Key Insights from Hong Kong's First Buy-Out Order issued under Section 214 of SFO

In SFC v Sound Global Ltd [2025] HKCFI 2052, in which DLA Piper Hong Kong represented the 2^nd Respondent, the Hong Kong Court of First Instance (Linda Chan J) provided important guidance on the valuation of shares in the context of a share purchase order granted pursuant to a petition by the Securities and Futures Commission (SFC) under section 214(2)(e) of Securities and Futures Ordinance (Cap 571). This is the first time such relief has been granted.

 

Background

As a result of a prior judgment in SFC v Sound Global Ltd [2022] HKCFI 3025, the Court ordered the 2^nd Respondent" to make an offer to purchase the shares held by the minority members of the company at a purchase price to be determined by the Court. The parties had starkly divergent valuation of the shares and the Court had to determine what was the correct approach to the valuation of the shares.

The Court considered whether to adopt the SFC's contended price, which was the closing price of the company's shares on the last trading date in 2016 (LTD), or to adopt the 2^nd Respondent's contended price set at the date of Judgment, alternatively the date of petition or amended petition. The Court also considered whether it should take into account the market and distress factors (as further discussed below) since the LTD when determining whether adjustments should be made to the final purchase price. Furthermore, the Court also had to determine whether an award of interest is just.

The SFC submitted that the LTD price should be adopted as the price of the Buy-Out Offer as there is no realistically workable or more suitable alternative price, and the Buy-Out Offer's purpose is to allow minority members to dispose of their shares at a fair price without having regard to the peculiar facts of the case. It was also submitted that the LTD price is the clearest evidence and reflection of the open market's sentiment on the value of the shares based on the available market information before the company’s respective suspension and delisting in 2016 and 2022. Moreover, the LTD price not only represents the last opportunity when the minority members could have exited the company before the suspension, but it was also the closest available approximation to the market value of the company’s shares at a time when all the facts of the case were yet to be known to the market.

On the other hand, the 2^nd Respondent submitted that the Court should rely on the general rule set out in previous authorities where valuation should be adopted as at the date of the buy-out order, and the Court should not justify departure from this general rule in the absence of clear evidence or circumstances. The 2^nd Respondent also contended that if the decline in value was not attributable to his own conduct, without an adjustment, it would be unfair to fix a date for the value of the shares when the company’s fortunes are at their peak since a shareholder must normally take the rough with the smooth.

 

Decision

The overriding principle is fairness as between the parties. The appropriate approach to be taken in all aspects of valuation including the date, the basis, the choice of methodology, assumptions and directions depends on what fairness in a particular case requires. The Court is given wide discretion to achieve as far as possible fairness as between the parties by considering all circumstances which include the possibility of a notional sale and the litigation's history. The Court may require valuation to be done on a date prior to petition. The Court would further consider any challenges associated with developing or applying a specific valuation method.

On the principles governing the date of valuation of a company which is a going concern, the Court provided that:

• If the business continues operating and its performance has not been affected by unfairly prejudicial conduct, valuation is generally conducted as of the date of the buy-out order. This allows interim profits or losses to be factored into the valuation.
• Where the business has been adversely affected by the conduct, but its impact can be ascertained and quantified, the price as of the order date is still adopted but pushed back with adjustments made to reverse the financial effects of the conduct.
• However, if the conduct's effect cannot be ascertained nor quantified (and is thus irreversible), the Court would instead adopt an earlier valuation date, either prior to the conduct or the date of the petition.

Factors that would adjust the valuation include:

• the distress factor, which addresses the heightened risks and uncertainties resulting from the company's financial issues, suspension and subsequent delisting; and
• the market factor, analysing and taking an average of the P/E and P/B ratios of comparables within the same industry, geographical location, and with similar market capitalisation as an indication of any changes in the market conditions faced by the company.

However, in this case, the Court held that no adjustment on account of the distress or market factor had to be made because the company's suspension was a direct result of the 2^nd Respondent's conduct. While the Court acknowledged the rationale behind the market factor argument, it was not applied due to the absence of evidence to determine whether the company's performance had declined due to market conditions. This was due to several factors including:

• the non-production of the company's books or records by the 2^nd Respondent;
• the significant time lapse since the company's suspension from trading; and
• the absence of a clean auditor's report since 2014.

Without such financial disclosures, the company's actual financial position and performance could not be determined. Had such information been made available, it would have been crucial in assessing the company's financial position and performance for the period in which the 2^nd Respondent contends that an adjustment should be made.

Ultimately, the Court agreed with the SFC's argument and adopted the LTD price for the Buy-Out Offer and further awarded interest for the period from the LTD to the date of payment.

 

Key Takeaways

The Court’s judgment in SFC v Sound Global Ltd offers guidance on the methodology for selecting the valuation date, with a particular emphasis on the overriding principle of fairness which governs all aspects of share valuation. The case also serves as a reminder that the LTD price is not a default benchmark. Courts may also consider reasonable alternative approaches as established in prior authorities if sufficient financial information (including the company's books and records) is made available. This would enable the Courts to assess the actual financial state of the company and determine whether its performance has in fact been affected owing to the alleged changes in market conditions.

The full judgment can be viewed here.