The decision of Justice Mangatal in Ming v JF Ming Inc is the latest judgment from the long-running family dispute and unfair prejudice proceedings over JF Ming Inc (JFM), a BVI holding company with subsidiaries holding substantial real estate in Hong Kong.
The judgment is notable as it is the first detailed BVI decision that deals with the valuation of real estate-holding companies in Hong Kong in unfair prejudice proceedings and the question of whether a minority discount should be applied in a non-quasi partnership case.
In 2014, the Claimants, three of seven siblings, jointly commenced unfair prejudice proceedings against their brother (Lawrence) and JFM. The proceedings were bifurcated and structured in phases:
In 2016, the BVI Court found in favour of the Claimants on all aspects of their claim and granted them the relief sought, including a buyout.
On appeal by Lawrence, in 2017 the Eastern Caribbean Court of Appeal set aside the buyout order but otherwise upheld all findings of Lawrence's unfairly prejudicial conduct and the other discrete remedies granted to the Claimants.
In 2021, the Claimants appealed successfully to the Privy Council, which reinstated the buyout order, concluding the liability phase of proceedings (see our blog on the judgment here).
In 2022, at the first stage of the valuation phase, the BVI Court (i) fixed the valuation date, (ii) determined the share entitlement of each Claimant, and (iii) decided that certain contested claims should be excluded as assets of JFM for the purpose of valuing JFM's shares.
The matter then proceeded to trial before Justice Mangatal, where the principal issue for determination was the fair value of the Claimants' shares as at the valuation date. The Court was concerned with two main issues: first, which expert's valuation was to be preferred, and second, whether a minority discount should be applied in valuing the Claimants' shareholdings.
Property valuation methodology
On the first issue, both share valuation and property valuation experts were instructed, but by the time of trial the only dispute concerned the property valuations of Kyoto Plaza, the most valuable real estate in JFM's portfolio:
The experts adopted different methodologies, leading to differing valuations. The Claimants' expert relied primarily on an income approach, with a market approach used as a cross-check, producing valuations of HK$1.44 billion (income approach) and HK$1.40 billion (market approach). Lawrence's expert, by contrast, relied exclusively on the market approach and arrived at a lower valuation of HK$1.27 billion.
The Claimants argued that Lawrence's expert erred in failing to apply the income approach or, at the very least, an alternative method as a cross-check. They contended that best practice, informed by the International Valuation Standards (IVS), required the income approach where the property's critical attribute was its income-generating ability from a market participant perspective.
Lawrence disagreed, arguing that in Hong Kong commercial real estate is valued both for capital appreciation and income-generation, such that the income-producing ability of Kyoto Plaza was not a critical element, and therefore did not mandate the application of the income approach. Lawrence also argued that there were insufficient reliable rental comparables to support a meaningful income approach adopted by the Claimants.
The difference between the experts' market approach valuations turned largely on their treatment of ground-floor units (in particular a unit with an unusual layout) and their selection of comparables and adjustments for factors such as location and age.
Ultimately, the Court preferred the evidence of the Claimants' expert, finding that it better complied with the IVS, particularly IVS 105, which emphasises the income approach for income-generating properties. In doing so, the Court implicitly accepted, without elaboration, that Kyoto Plaza's income-producing potential wa...