Vitaly Orlov v Magnus Leonard Roth And Another

Judgment Date04 June 2020
Neutral Citation[2020] HKCFI 1072
Judgement NumberHCMP1331/2017
Subject MatterMiscellaneous Proceedings
CourtCourt of First Instance (Hong Kong)
HCMP1331E/2017 VITALY ORLOV v. MAGNUS LEONARD ROTH AND ANOTHER

HCMP 1331/2017

[2020] HKCFI 1072

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1331 OF 2017

________________________

IN THE MATTER OF Three Towns Capital Limited

and

IN THE MATTER OF Section 724 of the Companies Ordinance (Cap. 622)

________________________

BETWEEN

VITALY ORLOV Petitioner

and

MAGNUS LEONARD ROTH 1st Respondent
THREE TOWNS CAPITAL LIMITED 2nd Respondent
(三鎮資本有限公司)

________________

AND

HCMP 2753/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2753 OF 2017

________________________

IN THE MATTER OF Three Towns Capital Limited (Company Registration No. 1094733)

and

IN THE MATTER OF ss. 724 and 725 of the Companies Ordinance (Cap. 622)

________________

BETWEEN

MAGNUS LEONARD ROTH Petitioner

and

VITALY ORLOV 1st Respondent
THREE TOWNS CAPITAL LIMITED 2nd Respondent

________________

(Heard together)

Before: Hon Coleman J in Chambers (Open to Public)

Date of Hearing: 3 June 2020

Date of Ruling: 4 June 2020

_______________

R U L I N G

_______________


A. Introduction

1. This Ruling relates to a concern that has arisen as to a potential conflict regarding the appointment of a Valuer of shares in the respondent company (“TTC”), following the making of a buyout order.

2. The matter of concern was first raised in correspondence, but seemed to me to be a point which required ventilation in court. Therefore, albeit without requiring any formal summons, on 29 May 2020 I directed the parties to appear at relatively short notice at a hearing on 3 June 2020.

3. The contest at the hearing was whether the Valuer appointed ought to be removed and replaced, notwithstanding that the Valuer is currently engaged in the valuation process directed by the Court, and notwithstanding that no criticism is made as to the conduct of the Valuer.

4. That contest gives rise to considerations relating to, at least: (1) the nature of the role of the Valuer; (2) the appropriate test to be applied in considering whether or not to remove the Valuer and replace him; (3) whether there was material non-disclosure during the appointment process, and the effect that might have on the appointment; and (4) the costs consequences if the Valuer is to be removed and replaced.

5. This is my Ruling.

B. The Order for Valuation

6. By way of background, these proceedings concern what were effectively cross petitions relating to TTC, where each petitioner (“Orlov” and “Roth”) were equal 50% shareholders, and where each accused the other of unfairly prejudicial conduct, and sought the relief of a buyout order.

7. In my Judgment after trial dated 28 August 2019 ([2019] HKCFI 2120), I found various unfairly prejudicial conduct by both sides, and I ordered Roth to buy out Orlov. I gave liberty to apply as to the precise terms of the buyout order, albeit only on the approach I directed within the Judgment.

8. As the parties were unable to agree the terms of the Order to be made, a hearing was fixed for argument on 31 December 2019. Subsequently, by my Ruling dated 23 January 2020 ([2020] HKCFI 273), I settled the finalised form of the relevant Judgment and Order. The approach taken in that Ruling, and the matters already agreed between the parties, are reflected in the terms of the Order dated 23 January 2020.

9. The precise terms of that Order included that:

(1) The price to be paid for the shares (“Shares”) to be bought out by Roth should be ascertained through valuation as a going concern (“Valuation”), without discount for the fact that each of Orlov and Roth’s shareholding represents a 50% interest in TTC, and with a valuation date of 1 January 2018.

(2) The price or Valuation of the Shares should be determined by a certified public accountant as valuer (“Valuer”) to be appointed by the Court.

(3) Absent agreement between the parties as to who should be appointed as Valuer, Orlov and Roth should submit the names of two certified public accountants as candidates for the Valuer, and the Court would appoint one of those candidates as Valuer.

(4) The Valuer would be appointed pursuant to written instructions to be settled.

(5) There would be procedures for the provision of information to all parties and the Valuer, and the ability for the parties to make representations (“Representations”) to the Valuer.

(6) The Valuer would have power to ask further questions of the parties on their Representations, and to permit further responses.

(7) The Valuer would have liberty to seek further directions from the Court if he thinks this is required in order to make a determination as to the Valuation of the Shares.

(8) The Valuer shall make a determination as to the Valuation in the form of a written report (“Report”) to the Court, having regard to any Representations and further responses made by the parties, and the Report shall set out the assumptions and methodology relied upon to arrive at the Valuation of the Shares.

(9) The Valuation shall be final and binding on Orlov and Roth, unless it is established that (i) the Valuer has departed in a material respect from the instructions given to the Valuer, or (ii) if there is fraud or collusion, or (iii) if there is patent error on the face of the Valuation in the Report.

(10) In the absence of either (i), (ii) or (iii) being established, the Valuation shall be made and Order of the Court.

10. In my Ruling, I made the following explanatory points (as are material for current purposes):

(1) I have ordered TTC, together with its subsidiaries, to be valued as a going concern.

(2) It is important that the information used for the Valuation process should be available to all parties, being Orlov and Roth, TTC, and the Valuer. The aim is equality of information.

(3) That does not require some sort of prior disclosure process between the parties themselves before information is provided to the Valuer. Rather, each party should provide the relevant and necessary materials to the Valuer, and simultaneously to the other party.

(4) Similarly, all communications with the Valuer should be on an “all-informed” basis.

(5) The Valuer must be entitled at any time and without restriction to seek whatever further documentation or information he considers necessary and appropriate for the purposes of making the Valuation.

(6) Whilst it may well be that in making their Representations to the Valuer in accordance with the procedure identified that each of Orlov and Roth may seek certain professional or expert assistance, it is not helpful for the Representations in effect to be made by or through experts retained by the parties. The point of the Valuation by the Valuer is to provide a process of valuation by an independently appointed single joint expert.

(7) Nor is it necessary or appropriate to reserve to the Court what might turn out to be a repeated valuation process by the Court itself, by reference to expert evidence material produced by the parties. Proportionality is important. I intended, and the settled Order provides, that the Valuation shall be final and binding on Orlov and Roth, save for only the narrow exceptions identified. Those exceptions are recognized exceptions to similar orders made in previous cases.

(8) For the avoidance of any future doubt, it may assist to know that the reference to “patent error on the face of the Valuation in the Report” is intended to identify a limited basis for interfering with the Valuation analogous to the Court’s limited basis for interfering with an arbitration award.

(9) The costs of the Valuation are to be reserved to the Court.

(10) The settled Order provides for TTC to be bound by the result, irrespective of any potential change in management or ownership.

(11) The timetable set for the Valuation process is the result of a balance, in the exercise of my discretion, of the need for an expeditious and efficient process leading to the Valuation against the need to allow sufficient time for each individual step to be taken, and it is intended that all parties and the Valuer keep to that timetable.

(12) In that regard, I have taken into account that the parties long ago agreed that it would be Roth to buy out Orlov if any buyout order were to be made, and that the Judgment making such an order was delivered in late August 2019, soon after the conclusion of the trial. The parties must, and they certainly ought to, have been considering matters relevant to the process of the Valuation, including the identity of the Valuer.

(13) There should be general liberty to apply in respect of any further consequential directions and orders.

C. The Appointment of the Valuer

11. The parties were unable to agree on the person to be appointed as the Valuer. In those circumstances, each of Orlov and Roth put forward two candidates. Orlov suggested Mr Stephen Apedaile assisted by Mr Ferry Choy of Sirius Corporate Services (HK) Ltd, alternatively Mr Bernard Poon assisted by Mr John Lees of EY. Roth suggested Mr Jon Rowell of FTI Consulting (Hong Kong) Ltd (“FTI”), alternatively Ms Edwina Tam of Deloitte.

12. In my decision as to which candidate to appoint as Valuer I noted, amongst other things, that no objection had been taken by anyone to any candidate on the basis of any inappropriate prior or existing connection between any candidate and any relevant party to the valuation process. I also pointed out that I was proceeding on the basis that all candidates would be capable of and would fully comply with the Code of Conduct for Expert...

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