interest should be awarded on top of the price

The overriding consideration is fairness as between the parties. It applies to all aspects of valuation including the date, the basis, and the choice of valuation methodology, assumptions and directions. The court takes into account all circumstances including the assumption of a notional sale and the history of events in litigation. Fairness may require valuation on the footing that the conduct complained of had not occurred, or valuation on a date prior to presentation of petition. The Court also takes into account any difficulties in formulating or implementing a particular valuation method.

The Court gave guidance on the principle governing the date of valuation of a company which is a going concern:

• If the company’s business continues and has not been affected by the unfairly prejudicial conduct, it would usually be fair for valuation to be conducted as at the date of the order. Such valuation would necessarily have taken into account and reflected both the upside and downside of the business.
• If the business of the company has been adversely affected by the unfairly prejudicial conduct and the effect can be ascertained and quantified, it would still be fair to have valuation as at the date of the order and adjustments would be made to in effect reverse such financial impact.
• If, however, the unfair prejudice has adversely affected the business and the effect is not one which can be ascertained or quantified, the Court would either adopt the date which pre-dated the unfairly prejudicial conduct, or the date of the petition (often for the reason that was the date when the petitioner decided to exit the company).

In the end, the Court refused to adopt the date of judgment or petition as the date of valuation, and instead adopts the price on the last trading date, on account of:

• Purpose of buy-out offer is to allow the minority members to dispose of shares at fair price without regard to negative effect caused by misconduct
• The last trading price is the clearest evidence and reflection of open market’s sentiment on the value of the company’s shares based on information available in the market before suspension in 2016 and eventual delisting in 2022
• The last trading price represented (i) the last time and opportunity when minority members could have exited the company before the suspension for which Mr Wen was wholly or partly responsible and (ii) the closest available approximation to market value of the company’s shares at a time when the misconduct (inflation of balances) was not yet known to the market and hence not factored into the market price
• There is no realistically workable or more suitable alternative price

The Court opined that no adjustment should be made on account of (i) distress factor which was the direct result of Mr Wen’s misconduct and (ii) market factor which is premised on a different valuation date and in any case not appropriate as Mr Wen withheld books and records of the Company from the Court.  The Court further awarded interest for the period from the last trading day to the date of payment.

This case reinforces the overriding consideration of fairness which applies to all aspects of valuation of shares. In particular, the Court gave practical guidance on the proper approach in selecting the date of valuation. Further, if a party seeks to make adjustments to the price on account of market factor, such party must disclose relevant financial information including the books and records of the company, failing which the Court will not entertain the same.

Read the full judgment here.

Mr Jenkin Suen SC, leading Ms Sheena Wong, acted for the SFC.

Mr Anson Wong SC, leading Ms Tara Liao, acted for the 2^nd Defendant (Mr Wen).