OPUS2
Elliott Associates, L.P. v Republic of Korea
Day 8
November 24, 2021
Opus 2 - Official Court Reporters
Phone: 020 3008 6619
Email: [email protected]
Website: https://www.opus2.com
[Page 2]
1 Presentation by PROFESSOR JAMES DOW
2 THE WITNESS: I'm going to present a slide deck.
3 Shall I begin.
4 Mr President, members of the tribunal, thank you
5 very much for giving me the opportunity to present my
6 opinion in this case.
7 I start, slide 2, by presenting some of my
8 qualifications. I have taught at a number of
9 universities, including many years at London Business
10 School where I teach corporate finance and valuation.
11 I have also taught asset pricing and corporate finance
12 to the PhDs.
13 My research areas are connected with both financial
14 markets and corporate finance, and focus in a number of
15 my papers, my primary focus is on price dislocations
16 that can arise when investors with different information
17 or views are constrained by limited capital, by cost of
18 carry, and by limited trading horizons.
19 I have testified in a number of arbitrations
20 previously and had the honour of encountering some
21 members of the tribunal before. I have listed a few of
22 those arbitrations at the bottom of slide 2.
23 Passing to slide 3, I have a couple of corrections.
24 In my first report, Figure 11, Figure 11 is a graph with
25 two lines and the labels are interchanged.
[Page 4]
1 confounding factors.
2 THE PRESIDENT: I was a bit confounded by the language.
3 Please go ahead.
4 THE WITNESS: Let's add a third correction then to that
5 effect.
6 Passing to slide 4, my agenda for this morning is to
7 talk about the analysis of the newly produced swaps
8 transactions; then to proceed to my main damages
9 analysis as of ten days ago.
10 Slide 4, please.
11 I will introduce some key concepts in this
12 arbitration. I'll present my damages conclusions,
13 namely that there are no damages. I will then speak to
14 Elliott 's damages on SC&T shares and I will say that
15 they are implausible, and finally I will present some
16 other opinions.
17 Slide 5, please. The swaps.
18 My second report, Appendix E, relied on some
19 incomplete information from the Claimant listing sales
20 of swaps, but there was no information on when those
21 swaps were purchased. That new information has been
22 produced and I can now speak to that.
23 Slide 6. What are swaps? What are short sales?
24 Swaps are financial contracts, financial
25 derivatives, that allow traders to gain economic
[Page 6]
1 changes hands, namely number of shares in the swap
2 multiplied by the price.
3 To work out the profits or losses on the swaps, we
4 simply add up that gross consideration column, and that
5 is what Mr Smith did on Monday; that is equivalent to
6 what Mr Smith did on Monday.
7 Slide 8.
8 Elliott profited from the Cheil swaps. It sold them
9 high and bought them back low. On this graph I show
10 that over the summer of 2015 Elliott sold shares in
11 Cheil and bought them back later on, at a lower price.
12 Slide 9 shows that on my previous report, when
13 I didn't know when the swaps had been bought, I had
14 assumed they were sold previously. So I assumed they
15 were long positions. In fact they were short positions.
16 In either case there would be a profit because I thought
17 the swaps had been bought on the way up for Cheil
18 prices. As we see on slide 9, the price went up until
19 the sales, whereas if we revert back to slide 8
20 excuse me, I hope that doesn't confuse — on slide 8 we
21 saw that afterwards the price went down again. So they
22 still bought at a low price.
23 On slide 10 I indicate the trading profits on swaps.
24 They are mostly Cheil swaps, to be clear. There are
25 only a few SC&T swaps.
[Page 8]
1 swaps as a doubling down ended up being profitable.
2 I note at the bottom of that slide that there are just
3 a few — and Mr Smith mentioned it actually on Monday.
4 There are some transactions that don't close in the
5 data, but I conjectured and Mr Smith confirmed that
6 these transactions were offsetting Cheil and SC&T, which
7 were collapsed, as he put it, after the shares were
8 unified in September.
9 Slide 13, the economic implications of what we just
10 saw.
11 First of all, Elliott's trades in SC&T and Cheil
12 should be considered as a whole. Mr Smith managed the
13 trades on a consolidated basis, not by legal entity.
14 I believe he testified that he didn't know which Elliott
15 entity the trades would be allocated to.
16 And also, focusing only on the SC&T loss, without
17 netting off the gain from Cheil, could, from an economic
18 point of view, create an opportunistic or windfall
19 litigation gain from a trading strategy, a merger
20 arbitrage that was an integrated bet.
21 I appreciate there may be legal reasons why the
22 swaps and the SC&T shares are not treated in the same
23 way, but from an economist's point of view, I view them
24 as a whole.
25 If one allowed people to claim in arbitrations, you
[Page 10]
1 efficient market.
2 Fair market value, an agreed standard of value for
3 damages, is described in that paragraph here, which we
4 have seen previously in this arbitration, I believe, and
5 probably have also seen in many other arbitrations.
6 Widely recognised and accepted standard of value.
7 Stock market price, the price at which investors buy
8 and sell on the stock exchange.
9 Efficient market, the stock market rapidly reflects
10 new information and there are no risk-free arbitrage
11 opportunities. Economists like to say there's no such
12 thing as a free lunch.
13 Mr Smith on Monday mentioned there was a tiny
14 arbitrage that they'd profited from, but he mentioned
15 that such things are rare, that the amount of money was
16 small, and that the market — he wouldn't expect those
17 kinds of arbitrage to persist, and I thoroughly agree
18 with those statements.
19 When we say there are no risk-free arbitrage
20 opportunities, there's no such thing. You can never
21 reach absolute zero, so to speak. That's true in
22 physics, but in financial markets one would not say that
23 there are never, ever any arbitrage opportunities, but
24 rather that they are very small and unlikely.
25 Slide 17. Mr Boulton's intrinsic value standard.
[Page 12]
1 about these things, but every investor that is trying to
2 make money over above general market returns is forming
3 a view on intrinsic value and investing accordingly.
4 Slide 18. Sum of the parts, net asset value. That
5 means the sum of each component's value before
6 considering the costs or benefits of the structure that
7 holds them. These component values may be market
8 prices, they may be estimated.
9 I have the following comments. Sum of the parts,
10 net asset value, absolutely standard techniques. They
11 are used interchangeably in this arbitration. That is
12 fine with me.
13 Liabilities which reduce value should be included.
14 The "net" in net asset value refers to that.
15 There is often subjectivity in determining the net
16 asset value or the sum of the parts, for example,
17 unlisted components, tax liabilities, etc.
18 Mr Boulton and Mr Smith often interchange sum of the
19 parts or net asset value with intrinsic value. And
20 I will try not to do that in my answers to any questions
21 I may be asked.
22 Now, I teach valuation and on slide 19 I demonstrate
23 a lesson that I give always, and I gave it a week ago,
24 last week, to my students.
25 Having covered the standard textbook stuff on
[Page 14]
1 could in the future turn into much more because there
2 will be many excellent investments made, very good ideas
3 for developing the future of the company. Then it could
4 be more than 100 Won.
5 Of course, if the manager is squandering cash flow
6 on pet projects, then it could be less.
7 Importantly also, I stress that there is often an
8 unexplained residual. There may be a component to the
9 discount that one cannot completely explain. Just as in
10 medicine, one can pick out confidently certain risk
11 factors that will determine whether a patient who gets
12 COVID will have a successful outcome or not, but one
13 cannot determine in any particular case exactly how
14 likely that is.
15 There's always an unexplained residual.
16 So media reports recently described the Royal Dutch
17 Shell structure. For over a hundred years Royal Dutch
18 and Shell Transport and Trading, two different holding
19 companies in the Netherlands and the United Kingdom,
20 have both held shares in the Shell Oil company. They
21 have been the sole owners, joint sole owners of the
22 Shell Oil company. Obviously those shares have the same
23 net asset value, but their prices have typically
24 diverged, and persistently diverged over long periods of
25 time, often by periods of up to 20%, and very frequently
[Page 16]
1 possibly errors.
2 Expectations of future good and bad activities, as
3 I highlighted with my coin example.
4 Costs of governance, I put it in bold because that
5 is raised as an issue in this arbitration, including
6 value captured by controlling interests at the expense
7 of other shareholders.
8 Conglomerates and complex structures lead to maybe
9 a lack of management focus or poor capital allocation.
10 I would be happy to speak more to that if requested.
11 And in the media, Johnson and Johnson and GE, two
12 conglomerates that are currently in the process of
13 splitting up, are good examples of that.
14 Future taxes on existing gains, I have mentioned in
15 the context of the coin.
16 Market price manipulation, for we have heard
17 allegations of attempted manipulation.
18 And again, the unexplained residual.
19 Discounts are often persistent. We cannot assume
20 they will go away, narrow, or grow in any given time
21 frame. They're part of market value, and in an
22 efficient market, absent manipulation, they are part of
23 fair market value.
24 Slide 21, please.
25 I'm now going to speak to my damages conclusions.
[Page 18]
1 and that have been raised in previous testimony and
2 arguments.
3 So let's pass to slide 23. SC&T shares — here are
4 my conclusions. SC&T shares were traded in an efficient
5 market. Since the fair market value of a stock traded
6 in an efficient market is its stock price, SC&T's fair
7 market value was its stock price.
8 Manipulation can cause the share price to deviate
9 from fair market value, but when quantified, the alleged
10 market manipulation had no significant impact on SC&T's
11 market value. That is very important.
12 Equally important, the merger ratio was based on
13 market prices. This means that EALP received the fair
14 market value when it exchanged shares in SC&T for shares
15 in the merged entity. I have a footnote there. Some of
16 the shares were actually sold or given back in the
17 put back option at an appraisal price plus generous
18 interest.
19 Effectively, Elliott sold its SC&T shares at the
20 market price and there are no damages from selling an
21 asset at fair market value; or in other words, there are
22 no damages from being forced to surrender an asset at
23 fair market value.
24 What is the damages methodology in this case? On
25 slide 24 I have summarised the methodology as I see it.
[Page 20]
1 damages. That's the first box on the right-hand side.
2 This could have ended up with the NPS voting to
3 reject, and the merger being approved anyway,
4 a possibility I highlight in my second report. Again,
5 nothing changes and no damages.
6 Also, the merger vote could have been to reject and
7 the merger could indeed have been rejected, in which
8 case, and I think this is the box we need to debate,
9 because the other ones are not contentious; in that case
10 I say not much changes and no damages.
11 So why do I say nothing much changes? I say that
12 because of what we see on slide 26.
13 What would the market have seen immediately after
14 the counterfactual vote to reject the merger? They
15 would have seen this picture, which is not the family
16 tree of Lucrezia Borgia's clan, complete with, or
17 possibly not complete with the transgenerational
18 incestuous offspring, but this is the ownership
19 structure of the Samsung Group. This picture paints
20 a picture of a corporate group, which most corporate
21 governance experts would say is less than ideal, is
22 problematic, and presents risks of value transfer
23 between different entities at the behest of the
24 controlling family interest.
25 So that is why I say nothing much would have changed
[Page 22]
1 had been rejected, SC&T's market price would have
2 reverted immediately to sum of the parts or sum of the
3 parts minus 10%.
4 I'll note that the claimed damages are almost as
5 large as the 685 billion Won initial investment and
6 much, much bigger than Elliott's 49 billion trading loss
7 on SC&T. It is in fact a 90% return over approximately
8 three months, and if we annualise that, 90% over
9 three months — this is a rough calculation, the
10 three months particularly — but 90% over three months
11 is in fact 1,300%, an annualised return rate.
12 Also these damages obviously do not account for the
13 profit from the swaps that was confirmed by the
14 transactions released last week, which we were informed
15 last week.
16 Slide 30.
17 The Claimant relies on flawed assumptions about the
18 discount presented as conclusions. Mr Boulton relies on
19 two fundamental hypotheses or assumptions.
20 The only reason for the discount of SC&T is that the
21 price was depressed by the fear of this specific merger,
22 and that rejection of this merger would have eliminated
23 the discount, the governance discount, with only what he
24 calls a holding company discount of 10% remaining.
25 I say this specific merger because, having rejected
[Page 24]
1 announcements. Absolutely. The market price
2 incorporates the buy and sell decisions of different
3 investors. That's why we rely on it.
4 Third, a listed share price may be affected by
5 a perceived lack of alignment between the controlling
6 shareholder interests and others. Absolutely. The
7 market price must reflect all commercial risks,
8 including corporate governance concerns.
9 Fourth, the share price may be affected by any
10 anticipation of future events. Well, absolutely, it
11 must do that because when you buy a share, you buy an
12 entitlement to future cash flows, many of which are in
13 the long-term future. Tesla shares have a high price,
14 not because Tesla is going to pay dividends this year —
15 as Mr Boulton said yesterday, Tesla does not pay
16 dividends — but because at some point in the distant
17 future, Tesla shares may return large value to its
18 shareholders, and that of course is reflected in today's
19 price because share prices must be inherently
20 forward-looking.
21 Slide 32. Governance and tax caused much of the
22 SC&T discount.
23 We agree that governance was a primary driver of
24 a discount. Mr Boulton says so and I say so.
25 We also agree with Elliott that there was
[Page 26]
1 trend and when it goes below the trend it will tend to
2 drift back up to the trend, and when it goes above the
3 trend it will tend to drift back down to the trend.
4 Two observations.
5 First, such behaviour would contradict semi-strong
6 market efficiency. That's exactly the definition of
7 semi-strong market efficiency which Mr Boulton and I,
8 and indeed Professor Milhaupt, agree to be the case
9 here, that the market was semi-strong efficient.
10 So it would contradict that, but more specifically,
11 instead of just appealing to the general idea of
12 efficiency, I did a statistical analysis to see whether
13 the data show any evidence of reverting back anywhere,
14 and a statistical analysis presented in Appendix D of my
15 second report shows that movements in the SOTP discount,
16 the net asset value discount, do not predict SC&T
17 prices.
18 So when the discount has gone to a large value,
19 statistically there is no evidence that it will then
20 tend to go to a smaller value. And I test that at
21 different horizons as well.
22 Let's look now at evidence from the cross-section,
23 having looked at the time series. Slide 34 shows that
24 net asset value discounts are common and persistent in
25 Korea. Actually I don't know that anybody disputes that
[Page 28]
1 to exit, the discounts were to be in the 40s or 50s,
2 depending on the date of the trading plan.
3 I review industry and academic evidence. One of the
4 reports there shows 35%. And the comparables in
5 Mr Boulton's holding company I say show a median of
6 nearly 40% and a mean of a little more. I'm happy to
7 follow Mr Boulton's preference for the median. And
8 I have excluded a couple of companies with premiums for
9 the reasons that I think they are anomalous, but I note
10 that if we take the full sample — because I think
11 Mr Boulton's sample is skewed by the inclusion of
12 a couple of anomalies with premiums. But even if we
13 include them in the sample, the median is very similar
14 to what's shown on this picture. So it makes little
15 difference. And the median of course is Mr Boulton's
16 preferred measure. We agree on that. I think that is
17 appropriate.
18 Slide 35.
19 All this talk about price versus net asset value is
20 a bit of a red herring. I have said that if the
21 tribunal asked me to quantify damages in the case where
22 Ms Tan takes a Tesla share from Mr Turner, I would rely
23 on the market price of Tesla to give damages, and I said
24 that's what I would do here, and that's essentially what
25 I'm doing in my report.
[Page 30]
1 Page 36, tunneling. Tunneling is not price
2 manipulation. We've heard allegations — the tribunal
3 has, I wasn't listening, but I understand that the
4 tribunal has heard allegations of price manipulation.
5 Some of those allegations were rather what I would
6 describe as tunneling. Professor Milhaupt uses that
7 word.
8 Tunneling is not price manipulation. Why not?
9 Suppose a company is subject to risk of tunneling.
10 Tunneling, in other words, value will be extracted
11 through the means of contracts which are written at
12 prices that are not the market prices for those
13 contracts. It could be somebody claims management
14 services for inflated fees. That would be a tunneling
15 system. Or it could simply be the controller diverts
16 contracts to their preferred wholly owned corporate
17 entity, although that's not really tunneling, but it's
18 similar.
19 If a company is subject to these risks, then its
20 price will be low. Suppose I buy at that price.
21 Have I bought at a manipulated price? Well, no. It is
22 the tunneling risk that depressed the price, not the
23 manipulation. In other words, the true value of the
24 shares I bought were low because it really was not going
25 to receive those cash flows. It was never going to
[Page 32]
1 They would have had them taken at the low price, but
2 they would have also bought them at the low price. That
3 washes out.
4 So any allegation of manipulation that takes place
5 before 2015, when Elliott started to buy shares, is of
6 no relevance to the damages.
7 Obviously, any manipulation that is alleged that
8 takes place after the merger ratio has been set also has
9 no relevance for damages because it doesn't feed into
10 the price of the transaction.
11 Slide 38.
12 Manipulation did not cause the SC&T discount. As we
13 saw, the SC&T discount was large and the manipulation
14 that I have been made aware of within that window, the
15 only quantifiable thing was a Qatar contract which
16 allegedly should have been disclosed earlier.
17 A straightforward calculation shows that the maximum
18 possible impact would have been less than 2%. 2% is
19 very generous. Let me explain how I got that 2%.
20 I said what was the revenue from the Qatar contract,
21 what was a plausible margin, and therefore I estimated
22 that earnings would have been, if memory serves me
23 right, between 10 and 20 million a year higher for SC&T
24 from the contract.
25 What multiple do we apply to earnings in that range,
[Page 34]
1 start wrapping up.
2 MR TURNER: Excuse me, sir. Mr Boulton yesterday took
3 a third more time than he was allowed. As I mentioned
4 yesterday after Mr Boulton's presentation, we weren't
5 taking any issue with that, there's plenty of time, and
6 that I assumed that my learned friend would be equally
7 indulgent were Professor Dow to run over.
8 I trust that that is still the case. No objection
9 was made to that yesterday, and so I would like the
10 tribunal to allow Professor Dow to finish his
11 presentation.
12 MR PARTASIDES: Mr President, perhaps we could ask how much
13 longer we should expect?
14 THE WITNESS: Less than ten minutes.
15 MR PARTASIDES: No objection.
16 THE PRESIDENT: Okay. Please go on.
17 THE WITNESS: Thank you. My apologies for being slow.
18 Where was I. Manipulation did not cause the SC&T
19 discount. Yes. I have quantified that.
20 So what I was saying was my watch is a little bit
21 off, perhaps, but how do I compensate for that if I need
22 to catch a train and I don't want to miss the train?
23 I chuck in a couple of extra minutes, I make an
24 adjustment to the time that I have seen on the watch.
25 Now, I have another watch that I took on a climbing
[Page 36]
1 except Korea. That's because in other countries Samsung
2 could have chosen the merger ratio, effectively.
3 But here the merger ratio is set by Korean law to be
4 the market price. So let's review the logic.
5 I'm supposed to be frightened that I will get the
6 merger ratio price in the event of a merger, and yet if
7 I look forward to what would happen if the shares are
8 taken from me at this ratio, I would effectively be
9 getting the market price.
10 So if I just set the same old market price I would
11 have set anyway without any fear, then when the shares
12 are taken from me, they will be taken at the fair price,
13 and I have nothing to be frightened of.
14 The whole point of the regulated merger ratio in
15 Korea, which I think is a very good law actually, is to
16 rely on market prices to set the ratio and protect
17 against abusive nonmarket ratios. I would be happy to
18 say more about that.
19 What about the therapeutics theory. On page 41
20 I speak to that.
21 Professor Milhaupt says Elliott could be providing
22 a kind of therapy, and I completely agree with the
23 statement I give there from Mr Milhaupt as a quote, that
24 activism can potentially play a therapeutic role in
25 improving corporate governance.
[Page 38]
1 A few years later, on slide 44, I describe how
2 Elliott tried to block the Hyundai Motor group
3 restructuring. They succeeded in blocking that, but the
4 discount persisted, and Elliott estimates — in my
5 second report, I show that Elliott estimates that
6 discount after the merger at 42-82%. And Elliott sold
7 at a substantial loss.
8 Other opinions. Very briefly, slide 46, Elliott's
9 trading plans reveal it did not expect the discount to
10 disappear and was surprised it widened, showing that
11 discounts can widen as well as narrow, and showing also
12 that Elliott's plan was to exit at post-tax discounts
13 ranging from 40% to 27.5%, large discounts therefore
14 when we add the tax.
15 The trading plan is shown on slide 47.
16 Finally, last slide, page 48, my slide, a few other
17 opinions.
18 The excess discount is contradicted by evidence that
19 the Cheil and SC&T shares moved in the same direction.
20 I mentioned that already in the case of my analysis of
21 the swaps. I give references there to my reports where
22 I do that analysis.
23 Synergies were mentioned. I give those references
24 here.
25 Finally, pre-judgment interest. I have a strong
[Page 40]
1 paths have crossed before. So let me introduce myself.
2 My name is Elizabeth Snodgrass, I'm one of the
3 lawyers for the Claimants. I'm going to be asking you
4 questions about the two opinions that you have provided
5 in the case, and those two opinions, which you may
6 already have there, they are also in the first two tabs
7 in the binder that's been provided to you, and that's
8 being passed out around the room.
9 I'm going to do my best to state my questions
10 clearly and slowly and succinctly. I know you have been
11 under some time pressure to get your presentation out.
12 I have a terrible habit of speaking very quickly. If
13 you find that I am speaking too quickly or my questions
14 aren't clear, please let me know, and I'll slow down and
15 try and restate them.
16 The binder that I have given you also contains some
17 documents that I might take you to during the
18 examination. But it doesn't contain all of the other
19 experts' reports that we may look at during our
20 discussion. If we need to look at those expert reports,
21 they are going to be put up on the screen.
22 I may take you to a particular paragraph of those
23 reports, but if you would like to look at anything in
24 wider context or scroll around in those documents that
25 you don't have in hard copy, please let me know and we
[Page 42]
1 Q. And in RosInvest Co versus the Russian Federation, you
2 were appointed by the Respondent, Russia?
3 A. Correct. {G1/1/5}.
4 Q. I'm going to skip over the Russian words because I'II
5 get them wrong. Yukos versus Russia, you were also
6 appointed by the Respondent, Russia?
7 A. Correct.
8 Q. And then in the three arbitrations initiated by the
9 former Yukos shareholders, Hulley Enterprises, Yukos
10 Universal and Veteran Petroleum Ltd against the Russian
11 Federation, you were appointed by the Respondent; is
12 that correct?
13 A. Correct.
14 Q. So in all of those investment arbitration engagements
15 that you highlight in paragraph 4, those were
16 appointments by the Respondent; is that correct?
17 A. Correct. I have done other arbitrations where I was
18 appointed by the Claimant.
19 Q. Right, but you highlighted those appointments by the
20 Respondent.
21 And you were also engaged in Mason Management LLC
22 versus the Republic of Korea by the Respondent, the
23 Republic of Korea; correct?
24 A. Correct.
25 Q. And of course Korea has retained your services here.
[Page 44]
1 of liability.
2 Q. Yes, there was an analysis of financial loss and Russia
3 was putting forward that no financial loss arose.
4 But in any event, in the arbitrations initiated by
5 Hulley, Yukos Universal and Veteran Petroleum, you also
6 argued for zero damages?
7 A. Correct, yes.
8 Q. And we know of course your position in this arbitration,
9 Professor, but just to confirm, in Mason versus Korea
10 your position is also that the claimants are entitled to
11 zero damages; isn't that right?
12 A. Mason versus Korea is a case that's very similar to this
13 one.
14 Q. And your position there is zero damages?
15 A. Yes.
16 Q. So in a run of, if I have counted correctly, some nine
17 cases involving different factual situations, different
18 investors, in different countries, you've consistently
19 reached the same conclusion: zero damages?
20 A. Yes. Yes, that's true in those cases.
21 Q. Okay. So I wanted to ask some questions also about your
22 background.
23 I'm right to understand, as you said this morning,
24 that your background is in finance and economics; is
25 that correct?
[Page 46]
1 A. Yes.
2 Q. And again, in paragraph 3 of your second report, you
3 then say you were supported in the preparation of your
4 report by consultants at the Brattle Group and again
5 Professor Jungsuk Han from the Stockholm School of
6 Economics?
7 A. That's correct.
8 Q. Is it fair to say that Professor Han acted as
9 a consultant on Korean economic matters for your report?
10 A. Well, let me describe the situation and then you can —
11 or the tribunal can form their view.
12 So Jungsuk is my former PhD student and my main
13 research co-author, and we are in the habit of speaking
14 on Zoom about our research project every week for
15 a couple of hours.
16 And so when this case came along I asked the people
17 at Freshfields whether I would be allowed to mention the
18 case to him and they said, well, we would have to get
19 him appointed. So we did that, and therefore that is
20 reflected in those quotes.
21 We had a brief conversation where he said, well,
22 what are you working on these days, and I said, well,
23 I'm actually working on a Korean case. It's in fact
24 something to do with Samsung merger and Elliott, do you
25 know anything about that? So that was a brief
[Page 48]
1 A. Correct.
2 Q. Okay.
3 I want to turn now to questions of valuation
4 methodology, and I think we can probably take some of
5 this quite quickly.
6 I heard you this morning in your presentation agree,
7 I think — I think we were already there on the basis of
8 your written reports — that for purposes of our
9 discussion, we can use the terms sum of the parts and
10 net asset value or NAV effectively interchangeably;
11 right?
12 A. I agree.
13 Q. And I think you accepted this morning that they are
14 absolutely standard valuation techniques; yes?
15 A. Indeed.
16 Q. And Mr Boulton used a sum of the parts or NAV analysis
17 to derive the intrinsic value of Samsung C&T and Cheil
18 in his expert reports; correct?
19 A. His estimate, his view of intrinsic value, indeed.
20 Q. Yes. And you're aware that analysts that valued SC&T
21 generally utilised similar asset-based sum of the parts
22 valuation methods to assess the value of SC&T; correct?
23 A. Absolutely.
24 Q. And so by adopting a sum of the parts methodology,
[Page 50]
1 that fair?
2 A. Well, I find that question a little broad.
3 Given that Mr Boulton presents a sum of the parts
4 methodology and makes judgments about the inputs and
5 discounts to be applied, to that extent it is of course
6 incumbent on him, and me, to debate those judgment
7 calls.
8 Q. But there's nothing more implied by the word subjective
9 than that they are an exercise of professional judgment
10 and —
11 A. What more is implied?
12 Q. I'm asking whether there is anything more implied by
13 that word.
14 A. In the arbitrations that I've taken part in, I think
15 "subjective" and "judgment" are pretty much
16 interchangeable pieces of terminology.
17 Q. Right.
18 A. But I suppose I might use subjective to emphasise that
19 the judgment required is important and makes a big
20 difference, but I agree that in logical terms there's no
21 real difference between those terms.
22 Q. Right. So I'm interested in the sort of proliferation
23 of these contemporaneous sum of the parts valuations of
24 SC&T around the merger period.
25 A. Mm-hm.
[Page 52]
1 right?
2 A. As I indicated in my slides, it is normal for investors
3 to form a view of intrinsic value. Different investors
4 will form different views, and the market price reflects
5 the aggregate of those views.
6 So it is absolutely normal, as I said in my slides,
7 to have those views, to invest time in forming those
8 views, and to trade accordingly.
9 Q. Right. Indeed, you acknowledged in your second report
10 that there are potential mispricing opportunities in the
11 market?
12 A. Could you give me a reference for that?
13 Q. That's paragraph 136 of your second report.
14 For the operator, it's {G3/1/63}.
15 A. I say the fund — I agree that the funds management
16 industry plays an important role in collecting
17 information and identifying potential mispricing
18 opportunities. I say it's axiomatic that the profits
19 that can be extracted from these efforts become smaller
20 as markets become more efficient:
21 "The likelihood of any investment manager
22 consistently identifying and arbitraging [is] low."
23 That should be "is" low. Particularly after
24 transaction costs.
25 Q. Yes, but you have drawn attention to exactly what
[Page 54]
1 because I think it's worth more than the market price.
2 It's quite possible that I would — events would prove
3 me to be right and I would make lots of money.
4 But when I say we can take the market's word for it,
5 I mean that we can — you know, our first reference
6 point should be the market price and anybody who wishes
7 to argue otherwise has to prove that the market price is
8 wrong.
9 Particularly in an arbitration, as I gave the
10 example with the Tesla case, even if I've got my own
11 estimate of what Tesla shares are worth, and I do have
12 that and I do think I'm right, that doesn't mean that
13 I would recommend to a tribunal that they should be
14 taking my intrinsic value rather than the market price.
15 Q. I was actually asking a slightly different question.
16 So I was just asking about this question. So when
17 you speak of market efficiency, you mean that a market
18 is efficient in incorporating information to a company's
19 share price; correct?
20 A. I think by definition.
21 Q. Yes. But what efficient does not mean is that a share
22 price is more accurate in an efficient market than it is
23 in an inefficient market in the sense of the information
24 necessarily being correct that is being incorporated.
25 A. Well, I think I disagree. In an inefficient market
[Page 56]
1 given wrong information, and if market participants
2 don't realise that it's wrong and don't suspect that
3 that might be going on, then absolutely, the market
4 price will be wrong.
5 Q. Right. So a determination of semi-strong market
6 efficiency tells us about the rapidity with which
7 a market reacts to information. It doesn't tell us
8 whether the market had complete or accurate information.
9 That's the only simple point I was —
10 A. Correct, because — and this may be too much information
11 for some people in the room, but the terminology of
12 semi-strong refers to the market pricing efficiently
13 given public information and it says nothing about
14 information which is not public information.
15 Q. Right. While we're on the topic of accurate
16 information, I wanted to take to you a case that you
17 cite, the Delaware Supreme Court's 2017 decision in
18 DFC Global Corp versus Muirfield Value Partners. You
19 cite that in your first report. The case is actually at
20 tab 36 of the binder that's in front of you.
21 A. I have just broken my binder.
22 Q. I'm so sorry. I hate lever arch files. I've lived in
23 England for many years and I loved many things about it
24 but I do not miss lever arch files for one minute.
25 Tab 36.
[Page 58]
1 market so long as interested buyers are given a fair
2 opportunity to price and bid on the something in
3 question; yes?
4 You note the comment about fair opportunity, but
5 what I just wanted to draw your attention to is two
6 paragraphs above the paragraph that you highlight here
7 in your first report. So if you turn two pages back in
8 the bundle, {G1/28/40}, do you see the paragraph that
9 begins "As we shall discuss" on page 38 of the document,
10 and the Opus reference, {G1/28/40}?
11 A. "As we shall discuss"?
12 Q. Yes. So the court makes a couple of important caveats
13 about the reliance on market price:
14 "As we shall discuss, we have little quibble with
15 the economic argument that the price of a merger that
16 results from a robust market check, against the backdrop
17 of a rich information base and a welcoming environment
18 for potential buyers, is probative of the company's fair
19 value. But, not only do we see no licence in the
20 statute for creating a presumption that the resulting
21 price in such a situation is the 'exclusive', 'best', or
22 'primary' evidence of fair value, we do not share DFC's
23 confidence in our ability to craft, on a general basis,
24 the precise pre-conditions that would be necessary to
25 invoke a presumption of that kind. We also see little
[Page 60]
1 importance of whether a market price is fair in the
2 factual circumstances of a particular transaction.
3 Would you accept that's what the court is saying?
4 A. Could you please repeat the question?
5 Q. I said I'm drawing your attention to the fact that the
6 court is emphasising the importance of whether a market
7 price is fair in the circumstances of a particular
8 transaction rather than stating a general presumption
9 that a market price is fair.
10 A. I'm sorry. Because I'm not a lawyer, it's a bit hard
11 for me to wrap my brain around the phraseology there,
12 but I think on page 2 -- that is {G1/28/4} — they are
13 talking about a deal price - I presume that's a merger,
14 I don't know if it's a merger resulting from an open
15 process, not necessarily a market price.
16 But agreed that what they're saying there is that if
17 the deal price results from something like a market,
18 because I guess that's what they mean by an open
19 process, informed by robust information, public
20 information and easy access to deeper non-public
21 information, that's certainly strong evidence of fair
22 value. That is certainly sufficient — a sufficient
23 condition for the deal price being fair value. I don't
24 think I could argue against that. That's got to be
25 true.
[Page 62]
1 ROK's opening statement cited for the proposition that
2 the Delaware courts trust the market."
3 A. Yes.
4 Q. " ... very important pre-condition which is set out in
5 case. They trust the market price because they believed
6 that the process was robust and conflict-free."
7 A. Right.
8 Q. I was going to ask you, given your reliance on DFC
9 Global, presumably you would accept that a similar
10 standard should be applied in the context of the
11 valuation that the tribunal should consider here. The
12 tribunal should consider the market price only if they
13 could be confident that the process was robust and
14 conflict -free?
15 A. Okay. So I could have given you that one without the
16 legal pain, but I appreciate it's necessary to go
17 through that. I now understand. Completely, I think,
18 we're in full agreement here.
19 This is like my watch. If I think the watch is
20 totally smashed, I would have to draw a line through the
21 market price, as Mr Boulton said, and the Delaware court
22 would presumably do the same.
23 So if it's completely smashed, if the market price
24 means nothing, I can't trust it. I totally agree,
25 and I take the allegations of manipulation quite
[Page 64]
1 been made aware that the ROK has indicted [Redacted] and
2 others for manipulation of the SC&T share price and
3 other offences, and that's at footnote 39, which is to
4 paragraph 25 of your second report, if you want to turn
5 that up. For the operator, it's {G3/1/15}.
6 A. I'm sorry, paragraph 25?
7 Q. It's footnote 39, which is a footnote to text in
8 paragraph 25. And the reference there is the third
9 sentence after the citation in the footnote.
10 A. I see it.
11 Q. Yes. And in that footnote you rely on the
12 characterisation of the indictment as stated in the
13 ROK's pleadings in this arbitration. You say:
14 "I understand from counsel that the manipulation on
15 which the indicted charges are based allegedly occurred
16 after the Merger Announcement on 26 May 2015."
17 Then you cite statement of Rejoinder and Reply to
18 defence to preliminary objections.
19 Now, my question for you is: allegations of price
20 manipulation would of course be a serious challenge to
21 a theory of valuation that is based on market price,
22 wouldn't it?
23 A. It would certainly be a serious challenge and it would
24 be a successful challenge if I concluded that the
25 manipulation worked during the window that I identified
[Page 66]
1 market price of SC&T had been manipulated or was
2 otherwise unreliable because it was based on false or
3 incomplete information, that that would be something
4 that would mean the market price couldn't be trusted as
5 a proxy for fair value; right?
6 A. Sorry, I don't have the transcript. If it could be
7 shown — well, if the market — if there was
8 demonstrated manipulation that could be quantified and
9 allowed one to correct for in the market price, then
10 I could trust the market price as an input because
11 I could make that correction.
12 If the manipulation was so severe beyond a certain
13 point, there would be a point where one would give up
14 and the watch would be smashed, in my example.
15 So it's a question of judgment at looking at the
16 specific instances of manipulation that one believes to
17 have occurred.
18 Q. So at the time when you wrote your second report, had
19 you been able to review the PPO's indictment?
20 A. I don't recall.
21 Q. Okay. Have you seen the PPO's indictment of [Redacted]
22 since you wrote your second report?
23 A. I believe I have been given that, but I have not read
24 all of it and I have seen a summary of it that I have
25 read. But I couldn't tell you right now — it was
[Page 68]
1 my mind are not relevant examples of price manipulation.
2 Therefore, I need to look specifically at the exact
3 instances of — the definition of price manipulation
4 that was in the press release, and particularly —
5 I understand in the hearings of this tribunal last week,
6 include certain things that I don't consider to be price
7 manipulation but rather corporate governance events and
8 tunneling events, and they also include things which
9 were outside the relevant window such as the share
10 repurchases in August, I think they were.
11 So I would really need to look in detail at what the
12 allegations were and I have not seen anything that
13 changes my opinion.
14 Q. But you didn't look in detail at what the allegations
15 were to determine whether they —
16 A. Well, the — in writing my second report I relied mostly
17 on Mr Boulton's reports and some of the allegations
18 surfaced after I wrote my report, and so having looked
19 at those, I didn't — I haven't seen anything that
20 relates to price manipulation in the relevant window,
21 but if I'm mistaken, I would be happy to — you know,
22 I'm sure you will bring me to those and I'll be happy to
23 comment on them.
24 Q. Very good. Let's go ahead and turn to the press release
25 that was issued by the Seoul Central District
[Page 70]
1 "Ultimately, upon a comprehensive review of the
2 various views of academia and court precedent, the
3 accuracy of the facts being proven by the evidence,
4 importance and severity of the matter, the need to allay
5 the peoples' suspicions through a judicial review, and
6 the results of a review by the Chief Prosecutor's
7 Conference that was made up of expert criminal
8 investigators, the key individuals in charge were
9 indicted."
10 Q. So if you will look at the top of page 4 of this
11 document, the Opus reference is the same {C/698/4},
12 after the heading "Subjects of Investigation, Seized
13 Materials ...", we see a description of that
14 comprehensive review. We see that the prosecutors
15 conducted:
16 "860 interviews with roughly 300 individuals
17 including Samsung Group personnel including [Redacted]
18 external consultants, shareholders, investors, related
19 experts, etc, in addition to the seizure/analysis of
20 22.7 million digital files, (23.7 TB) [I believe that's
21 an abbreviation from terabytes] from servers/PCs."
22 Do you see that at the top of page 4?
23 A. I see that.
24 Q. The first bullet.
25 So you will agree with me of course that an
[Page 72]
1 be crimes.
2 Q. Right. So if you could turn back to page 3 of the press
3 release, we see the prosecutors explaining in the pink
4 box {C/698/3}, the pink shaded box, the context for the
5 investigation and the indictment, and the text in the
6 pink box refers to two Supreme Court judgments. Do you
7 see that? At the first asterisk bullet it states:
8 "The Supreme Court en banc judgment (issued
9 August 29, 2019) first defined the term 'Succession
10 Project', then expressly acknowledged that the merger
11 between Cheil Industries and Samsung C&T in question was
12 a part of the [Redacted] succession project ..."
13 Do you see that?
14 A. I see that.
15 Q. And at the second asterisk bullet it states:
16 "... in the final appeal for the above judgment, the
17 Supreme Court's judgment (issued June 11, 2020) found
18 that the merger was advanced by Vice Chairman [Redacted]
19 and that bribes were given to the
20 President of the Republic of Korea and [Redacted]
21 And there we have a translator's note:
22 "... in return for supporting the succession project
23 that involved the present merger, etc."
24 A. I see that.
25 Q. So do you understand from this that the context for the
[Page 74]
1 A. I don't think I had.
2 Q. You don't think you had?
3 A. I actually don't recall.
4 Q. So were you aware, or do you recall, that in addition to
5 charges of price manipulation in a general sense, the
6 indictment covered charges of false disclosures and
7 accounting fraud?
8 A. Well, I was already aware of the Qatar contract
9 allegations. I don't know if they're covered by this
10 indictment.
11 Q. Well —
12 A. And I was aware of the Biogen issues at a general level,
13 and particularly because Mr Boulton in his first report,
14 when he does the valuation, his sum of the parts in his
15 first report, section 5, talks about Biogen and indeed
16 notes that there was a call option which could have an
17 effect on the value of that component, and that the
18 price, the strike price of that call option was not
19 known.
20 So I did review his analysis of Biogen and I didn't
21 think that it could be quantified as being particularly
22 relevant for the market price, but I also didn't think,
23 and perhaps I don't have enough information really to
24 form a definitive view, but my view then was I didn't
25 have information enough to quantify it or that it would
[Page 76]
1 Q. I'm putting to you, I think, a simpler proposition,
2 which is it is likely to have an effect on the price,
3 and it's an effect that you didn't take into account in
4 your second report because it seems that you weren't
5 aware of it?
6 A. Well, it seems from my footnote that I was aware of it,
7 but I thought it was after the announcement date, if
8 I understood correctly, and I don't have my footnote in
9 front of me, but was my understanding of what you read
10 out from my report.
11 I did spend some time thinking about the call option
12 issue, and have done since then, but I don't really have
13 a view that it would make a big difference to the price.
14 In other words, I don't think of it as the thing that
15 would make me say the Biogen call option, which I think
16 is probably relatively small, would be the broken watch,
17 would be the thing, the rock climbing expedition that
18 makes the watch smash, if you like.
19 Q. But you didn't include any analysis of the Biogen call
20 option in your report?
21 A. No.
22 Q. And you thought it had occurred — you thought that this
23 issue related to manipulation that occurred after the
24 date of the merger announcement date, when in fact it
25 was before the announcement date?
[Page 78]
1 in the text after the pink box, we see that the merger
2 between then Everland, which became Cheil, and SC&T
3 gained urgency after the illness of Chairman [Redacted] in
4 May 2014; correct?
5 A. Correct.
6 Q. And per the second bullet, [Redacted] and the Samsung office
7 in the spring of 2015, the quote is "established
8 a detailed plan to advance the merger". Are you with
9 me?
10 A. I am.
11 Q. And could you please read the third bullet.
12 A. "From May 2015, Samsung C&T gave a fraudulent
13 justification for the merger (independent determination
14 by management for growth of the company), made
15 fraudulent calculations of synergy figures, and
16 manipulated accounting firm reports to state that the
17 merger ratio based on share price (1:0.35) was
18 appropriate."
19 Q. And then could you take a look at the text at the
20 sub-bullet with the number 2. Could you read that as
21 well?
22 A. "During the announcement of the merger that took place
23 immediately after the Board of Directors meeting on
24 May 26, false information regarding the purpose,
25 background, and effects of the merger was disseminated
[Page 80]
1 to go ahead was certain.
2 Q. So in your opinion, manipulation of the share price,
3 just to make sure I understand your position,
4 manipulation of the share price after the merger
5 announcement date is immaterial?
6 A. Well, it doesn't feed into the price at which the shares
7 were taken, and to that extent I don't see how it could
8 be relevant.
9 Q. Could I just ask, why are we talking about the shares
10 being taken? This isn't an expropriation case.
11 A. I could — what would be a better verb?
12 Q. Well, damages are being calculated by reference to the
13 value of shares and what the value of the shares would
14 be if the merger had not closed.
15 A. Well, I would say the price — okay. If you don't like
16 me saying — I said "taken" because I thought that was,
17 you know, sort of putting it in the starkest terms. But
18 I could say the price at which Elliott sold the shares,
19 which is — or the consideration Elliott received for
20 the shares, which is Mr Boulton's valuation methodology:
21 Value minus consideration.
22 Q. Well, no, the valuation methodology that Mr Boulton uses
23 is the price at which Elliott would have sold the
24 shares —
25 A. Value.
[Page 82]
1 shares — what the vote was going to be on that
2 valuation date. So I don't completely understand that.
3 But certainly he is taking his estimate in his
4 counterfactual of the share value on 16 July, the
5 Tuesday.
6 That's the end of my sentence. I'm sorry.
7 Q. Okay. We'll come back to the counterfactual.
8 Let me just find where we were. We were working our
9 way through the ROK's prosecutors' announcement of their
10 indictment. I think we were nearly finished with that
11 document, but let me just check my notes before we move
12 on.
13 A. I think I got it right in my previous sentence, but it
14 was a little bit long. I apologise for that.
15 Q. No worries.
16 All right.
17 So if you would turn with me, please, to exhibit
18 C-53, which is at tab 5 {C/53/1} of your bundle. This
19 is the Seoul High Court's decision in the appraisal
20 price litigation
21 A. Yes.
22 Q. Could you turn with me, please, to page 18 of this
23 decision {C/53/18}.
24 So in this portion of the decision the court is
25 considering information about SC&T's share price
[Page 84]
1 the paragraph that's right after the heading, it says:
2 "With the recovery of the housing economy in the
3 first half of 2015, major construction companies
4 significantly expanded their supply of new housing.
5 Yet, the Former SC&T did not do so."
6 Do you see that?
7 A. I see that.
8 Q. And if you go with me to the next page, at the beginning
9 of the first full paragraph {C/53/19}, the court
10 observes:
11 "The Former SC&T supplied around 300 new houses for
12 the first half of 2015. Yet on July 17, 2015, the date
13 of the shareholders resolution for the merger, the
14 Former SC&T announced that it had 'plans to supply
15 a total of 10,994 apartment households in eight
16 locations of Seoul in the second half of 2015'. This is
17 in contrast to the details of the modification to the
18 housing business strategy as agreed by the Subject
19 Company and actual performance in the first half of
20 2015."
21 Do you see that?
22 A. I do.
23 Q. So the suggestion is that SC&T deliberately suppressed
24 its activity in the housing sector in the first half of
25 the year so effectively that market commentators were
[Page 86]
1 shares were worth as a result of such considerations put
2 in this report. And had Mr Boulton put forward such
3 a number, I would have certainly engaged with that.
4 Now, if the Samsung family, shall we call it that,
5 took business away from SC&T in the run-up to the
6 merger, that's not manipulation; that is tunneling and
7 that is why SC&T all along, as we saw in my time series
8 evidence, traded at a discount, if true. That is one of
9 the factors that fed into SC&T's discount.
10 So I said in my presentation earlier, tunneling is
11 not manipulation, because if the family don't like —
12 you know, tunneling means that the controlling interests
13 divert business to the bit of the company that they
14 prefer. That's tunneling.
15 Manipulation is, given that the business has that
16 environment or rather factors of its environment, do we
17 cause shareholders and the market, do we cause the
18 market to make wrong inferences about what will happen
19 to that company?
20 So diversion of resources away from SC&T, I take to
21 be a form of tunneling, although not a very egregious
22 one actually. It's —
23 And so I wouldn't call that price manipulation.
24 Q. I don't think I got an answer to the question.
25 A. The question was ...?
[Page 88]
1 So these are — whether it's that sort of decision
2 or whether it is actual diversion of value, for example,
3 "I don't do housing with this company because I don't
4 want to, I want the activity to happen in another part
5 of my empire", and then later on circumstances have
6 changed, so I reverse that decision. That is more akin
7 to tunneling.
8 And what I'm saying — the question I was asked
9 is: why isn't tunneling price manipulation? Well,
10 that's simple, because if a family group has some
11 businesses in it that don't get their fair share of
12 resources, they're just not as valuable. It's not that
13 the market is wrongly valuing those components. It's
14 that they really aren't as valuable.
15 That is why I say that tunneling is not price
16 manipulation, because tunneling reduces value and those
17 other things I mentioned, such as succession plans that
18 the market doesn't like, they also reduce value, but the
19 market can properly reflect that in a low valuation.
20 That's not tunneling — that's not price manipulation.
21 Q. So you've diagnosed the conduct that's described in this
22 portion of the appraisal price litigation judgment as
23 tunneling?
24 A. Yes.
25 Q. And you accept that that tunneling conduct affected the
[Page 90]
1 Q. Let's take it in two halves. How about the decision to
2 withhold —
3 A. If I may, please.
4 If the merger had been rejected as Elliott wanted,
5 I would have thought that it's less likely that the
6 controlling interests would have given that housing
7 contract to SC&T, arguably. And that complicates
8 matters. That's all I wanted to say, so please continue
9 with your question.
10 Q. So let's take it in two halves.
11 The decision not to have any contracts announced in
12 the first half of the year before the decision, before
13 the vote on the merger, so we don't know the outcome of
14 the vote on the merger, if the intention of that was to
15 suppress the share price of SC&T, how would you diagnose
16 that?
17 A. If I know that I'm going to announce — do the housing
18 anyway, in either branch of the eventualities, rejection
19 or acceptance, if I know that for sure, and I tell the
20 market I'm not going to do it, that is manipulation.
21 I think that's what you were trying to get at.
22 Again, I note that this document led to a conclusion
23 that the shares were worth 66,000 and some, and so my
24 inference would be the court thought, in terms of
25 watches, it's more of a five-minute or two-minute
[Page 92]
1 not going to be awarded, so the shares were already low
2 then?
3 So let me go through your question.
4 If the housing decision in the first half of 2015
5 was don't build houses, and if that was an irreversible
6 decision, then that certainly would be — I guess that
7 would not be price — I'm not sure. Could that be
8 a form of price manipulation? Because obviously this
9 housing decision was reversible. So I think your
10 question is, sir: if the housing decision had been
11 irreversible, what would I have answered then.
12 I think it's difficult to say because — but
13 I suppose if the housing decision to take business away
14 from SC&T or to fail to invest in SC&T was an
15 irreversible and permanent decision, then ... I'm afraid
16 I can't be sure because that would simultaneously cause
17 a permanent loss of value to SC&T and it would affect
18 the merger ratio.
19 I suppose it would not be manipulation because it
20 would affect the merger ratio only to the extent that it
21 reflected a permanent loss of value to SC&T.
22 So I think my answer to your question is: had the
23 housing decision in the first half of 2015 been an
24 irreversible decision, then that would be not
25 manipulation, and I believe I just replied to
[Page 94]
1 lawful and some are unlawful in the sense that they
2 consist of feeding incorrect or incomplete or fraudulent
3 information to the market. Let's suppose that.
4 Now, would it be correct, once you have all the
5 evidence, would it be correct to look at the totality of
6 the actions in furtherance of this plan, and would you
7 refer to that as market manipulation?
8 A. I don't have the transcript in front of me. So with
9 that caveat, because I don't recall the full text of
10 your question — thank you, I have just been shown the
11 transcript.
12 Could I see the beginning of the question on the
13 transcript, please? Thank you.
14 (Pause).
15 And then the rest of the question, please.
16 So I agree we should look at the totality of
17 actions, as you asked me. Indeed — and then there's
18 another part of your question which is some of those
19 actions are lawful and some are unlawful. And because
20 I'm not a lawyer —
21 MR GARIBALDI: Let me rephrase —
22 A. I can't really speak to that distinction.
23 MR GARIBALDI: Let me rephrase that so as not to get you —
24 A. I can just ignore that —
25 MR GARIBALDI: No, no, no, I don't want you to ignore that,
[Page 96]
1 important part of Mr Boulton's analysis because he says
2 after the merger he looks at the discount of the
3 combined entity which he estimates at 5-15% and then
4 gets 10, and he says that would also have been the
5 discount in the but for world.
6 So as I said in my opening presentation, I think
7 that in the but for world, SC&T would not have been at
8 the top of the food chain, so to speak, in the Samsung
9 empire, and would not have benefited from such favoured
10 treatment, because Cheil was, I think, the favoured
11 vehicle.
12 So I do agree that manipulation via tunneling, if
13 I may call it that, that you're alluding to in your
14 question, would require an adjustment to the merger
15 ratio for the purposes of damages, if that tunneling
16 would have been reversed in the counterfactual. But if
17 that so-called tunneling, succession plan, whatever, as
18 you said in your question, would not have been reversed
19 in the counterfactual, then I'm not sure, and I think
20 members of the tribunal are probably quite capable of
21 doing the mental analysis better than me, sort of here
22 on the hoof, but I think I would not call that
23 manipulation because in the counterfactual Elliott would
24 be left with an independent SC&T that would not be so
25 favoured, and therefore — I'm sorry, that's a long
[Page 98]
1 end of the first bullet point the court recording:
2 "Those in the financial circles are raising
3 suspicions that Samsung Group is deliberately reducing
4 new contracts and shifting construction projects to
5 other affiliate companies due to the merger between
6 Cheil and the Former SC&T."
7 Do you see that?
8 A. I don't see that, but I will take that —
9 Q. Sorry, that's on page 21. I might have misled you by
10 referring you to page 22. It's at the end of the first
11 bullet point in the middle of {C/53/21}.
12 It's just a similar —
13 A. Similar point.
14 Q. — point. My question was whether that was a narrative
15 that you'd been aware of when you prepared your second
16 report?
17 A. Well, I was just thinking about that. Price
18 manipulation doesn't really enter into Mr Boulton's
19 second report. There's a brief reference to it. And so
20 while I engaged with the things that he did say, it
21 wasn't the focus of my second report.
22 Q. So you didn't analyse the possible influence on SC&T's
23 share price of this kind of decision-making in the
24 construction sector either?
25 A. No, I didn't. My point would be the same, I think,
[Page 100]
1 "unprecedented". So it says:
2 "On the contrary ...
3 We read there:
4 "... it may actually happen to be the case that they
5 would give the key investment sector in Samsung
6 Electronics such as semi-conductors and display
7 technologies to Samsung Engineering or any other outside
8 construction company. According to the media reports,
9 for the second phase constructions for the
10 KRW 400 billion Samsung Electronics Vietnam investment
11 project, the company in charge was changed to Samsung
12 Engineering as of February 2015, of which the first
13 stage was completed by the Former SC&T and Cheil. This
14 kind of change is unprecedented. The Former SC&T was in
15 charge during the initial construction phase of the
16 construction project by Samsung Electronics of
17 a research institute within Seoul University, but also
18 dropped out in the middle and now is taken over by
19 Samsung Engineering. Samsung Group can at any time
20 control the performance of the Former SC&T. The
21 performance of the construction sector in particular can
22 be influenced greatly depending on the status of
23 construction orders retained by Samsung Electronics and
24 on the potential for profitability."
25 The suggestion there seems to be that there was
[Page 102]
1 whether it might be a convenient time?
2 THE PRESIDENT: Whenever it's convenient around this time.
3 So let's break now for an hour and we will resume at
4 2 o'clock.
5 Professor, the same rule continues to apply.
6 THE WITNESS: Of course.
7 THE PRESIDENT: I think you will be shown to a room where
8 you can have your lunch. Thank you very much.
9 THE WITNESS: Thank you, sir.
10 (12.54 pm)
11 (The short adjournment)
12 (2.00 pm)
13 MS SNODGRASS: Professor Dow, before we broke for lunch we
14 had tab 5 of the bundle that you have in front of you
15 open. That's exhibit C-53 {C/53/1}.
16 So in addition to identifying the strategies that
17 Samsung Group used to depress SC&T's share price, in the
18 appraisal price litigation, the Seoul High Court also
19 recognised that SC&T shares were undervalued in the
20 run-up to the merger because of the threat of the merger
21 itself, and I want to look at that analysis with you.
22 So if you could go with me to {C/53/16} of the
23 appraisal price litigation decision. That's also on 16
24 in the Opus reference.
25 On page 16 we see the heading C, "The undervaluation
[Page 104]
1 "One reason for the weak share price of the Former
2 S&T [I think that's just a mistranslation] is due to the
3 view that the Former SC&T shares are at the losing end
4 of Samsung Group's restructuring process. The share
5 prices are extremely undervalued at the moment, and
6 a sharp rise in share price would be possible even with
7 just an improvement in the investor sentiment in
8 relation to ownership restructuring."
9 My question to you is whether you would agree with
10 that analysis. (Pause)
11 A. I think that this analysis is the fear of the merger
12 theory, and I don't agree with the fear of the merger
13 theory.
14 Q. So you don't think that the share prices were extremely
15 undervalued at the moment and you don't think that
16 a sharp rise in share prices would be possible even with
17 just an improvement in investor sentiment in relation to
18 ownership restructuring?
19 And you don't think that one reason for the weak
20 share price of former SC&T is due to the view that the
21 former SC&T shares are at the losing end of Samsung
22 Group's restructuring process?
23 A. Well, there's two interpretations of the first sentence,
24 and one interpretation is fear of the merger, which I've
25 said I don't believe that's a viable theory.
[Page 106]
1 something that an analyst has said, so. They say those
2 kinds of things all the time.
3 Q. So you don't —
4 A. I don't read much into it.
5 Q. So you don't have an opinion on that question?
6 A. Well, my opinion is, if it's fear of the merger, you
7 know my view on fear of the merger.
8 Do I think they're undervalued at the moment?
9 I don't particularly think so. I don't think they were
10 extremely undervalued at the moment. I think that's my
11 testimony I've already given, even though I didn't do
12 a valuation on that date. But I did provide an opinion
13 on valuation date. So to that extent. I don't think
14 they were extremely undervalued, no.
15 As I showed in my presentation this morning, I think
16 the whole issue of share price versus net asset value is
17 a bit of a red herring because even if one started from
18 net asset value, I don't think a realistic discount
19 would take you very far from the share price.
20 Q. Sorry, we're just getting the transcript. My transcript
21 is not showing up. So I'm getting it fixed so I can
22 make sure I see what you're saying.
23 Excellent, thank you.
24 I believe you said, notwithstanding I didn't have
25 the transcript in front of me, that you said that nobody
[Page 108]
1 not what I believe, because my evidence was that the
2 merger taking place at market prices cannot be an unfair
3 or predatory transaction.
4 So to put it in simple terms, I completely disagree
5 with Professor Milhaupt's statement that he made on
6 Monday, that the merger is classic tunneling.
7 Q. You also then disagree with Professor Bae, who is an
8 expert on Korean tunneling transactions, who in his
9 evidence confirmed his view that the Cheil-SC&T merger
10 was, from the perspective of SC&T shareholders,
11 a tunneling transaction. For the transcript, the
12 reference is {Day6/94:22} through {Day6/95:3}. Do you
13 recall Professor Bae's evidence to that effect?
14 A. I do recall; I don't agree with him.
15 Q. But in your reports you do specifically argue that in
16 the period leading up to the merger SC&T shares priced
17 in the risk of a merger at a merger ratio that
18 undervalued SC&T and overvalued Cheil?
19 A. Could you show me if I say that, please?
20 Q. Yes, first report, paragraph 36. The reference for the
21 Opus operator is {G1/1/15-16}.
22 A. Yes, that is not at all what you said because if I could
23 see the transcript? If I could see the transcript of
24 what the question was?
25 Q. I'm sorry, paragraph 35, apologies, of your first
[Page 110]
1 risk would have been priced in to the market price; yes?
2 A. But I don't think it was a tunneling transaction. So if
3 you ask me, if it was a tunneling transaction, or if
4 there is a tunneling transaction, is that priced in, of
5 course. But my evidence has been that this is not
6 a tunneling transaction.
7 Q. What did you mean when you said in paragraph 35:
8 {G1/1/15}
9 "... EALP made this investment with full awareness
10 of the risk that the Merger would occur."
11 What were you trying to convey there?
12 A. Just that the — well, to give you one example, in my
13 presentation this morning I said imagine a price — not,
14 by the way, price manipulation, I agree, in the way that
15 I have defined price manipulation, would create a value
16 transfer within the window of time that I set out this
17 morning and should require an adjustment to the price.
18 Okay. So I want to make that clear.
19 Let's suppose that a price manipulation took place
20 before Elliott acquired the shares. Could you remind —
21 yes, it's paragraph 35, isn't it?
22 Q. Paragraph 35, yes.
23 A. So let's suppose that price manipulation took place
24 before Elliott acquired the shares. Then the price was
25 too low, relative to what I have said was the right
[Page 112]
1 its value resulted from that risk, the risk of the
2 merger. I know you don't like the theory, but that some
3 part of the observed discount was attributable to that
4 risk?
5 A. Well, it's not that I don't like the theory, because in
6 my report I say if the tribunal finds that, say, the
7 Qatar contract should have been disclosed earlier, then
8 the tribunal could adjust the price and that would give
9 rise to small damages, I guess, and possibly many other
10 things come into play.
11 So to that extent I obviously do agree and I'm
12 not — you know, I'm not disputing that to that extent
13 the price could have been too low, and therefore some
14 adjustment would have been required.
15 Q. I think —
16 A. So the main difference between myself and Mr Boulton
17 is — well, one of the differences between myself and
18 Mr Boulton is that his NAV discount is just implausibly
19 large, and another difference is that he draws a line
20 through the price, whereas in my judgment the
21 allegations I have seen aren't enough for me to draw
22 a line through the price.
23 But even if I did, and even if I were to use a net
24 asset value approach, which to be perfectly honest
25 I don't think would be a good idea, but if I had to do
[Page 114]
1 Claimant knew about the risk of the merger and
2 specifically you take the view that EALP knew that the
3 merger was likely to occur. And I can take you to what
4 I'm talking about in your reports if that would assist
5 you.
6 A. Yes, that would assist me.
7 Q. Okay. So at paragraph 122 of your first report, which
8 is {G1/1/57}, Opus reference. You say:
9 "... EALP not only knew the Merger had been
10 announced and —"
11 A. Paragraph?
12 Q. 122.
13 A. Yes.
14 Q. "... EALP not only knew the Merger had been announced
15 and the Merger Ratio had been set, it knew the market
16 was supporting the Merger, and it was accepting the risk
17 that the Merger would happen."
18 Do you see that?
19 A. Yes, thank you very much. I understand what you're
20 getting at.
21 Q. Then if you look at paragraph 202 of your second report,
22 which is {G3/1/94} for the Opus report?
23 A. Paragraph 202?
24 Q. 202. You're attributing to EALP —
25 A. Got it. So I'm here saying —
[Page 116]
1 so they can't be compensated for the cheap price.
2 And I totally accept that it is for the tribunal to
3 decide whether the shares or which shares among the
4 purchases made by Elliott, I totally accept that the
5 tribunal should decide whether some of the shares
6 purchased by Elliott were purchased at a price
7 reflecting near certainty or high likelihood of the
8 merger occurring.
9 If the merger were to depress the value — this is
10 a separate argument from other arguments I have made in
11 the case. If the merger were to depress the value for
12 whatever reason, and Elliott bought the shares when that
13 had already happened, then they shouldn't claim for the
14 drop in value which they actually benefited from in the
15 form of a low price.
16 That's what I'm saying there, and I totally agree
17 it's for the tribunal to make that determination.
18 Q. So you say in your first report that you offered
19 a similar opinion in the RosInvest Co arbitration, and
20 that's at paragraph 124 of your first report, if that
21 assists?
22 A. Yes.
23 Q. {G1/1/57-58}.
24 You say that the tribunal in RosInvest Co accepted
25 your position in that case?
[Page 118]
1 'priced in' the likelihood and effect of the Russian
2 Federations actions in respect of Yukos."
3 So that's the priced-in-the-risk argument?
4 A. Totally.
5 Q. So given your familiarity with these issues, you're no
6 doubt aware that the focus of the analysis in that case
7 was whether the Claimant had purchased the shares at
8 a price that accounted for the action by the Respondent
9 state, the action that constituted a breach of the
10 Treaty; correct?
11 A. Yes, indeed.
12 Q. So you accept that, putting to one side the issue of the
13 3.4 million shares which were purchased after the date
14 of the EGM —
15 A. Well, this section is mostly about those, I think.
16 Q. Yes; the merger occurring was not a certainty when the
17 Claimant purchased its SC&T shares that were subject to
18 appraisal rights; correct?
19 A. Correct.
20 Q. And in any event what's at issue in this case is the
21 ROK's wrongdoing or alleged wrongdoing, its interference
22 in and its subversion of the NPS process that led to the
23 vote in favour of the merger.
24 So that conduct is separate from Samsung's
25 misconduct, whether you want to call it tunneling or
[Page 120]
1 argument carries over.
2 Now, in the question, I think Ms Snodgrass built in
3 an extension of that, and you will correct me if I am
4 wrong, I hope, that: what do we do when there's
5 a probability priced in, but not certainty?
6 Well, I don't have a magic formula for what we do in
7 that case, but I suppose it's something in between what
8 we would do if there was no such argument and what we
9 would do if it's a certainty, I guess.
10 But I'll remind the tribunal that this section is —
11 it's in the section in my second report called
12 "Miscellaneous Issues". That is not my main argument,
13 but I think it is important. It is important to note
14 that Elliott bought shares in June and I'm talking about
15 those shares.
16 Q. So the analogy you're drawing is between a case in which
17 what was at issue was governmental misconduct that was
18 known about and that affected the value of the shares —
19 that's the RosInvest Co case — and in this situation an
20 event that affected the value of the shares that was not
21 governmental misconduct. It was not the breach that is
22 complained of?
23 A. I don't follow your logic there because surely you
24 allege that the government misconduct contributed to the
25 merger being approved.
[Page 122]
1 of government interference or as a result of government
2 interference? What is the risk that they actually
3 accepted when they purchased the shares? The commercial
4 risk that the merger would happen, or the legal risk
5 that the government might interfere with the merger?
6 A. Well, I'm an economist. So —
7 THE PRESIDENT: It may be a legal issue. If it's in your
8 view a legal issue, then just say that. That's entirely
9 fine.
10 A. Yes. I would just say to the tribunal we need to
11 construct an appropriate counterfactual and in the
12 RosInvest Co case, where the government action was
13 common knowledge, the counterfactual would be no bad act
14 by the Russian Government, therefore Elliott would not
15 have been able to buy cheaply, because they bought at
16 a distressed price, RosInvest Co and Elliott Company,
17 I believe. You will correct me if I am wrong.
18 In this case, what would have been the
19 counterfactual: so the merger went ahead, Elliott bought
20 the shares anyway, it didn't like the merger, it
21 suspected something fishy had gone on, maybe, but it
22 didn't link that to the government.
23 Not sure it would have made any difference to the
24 price whether or not it was the government; okay? So
25 then no damages.
[Page 124]
1 I'm thinking on the hoof here. I don't see why it would
2 make a difference, but if the tribunal reasons that it
3 would make a difference, and if — I mean, bear in mind
4 this is only a back-up argument, so to speak, relating
5 to if damages were to be awarded anyway on the other
6 shares, then indeed the tribunal could make an
7 adjustment for that.
8 I hope that's clear because it's quite a complicated
9 answer.
10 THE PRESIDENT: Well, I have no idea what the answer is.
11 That's why I'm asking.
12 A. Well, I don't know - I don't know to what extent one
13 can separate the consequences of the Korean State's
14 actions from Samsung's actions. That's what I'm saying.
15 Construct a counterfactual. Ms Snodgrass is
16 inviting me, I suppose, to construct — and you are,
17 sir — to construct a counterfactual in which the merger
18 was pushed through, it was a horrible merger, the price
19 fell, for whatever reason, that's how it happened, but
20 had the market known it was because of the President's
21 involvement or the government's involvement, then the
22 price should have fallen even further.
23 That further drop in price, caused by the
24 incremental severity of the problem reflecting
25 participation by the government, could then potentially
[Page 126]
1 A. Oh, you're absolutely right.
2 Q. The merger wasn't approved until 17 July.
3 A. Correct. Correct. So I guess that takes us to the grey
4 area that I referred to previously, where the merger was
5 very likely, but not 100%.
6 And then, I'm not going to quantify this, but then
7 to the extent that the market thought the merger was
8 going to happen, there would be no damages. To the
9 extent that the market thought the merger might fail,
10 there could potentially be damages had the tribunal
11 already decided that the older shares, if you'll allow
12 me to call them that, the shares purchased earlier, were
13 liable for damages.
14 I hope that's clear.
15 Q. On what basis do you consider that the merger was very
16 likely as of the date of the merger announcement?
17 A. I don't want to offer an opinion and I should not have
18 said "very likely", but obviously quite likely, somewhat
19 likely, and it's not for me to quantify that probability
20 because I think the tribunal will have heard lots of
21 evidence to decide whether that was a high probability
22 or a low probability.
23 Q. So when you said in your second report that Elliott knew
24 that the merger would occur, you don't mean to say that
25 there was certainty?
[Page 128]
1 a heightened possibility and I'm treating it as
2 a certainty by excluding those shares. And if it's just
3 a high probability but not a certainty, as I said
4 before, I suppose the tribunal has to find some sort of
5 halfway house, or would have to find some sort of
6 halfway house.
7 You will forgive me that I'm a bit blasé about
8 liability, because, like Mr Boulton, I see my role as
9 a damages expert to assume liability before I even start
10 work.
11 Q. The degree of certainty that Elliott did or didn't have
12 about this seems to be significant to your damages
13 analysis?
14 A. Well, this is not my main damages analysis. To be
15 clear, this is a miscellaneous issue on damages and I'm
16 saying that if the tribunal decides to award damages at
17 all, then it should consider whether to exclude the
18 shares purchased later on.
19 Q. And in expressing the views that you state in
20 paragraph 205, when you express those views, were you
21 aware that in March of 2015 Elliott had met with the
22 NPS, who had indicated that they wouldn't support the
23 merger on the current proposed terms?
24 A. I believe so.
25 Q. And you are aware that in April of 2015 Elliott had met
[Page 130]
1 A. Are we looking at the second report?
2 Q. The second report, paragraph 2.5.7. That's {F5/1/17}.
3 A. Paragraph 2.5.7.
4 Q. (III), which is over on the next page {F5/1/18}. That's
5 just a summary of his definition of the excess discount
6 and his calculation of the excess discount. There's
7 obviously a longer analysis of that later in the report.
8 MR GARIBALDI: It disappeared from my screen.
9 MS SNODGRASS: Mine too.
10 MR TURNER: Opus has censored Mr Boulton's report, very
11 sensibly, but I wouldn't mind seeing it if the question
12 is being put.
13 MS SNODGRASS: I think it's coming back. {F5/1/18}.
14 So —
15 A. Sorry, I was at the wrong page.
16 Q. This really wasn't a major point. It was mainly just to
17 say he has this concept which is this excess discount,
18 which is part of the observed discount, but not all of
19 it.
20 A. That's the bit that would have gone away had the merger
21 been rejected.
22 Q. Yes, and in your second report you subject Mr Boulton's
23 analysis of the excess discount to empirical scrutiny?
24 A. Yes.
25 Q. To test whether it is supported by market data; is that
[Page 132]
1 would be robust empirical support for Mr Boulton's
2 analysis of the excess discount; yes?
3 A. No, because the excess — okay, so what I'm testing here
4 is what I called in my presentation this morning the
5 value transfer theory, namely that the merger is an
6 event that would transfer value between the two
7 companies. And that's mostly what it was about.
8 So this is one leg of my analysis but there are
9 others, for example that Korean Chaebol companies trade
10 at discounts anyway, which are much bigger than the 10%
11 Mr Boulton postulates.
12 So this is one leg of my analysis, not the whole
13 analysis.
14 Q. Okay. So I thought you were —
15 A. It's a sense check, if you like.
16 Q. I thought you were testing his excess discount theory.
17 That's what it says in your report. Is that the same
18 thing as the value transfer theory or are they different
19 things?
20 A. It is — yes, I guess there are two legs to his excess
21 discount theory, and sort of one part is: was there
22 an excess discount at all? And the other part is: how
23 big was the excess discount?
24 So this is looking at statistical data, so it is
25 saying, I suppose, it's examining the proposition that
[Page 134]
1 agree that that was an event that was at least
2 calculated to make the merger less likely, wouldn't you?
3 A. Second event? Oh, third event, sorry. 9 June. It's
4 the third row in that table 5.
5 Q. Yes. That's the first event I'd like to talk about.
6 A. Elliott's first injunction — let me make sure I get
7 this.
8 Q. The question was — Professor Dow?
9 A. Yes.
10 Q. The question was whether that was an event that was at
11 least calculated to make the merger less likely;
12 correct?
13 A. Yes. I say that in table 5. "Effect on Merger
14 Probability", the third row, "Decrease". In other
15 words, Elliott 's first injunction lowers the probability
16 of the merger.
17 Q. So Elliott first announced its injunction application
18 against the extraordinary general meeting in a press
19 release on 9 June, which happens to be in the bundle, if
20 you would like to look at it. It's at tab 6, exhibit
21 C-193. I don't think you need look at it, but it's
22 there if you would like to. {C/193/1}.
23 We can go back to the table you were looking at.
24 {G3/1/83}
25 You point out at the end of trading on 9 June the
[Page 136]
1 I don't recall that I have.
2 Q. Okay. So take what time you need with it. It's
3 a document that's dated 10 June 2015. It was prepared
4 by Samsung Securities. It's entitled "Market Forecast
5 Analysis (DRAFT)". I'm not surprised you haven't seen
6 it; it was only recently disclosed by the ROK to the
7 Claimant.
8 If you could turn to the second page of the document
9 and read the text at the first dashed bullet under the
10 diagram. {C/759/2}
11 A. [Redacted]
12 [Redacted]
13 [Redacted]
14 [Redacted]
15 [Redacted]
16 [Redacted]
17 [Redacted]
18 [Redacted]
19 Q. So this contemporaneous analysis by Samsung Securities
20 suggests that [Redacted]
21 [Redacted]
22 doesn't it?
23 A. Well, let me first of all point out there is an error in
24 the paragraph I have just read.
25 Q. What's the error?
[Page 138]
1 was a reaction to Elliott's first injunction on 9 June,
2 that would indeed be a pass, is what you're saying.
3 Q. Yes.
4 A. So, my comments. What time of day in Korea was
5 Elliott's first injunction released to the market?
6 Because if it was released after the close on 9 June,
7 then you are right and the price movement on 10 June
8 conflates the reaction to two events, Elliott's first
9 injunction and treasury shares sold to KCC.
10 If Elliott's first injunction was first disclosed to
11 the market on 9 June, then you are wrong or, rather, the
12 Samsung Securities analyst is wrong because the
13 information was already in the price on 9 June.
14 So it doesn't really matter what they say, but it
15 was previously in the price and it's the minus 3.5 and
16 not the 10.3.
17 So I don't know if you know or anyone knows when
18 this legal injunction was released to the market.
19 Q. You didn't verify the time of the release of the
20 information to the market when you conducted your event
21 study, did you?
22 A. No.
23 Q. And that would have been relevant to determining how you
24 should evaluate that data for your event study, wouldn't
25 it?
[Page 140]
1 So tab 8, C-199, is a press release that Elliott put
2 out —
3 MR TURNER: I beg your pardon, did you say tab 8? Sorry,
4 I had phased out for a moment.
5 MS SNODGRASS: Tab 8.
6 So, this is a press release that Elliott put out to
7 announce its intention to file an application to, in
8 American English, enjoin, or in British English, injunct
9 the sale.
10 MR TURNER: Other way round, I would have thought —
11 MS SNODGRASS: Is it the other way around?
12 MR TURNER: — but I don't think it matters for the purposes
13 of this cross-examination.
14 MS SNODGRASS: I lived there so long I can't remember which
15 way is, quote, right, and which way is, quote, wrong.
16 A. They were trying to stop it.
17 Q. They were trying to stop it, exactly.
18 If you would look at the very small text at the
19 bottom of the page, footnote 2, the second sentence of
20 that footnote indicates that the sale of treasury shares
21 to KCC was disclosed just before the market closed on
22 10 June. It says there:
23 "The proposed sale was disclosed just before the
24 close of market on 10th June 2015."
25 So the market didn't know about the sale of treasury
[Page 142]
1 Q. Samsung Securities?
2 A. Samsung Securities analyst, I don't care about that.
3 What I care about is when exactly is "just before", were
4 there trades after that price, or was it like 30 seconds
5 before? Or was it five minutes before? When was just
6 before?
7 And the other question is: when was the Elliott
8 first injunction declared to the market? Was it before
9 closing? Was it after closing?
10 I would tend to think that just before closing is
11 before closing and that's the end of it. But if you
12 represent to me that just before was, you know, a few
13 seconds, then I completely agree that one would have to
14 look at that again.
15 Q. But these aren't questions that your event study
16 answers?
17 A. No, as I say, my event study identifies those events in
18 table 5 with the dates shown in table 5.
19 Q. And what happened to SC&T shares on 11 June, which was
20 the first trading day on which the market, assuming that
21 this was immediately prior to close of the market, first
22 trading day on which the market had the chance to
23 assimilate the news of the SC&T sale of treasury shares
24 to KCC?
25 A. Well, I don't want to assume that, because I've been
[Page 144]
1 A. I happen to be looking at that.
2 Q. This is going to be on a spreadsheet that is probably
3 going to have to be put up on a screen. So the Opus
4 reference is {G1/56/1} and I say with trepidation we're
5 going to have to look at some rows in a spreadsheet to
6 find your confidence interval and show that this clears
7 it.
8 So if we can go to row 87 in this spreadsheet.
9 All right, this fills me with terror. I hate
10 spreadsheets.
11 A. Me too.
12 Q. But I think we can do it if we do it together.
13 A. We'll support each other.
14 Q. There we go.
15 So as we can see from columns C and D, I'm right to
16 understand, am I, that you set the confidence interval
17 at approximately plus or minus 3.3% excess returns for
18 SC&T; have I understood that correctly?
19 A. Can we go to the —
20 Q. Can we go to the top so we can see the headings. That
21 would be fair enough.
22 A. I'm not going to ask you to hide the intervening rows.
23 Q. I wouldn't know how to do that. I'm not driving the
24 cursor anyway.
25 A. It's quite easy actually. I can tell whoever is doing
[Page 146]
1 Q. But you didn't consider the market movement on this date
2 in your event study, did you?
3 A. Let me go back. We need to be precise.
4 Q. Yes.
5 A. So the date is 24th of —
6 Q. June.
7 A. — June, and I don't see that in table 5.
8 So I think the answer to your question, unless I'm
9 over-simplifying, is, no, I didn't.
10 Q. Now, at paragraph 164 of your first report, which is on
11 Opus reference {G1/1/76}, which is internal page 72 of
12 the report, you reference the SK merger which in that
13 paragraph you describe as occurring almost
14 simultaneously with the SC&T and Cheil merger, and
15 indeed it was. It was happening on 24 June.
16 A. If you'll give me a moment —
17 Q. Yes, sorry.
18 A. Because having — I mean, like you, spreadsheets take up
19 quite a lot of my brain. So I have now got to clear
20 that memory —
21 Q. Understood.
22 A. — and return to normal thinking processes, if you don't
23 mind.
24 Okay, so 164 we're talking about?
25 Q. Yes. There's a reference there to the SK merger, and
[Page 148]
1 as a comparable company.
2 Q. Right. But you didn't include the date of the NPS vote
3 on that merger in your event study?
4 A. Absolutely true.
5 Q. Okay. But you accept — or do you accept — that the
6 NPS's vote on the SK merger would have been understood
7 by the market to increase the likelihood that the NPS
8 would vote against the SC&T-Cheil merger?
9 A. Again, there are double negatives and things in my
10 brain, but I think what you're saying is had I done —
11 what would happen to table 5 if I added an extra row.
12 Q. Yes.
13 A. And that extra row related to the — remind me of the
14 event.
15 Q. 24 June.
16 A. 24 June on which — could you remind me, the NPS —
17 Q. The NPS voted against the SK merger.
18 A. Voted against SK. So voting against SK on 24 June might
19 be taken to be relevant for SCT and therefore might be
20 grounds for having another row in my table 5.
21 Q. That is the suggestion.
22 A. Might be, yes. You know, on the hoof, I'm — I have to
23 think about it some more, but let's say it could be
24 included in table 5. Then I think you've said to me
25 that if I did include it in table 5 — and again, there
[Page 150]
1 your event study.
2 A. Well, I mean, I picked some events that I thought were
3 clearly relevant, and I agree that there may be other
4 events that were clearly relevant which I didn't think
5 of putting in. You've suggested one of them. I would
6 have to think some more about whether it's right to put
7 it in or whether there's some other stuff going on.
8 I mean, you've made a sensible argument. I'd have
9 to consider that in more than five minutes, I think.
10 But if I did put it into table 5, then it would pass in
11 the first test column and we don't know what it's going
12 to do in the second test column because you don't want
13 to look at that. So absolutely, we agree, I think, on
14 all that.
15 Q. Right. Can we move on to another event, which is the
16 10 July leak of the NPS's decision to reject the SK
17 merger precedent and vote in favour of the Cheil/SC&T
18 merger.
19 Now, on your test this disclosure should have led to
20 the share price of SC&T declining, whereas in fact on
21 your analysis the share price increased; yes?
22 If we go back to — if I can get the right page in
23 front of me.
24 A. So on 10 July people found out that NPS was going to
25 back the merger and that should increase the probability
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1 we have a very small increase in SC&T share price up by
2 just under 1%.
3 A. Instead of 1.3.
4 Q. But that's within the range of statistical or not
5 statistically significant, according to your parameters;
6 correct?
7 A. Okay.
8 Q. So each —
9 A. So we can change — I mean, if you're right, and if,
10 etc — I would have to do more checks, but for this row,
11 10 July, we can change — there are two fails ending in
12 a joint test to fail. We can change the first fail to
13 a pass. The second one is still a fail and the joint
14 test is still a fail, unless you're going to tell me
15 about Cheil.
16 Q. And we could add an event that would also be a pass?
17 A. No, because if we added the Monday, we would also have
18 to look at — sorry, the Monday —
19 Well, no, no. Sorry, we would have to check what
20 Cheil did on the Monday. So I've got 2% here, but
21 you're telling me that's the Friday and it should have
22 been Monday. So what we need to do is look at what
23 Cheil did on the Monday. Perhaps you've done that.
24 Q. I think the general point I'm putting to you is that the
25 market reaction to news that made the merger more likely
[Page 154]
1 MS SNODGRASS: I think so.
2 THE PRESIDENT: We break for 15 minutes until 15.35.
3 (3.20 pm)
4 (A short break)
5 (3.35 pm)
6 THE PRESIDENT: Let's go on, Ms Snodgrass.
7 MS SNODGRASS: Thank you.
8 So at the end of our last session you were asking
9 about the Cheil position in relation to your event
10 study. I just wanted to pick up on that.
11 So for test 2, market movements in Cheil's share
12 price, you set a confidence interval of plus or minus
13 6.8%, which I can show you {G1/56/1}, we can share that
14 on the screen, which is another spreadsheet, Output 3.
15 If you scroll up and look at the headings.
16 A. 6.8%.
17 Q. Yes. Sorry, plus or minus 6.8%. I might have said that
18 wrong.
19 If we scroll down to rows 68 through 80 -- I don't
20 know if we can see all of those on one screen — we see
21 that for all of the event dates that you have selected
22 except for the first, the merger announcement date, all
23 of those dates are within that confidence interval,
24 aren't they?
25 So the first date, the merger announcement date?
[Page 156]
1 say I'm personally grateful for that.
2 A. I'm glad we went back to it.
3 Q. Very good.
4 Now, I understand that in your second report you did
5 not express an opinion concerning what the impact of
6 SC&T shareholders rejecting the merger at the
7 extraordinary general meeting would have been on the
8 SC&T share price; correct?
9 I can say that again.
10 A. Yes, please.
11 Q. In your second report you did not express an opinion
12 concerning what the impact of SC&T's shareholders
13 rejecting the merger would have been on the SC&T share
14 price. You were agnostic about that.
15 A. Well, today I said I don't think it would have made much
16 difference.
17 Q. But in your second report, which was my question?
18 A. Yes. I said I was agnostic, meaning — I guess I meant
19 I didn't really see what evidence there was one way or
20 another, and therefore I was agnostic about which way it
21 would have gone.
22 Q. But we've just seen that when events occurred that made
23 the merger less likely to proceed, SC&T's share price
24 increased?
25 A. I don't see that because my table 5 shows the contrary
[Page 157]
and you have asked me — you have questioned some of the numbers and results in table 5, but — and again, we didn't keep a score card, but from memory there were certainly some of the points you made which I did not accept, and I think there was, from memory again, there was one of the points you made when I did accept, you said it had been — the leak had happened after 3 pm, and therefore one would have to look at 11 July; is that right?
And I actually don't recall whether you took me to the spreadsheet of 11 July, but perhaps you did, and if so, the transcript will show whether I ended up saying it was significant or not.
Q. So you don't accept that there's evidence that when events occurred that made the merger less likely to proceed, SC&T's share price increased?
A. There doesn't seem to be much evidence because on the face of it, if you change a couple of rows in table 5, it wouldn't provide strong evidence to the contrary of what I'm asserting in that section.
Correct me if I am wrong on that.
Q. Could you turn back with me to exhibit C-53 {C/53/1}, which is at tab 5 in the bundle you have in front of you. This is the Seoul High Court decision in the appraisal price litigation, which we've looked at
[Page 158]
before.
A. Yes.
Q. If you turn to page 17 of that, which is {C/53/17} Opus reference. We've got an analysis there that's endorsed by the court of Hanhwa Investment & Securities dated June 15, 2015, carrying over from 17 to 18. The analysis is actually on the top of 18. It says:
"If this merger were to fail, we recommend a hold strategy for the Former SC&T shareholders. The appeal of the undervaluation of the Former SC&T will gain attention, thus leading to normalisation of share prices. It appears that the potential upturn in share price will reach 40%."
Do you see that?
A. I do see that.
Q. Let's also turn, please —
A. Let me just comment.
Q. There wasn't actually a question.
A. A hold strategy — a hold strategy —
Q. There actually wasn't a question, Professor Dow.
A. Well, I do have to comment because a hold strategy is notoriously analyst-speak for not a very good thing to hold.
Q. Shall we turn to exhibit C-510, please. That's at tab 15. {C/510/1}.
[Page 159]
A. I'm there.
Q. So this is the testimony of a Mr [Redacted] who is a member of the NPS research team, who prepared the meeting materials for the NPS Investment Committee meeting on 10 July 2015. This is his testimony to the Seoul Central District Court.
If you could turn to page 15 of that testimony, {C/510/12} is the Opus reference, and let me find where it is on the document. At the bottom of the page, the answer at the bottom of the page, Mr [Redacted] explains that [Redacted] [Redacted] [Redacted] And [Redacted] he explained was that [Redacted] [Redacted] [Redacted] [Redacted] [Redacted] [Redacted] Do you see that?
A. I do.
Q. Now, these observations parallel the conclusion reached
[Page 160]
by Mr Boulton on the basis of his analysis that once the threat of the predatory merger, or the merger if you don't like the term "predatory", is removed, the share price would rise, and rise significantly, don't they?
A. These analysts say the share price would have gone up a lot, and that is also what Mr Boulton thinks, and Mr Boulton indeed looked to the skyrocket man for support for his thesis.
Q. So just to be clear, the skyrocket man is not an analyst. He's a member of the research team of the share management division at the NPS. Does that change your opinion of his analysis at all?
A. Well, I don't think the tribunal should — I mean, the short answer is no, but I think the better answer is I don't think the tribunal should look to me for a prediction of what would have happened in the counterfactual, because the tribunal has already heard about this skyrocket report, so there's nothing new there.
Does it change my mind? Not really.
Would rejection have led to an increase in the SC&T share price? I argued in my presentation this morning that I don't really think so, but — and I gave the argument to support that that the corporate governance structure of Samsung is unfavourable and that SC&T
[Page 161]
independent simply I don't think would have changed that overnight. I just don't think would.
But I think I have seen the same evidence that the tribunal has seen at this point. I don't think I can add anything more to what I have already shown to the tribunal or what the tribunal has heard in learning from this report.
So I don't want to add anything to what has already been said because I think I have said it all already.
Q. So it's not clear to me whether you are in fact agnostic and don't have a view, or you're offering halfway conclusions as to what would be likely to happen with the share price?
A. Okay. So —
Q. So can you clarify?
A. Yes, I would love to.
So when I spoke about discounts in my presentation this morning, I did that glass analogy and the coin in the glass, and I said that there's always an unexplained residual. I gave the example of Shell.
One can never be too confident in predicting what share prices will do. So an analyst predicts — I appreciate that he is not a sell side analyst but a member of the NPS team. Somebody predicts that, you know, [Redacted]
[Page 162]
That's a prediction. That's what that person thinks is going to happen. Share prices are notoriously hard to predict. And I don't like to say for sure what I think is going to happen because I know that I will be wrong a lot of the time if I make such predictions.
If I was a hedge fund manager, perhaps I would take a more relaxed view. I would make predictions, I would be happy to trade on those predictions and, you know, some of them would be wrong, some of them would be right, and that would be fine.
But as I am here before the tribunal, I think I have to give a quantification of how precise any predictions I might make would be, and anybody who tells you that they know what the share price is going to do tomorrow, and they know this for sure, is not being realistic.
Somebody can express an opinion about what they think the share price is going to do tomorrow. They might be right; they might be wrong.
Likewise, what would have happened to the share price in a counterfactual, anybody who tells you that they have a clear picture of what would have happened is not being realistic. They can tell you their idea.
They might be right; they might be wrong.
In that sense I'm agnostic.
There's also a sense in which I think it wouldn't
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have changed very much on balance of probabilities. And that's because Mr Boulton's discount, which he triangulates or supports with the rocket man, is an implausible discount. 15%, which is the bigger of his range, he says 5-15, 15% is already what Elliott says should be in the discount just for an allowance for tax.
So when Mr Boulton says only 5-15% would be left, even if we took the 15%, as opposed to the 10% which he ends up using, even if we took his 15%, then we would be saying SC&T would have traded the very next day at no discount apart from the tax liability — I don't think that is at all plausible.
That's what I have to say.
Q. So, Professor Dow, you're agnostic but you do have opinions about what is likely to happen, and if I can, I will take to you one of the opinions you express in your second report, where you suggest, and this is at paragraph 172(c) of your second report {G3/1/80}, that the reason you don't think — one of the reasons you don't think the discount would be ameliorated if the merger were rejected is, you say:
"Because the threat of future predatory transactions is not cured by the Merger rejection ..."
Is that right?
A. Correct. That's my Borgia family tree.
[Page 164]
Q. And you go on and you say in the paragraph above that that's because, or another reason is because after the merger SC&T would also continue to have been controlled by the [Redacted] family; is that right?
A. Could you give me the quote?
Q. Paragraph 172(b), the second sentence:
"Since SC&T would also continue to have been controlled by the [Redacted] family, this is another reason that Mr Boulton QC should have included the risk of such predatory transactions in his SC&T Holding Company Discount."
A. Yes, Mr Boulton says that, and actually in my presentation this morning I made the point that it would not actually have been control, because there's a difference between having a two-thirds majority in favour of the merger and having a simple majority and, indeed, having a two-thirds majority in favour of other restructurings.
So my second sentence of 172, paragraph (b), where I say "Since", I should have said:
"Since, according to Mr Boulton, ..."
And then the sentence as it stands. Thank you for bringing that to my attention.
Q. Sorry, let me make sure I understand what you're suggesting.
[Page 165]
You're suggesting that Mr Boulton considered that SC&T would continue to have been controlled by the [Redacted] family?
A. Am I wrong?:
"Mr Boulton QC states that 'in the Counterfactual Scenario, Cheil would continue to have been controlled by the [Redacted] family' ..."
Q. Yes, Cheil.
A. Oh, sorry, sorry, sorry:
"Since SC&T would also continue to have been controlled by the [Redacted] family ..."
Forgive me, I read Mr Boulton's quote wrong:
"Since SC&T would also continue to have been controlled by the [Redacted] family ..."
Yes, that is what I say in 172(b).
Q. So you're making a contention there that after the merger SC&T would also continue to have been controlled by the [Redacted] family; yes?
A. No, in the counterfactual, I think, we're talking about?
Q. Yes, yes.
A. So in the counterfactual I am saying that SC&T would continue to have been controlled by the [Redacted] family.
Q. So you accept, I think, that together the [Redacted] family and Samsung affiliates did not have enough shareholder votes to approve the merger on their own; right?
[Page 166]
A. Yes, although I do make an argument that in my second report, I do make an argument that had they known that there was pushback from — had there been pushback from NPS, had they been unable to control NPS, they might have expended more energy elsewhere.
Q. But you appreciate that that's a question of factual evidence and what would have happened on the basis of information about the Korean economy and political economy that's outside of your expertise?
A. I do, and I drew that possibility to the attention of the tribunal. I don't want to say that that is a strong argument, but simply drawing attention to that.
Q. Okay.
You also agree, I think, that if the NPS had abstained, had not attended the EGM, and everything else had been the same, Samsung and the [Redacted] family would not have had the votes for the merger to carry; is that correct?
A. Correct. It would have been more than 50%, I think, but less than two-thirds.
Q. And so you would agree that if all the other shareholders had acted the same way, but the NPS alone had acted differently, minority shareholders would have had negative control of the company, or at least sufficient negative control to prevent the merger from
[Page 167]
proceeding, wouldn't they?
A. Well, indeed. If they had — if the merger had — yes. If the merger had been prevented, then they would have prevented it from proceeding, I think you just asked me. Or did you say something different?
Q. No, I think — I think you've answered the question I asked.
So when you say that SC&T, in the counterfactual, SC&T would also continue to have been controlled by the [Redacted] family, you can't have meant that they had sufficient —
A. Two-thirds majority.
Q. -- control to force through a transaction like the merger, can you?
A. Well, you are saying if the merger was rejected once, it must have been rejected always. Or you're suggesting to me.
Q. No, I'm asking the question I asked.
A. Well, I say if the merger was rejected once, it might have been accepted another time.
Q. I asked: when you say that SC&T, in the counterfactual, SC&T would also continue to have been controlled by the [Redacted] family, you can't have meant that they had sufficient control to force through a predatory transaction like the merger, can you?
[Page 168]
A. Well, I just said they might have been able to. They might have been able to bring up a merger. I don't want to say it's a predatory transaction because I don't think it was, but they might have been able to bring forth further mergers and that might have been successful.
Q. But a merger that was equally damaging to the very same minority shareholders that had voted no to this merger, you would accept that the risk of that merger being accepted by the very same group of minority shareholders, the very next day, was substantially reduced, wouldn't you?
A. Well, I don't think the very next day is a plausible counterfactual. But possibly a year later, who knows.
Q. Within the near term?
A. Frankly, had it been rejected on May — sorry.
Q. Within a period of time —
A. June 17, I believe was the date.
Q. Within a period of time that this information would have been instantaneously incorporated in the market price.
A. I'm sorry, I think I haven't answered your previous question and now you're asking me another question.
Q. Well —
A. So you said would it have been plausible — could you repeat your question, please?
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Q. I'm asking: would it have been plausible to think that a group of minority shareholders who had rejected a merger on these terms, because it was disadvantageous to them, would, in the near term, by which I mean a period of time short enough to be instantaneously reflected in the share price, turn around and approve a merger that was equally damaging to their interests? Is that plausible?
A. Well, I don't understand that question because the merger vote was on — you will correct me if I'm wrong — 17 July.
Q. That's correct.
A. The Wednesday. And you are saying: and according to Mr Boulton and me, whatever reaction would have happened would have taken place on the — well, Mr Boulton I'm not sure, but I certainly think it should have taken place by the Thursday morning, the 19th —
MR TURNER: Sorry, can I just interrupt for one second. I looked this up because my learned friend said that the 10th was a Friday, which meant that the following week when we had been talking about Wednesdays couldn't be right, and so I looked it up and the valuation date, the 16th, is a Thursday, and the 17th is a Friday.
I'm sure this doesn't change anybody's evidence, but I just felt we should be talking about the right day of
[Page 170]
the week if we're talking about them at all.
THE PRESIDENT: It's on record now.
A. I stand corrected. I am very sorry to have introduced confusion, because I had looked it up and I must have got it wrong.
So. Friday, the merger vote. Whether Friday evening or Monday morning, the reaction to the merger vote. You are surely not asking me: what if there had been another proposal on the same Friday or over the weekend?
MS SNODGRASS: No, I'm actually putting to you that it's implausible to think there would have been one.
A. It absolutely would have been very implausible that there would have been one over the weekend.
Q. And then I'm putting it to you that there would have been a reaction in the market price, a positive reaction in the market price. The bad news, a merger that is detrimental to the interests of SC&T shareholders, is not going to happen. My suggestion is that would be reflected in the SC&T share price?
A. Well, I don't agree that it would have been — sorry. Could I see the transcript, please?
Your question is premised on the following statement:
"The bad news, a merger that is detrimental to the
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interests of SC&T shareholders, is not going to happen."
And you then asked:
"My suggestion is that would be reflected in the SC&T share price?"
Here is my answer to your question.
I don't accept your premise because, as you know, that's not my view of the transaction.
Nevertheless, in response to the question, would whatever reaction was going to happen be reflected in the SC&T share price, obviously yes, Mr Boulton and I agree it would take place quickly.
Q. Can I just ask one follow-up on that. You don't accept that the risk of the merger was reflected in the SC&T share price? I thought we'd established before lunch or before our break that you did?
A. Whatever risk it posed —
Q. Was priced in?
A. Whatever risk it posed. That doesn't mean I think it was a negative. It means whatever risk it posed was priced in.
Q. So whatever risk it posed was priced in?
A. Yes.
Q. When that risk, whatever it was, doesn't materialise, that is also priced in?
A. Yes, absolutely.
[Page 172]
Q. Instantaneously?
A. Well, absolutely.
Q. Okay.
A. But if the bad thing — if the thing that is revealed not to happen — not to be going to happen is not such a bad thing, then we don't see the skyrocket.
Q. Right. I understand your evidence on that. Thank you.
Okay. I want to turn now to the issue of the discount —
A. Yes.
Q. — which Mr Boulton applies.
A. This is the key issue actually.
Q. Now, you heard Mr Boulton's evidence yesterday. So you heard him explain what this residual holding company discount is and how it was calculated; yes?
A. Yes.
Q. You therefore also heard him explain that a general Korea discount is incorporated into his sum of the parts valuation by virtue of the fact that he uses Korean market prices and Korean comparables for components of that sum of the parts valuation, and I'm happy to put a transcript reference —
A. No, no, I'll clarify that what is meant, I think, by a Korea discount there is that — I mean the proximity with North Korea was mentioned and therefore I think
[Page 173]
it's not a doubt in this arbitration that the multiples of a Korean company in South Korea could be lower than the multiples of companies somewhere else.
And that is nothing to do with the holding company structure. That would be true of any company that has nothing to do with a Chaebol. Apparently that is the case.
Q. I think I would prefer to put the excerpt of the transcript up because I don't think Mr Boulton was speaking about a general Korea discount in such narrow terms.
Just so we're all on the same page, could we have transcript {Day7/178:6} through {Day7/179:4}. I don't mean to linger over this point, but I don't think he was defining the Korea discount in such a narrow way.
A. Which line do we wish to look at?
Q. If we start at line 6 on page 178, he says:
"... I've already reflected a Korea discount in the way that I have valued the sum of the parts.
"So, two examples. I value the trading companies by reference to comparables in Korea. To the extent that those comparables are already subject to the Korea discount, that's in my comparable, it's in my sum of the parts valuation.
"I have valued the listed investments by reference
[Page 174]
to their market prices. To the extent that those listed prices are affected by the Korea discount, they are lower.
"And therefore my sum of the parts valuation builds in the Korea discount."
He's not there referring to the geopolitical Korea risk. He is referring to whatever Korea risk there is reflected in market prices in Korea; correct?
A. I guess he's referring to the valuation ratios, the multiples, that any company in Korea would have which is not part of a Chaebol. And separate from complications that arise if it is in a Chaebol.
And you're quite right that the geopolitical risk is perhaps only one of those risks.
Q. I don't think that's fair. I don't think he is separating out complications that arise if it's in a Chaebol. I think he takes those entities as he finds them. Takes the market price of those entities as he finds them. I think that is the point that he's making, actually.
A. I think that's — I think I can take that point and then it's nevertheless true that — yes, I think that's fair. I think that's fair.
Q. So I wanted to turn, if we could, please, to paragraph 46 of your second expert report {G3/1/23},
[Page 175]
which summarises arguments that you make in support of the argument that the discount Mr Boulton applies is too low.
A. Yes.
Q. By reference to a number of comparisons. Let me just catch up with myself here.
A. But I would like to point out, even if the companies in the sum of the parts are themselves depressed by a holding company discount, which he calls the Korea discount, it is still going to be true that once you put those pieces inside a holding company themselves, there could well be a further holding company discount, as I call it, not in the narrow sense that he defines it.
Q. So looking at paragraph 46 of your second report?
A. Yes.
Q. You identify, and also over the next page, you've got Figure 7, which depicts a number of these comparisons —
A. Yes.
Q. — that you draw as support for the argument that the discount that Mr Boulton applies is too low.
A. Yes.
Q. And the first comparison you draw is in text in paragraph 46(a) and in the Figure it's the first two bars.
You point out that EALP's NAV calculations in the
[Page 176]
period 2007 to 2014 range from a premium of 25.8 to a discount of 34.3.
A. Correct.
Q. Now, you would agree that the average of those figures would yield a discount of 8.65%; correct?
A. I haven't done the maths, but while a straight average of those two numbers might yield a discount of 8.65%, I refer to you my presentation this morning where I showed the time series of the discount of SC&T and you will see, you will recall no doubt from that — the tribunal will recall no doubt from that time series that SC&T has usually been at a discount, and sometimes been at a premium. And so if you ask me what was the average, and I don't think I have done a calculation — in fact I know I haven't — but it's clear that if you took the average, it would be a lot less than the straight average of 34.3 negative, and 25.8 positive.
Q. That sounds a lot like a point that Mr Boulton was making, that a simple average isn't necessarily that informative, unless you know what's driving a particular discount or a premium at a given time.
But let's look at —
A. That is a different point. I'm just saying if you take an average, you have to take the correct average.
Q. Let's look at paragraph 46(b) and the next two bars in
[Page 177]
Figure 7 {G3/1/24}, where you point to EALP's NAV calculations from November 2014 to February 2015, and I'm using round figures, they range between 33 and 45%.
A. As I say in that paragraph.
Q. The first question that I wanted to put to you about this comparison is that you understand that Elliott's NAV calculation included all discounts, any and all of a holding company discount, a generalised Korea discount, specific pressure on the share price that was exerted from time to time by any number of factors. So it didn't seek to disaggregate any components of the discount, right; it just measured a total discount?
A. The only person who has tried to decompose the discounts, I believe, is Mr Boulton, and to some extent myself.
Q. So I'm asking you, in what way then is this a fair comparison to Mr Boulton's analysis of the excess discount in which he has disaggregated, or sought to, the specific risk of the predatory merger and where he deals with the Korea discount in the sum of the parts analysis?
A. Well, this picture shows very clearly that Korean companies don't trade — taken in the round, this evidence confirms my view that Korean companies simply don't trade at 10% discounts to net asset value.
[Page 178]
Let's look at that. Every bar is below and if we took the weighted average of the first two bars — every bar is below except for the first two bars, and if we took the weighted average of the minimum and the maximum, with weighting according to how much time was spent, in other words weighting of that picture I showed you this morning, I have no doubt that would also lie below.
So my point is discounts of 5-15% never happen in Korea.
Now, therefore I think that supports the view that they weren't at all likely to happen following a counterfactual merger rejection. And I strengthen that view by noting that Elliott has estimated the tax liability — none of these analysts, as Mr Boulton yesterday, break out separately tax and other, except Elliott does so. But the tax liability, according to Elliott, is 15% — I think it was 14.7 — which is of course bigger than the 10% that Mr Boulton uses.
So I say that the evidence in this picture tells me that 10% is implausible, and particularly when one views that an allowance for tax would already outweigh the 10%.
Q. I don't think you answered my question, Professor Dow. The question I was asking you was not about this whole
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picture. The question I was asking you was about the third and fourth bars in this picture. And the question I was asking you was: do you understand that the discount depicted in that picture incorporates a number of different discounts, and that the discount to which you are comparing it and saying, look, this shows Mr Boulton's discount is too small, is only part of the discount that is depicted in those bars? That's the question I'm putting to you.
A. I think I did answer that question, because —
Q. I'm sorry, I didn't hear an answer to my question.
A. Maybe we can check the transcript.
I believe I started out by saying that the only person who has attempted a decomposition of the total discount in these proceedings is Mr Boulton and to some extent myself.
Q. So you accept — well, so then you accept that it's not a fair comparison, or it's not an exact comparison at the least, between the two bars here and the discount to which you are comparing it, Mr Boulton's residual holding company discount?
A. No. I'm saying that Mr Boulton's claimed 10% simply doesn't look plausible at all in light of the fact that it's smaller than any other experience in Korea.
Now, if you want to make the point that the
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counterfactual is something that's never been seen before, and therefore evidence of what has happened is not relevant anyway, well, I don't know what to say.
Q. The point I was making is that aspects of the discount are reflected elsewhere in Mr Boulton's analysis, but I think I have already made that point.
Can we turn to the third comparison that you draw and paragraph 46(c), the fifth and sixth bars in Figure 7.
A. Yes.
Q. You point to the selling levels in the trading plans in place from time to time for the Claimant.
A. Yes.
Q. And you describe those in paragraph 46(c) as "implied estimates of SC&T's expected long-term holding company discounts". That's a quotation.
A. Yes. That is a quotation.
Q. Now, the words "implied estimates" were no doubt carefully chosen, Professor Dow, because of course the words "holding company discount" doesn't appear anywhere on Elliott's trading plans, do they?
A. If — no, but it's implied. I think it's a very good implication. I could explain if you would like?
Q. Well, no, I think I'll ask you. In fact it was put to Mr Smith in cross-examination last week that in
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calculating their NAV estimates, Elliott did not in fact even apply a holding company discount properly so-called; isn't that right?
A. Discounts — I'm sorry, discounts are discounts. What are you saying they should have done?
Q. Well, we see Mr Smith explaining what they did do in evidence, which was on {Day3/44:1-9}.
A. But, correct me if I am wrong, when somebody computes the NAV discount, they simply look at the NAV and they look at the share price and the NAV discount is a gap between the NAV and the share price. And that is of course what Elliott did.
Q. Yes, and that discount will incorporate, as I said at the outset of this discussion, any number of discounts, not necessarily a holding company discount?
A. Well, a holding company discount, as you define it, is the discount that would apply in the counterfactual. I think we agree on that.
Q. I think we're in the situation where our labelling is obscuring clarity. But I think what you are criticising Mr Boulton for is a level of discount that is too low in circumstances where Mr Boulton has deliberately tried to exclude from the discount elements that Elliott understandably and intentionally did include, and I'm pointing out that that's an unfair comparison.
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A. No, it's a fair comparison, because Mr Boulton says that he thinks the discount would have gone down to 10%, and Elliott trading plan shows that Elliott were planning to completely close out their positions at discounts far in excess of 10%, and therefore implicitly they did not hold the view that the share price was going to immediately jump to 10% discount.
Q. Did you hear —
A. Implicitly they held the view that the share price would presumably have narrowed, but not to 10%.
Q. Did you hear the evidence of Mr Smith or did you read the evidence of Mr Smith?
A. Yes, I did. I watched on Zoom, I read some and I saw him in person on Monday this week.
Q. So you heard his evidence or read his evidence about the significance of the unwind part of the —
A. Yes.
Q. — trading plans?
A. He said they don't matter at all.
Q. And there's no evidence in the record that the reference to 20% in one version of the trading plan or the reference to 27.5% in another reflected a view on what the holding company discount or any other discount was likely to be over time?
A. Well, I didn't really know what to make of Mr Smith's
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evidence because one way of interpreting it would be that the unwind plan — unwind part of the plan was something they never did, and was never part of any calculation and never formed a basis for any of Elliott's decision-making.
If that is the case, what can I say? I simply invite the tribunal to form their own opinion on whether the unwind part of the trading plan contained any information or not.
If, as Mr Smith said, it was not very informative, then no doubt the tribunal will apply a suitable degree of scepticism or put less weight on my Figure 7 green and purple bars, which are indeed extracted from the Elliott trading plan.
So I took them from the Elliott trading plan, but if Mr Smith says that doesn't mean anything at all, or doesn't mean very much, and if the tribunal thinks that's the correct interpretation, then obviously the tribunal will put less weight on those bars.
Q. Are you in a position to give any evidence on the meaning of the trading plans?
A. Well, when I saw the trading plans I thought they must mean something, because otherwise what were they doing there.
Q. And we now have Mr Smith's evidence as to what they were
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doing there.
A. Mr Smith's evidence, I don't really understand it, but he said there's no point in even having that unwind, effectively, because it doesn't mean anything. So if the tribunal feels that that's the correct interpretation of the trading plans, as I have said, they will interpret them accordingly.
Q. So finally in paragraph 46(d), and the final two bars in Figure 7. {G3/1/24}
A. Yes.
Q. You refer to the average and median net asset value discounts for the Korean holding companies referred to in Mr Boulton's report?
A. I do.
Q. Mr Boulton had responded to your first report's analysis of two Korean holding companies by identifying additional firms in his analysis; yes?
A. If you say so, yes.
Q. And he noted that holding company discounts, including in this broader sample, are occasionally holding company premiums?
A. He does.
Q. And he had found a median and a mean of 35% and 15% from his expanded sample. Is that ...?
A. The numbers sound right because the 35 is close to 39,
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and the 15 is close to his upper bound on what he calls the holding company discount.
Q. But your calculations excluded some of those companies, namely —
A. Correct.
Q. — those that traded at a premium?
A. Correct.
Q. And arrive at a different mean and a different median?
A. As noted in footnote 57.
Q. Why did you exclude companies that trade at a premium?
A. Okay. I thought they were anomalous, first reason.
Second reason, I think the median is probably a more robust guide, and so in circumstances where the mean and median diverge significantly, it can be useful to revisit the analysis, possibly — this is an indication of outliers — possibly remove the outliers or possibly remove — possibly rely simply on the median.
Now, Mr Boulton, I would like to make clear, gave testimony yesterday that he agrees with that view. He prefers the median. I believe we can bring up his testimony if need be. And also, if one looks — I invite the tribunal to consult Mr Boulton's first report, section 5, where in analysing multiples, he repeatedly follows a process of discarding data where the median and mean are different, and of preferring the
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median to the mean.
Following that process, therefore, one would do what I have done, but even if we include the discarded companies, then, as Ms Snodgrass has just pointed out, the median in Mr Boulton's full sample, 35-point-something, if I recall correctly, is very close to the median that we see in the truncated sample, 39.
So while I think it's appropriate to throw out those anomalous cases of premiums, the tribunal doesn't have to agree with me. The tribunal can take the full sample, applying the median, which both Mr Boulton and I agree is the more appropriate of the two — Mr Boulton said so yesterday, and it's also what he does in his report and the median then would be 35, I think you said, Ms Snodgrass, instead of 39.
Q. Did you investigate why the companies that you treated as anomalous were trading at premiums?
A. No. For that matter, nor does Mr Boulton investigate why the companies he discards in his multiples analysis were discarded, or —
Q. Did you consider that they might be part of a merger couple, for lack of a better word, that one might be benefiting from a premium in anticipation of benefiting from a tunneling merger, for lack of a better description, and the other suffering from a discount for
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the same reason?
A. No, I did not.
Q. And you —
A. But I don't believe in tunneling mergers, so, as in Korea we know they are prohibited by law because of the very good rule that market prices set the merger ratio.
Q. Right.
In your reports, Professor Dow, you express scepticism about the prospects for shareholder activism meaningfully to mitigate what you describe in your first report as the persistent perceived discount which is based on various legitimate factors. This is at paragraph 60 of your first report which is {G1/1/75}.
A. Paragraph 60 of my first report?
Q. Yes. Let me get that in front of me as well. I am actually going to go to another paragraph in your second report where you express a similar sentiment.
In paragraph 71 of your second report, which is at {G3/1/33}, you argue that the discount that's attributable to, among other things, Chaebol's convoluted share structure is too deep-rooted to be mitigated by an activist campaign; is that right?
A. Are we reading from paragraph 71?
Q. Let me look. Yes, I'm looking at second report, paragraph 71. {G3/1/33}
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MR TURNER: But you're not suggesting, Ms Snodgrass, that you're reading from it in the question that you've just put?
MS SNODGRASS: No, I'm referring to "deep-rooted structural reasons for the NAV discount in Korea". That is paragraph 71 of your second report:
"These include, but are not limited to, 'rational concern that the controlling families could use the company's funds for the benefits of their private interests at the expense of outside minority investors'."
A. I think I can agree with that.
Q. So if you could turn to exhibit R-61 at tab 26 of the bundle. Have you had a chance to review this document before, Professor? {R/61/1}.
A. I think I have quite recently seen it.
Q. Yes, you might recall it because it featured in the Respondent's opening submissions in this arbitration, so you might have seen it last week.
It's an internal NPS document that was prepared in May 2014, titled "Review of the Possibility of Corporate Governance Reform of Major Groups". Do you see that there at the top of the page?
In this document the ROK considers a series of case studies regarding corporate reform in Korea and the
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impact on share prices that such reform has had and could have had.
I would ask you if you would, please, to turn to page 5, which is the same reference on the Opus transcript {R/61/5}.
MR TURNER: Sorry, just for the transcript, it's a slip of the tongue by my learned friend. We agree this is a document, unless anybody is going to take this against me for not having raised the point, we agree this is a document produced by the NPS. We do not agree it was produced by the ROK in any sense other than produced in these proceedings. Lest I be taken to give our attribution argument away by not challenging that no doubt inadvertent remark by my learned friend.
MS SNODGRASS: I'm not that subtle, Mr Turner.
Understood.
So if you could look at the table in the middle of page 5, please. It's an example relating to the creation of a holding company in the SK Group; correct?
A. Yes.
Q. And you see that there are three columns in the table; correct?
A. I do.
Q. And in the second column there are two subcolumns. The second column, "SK Group's Combined Market
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Capitalisation" has two subcolumns, "Absolute Return" and "Relative Return"?
A. Yes.
Q. And the third column under "KOSPI", we again see "Absolute Return", and we say that the third column — if I'm reading this correctly — is the difference between the absolute return and relative return columns; correct?
A. Let me check.
(Pause).
Correct.
Q. So I understand this to be a calculation of SK Group's combined market capitalisation against the performance of the KOSPI over the same period?
A. So do I.
Q. So could you read the second row, the far left cell that begins "3 months after transition to the holding company".
A. Absolute return?
Q. Yes.
A. 142.5. Relative, 98.3. Absolute return on the KOSPI, 44.2.
Q. So we see an example of what the NPS in the text paragraphs above the table describes, at the second dashed bullet point, as a "surge in enterprise value",
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in response to a corporate restructuring; correct?
A. I disagree.
Q. You disagree?
A. Yes. Could you show me where they say that?
Q. They say that in the text that begins:
"SK Group's market capitalisation, which stood at about KRW 11.9 trillion 3 months prior to the transition into the holding company, recorded about KRW 21.8 trillion after the transition, showing a surge in enterprise value."
A. I missed — I believe you said something about in response to an event. Maybe we could look at the transcript?
Q. So I said: here is an example of what the NPS describes as a "surge in enterprise value", in response to a corporate restructuring; correct? And you said —
A. Sorry, your question originally said a "'surge in enterprise value', in response to a corporate restructuring".
Q. That's what my sentence was.
A. And I disagreed with that. And now you are saying again, "'a surge in enterprise value', in response to a corporate restructuring".
Please show me where the NPS says it was "in response", I quote, "to a corporate restructuring".
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Q. So you're denying the causal connection?
A. Well, I note that you misquoted the report and I suspect that the reason they did not use the wording you used is that it is difficult to attribute cause and effect over a three-month period to a specific event. That is why when we do event studies you will have noticed we look at very short periods of time, and that is why earlier this afternoon we were discussing the few minutes before the close.
So over a three-month period, an event study is notoriously imprecise. It could do still give background information, and I have used such long-term returns in the same way in my report, so it could be useful for background information, but it is a not — a precise estimate of the response to an event.
Q. But for an investor who was holding a share on, I forget what day of the week we decided it was, a Friday?
A. Yes.
Q. Who was expecting information to be instantaneously incorporated into a share price on the Monday, we are talking about a very short period of time, the point you are making about the time horizon is of less significance; yes?
A. We do event studies on short periods because over a very short period, if there's a big movement relative to the
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index, it's very likely to be in response to the event we've isolated. It's unlikely that other significant things would have arrived at exactly that moment, although possible, of course.
Over a longer period such as three months, it's very likely that other significant events would have happened, and therefore the response to the event in question gets confounded with all those other things.
Q. Just give me a minute. (Pause).
So could you turn to paragraph 76 of your second report, please. {G3/1/38}. I'm looking for the sentence.
I think I've got the wrong reference.
(Pause).
I've got the wrong reference in my notes. So I will come back to this point.
Can I ask you just a more open — a point that's not tethered to your report.
Is it fair to say, Professor Dow, that you disagree that Samsung's adoption of the restructuring proposals that have been discussed or were put together by EALP would have predictably released additional value either by reducing the discount or increasing the NAV of SC&T?
A. I think we're really talking about decreasing the discount here. First time I have heard anyone say
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increasing the NAV.
Do I agree that I think in the counterfactual the discount would have sharply reduced? Yes, I have said that I do disagree with that. I have said that I don't think it would have changed very much or at least it would certainly not have changed as much as Mr Boulton said it would.
Q. Okay. So let me just take you to Mr Smith's brief description of the proposal from the transcript, {Day3/85:4-9}. We have Mr Smith explaining what was envisaged in terms of a restructuring. He says at line 4 to 9:
"... importantly step 3 was a merger between three companies, Cheil Industries, Samsung C&T, and the holding company created from the second step to create a sort of top holding company, which step we envisaged to happen on the basis of effectively net asset value."
Do you see that?
A. I do see that.
Q. Could you turn, please, to page 15 of exhibit R-61, which is the one we've been looking at {R/61/15}. This is where the NPS is assessing impact on stock prices of various re-organisation scenarios for the Samsung Group.
A. Mm-hm. Yes.
Q. Scenario 2 involves the conversion of the Samsung Group
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into a holding company structure and it contains a comment section on the right of the table.
The first sentence says:
"In the event of a split of Samsung C&T's shares in Samsung Electronics, the 30-40% discount on the value of Samsung Electronics which is currently given to it is expected to disappear."
So that's the ROK writing about addressing Samsung Electronics' discount —
MR TURNER: Excuse me, sir. It is not the ROK writing about anything at all.
MS SNODGRASS: Apologies. It's the NPS writing about it. On our submission it is the ROK. I appreciate that the ROK takes a different position.
But that is the NPS writing about addressing Samsung Electronics' discount in 2014; right?
A. If you can understand the rest of that box —
Q. I'm not asking you about the rest of that box. I'm asking you about the first sentence.
A. Well, I can't help noticing the rest of that box, and I represent to the tribunal that the rest of that box is a complete mess.
But if you are asking me to note that the first sentence says that the discount will disappear in that scenario, I can't disagree. That is exactly what the
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first sentence says.
Q. So I'm asking: would you accept on this basis that the NPS considered that there were realistic prospects for reforming the Samsung Group and the Chaebols' convoluted share structure that would have reduced the discount and released additional value?
A. Well, given their completely incoherent remainder of the box, I'm not sure what to conclude, but based on the first sentence, that's of course what one would conclude.
Q. So I'm turning now I think to the last topic I wanted to cover with you. And I just wanted to make sure I understand your position concerning the counterfactual scenario.
First I wanted to ask about your correction to paragraph 102 of your second report which was highlighted on slide 3 of your presentation, sorry.
A. Yes.
Q. I guess my question is an open one. What is the significance of the changes you have made to paragraph 102?
A. Thank you. I think the question of counterfactual here — as you've kindly given me an open question I'll take the opportunity to give an open-ended answer.
I think the question of the counterfactual here has
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entered in a slightly odd way because Mr Boulton maintains that the valuation date is 16 July, which I believe I was informed was a Thursday. And in his first report there is no mention of any counterfactual.
In his second report the counterfactual appears and mysteriously it seems to apply on the Thursday, even though the bad act which we're supposed to remove on the Thursday, I don't actually see how that could have affected stock prices on the Thursday, but perhaps people who are more experienced than me in these matters can formulate a view on that. And maybe can make sense of that.
Therefore, the whole question of the counterfactual is sort of slipped in on the second round.
Nevertheless, I know what a counterfactual is and in my second report I think there was a little bit of a tension between wanting to value on the Thursday when I couldn't see how the counterfactual could be any different because the bad act having been removed — sorry, alleged bad act, but as I'm a damages analyst, I tend to just assume liability a lot of the time.
In the counterfactual, the alleged bad act having been removed, I couldn't quite get my head around the fact that that was supposed to nevertheless influence the valuation on the Thursday, even though I don't see
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how it could have had an impact until later on.
So, still, my view of the counterfactual is clear. In that paragraph of my second report I note that in the counterfactual there might perhaps have been alternative outcomes, and not just in the presentation I gave this morning, I highlighted the yellow box at the bottom right-hand corner which is rejection, and mostly today we've been talking about rejection.
I highlighted that in the counterfactual perhaps other things could have happened which did not lead to rejection.
Given that the counterfactual involves the complex interplay between the actions of Korea which are complained of in this case, and the actions of the Samsung Group which are not the basis of the complaint, well given that, I think it's useful to highlight to the tribunal, and for the reasons that I say in my second report, following that paragraph, that one might also wish to consider — the tribunal might also wish to consider alternative counterfactuals.
But the outcome in those alternative counterfactuals, the cases where the merger would have gone ahead anywhere, are pretty clear. There's no damages. So really the argument has to be, and the area where we disagree, I disagree with Mr Boulton, relates
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to the counterfactual of when the merger was rejected; would have been rejected.
Q. I think I was asking a narrower question. I was trying to understand the significance of having changed the word "because", "[comma] because", to the word "furthermore"?
A. Because —
Q. I was wondering whether I was right to understand that in the original formulation of paragraph 102, there was a connection, a logical connection between the first statement and the second statement, and you are meaning to convey some different meaning or relationship between those statements in the revised paragraph 102?
A. I'm going to look at my corrections —
Q. So have you changed your view or is it a —
A. No, I haven't changed my view. It is a clarification because I thought that paragraph was not well worded.
If you could — may we look at my slide on the screen? Is that something we can get? Or perhaps I'll find it on my desk.
MR TURNER: Sir, I'm assuming you've all got a copy of —
THE PRESIDENT: We have a copy. Page 3 of your presentation.
A. I haven't got it, I'm afraid. Or I do, but who knows where. They aren't stapled and so they're all over the
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place.
TRIBUNAL SECRETARY: Mr Chairman, we have a clean copy which we could share.
MR TURNER: I will want that back at some point.
A. You will be welcome to it, sir. I'll autograph it for you if you like.
Okay. So your question is does that change the meaning, did I change my mind. Okay, answer: I didn't change my mind, but I thought it was badly drafted because the way it's drafted originally seems to say that the whole point I'm making is that the merger might not have been rejected in the counterfactual, and actually that's a small part of what I'm saying because, as we saw today, the real area of disagreement between me and Mr Boulton is what would happen in the event of a rejection, what would have happened in the event of a rejection.
So I think it is badly drafted in the original. I think the new version is clear. And certainly in the context of what I said today.
MS SNODGRASS: Thank you for that clarification.
So you identify the real area of disagreement between you and Mr Boulton as what would happen in the event of a rejection —
A. Well, unless one wants to take his damages methodology
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in a logical fashion as of 16 July, and say that we don't even need to look at a counterfactual, we just look at market price.
Q. I hadn't actually finished putting the question.
A. I'm sorry.
Q. You identify the real area of disagreement between you and Mr Boulton as what would happen in the event of a rejection, but I wrote down earlier that you said, "I don't like to say for sure what I think was going to happen"?
A. Correct.
Q. So your position is a position of not having an opinion about what was going to happen in the counterfactual?
A. My opinion is that anybody who confidently states that stock prices are going to be any particular value tomorrow is not being realistic at all. Anybody who says, I know enough about what's going on with the discount to tell you confidently what it will do tomorrow or in a counterfactual, is simply not being at all realistic —
My position, however, is that I can confidently say I don't think, on balance of probabilities and weighing all the different outcomes that could have happened, I think I have made it clear that I don't think it would have changed very much on balance.
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Q. So you don't have an opinion or you do have an opinion?
A. I have an opinion on what would have happened, on average, weighting all the possible outcomes. I have an opinion on that.
If you ask me to say: give me a number for the stock price at the time immediately following — you know: in the counterfactual, give me a number, I want a number, I have to say anybody who gives you a number is not being realistic, and I'm putting that politely. Anybody who gives you a single number with a high degree of confidence has no idea how stock prices behave.
Q. Well, to put the point politely, Professor, you do appreciate that giving me a number or giving the tribunal a number really is the central damages question in the case, because of course Claimant says we have shares, they have shares that would have traded at a higher price if the merger was rejected. They say the discount would have reduced if the merger was rejected. And the central quantum question in the case therefore is by how much would that discount have reduced? By how much would that price have increased? And so giving the tribunal a number really is the question —
A. Right.
Q. — that has to be answered.
A. Let me give the tribunal a number.
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Method 1. Produce a valuation on 16 July, the valuation date. Method 1 says take the stock price. If the tribunal thinks the stock price was out because of manipulation, method 1 says adjust the stock price, if it's the watch that is a few minutes slow.
Method 1 says if the tribunal thinks that the watch was smashed, the stock price had no useful validity, which I think is extreme, but if the tribunal takes that view, go to the NAV, apply a typical and realistic and plausible market discount, and that will give you a number not 100 miles away from the stock price anyway.
That's method 1.
Method 2, second round of reports. Construct a counterfactual. I say in the counterfactual the stock price on average, considering the balance of probabilities, would not have changed very much. It might have gone up, it might have gone down, because that's what stock prices do. I can even quantify you the — I could even make an attempt to quantify the standard deviation of such a prediction, but I don't think that would be what I'm being asked to do here.
Am I confident that my method 2 prediction, not very different from the stock price on the 16th, am I confident that that's a reasonable prediction, considering the range of possible outcomes? Yes.
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Would I say it's identically zero difference from the stock price on the 16th? No. But what I can say with confidence is that the stock price in the counterfactual, considering the range of possible outcomes and their probabilities, in my opinion, would not have been very different from what it actually was on the 16th.
Q. But did you perform any of that analysis in any of your reports?
A. Well, I believe that both my reports, my presentation this morning and the conversation we have had today support that analysis. And we can go through it if you like, and I'm willing to take as long as you would like, but I hope that the conversation we've had today would be useful to the tribunal even if we don't do that.
MS SNODGRASS: I have no further questions.
THE PRESIDENT: Thank you very much. Redirect?
MR TURNER: Yes, a few questions, sir.
Re-examination by MR TURNER
MR TURNER: I'm going to move my learned friend's enormous ring-binder, lever arch file.
Professor Dow, at the very beginning of your cross-examination you talked to Ms Snodgrass about analysts and you said that they were sell side analysts and you gave an analogy of a Swiss watch shop.
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Can you explain to the tribunal what a sell side analyst is?
A. Investment banks — brokers, really. Brokers employ people to be analysts. They put out recommendations to investors. They attend briefings from the company. And in these briefings the CFO or the CEO will present financial results and will talk about future plans, and the analysts can ask questions. And then they write reports presenting their analysis.
These reports are very detailed. They include, typically they include net asset value or sum of the parts type calculations, but they go beyond that. They would do detailed multiples analysis. They would do discounted cash flow analysis. They would actually produce consensus cash flow estimates for companies for the next few years.
So that's very helpful, but at the end of the day, the analysts are subject to pressure from the companies they cover, and I wish I had a hot dinner for every time one of my students has come to me and said, you know, I'm doing your course because I used to be an analyst and I just couldn't take it any longer because I was fed up with my boss chewing me out because my boss had just been shouted at on the phone for 45 minutes by the CEO of this company that you'd told the market was a sell.
[Page 206]
So analysts are obviously reluctant to — I don't want to put it that way, but analysts' forecasts tend to be somewhat biased upwards, and that is a documented fact that I present in my report.
Let me see if it's the first or second report. I will find it difficult to find that, I think, but let me look at the figures, and that might be a guide.
(Pause).
I'm just going to take one minute to see if I can find the Figure in question because there is a Figure where I show the analysts' reports, compare them to the share price, and give a footnote to the research, the documents, that analysts' reports are generally biased in an upward direction.
Well, I cannot find it. But perhaps if I've got the list of references at the end of my report, I might find it there.
(Pause).
MR TURNER: We suggest you might be thinking of footnote 138 of your first report on page 61. {G1/1/65}
A. That's a useful suggestion since I was looking through my second report. And that is indeed the footnote which is useful in that context.
So on page 61 we see the target price given by the analysts. It's always above the actual price. Page 61
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of my first report.
(Pause).
On page 61 I show a graph of the actual stock price versus the target price. That's the analysts' target price.
I say that:
"... quite typical for many stocks. It has been documented that stock analysts tend to give optimistic views of the stocks they cover. This pattern has been documented in the US for some of the largest companies in the world [and the small ones too], as well as in Korea."
Footnote 138, I give a reference to three papers — two papers which demonstrate that, including the Hong and Kubik paper is very detailed and comprehensive. And the second paper is specific to Korea.
Q. Thank you very much. Can I ask you to turn to your second report at page 10. {G3/1/15}. You were taken to footnote 39 by my learned friend earlier today. Do you remember those discussions?
A. Honestly?
Q. Okay, well, let me — it's been a very long day, Professor Dow. Let me remind you.
This footnote says:
"While I am aware that a recent indictment against
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[Redacted] alleges manipulation by the Samsung Group of the SC&T share price, I understand from counsel that the manipulation on which the indicted charges are based allegedly occurred after the Merger Announcement ..."
Do you remember, I ask with trepidation, but do you remember a discussion with my learned friend Ms Snodgrass about an allegation of the manipulation of the Cheil share price in relation to Biogen?
A. Yes, I do.
Q. And you said in the light of that discussion that you stood corrected in relation to this footnote; do you remember that? Vaguely?
A. Vaguely, yes. Rather vague actually.
Q. Do you see a mention of the alleged manipulation of the Cheil share price in this footnote?
A. I do not.
Q. And can you turn to paragraph 109 of the same report. It's on page 46 {G3/1/51}.
Is this where you dealt with the Biogen issue?
A. Yes.
Q. You were asked some questions by my learned friend about hindsight and you talked about how hindsight might show that — I think the phrase you used was that the market price was wrong. Do you remember that discussion?
A. Somewhat.
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Q. Can you tell the tribunal how hindsight might affect the accuracy of the market price at which a share was bought?
A. Well, I'm afraid I don't remember enough about the conversation to situate my answer in the context of that conversation.
However, with hindsight one can always say that a decision was a good one or a bad one and maybe one can always say that the outcome that happened could have been foreseen.
So an analysis with hindsight is very different from an analysis based on the information available at the time of a trading decision.
I don't know if that answers your question, sir.
Q. Not completely, because I asked — it may be your answer — how hindsight affected the accuracy of the market price at the moment that you bought the shares.
A. If I buy some shares at a certain price on a certain theory, I suppose hindsight could help me to confirm or reject that theory. I can't say any more than that.
Q. Very good.
There were questions both from my learned friend Ms Snodgrass and from Mr Garibaldi about the difference that you drew in your evidence-in-chief, for want of a better word, your presentation, between tunneling and
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price manipulation.
Now, this is where my having given you my copy may leave me at a disadvantage, but I believe it was on slide 36, but my note may be unreliable, and if it is, I'm sure you'll find it in the copy that I gave you.
A. Tunneling is not price manipulation —
Q. From memory —
A. — was the title of slide 36.
Q. — that sounds right. So I had got the right reference, I'm relieved.
A. If you're not going to use the rest of my presentation, I can give you back your copy.
Q. It's fine. If that reference is right, then I have confidence in my later reference.
Have you got slide 36 in front of you?
A. I have, yes.
Q. Do you remember the questions, in particular the question from Mr Garibaldi, which was: where there was what you call tunneling and also what you call price manipulation, whether you should look at the transaction or the events in the round.
I think I'm representing your question accurately, sir, but if I'm not —
MR GARIBALDI: Not quite. My question was: when all of those actions are part of a programme or plan —
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MR TURNER: — then should they be looked at together?
Do you remember that discussion you had with the learned arbitrator Mr Garibaldi?
A. So I do. So shall I speak to that question, sir?
Q. Yes, please.
A. Well, so I distinguished two different things.
Tunneling and price manipulation. And I said price manipulation within the time window that I identified, namely beginning of 2015 up until the merger announcement when the ratio was set, price manipulation within such a window, if it happened, can give rise to damages and should be offset or accounted for by an adjustment to the valuation that results from the share price.
Now, Mr Garibaldi has asked — but I also said tunneling is not price manipulation. I mean, Samsung company has, shall we say, horrible corporate governance for the sake of argument, and I'm not using the right words, but I think everybody knows what I mean. Samsung has problematic corporate governance and that can give rise to tunneling or other things that reduce the value of companies in the Samsung Group.
If that's part of the same — so the question then is, if the same person, the same entity, is perpetrating these two different actions, the tunneling action and
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the manipulation action, should they be taken in the round? Well, I think, unless I misunderstood the question, sir, my answer would have to be, well, I do maintain my position that they are separate things, and that the damages calculation should require removal of the manipulation and should make an allowance for that, but the tunneling was never going to give rise to damages, and therefore should not be removed.
I don't know if that is a better answer to your question, sir, or to you, Mr Turner.
MR TURNER: I cannot answer that question either on my behalf or on behalf of Mr Garibaldi. It is your answer.
A. It is my answer.
Q. And I will go on to my next question, unless Mr Garibaldi has a follow-up question from that?
MR GARIBALDI: No, my question was answered the first time, thank you.
A. Thank you.
MR TURNER: Professor Dow, just quite recently you were discussing with my learned friend Ms Snodgrass paragraph 46 of your second report. {G3/1/23}. We can have it on the screen for reference, but I would like you to look at the chart {G3/1/24}, where you were talking to the Elliott bars, for want of a better description, the fifth and sixth bars in your chart.
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A. Yes, the trading plans.
Q. The trading plans. Can you tell the tribunal whether the discounts that you represent in that chart are before tax or after tax?
A. They must be exclusive of tax because they are smaller than I know them to be once they include tax.
Q. If you can pick up my copy of your presentation again and turn to slide 34, do you have that?
A. I have it.
Q. Is that what you corrected with the light green addition to the dark green bars on that slide?
A. Yes, that is what I corrected with those light green sections indicated on my slide 34. That is an additional allowance for tax and therefore I ask the tribunal to replace those two bars in Figure 7 — those are the third and fourth bars in Figure 7 — with the numbers on slide 34.
And just to clarify, the reason why I think it needs to be done with the tax added on, as I have shown in slide 34, is that, as Mr Boulton stated yesterday, everybody except Elliott does it on that basis.
Analysts normally apply discounts to pre-tax sum of the parts; whereas Elliott had done it to post-tax sum of the parts, and therefore my Figure 7 is deficient and the situation is better described by my slide 34.
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Q. If you stay on that slide, you remember being taken to an NPS document from 2014 that my learned friend Ms Snodgrass showed you, where there was some analysis of the effect of restructuring of Chaebol groups; do you remember that?
A. I'm afraid, sir, I have seen a number of documents this afternoon.
Q. I had better get my enormous file back then.
You were taken — I haven't even got a note of it now. It's tab 26, R-61.
A. Oh, I've got it in front of me open at that page.
Q. Well, I was going to ask you to turn to {R/61/5}.
A. Yes.
Q. You can see that there is a discussion of SK Group. Do you remember being taken to that discussion by my learned friend Ms Snodgrass?
A. Yes, I do.
Q. Can you look at your slide 34 and tell the tribunal at what discount SK Group trades to its NAV?
A. We see in slide 34 that SK Group trades at a 35% discount to its NAV.
Q. Can I ask the operator to bring up Professor Bae's report, which is {G5/1/67}, at page about 67.
Not bad. Let's go up one {G5/1/68}. No. Down two. Can somebody else me here? It's got SK in it. Down
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a few more. {G5/1/63}. No.
A. The one that has SK in it?
Q. I think we're going the wrong way. 66, I'm told {G5/1/66}. 66 in the Opus numbering. Et voilà.
Is that your understanding of the SK Group structure?
A. Yes, it is.
Q. And if you can go to slide 67, or page 67, I'm sorry, of this {G5/1/67}, is this your understanding of the LG Group ownership structure?
A. Yes, that is my understanding.
Q. And on your slide 34 can you tell the tribunal at what discount LG Corporation trades?
A. LG Corporation trades at 49% discount to net asset value.
Q. Is it your evidence that the SK and LG corporate structures that we have just looked at are more akin to a standard holding company structure?
A. Yes, that is my evidence. They are cleaner ownership structures.
Q. Now, Ms Snodgrass also asked you a question about your opinion that the [Redacted] family would have the same control of SC&T after the merger — sorry, after the merger had hypothetically been rejected as it had before.
A. I remember that line of questioning.
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Q. In your opinion — how can you justify that opinion in the hypothesis put by Ms Snodgrass, that the merger had been rejected?
A. I'm sorry, could you please repeat the question?
Q. Yes. Can you explain to the tribunal —
A. Yes.
Q. — why you consider that there would have been the same degree of control in the event that the merger had been rejected as in the actual event that the merger was approved?
A. Well, I believe that the Samsung Group would have had or the [Redacted] family, I think your question was the [Redacted] family would have had the — I mean, the shareholdings would have all been similar. The shareholding levels would have all been similar. So nothing much would have changed in the shareholder register. So nothing much would have changed in terms of control.
Q. In your opinion — I think you may have answered this question just now, but I haven't got a clear note of it — in your opinion what would have happened to the discount to NAV of SC&T's market price in that hypothesis?
A. Of the counterfactual?
Q. Of Mr Boulton's counterfactual.
A. I believe I finished my testimony by saying to the
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tribunal that in my opinion it would not have changed much or would not have changed at all. But let's say would not have changed much.
MR TURNER: Thank you very much, Professor Dow. I have no more questions.
Questions from THE TRIBUNAL
MR GARIBALDI: Professor Dow, there is a lot to digest in your two reports and on the testimony you have given today. This is something that the tribunal will have to do particularly because it seems to me that what you have said to has gone beyond your report in some respects. I will not characterise as changes or as expansions, but there have been differences between what you said in writing and what you said today.
So that raises issues of trying to organise our minds to attempt the task of understanding your opinion.
It seems to me from what I have read and heard that, to go to the most basic structure, you have a set of legal theories, or legal — I'm sorry, economic theories or economic conceptions, and then you have a set — a universe of facts and assumptions. Some are established facts and some are assumptions. And you apply the economic theories to those facts and come to a conclusion or to a series of conclusions.
The main conclusion is that there is no damages.
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But then you have added a number of subsidiary conclusions which suggest the possibility that in some cases there might be damages?
A. Absolutely.
MR GARIBALDI: Now, the first observation that I would like to make, and it's a general one, is I have talked about a universe of facts and assumptions. It is not clear to me at this point what that universe of facts and assumptions consists of. I'm not sure what is it that you are taking as facts, what you are taking as assumptions.
It would be helpful — I say that to both parties — if that universe is made explicit in argument at some point.
Now, here comes my question.
I understand, particularly from what you have said today, that there are circumstances or hypothetical circumstances that might lead you to the conclusion that the damages were not zero, but rather materially more than zero.
Could you summarise what circumstances should have changed, should have changed or should be established, so that in your opinion the damages would materially be more than zero?
A. Thank you, sir. I'm sorry that I have not been clear,
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and I —
To some extent I'll explain why my presentation diverges from my reports in a few places or in some places.
First, there are the swaps. I didn't know about the swaps in quite the same way as I do now. I didn't see that Elliott had a view that this was all part and parcel of the same plan. I totally understand that from a legal point of view the swaps may or may not be relevant. That's not for me to say.
Now, you ask me: what about situations where I appear to concede — indeed I do concede — that damages could be due. And what are they, how much damages, what is going on, could I explain it to you.
MR GARIBALDI: In summary.
A. In summary. Simply put —
MR GARIBALDI: I say in summary because you don't quantify them. Your presentation, both the written one and the oral one, as far as this potential damages that we are talking about, is silent on quantification.
A. Excellent.
MR GARIBALDI: So it is conceptual, and I would like you to summarise conceptually what it is.
A. Yes, okay.
So the key slides from my presentation, I think, and
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there are probably more than two, but I think they're slides 22 and 35. And slide 22, I'll tell you, just shows a picture of a car. You don't need to look at it. But you may recall — and that's all it shows. You may recall that I said that if somebody took a Tesla share from Mr Turner, if Ms Tan took his one share in Tesla, how would I look at damages.
Okay. And the second one is 35, that all of this talk about net asset value in the reports, where I defend the price against looking at net asset value, is a bit of a red herring, because common sense tells me net asset value minus a reasonable discount is not very far from the price anyway.
Okay.
Now, what it boils down to, sir, and to answer your question about how to reach small damages and why I don't do that, it's not uncommon in arbitrations that the but for world is something the tribunal needs to specify.
So what I have given as a roadmap to the tribunal is one avenue for awarding damages would be if the tribunal — it's my slow watch example.
If the tribunal thinks that the market price was a little bit off because of manipulation or a moderate amount off because of manipulation, let the tribunal
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make an attempt to quantify that, and make an adjustment to the market price. Then let the tribunal apply standard methodology proposed by Mr Boulton, which is value minus price paid, where value is the market price subject to such a small adjustment or a moderate adjustment. I hope that's clear.
Now, if for some reason the tribunal doesn't like the market price at all, it's my broken watch example, the tribunal could operate instead in terms of net asset value. But I don't like that particularly because I actually think a common sense discount on to net asset value would take you pretty well in the region of the market price anyway, and so why not rely on an adjustment to the market price.
But if you do want to start with net asset value, go ahead, look at my report, and make your own mind up about what is a suitable net asset value discount.
I think it would be a lot bigger than Mr Boulton says it is.
What kind of adjustments would the tribunal need to make if it feels that manipulation gave rise to damages? I think that's really what could give rise to damages in my framework.
Here the tribunal has heard a lot of evidence, the last week, about attempted manipulation. I hadn't heard
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all that evidence. I also don't know whether the tribunal will find that this attempted manipulation should be considered as documented and reach a conclusion accordingly. I don't know the tribunal will find that some things should be included as an adjustment and others not. I don't know that.
I note that some of the manipulations that I have seen — I'm trying to keep it short — should be excluded in my view because they happen after May 26, before 2015, or they were tunneling.
I note also that there was the put back option where the court looked at the share price in 2014, December, I believe, and said: let's just work with that. I note that for the purpose of the tribunal. Possibly an avenue that the tribunal could take. I don't want to say that's a good avenue, but that would be an avenue.
Of the manipulations that I have seen, which can easily be quantified, much was made of the Qatar contract in earlier submissions, but that isn't significant at all, as I hope you agree, but it really couldn't account for more than 1 or 2%.
If the tribunal thinks other manipulations were of a similar order of magnitude, perhaps that would be a guide to the decision.
I don't know if I have helped you enough, sir, or
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been clear enough.
MR GARIBALDI: Yes. No, I appreciate that, and I think you have restated pretty much what you said before.
There is one question which has been presented to the tribunal which is not related to this point that we are talking about. That is that the decision of the NPS to vote in favour of the merger was leaked immediately after it was taken, and that was several days — I don't have the dates in my mind — before the actual extraordinary shareholders meeting where the merger was approved.
I would like to have your opinion about whether it would be appropriate or not appropriate to take as the valuation date the day before the vote of the NPS, which is therefore before the market took cognisance of their results to that vote.
A. Sir, if I'm not mistaken, the valuation date — I'm not quite sure what the question is.
MR GARIBALDI: The question is —
A. I thought the valuation date was the date before the vote of the NPS; is that -- oh, no, the vote of the NPS, I understand. Not the shareholders' vote.
MR GARIBALDI: That's right. There is a difference of — I don't have the dates in my mind, but from an economic standpoint, would it be a good idea or a bad idea to
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move the valuation date to the date before the vote of the NPS?
A. Given that it was leaked?
MR GARIBALDI: Given that it was leaked.
A. That's an interesting idea. It seems consistent with but less extreme than what the court decided, or the assessors decided in the case of the put back option, to move back to December.
I can't say on economic grounds that it would be a bad thing. So I don't have any particular objection to that, and I say that in the situation where I have no idea whether the price on the date you recommend was higher or lower than the price on the agreed valuation date.
MR GARIBALDI: All right. Thank you very much.
MR THOMAS: Just one area that I would like to ask you about.
Could you take a look at your second expert report and it's page 14, Figure 5. I think that Mr Smith was cross-examined on this earlier in the week, but my recollection is beginning to get a little overloaded {G3/1/19}.
I just wanted you, Professor Dow, to relate this apparent, what you say is an error —
A. Yes.
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MR THOMAS: — in the modelling to the valuations that took place after this correction that you say was made.
A. Okay. So let me explain the issue and then you will tell me if I have answered your question, sir.
So Elliott, as everybody else does, when doing the net asset value, values the listed companies at their market price and the unlisted components using another method such as multiples.
Now, here we had a component that was unlisted and became listed. When it became listed its market price suddenly became available and was obviously a better value than the multiples value because we tend to think that market prices are better, more accurate, than valuations based on multiples.
So Elliott revised its spreadsheet to replace the old value with the market price, and there was an intermediate period on that Figure. You can see there's a flat line just before it jumps up on Figure 5. There's an intermediate period where Elliott used the price that was discussed in the IPO documentation.
Okay.
Like a lot of companies, when it was listed the price was quite high, shall we say, it was higher than the price that accompanied the documentation. So that flat portion, it jumped up a lot from that. And it was
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also higher than EALP's analysis had suggested.
So it was a better price.
Now, that meant — and let me get this right — Elliott's — so SC&T's price didn't move in all this. SC&T's price didn't react particularly. It might have moved a little bit. It didn't react particularly to this.
But the net asset value jumped.
(Pause).
Let me make sure I've got this the right way round.
THE PRESIDENT: Next page may help, Figure 6. {G3/1/20}.
A. So the net asset value discount — thank you, sir.
The net asset value discount narrowed according to the way they were calculating it, but not really. If we allow for the fact that it was just a revaluation, in other words it was an apples-to-oranges comparison, and if we rebase it as an apples-to-apples comparison, then there isn't much change in the net asset value discount, Figure 6.
So there was a spurious change in the net asset value that didn't necessarily correspond to a real economic change, just because of essentially a different method for calculating the net asset value applied.
Now, why didn't the SDS — sorry, why didn't the valuation of the company of SC&T, why didn't that change
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very much when this piece was suddenly listed at a high price? Presumably it didn't change very much because the market had already done its own maths and was already in the marketplace valuing the SDS component at a much higher price than the formulaic number that was in the Elliott spreadsheet.
I mean, after all, the market was going to have to do that maths anyway after the flotation date. So they would have been doing it carefully in the run-up to the flotation, and that means it wasn't really news to the market for SDS — sorry, for SCT. It wasn't really news that this previously lowly valued component was now valued more because the market had been valuing it the way it wanted to all along.
I don't know if that's a good answer to your question. That's the best I can do at this late hour.
But it's a spurious change in the net asset value that results simply from an apples-to-oranges comparison, because the thing that was being valued, shall we say wrongly before, is now being valued more accurately.
MR THOMAS: I had that point before, but I'm not sure if I advanced very much further. But it's been a long day and we will leave it at that. Thank you.
THE PRESIDENT: I hesitate to make it a bit longer.
A. Of course, go ahead, sir.
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THE PRESIDENT: Staying on that Figure at pages 14 and 15, the corrected EALP analysis that you are doing here on the basis of the multiplier 2.5 going backwards from the correction date of November 2014 is hypothetical because we don't know —
A. Yes. It's a rough adjustment.
THE PRESIDENT: It's a rough estimate.
A. Yes. {G3/1/19-20}.
I mean, it's not an error for Elliott to have failed to know the listing price in advance, because nobody knew that. It's an error in interpreting the jump — sorry, the fall in the net asset value to have interpreted that as being a real — a significant change.
THE PRESIDENT: Yes, and the question whether how far before the November date it extends in the past is an estimate.
A. Yes. Absolutely.
So what Elliott should have done ideally would be to look at its — you know, the spreadsheet set off a red light: wow, the discount has changed a lot. What Elliott should have done is said: well, actually there's a reason for that. We're not valuing on an apples-to-apples comparison.
THE PRESIDENT: Okay. Maybe just before we finish, just to make sure that we have understood your evidence on some
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of the key points correctly.
A. Yes.
THE PRESIDENT: In a semi-strong efficient market the share price reflects all the information in the market that is available to the market?
A. Yes.
THE PRESIDENT: It doesn't reflect necessarily private information that is not in the market?
A. Correct.
THE PRESIDENT: There may be some insider trading going on, but given the volumes, it wouldn't have an impact on the price?
A. Well, that's a very big question and —
THE PRESIDENT: I thought you said earlier that the way a semi-strong market is defined is that it doesn't — it draws a line between publicly available information and private information?
A. Absolutely. Absolutely. And as you said, if there was insider trading, people trading with better information, it wouldn't have had much influence on the price. I just suppose that depends how many people had the information and how big their trades were.
THE PRESIDENT: And the more there are individuals in the market who have private information, the more likely it is that it will become public very quickly?
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A. Yes.
THE PRESIDENT: Okay. But that's the distinction you are making in principle between public and private information?
A. Yes. That's absolutely right, and therefore in a market where there are a lot of traders, semi-strong efficiency is a pretty basic criterion. It just means that you — you know, it's like my Brazilian friends who used to make money by selling in the evening and buying back in the morning. That's a pretty basic failure of a market to predict price movements, if that's always or systematically the case.
So semi-strong efficiency is a very basic condition that a good market — a liquid market, we would expect to follow.
THE PRESIDENT: Would the information available in a semi-strong efficient market also incorporate relative information in the share price; not only information about the assets of a particular company but also information about its competitors, other companies in the group —
A. It certainly would.
THE PRESIDENT: — and their performance in the market?
A. It would incorporate everything; everything that's relevant.
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THE PRESIDENT: The market wouldn't make a difference between whether the information is correct or incorrect, as long as it doesn't know whether it's correct or — it doesn't know that it's incorrect? It would incorporate information that is incorrect in the price if it doesn't know, if there is no collective understanding that the information is not correct?
A. Okay. Simple answer: you are absolutely right. If the market has the wrong information, then it incorporates the wrong information.
THE PRESIDENT: But if the market learns later that the information is actually incorrect, there would be an adjustment?
A. There would be an adjustment. Only caveat I would make, and I don't want to make complexities, is if the market thought all along that it was quite likely that the information was incorrect anyway, maybe that wouldn't have a big effect on the price.
THE PRESIDENT: And the market would incorporate — a semi-strong efficient market would incorporate all the information that is available to the market as a result of any event, whether or not that event qualifies legally as legal or illegal action?
A. Absolutely, yes. And of course it's not that uncommon in the context of a merger or anything else for —
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I mean, while there are regulations it's not that uncommon for the company's management to be selling the merger to the market, shall we say, by prioritising the favourable view in its communications. That's part of the process. And the market of course knows that's the case and makes a suitable adjustment.
So I guess the allegation must be in this case — you know, or the question for the tribunal is, you know, to what extent potentially did things go beyond that.
THE PRESIDENT: So market manipulation, in very simple terms, it means disclosure of information to the market knowingly that is incorrect?
A. Absolutely. So absolutely. You know, if I have a company that I own and I'm floating it on the stock market and I just don't tell people that there's some very bad news coming along soon, I'll be able to float it at a high price, which is the wrong price, and the price would be incorrect and that would be seriously misleading price manipulation.
THE PRESIDENT: Okay. Very good. Thank you very much, Professor.
A. Thank you, sir, and members of the tribunal.
THE PRESIDENT: That concludes your examination, Professor. Thank you very much for your time. It's been a long day.
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THE WITNESS: Thank you.
THE PRESIDENT: Thank you.
(The witness withdrew)
Housekeeping
THE PRESIDENT: For the parties, I don't think we are done yet. I think it would be useful to revisit the programme for Friday and firm it up.
It is the tribunal's ruling that both parties will have two hours for the closing statements. I'm not sure whether you have had a chance to discuss between counsel when to start, when to break for lunch and so on.
Mr Partasides?
MR PARTASIDES: The quick answer is we have not yet, members of the tribunal. I suppose what would be useful for us as we think about how best to organise our day is to know whether the tribunal intends to make use of any part of the day after the oral submissions, for example by tribunal deliberations.
If that is the case, then we may organise ourselves around that.
If that isn't the case, then it may be — and this is a proposal I haven't discussed with our friends opposite — that we would begin at 10 am until midday, and then we would hear from the Respondent from 1 pm to 3 pm.
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But that really depends on whether the tribunal had intended to make any use of the afternoon themselves.
THE PRESIDENT: Probably whether or not we start at 9 or 10 wouldn't make a difference. So I think we would be happy to start at 10, if the Respondent is.
MR TURNER: That is fine by us. We hadn't discussed it but we had exactly the same thoughts.
THE PRESIDENT: Okay. So we start at 10 until noon, the Claimant's opening. Then at 1 o'clock, we have a lunch break. We start at 1, continue until 3, and then we can discuss any housekeeping issues such as post-hearing submissions, deadlines, length, font, and all the key —
MR PARTASIDES: Margin size, as well.
THE PRESIDENT: It would be useful if you could discuss in the meantime and try and reach agreement on those issues.
MR PARTASIDES: Very well.
THE PRESIDENT: Okay. Anything else?
MR PARTASIDES: Not for us, thank you.
MR TURNER: Nor for us, thank you very much.
THE PRESIDENT: Thank you. And we will meet again on Friday. Thank you very much.
(5.55 pm)
(The hearing adjourned until Friday, 26 November 2021 at 10.00 am)
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INDEX
PAGE
PROFESSOR JAMES DOW (called) ....................1 Presentation by PROFESSOR JAMES DOW ..........2 Cross-examination by MS SNODGRASS ..........39 Re-examination by MR TURNER ................204 Questions from THE TRIBUNAL .................217 Housekeeping ...................................233
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