Monaghan and Gilsenan [2021] EWHC 47 (Ch) – Euro Accessories Limited

This was another case claiming conduct unfairly prejudicial to one or more shareholders (section 994, Companies Act 2006).

The background was that the company had been set by Mr Gilsenan to supply reinforcement spacers, tying systems for reinforcement and other components for use in relation to concrete.

Mr Gilsenan gave 24.99% of the shares to Mr Monaghan, the sales director, presumably as a form of incentive. The incentive was seemingly not effective as Mr Monaghan later left the company.

The Articles included a clause enabling Mr Gilsenan to buy the shares held by Mr Monaghan at “fair value”. This case related to the meaning of these two words.

A single joint expert was appointed to value the entire equity and she concluded that the company was worth £2.18 million as at 4 May 2016. She wisely did not seek to decide whether or not a discount should be applied. However, if a discount was appropriate, she said that it should be 55% for a holding of just under 25%.

On a pro rata basis Mr Monaghan’s shares were therefore worth £545,000. If they were valued as a minority holding, that value sank to £245,250.

For Mr Gilsenan it was argued that the meaning of “fair value” was plain: it was the market value of the 24.99% holding in question. The term had to be read in its context. The words had been set within the surroundings of a call option over minority shares in the Articles. Firm logic led to the market value of that standalone interest as being the relevant fair value.

For Mr Monaghan it was argued that fair value should be construed in line with International Valuation Standards (“IVS”).

Back in 2013, IVS used the term “fair value” to mean what they now describe as “equitable value”:

“Equitable value is the estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.”

This is an unusual valuation basis – it is not talking about two anonymous parties, but rather two known parties. The foundation of the definition is “respective interests” not respective bargaining skills.

It ended a lot of potential uncertainty when IVS decided to change the title from fair value to equitable value. The scope for confusion with IFRS 13 fair value was obviously enormous.

It was argued for Mr Monaghan that equitable value should be applied and that it was greater than the market value of a standalone holding of 24.99%. The respective interests meant that Mr Monaghan would be giving up a permanent minority position, but Mr Gilsenan would be adding to his control holding.

There have been at least two other cases which have included valuations using the principles of equitable value:

In the 2016 bankruptcy case of Ingram and Hall v Ahmed (upheld on appeal), there was a need to value 24% holdings in three family companies in which the family group held the remaining 76%.

The basis used was equitable value and this was taken to be the mid-point between the minority value and the pro rata value: the seller sells 24% but the buyer’s holding goes from 76% to 100%.

In the 2019 case of Estera Trust and Singh, dealing with the Edwardian Hotels group, the Judge used the term marriage value, borrowed from property valuations, rather than equitable value. However, this also involved a 50:50 split of the value between what the seller gives up and what the buyer receives.

For Mr Monaghan, similar arguments were applied that equitable value was the average of the pro rata and the discounted values. That then reflected the respective interests of the parties.

We now have another case in which equitable value has been interpreted in this way.

The Judge was persuaded by the analysis of the wording in the Articles: Article 6A gave the majority shareholder an option to require the minority shareholder to sell his shares to him. In that context, it was the value of the minority shareholding which had to be determined and a discount to reflect the size of holding was required.