All human life is here

There has been bruising litigation between Mr Maidment and Mr Attwood in a series of hearings between July 2011 and July 2012. In the middle of this process one of the parties went to the Court of Appeal: he was not content with one aspect of the judge’s decisions in the second of these hearings. Since the hearings there has been yet another (successful) application to the Court of Appeal.

The cases have involved an estate agency business and a property investment business; there have been allegations regarding funds in excess of £1 million moved to Northern Cyprus in suspicious circumstances; the estate agency business was transferred from one company to another for consideration of £5,000; and allegations were made that one of the parties paid himself excess remuneration.

As if this were not enough, properties in the property investment business were transferred to one of the shareholders at a discounted valuation.

Ill met by moonlight

In this bad-tempered bout, both protagonists have been described by the judge as either unreliable or unsatisfactory witnesses.

It is more than the litigation which has been bruising: Mr Maidment was subjected to a violent assault at Rainham Railway Station. He attributed the responsibility for this assault to Mr Attwood.

The valuation issue

It was stated that Mr Maidment was the 50% shareholder and sole director of the property investment business. Mr Attwood had ceased to be involved with this business for several years. It was therefore argued that Mr Attwood’s interest should be valued on a discounted basis. This appears to have been based on his position in company law, as a shareholder in a deadlock company and with no route to obtain representation on the board.

It could possibly also be argued that he had ceased to be a quasi-partner in the property investment business due to his lack of involvement. The judge found that the company had ceased to be a quasi-partnership long before the valuation point of October 2005.

The Sunrise Radio decision revisited

The judge referred to the case of Sunrise Radio (see the previous Valuation article, What brings a quasi-partnership to an end?) and stated that the only fair course was to require the interest of Mr Attwood to be valued on an undiscounted basis. This was the sole means of deriving a value which was fair. Part of the reasoning given by the judge was that the company could have been wound up on just and equitable grounds in 2005, resulting in a rateable 50% distribution of the company’s assets to Mr Attwood. This concept then triggered some interesting valuation considerations, and also a degree of confusion, as detailed below.

The hapless property valuation expert and the hired gun?

The judge found the evidence of one of the property valuation experts to be much less than satisfactory. He gave no less than 21 different reasons as to why he reached this conclusion. He did not find his evidence in respect of comparable properties to be convincing.

The other property valuation expert used a superseded definition of “open market value” rather than the more current Red Book definition of “market value”. Despite this lapse, the judge found this expert to be a far more impressive witness.

Counsel for the other side claimed that the fluency demonstrated by this expert in the witness box was the fluency of an advocate on behalf of his client, who had been hired to provide the highest possible valuation. However this did not shake the conclusions of the judge: he was clear as to which property expert was generally to be preferred.

It seemed apparent that the valuations being considered were in respect of a realisation of the property portfolios: there was discussion as to the discount that should be applied as the valuation was of a portfolio of residential properties and also the likely costs of estate agents and solicitors in the realisation. The judge found that the discount for the portfolio effect should be 5% (rather than 10%) and that 1% should be allowed for estate agents’ charges and 0.5% for the fees of solicitors.

The valuation of the shares

The role of the jointly appointed share valuation expert was to consider how the valuations of the underlying properties were to be translated into the value of the shares.

It was his opinion that there should be a deduction for the contingent tax on chargeable gains; he also considered that he needed to take account of the fact that a portfolio of properties will normally attract a lower value than the aggregated value of the individual properties. It was his opinion that these two factors meant that there should be a discount from net asset value of 50% of the potential corporation tax charge. He explained that the discount was justified, based on the time value of money.

Under cross examination the expert then stated that this deduction for contingent tax and block discount also effectively included an allowance for the costs of sale of the properties at a rate of 3%.

The evidence in the case summary, however, indicates that the share valuer was valuing the shares as if the company were to remain as the holder of the properties and that he was not valuing the shares on the basis of a liquidation and realisation of the assets.

It was evident that there was a lack of clarity as to the type of valuation that was required.

Introducing a privy council case

Reference was made to the case of CVC/Opportunity Equity Partners Limited v Demarco Almeida as heard in the Privy Council in 2002 (2002 UKPC16). In that case the only remedy available to a minority shareholder under Cayman Islands law was to petition for a winding up. However in that case the Privy Council found that the fair value for the petitioner’s minority holding was a pro rata going concern value, rather than the lower liquidation value.

The Privy Council stated that there were three alternative methods of valuation of the one share held by Mr Demarco: it could be pro-rata to the value of the whole company on the basis of a going concern; it could be a discounted minority value, again on the basis of a going concern; lastly it could be computed on a break-up basis.

Mr Demarco did not wish to leave the company: rather, he had been excluded against his will. The only remedy available to him was to seek a winding up. However this should not colour the way that his shareholding was valued. The valuation should therefore be on a going concern basis, without discount for its minority status.  

In accordance with the principles of the above decision, the judge stated that the fair value for Mr Attwood’s interests should be based on 50% of the going concern value.

Valuers at cross purposes?

It is evident that the property valuers were considering the realisation values for the properties and the allowances needed for the costs of realisation.

It initially appeared that the share valuer was basing his valuation on the company remaining in being and the properties being retained. However this simple vision was then made more complex, both by the block discount and also by the stated inclusion of an allowance for 3% selling costs.

The share valuation expert was asked to reconsider his report, based on the evidence heard relating to the property values and also on the question of the various deductions required for tax and other factors.

His task was made rather more multi-faceted as he was asked by the judge to consider in his deliberations the actual tax liabilities that had crystallised on the transfer of the properties to one of the protagonists. This is despite the fact that the judge had found that these properties had been transferred from the company at undervalue.

Observations

We can all relate to the value of the entire share capital of a private property investment company being based on the value of the property portfolio, but with some allowance for the contingent tax charge. This would generally be considered as being a going concern concept. In negotiations between buyer and seller of the shares, the buyer would be expected to draw attention to the fact that some of the properties are pregnant with gains. He would therefore expect to pay a lesser price than if he was purchasing the properties directly, as the tax base costs and the price paid would then be identical. He would not expect the reduction to that lesser price to be equivalent to the whole of the contingent tax charge.

In a break-up valuation, on the other hand, the deduction for the tax on chargeable gains should not be discounted; further deductions for the various costs of realisation would also be expected.

Andrew Strickland, Corporate Partner, Scrutton Bland
Valuation Group, May 2013