This is an interesting decision heard on 17th June 2013 which caught our attention involving the purchase of shares and their valuation.
In summary, at first instance the Judge carried out a determination of the valuation of the company for the purpose of allowing the respondents to purchase the petitioner’s minority shares with a finding that the petitioner had been unfairly prejudiced.
The Respondents then appealed and submitted that the judge had been wrong in distinguishing between bank debts and other debts. They also submitted that the judge had failed to take other relevant matters into account.
The appeal was heard by Lord Justice Laws, Lady Justice Black and Mr Justice Mann.
The Factual Matrix
In 2009, the petitioner, under section 994 of the Companies Act 2006, established that she had been unfairly prejudiced as a shareholder of Sunrise Radio Ltd (the company), and an order was made that she be bought out by the respondents, the majority shareholders of the company.
Consequently, it was necessary for the court to determine the price to be paid for the petitioner’s shares. The company had its own trading income, but also had a number of subsidiaries. They included Club Concorde Ltd (CCL) and Sunrise TV Ltd. The company was indebted to a company called Global Radio Services Ltd and had a bank facility with Allied Irish Bank (AIB). CCL also had debts.
As is common in share holder disputes each party relied upon an expert, in particular, the respondents instructed H.
In the course of three decisions, the judge determined the price to be paid to the petitioner for her shares.
Interestingly the judge’s reasoning for his approach and ultimate conclusion was that, amongst other things:-
(i) the basis of the valuation was an earnings/multiplier basis, to which liabilities were not necessarily referable;
(ii) net liabilities were brought in by H because of the ‘interdependency’ of all the companies and guarantees;
(iii) AIB’s indebtedness would be paid off on completion, so that feature had disappeared;
(iv) there was no evidence of the nature of the other ‘inter-company indebtedness’ and whether it would have been repaid on completion;
(v) non-profitable subsidiaries could be discarded;
(vi) it was for the respondents to put in evidence to show that some further deduction over and above the AIB debt would be appropriate;
(vii) therefore, it was appropriate to make a distinction between the bank debt and other debt;
(viii) since the valuation technique was an earnings/multiplier technique, it was not appropriate to bring in net indebtedness;
(ix) H only brought in net indebtedness because there were some special features;
(x) once the AIB debt was paid off, there was no basis for bringing in net indebtedness at all; and
(xi) net assets and liabilities might be brought into an earnings/multiplier calculation where they had a ‘significant impact’, but there was nothing in the evidence to suggest such an impact. In the end, the judge ordered that the value of the petitioner’s proportionate shareholding was £560,000. The respondents appealed.
The Respondent’s Arguments
The respondents submitted that:-
(i) the judge had been wrong in deducting only the AIB debt in arriving at the value of the company; he should have deducted other group liabilities;
(ii) in ascertaining the maintainable earnings of the company, the judge had wrongly failed to deduct interest on the AIB facility from the expenditure side, thereby inflating net positive earnings;
(iii) in ascertaining maintainable earnings of the company, the judge had failed to take out from the income side certain management service fees received by the company from other companies in the group; and
(iv) in valuing CCL, the judge had wrongly reduced the amount of consultancy fees payable by CCL, thus reducing the deductibles and inflating the net earnings figure.
The Court’s Findings
The court held:-
(1) It had not been easy to follow the logic of the judge’s findings in relation to external debts, and it had not been easy to reconcile it properly with some of the expert evidence given. It had been right that the shared assumption of the values had been that an ‘earnings/multiplier’ technique had been the appropriate one to adopt. It had also been right that net assets or net liabilities determinations would, by and large, have had no part to play in such a technique. However, the judge had applied a modified version of that in deducting the AIB debt. The judge’s reasons for drawing a distinction between the AIB debt and other debt were said to have been flawed.
He had held that it had been right to discard loss-making subsidiaries, so the portion of the net indebtedness attributable to them would not have caused a purchaser to make a deduction from the price. The deemed purchaser would have let the companies go, so that they would have had a nil value to the purchaser, not a negative one. To that extent the logic of the judge had been sustainable. However, whilst the judge’s ‘significant impact’ point might have been a reasonable way of capturing the ‘surplus’ point, it had been unfair for the judge to have said that there had been no evidence of any such debts.
Accordingly, while the judge had been correct to acknowledge the principle of some debts being deductible for the purposes of carrying out the valuation, he had not necessarily been right in confining those debts to the AIB debt. If he was going to consider the matter in the way that he had, then he ought to have considered other candidates.
In the circumstances, rather than remitting the matter, the court considered it appropriate to bring two relevant debts into consideration and those debts were deducted from the earnings/multiplier calculation.
(2) The liability of interest on the AIB facility had to be reflected in the calculation by either allowing the interest burden to reduce the multiplier-based figure, or by allowing a deduction from the price of the amount of the liability itself. In the latter event, double counting was avoided by removing the interest burden from the multiplier-based calculation.
That was the approach that the judge had adopted. It had followed, logically, that he had been right to remove the AIB interest from the earnings calculation, thus swelling the multiplier calculation itself. On that footing the judge had been right.
(3) The judge’s findings in regard to the management services fees received by the company had been a factual one. He had found that management effort spent in providing services for the subsidiaries would have been saved or used profitably elsewhere. There had been virtually no positive evidence on the point, so the question had been whether that had been a decision that had been open to the judge. In the end, the judge had arrived at a decision that had been one that had been open to him.
(4) In regard to consultancy fees payable by CCL, the judge had reached evidence-based conclusions. It could not be said that the judge had not been entitled to reach the view that he had reached on the evidence.
It had followed that the appeal succeeded in relation to the external liabilities point, but had failed on all other points. The sum payable to the petitioner fell to be adjusted accordingly.
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