Loose Fitting Robes?

If these action had succeeded the garment in which experts undertake determinations would be replaced by exceedingly tight whalebone corsetry. 

In the case of Premier Telecom Communication Group Limited (EWCA Civ 994) [2014], it was argued that the experts had strayed into legal territory and had addressed matters which should have been the preserve of the Court.

Mr Webb was a director of Premier Telecom Communications Group Limited (PTCG) and was employed until October 2011 when there was a parting of the ways. It was therefore necessary to value his shares. The instructing solicitors stated that they required a valuation, 'to reflect the remedy that might be applied by the courts in an unfair prejudice action of a minority shareholder'.

In their letter of engagement the valuers stated that they assumed that fair value equated to the IVS definition of market value.  

The Expert Report

On 21 March 2013 the valuers produced their report valuing Mr Webb's shareholding at £4.218 million and explaining how they had arrived at that figure. The report provoked an immediate protest from solicitors acting for Mr. Ridge and PTCG: this led to proceedings in which they sought to overturn the valuers’ conclusions. Mr Webb's response was to issue an application for summary judgement on the grounds that the claim had no real prospect of success.

The Court reiterated the doctrine relating to the work of experts, 'A distinction must be drawn between the expert who has misunderstood or misapplied his mandate with the consequence that he has not embarked on the exercise which the parties agreed he should undertake, and the expert who has embarked on the right exercise but has made errors in conducting that exercise and has come up with what is arguably the wrong answer'.

The lawyers for Mr Ridge identified various matters which they felt could be within the category of manifest error, if only they could widen the concept by vigorous use of the crowbar. They maintained that the Court should decide all questions of law bearing on the valuation. They went even further suggesting that it was for the Court to interpret the IVS definition of 'market value'.

This argument had been rejected by the lower court. The Appeal Court also swept the point away:

'Their instructions were to value Mr Webb’s shareholding on the basis of fair value on a pro rata basis, without discount to reflect a minority shareholding. Instructions given in such broad terms naturally invite the valuer to adopt whatever method he considers appropriate in order to produce a fair valuation.'

Including the Kitchen Sink?

A main point that was challenged in the valuation as being a manifest error in law was the addition of cash of £3.449 million to an EBITDA based valuation. Warming to their theme, the lawyers then also included a long list of detailed points as also representing manifest errors by the valuers. These points were very granular, including the treatment of wages paid to the children of Mr Ridge and the treatment of losses under one particular contract.  

The case put before the judge was that as a result of using the wrong figures the valuers had valued a hypothetical company which differed in significant respects from PTCG.

The Decision

The Court of Appeal understandably reached the same decision as the lower Court: these points were not manifest errors and there were no grounds to set aside the expert determination. Summary judgement was granted to Mr Webb on the basis that the points put forward on behalf of Mr Ridge had no real prospect of success.

This case resonates with the case of David A Bruce and TTA Management Limited (EWHC 936 [2015]. In that case the Judge would not entertain addressing a question as to whether or not certain income should be credited to a company. The higher court noted: 'John Jarvis QC …. declined to determine the question on the footing that where parties chose to select valuation by an expert, then recourse to the Courts was virtually non-existent….'

A Second Attempt to Challenge Experts

The second case was that of P Richards, K Purves and IP Solutions Group Limited EWHC 2599 [2016]. This related to the sale of IP Solutions Limited to a special purpose vehicle set up by a private equity house, 'LB'. The deal concluded on 3 December 2014 when the Claimants sold their shares in IPS to the Company for just under £2million each, at the same time acquiring a 30% shareholding in the Company.

The parties rapidly fell out and it was agreed that the shares held by the Claimants in the Company would be purchased at a price to be determined.

The relevant clause of the Articles of Association was Article 18.4 which provided for a pro rata valuation of the shares.

Clause 13.3 of the Articles was entitled 'the redemption premium provision' and was also of relevance in considering the value of the shares. This was a lengthy clause but was summarised by the Court:

'Article 13.3 in effect directs that on sale of a controlling interest in the Company, the holders of other than Class A or B shares will not receive any distribution until the value of the equity is at least twice the amount invested by the holders of the A shares and B shares (i.e. the LB investment companies). The intention was clearly to provide a priority return for LB's investment.'

In a letter to the parties prior to reaching their valuation conclusions the expert valuers advised that in their view it was appropriate to take the redemption premium provision into account in arriving at a value of the Claimants' shares pursuant to Article 18.4.

Counsel for the Claimants submitted that the experts had misconstrued the effect of Article 18.4 and that this amounted to a 'manifest error'. He argued that the proper construction and application of Article 18.4 in relation to Market Value is a matter for the court to determine and not the expert valuers.

Many of us will find this a startling position, striking at the efficacy of expert determinations.

The Court did not need to decide on the critical question of principle as to whether differences in interpretation of Articles of Association would amount to a manifest error. The Judge agreed with the valuers and concluded that the clear words in the Articles necessarily included a recognition of the types of shares held by the Leaver.

Andrew Strickland
Valuation Community, April 2018