The business of Destiny was the operation of three higher end hotels; the values of these had been agreed just after the trial commenced. 

It was quite understandable that the cost approach was the preferred means of undertaking the valuation of the shares as these were demonstrably trade related properties. The issues for the two business valuation experts were eventually limited to those of agreeing the adjustments needed to the latest audited balance sheet in order to derive valuation at the valuation point. 

Prior to the Court hearing the respondents had conceded many points, and agreed that the shares held by the petitioners should be purchased without discount for their minority status. The impression gained is that this was fast-moving litigation; it appears that some of these concessions came after the valuers had reached their conclusions and had reported on value. 

The Bases Chosen

The expert for the petitioners used the IVS definition which is now (in IVS 2017) described as “equitable value”:

“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 a valuation basis which does not follow the well-travelled path of anonymous market participants, but rather considers the realities encircling the shareholders to the company. 

The expert for the respondents used the IFRS 13 definition of fair value for financial reporting: 

“the price that would be received to sell an asset or paid to transfer a liability in an Orderly Transaction between Market Participants at the Measurement Date.”

Viewing the Transaction from Afar

Much was decided very soon after the Court hearing was started. However the following immediate questions arise:

• Should the fair value of the entire share capital be computed on a going concern basis, as this would be likely to represent the highest and best use under IFRS 13?
• Alternatively, if it was necessary to sell one of the hotels in order to fund the buyout of the shares of the petitioners, should the selling costs and associated costs of that hotel be deducted in deriving the value? At its bluntest, does the impecuniosity of the Respondents impact on the value?
• As a third alternative, should the selling costs of both main hotels and the associated costs, including early settlement penalties on bank loans, be deducted in order to arrive at a value which was fair between the parties? As it was the intention of the parties to buy, improve and sell the hotels, rather than to operate them over the long term, should this intention be reflected in the values in a shareholder dispute?

Equitable Value 

Equitable value is a valuation basis which has not been greatly tested and tempered in the white hot crucible of litigation. The example cited in IVS 2017 has equitable value as greater than market value: the benefits of synergy can be encompassed within it. 

In the case of Ingram and Hall and Ahmed (EWHC1536) [2016] the valuer who used this basis derived an equitable value as the mid-point between the minority valuation and the pro-rata value. This was therefore consistent with the assumption of even negotiating strength, with 50% of the synergy benefit being reflected in the price. 

The descriptions in IVS 2017 lead to the conclusion that equitable value is intended to be the same as or greater than market value, with the nature of the synergy benefits determining any uplift above market value. When dealing with synergy benefits existing between shareholders, it is difficult to see that the synergistic value can be greater than the pro rata value. 

Therefore, once the parties had agreed that the valuation was to be undertaken on a pro rata basis, the IVS 2017 equitable value fell out of consideration. 

Fair Value

It is accepted that fair value under IFRS 13 and market value under IVS 2017 are very substantially the same. 

These valuation bases both focus on market participants; value is to be discerned on the basis of highest and best use, regardless of the current use. This concept embraces the simple truth that the market price is the best price. 

Fair value is therefore far removed from considerations which are peculiar to the actual parties to a transaction. We might therefore expect that highest and best use would rest with the market participant who wished to operate the hotels as going concerns, and who would employ the capital most effectively by leaving the bank loans in place. Such a market participant would not need to factor selling costs into his appraisal model. The orderly liquidation premise would not be within his thoughts. 

The arguments developed during the Court hearing were that the valuation of the shares should reflect the financial realities between the parties, rather than those of anonymous market participants. These arguments therefore mean that IFRS 13 fair value also fell out of consideration. 

The Actual Basis and Premise of Value

Using the terminology of IVS 2017, the arguments that were developed in Court were consistent with the cost approach, using the summation method under that approach, applying the liquidation basis, with an orderly liquidation premise.

The realities of the financial circumstances of the parties bore heavily on the valuation: the Judge found that the interests of the parties had always been to realise the values in the hotels, and not to operate them long term as business ventures. This reality became a dominant factor in various valuation judgements. 

The Adjustments 

In addition to the restatement of the hotels at valuation, the Judge determined that there were the following adjustments to be made:

• Bank refinancing fees had been carried forward to be amortised over the period of the loan, and these were written off for valuation purposes;
• There were prepayment fees of £7.967 million if the bank and other loan were repaid early. It was agreed in principle that these prepayment fees should be deducted from NAV;
• Provision was to be made for costs in respect of interest rate swap agreements and also for the selling costs relating to the hotels.

Therefore the particular circumstances of this case resulted in a valuation determined by reference to asset realisations.

Andrew Strickland