Putting a price on the Crown Jewels: Legal principles and practical aspects of valuation of shareholdings in unquoted companies and of other business

1. Introduction
2. Valuation of shareholdings and other business interests is often central to the resolution of disputes whether those disputes are between shareholders, between persons in partnership, between members of LLP’s or between commercial agents and their principals and to the resolution of financial claims consequent upon divorce.
3. Shareholding and business valuation is recognised an art not a science: Joiner v George [2003] BCC 298.
4. [So Roger, does that mean you are an artist rather than a man of science?] Mostyn in H v H [2008] EWHC 935 (Fam) – “The purpose of valuations, when required, is to assist the court in testing the fairness of the proposed outcome. It is not to ensure mathematical/accounting accuracy, which is invariably no more than a chimera. …. In my experience, valuations of shares in private companies are among the most fragile valuations which can be obtained.”
5. The role of experts in valuation
6. Ultimately it was made clear in Re Bird Precision Bellows [1986] Ch 658 that, in the context of claims under section 994 Companies Act 2006, the court retains the power to disregard the views of experts as to valuation and to apply its own view of what is fair and reasonable in all the circumstances: see also Re Planet Organic Ltd [2000] BCC 610.
7. That residual autonomy would also seem to apply to valuations for the purpose of assessing the extent of “compensation” payable for the purposes of the Commercial Agent (Council Directive) Regulations 1993 and, indeed, for other purposes such as the valuation of shareholdings and business interests for the purposes of financial orders in matrimonial proceedings.
8. However, as regards all those areas in which valuation is required, the evidence of expert valuers is usually central. Such expert evidence is generally both required and relied on by the courts.
9. That being said, a court is likely to give less weight to an expert’s opinions if he is a “professional expert witness” and has little or no practical experience of valuation in the context of buying and selling companies and businesses. 
10. Indeed, valuation evidence based on a simple application of pure theory rather than based on verifiable evidence in the form of, for example, comparators, is likely to carry less weight: see Taylor v Cobham & Lifemarque Ltd [2009] EWHC 2650; Re Sunrise Radio Ltd [2011] EWHC 3821 and Wann v Birkinshaw [2017] EWCA Civ 84.
11. Certainly, once valuation theory has been applied, it has repeatedly been emphasised that both the expert and, in due course, the court must stand back and assess their views against the commercial reality and business common sense: see Chilukuri v RP Explorer Master Fund [2013] EWCA Civ 1307.
12. The court’s approach to determination of valuation issues
13. The court is certainly expected to take a pro-active approach to the determination of share and business valuation issues: see North Holdings v Southern Tropics [1999] BCC 746 and Re Clearsprings (Mangaement) [2003] EWHC 2516.
14. Under the Civil Procedure Rules 1998 the court clearly has case management powers permitting it to order early valuation whether by separately instructed experts, by a single jointly instructed expert or by a court appointed assessor: see CPR Part 35 generally and, in particular, CPR 35.15 (regarding assessors) and CPR 35.7 (regarding single joint experts).
15. The court is, of course, required to use its case management powers to further the over riding objective of dealing with cases justly. To that end, courts regularly give directions for the obtaining and exchange of expert evidence as to valuation at an early stage in proceedings in the hope that the availability of valuation evidence at an early stage will encourage early settlement.
16. Increasingly, in order to minimise costs and to reduce the ambit of disputes, the value of a company or business is ordered by the court to be the subject of evidence from a single joint expert or from an assessor appointed by the court: see, for example the discussions in this regard in North Holdings v Southern Tropics [1999] BCC 746 and Re Company (No. 006834 of 1988) (1989) 5 BCC 218.
17. Indeed, courts often give directions for the early instruction of those who are to provide expert valuation evidence on the basis of assumptions directed by the court at a time when the facts still have to be determined by the court. So, for example, in a claim for relief from unfairly prejudicial conduct under section 994 Companies Act 2006 the court might direct an expert valuer to provide his valuation evidence on the basis of assumptions as to, say, the extent of diverted business opportunities or misappropriated assets or funds, the appropriate date for valuation or as to any allowance to be made for any alleged unfairly prejudicial conduct.
18. [Roger, are there any practical problems that you come across in these types of cases where directions are given as to early obtaining and disclosure of expert evidence?] Often the biggest challenge for the expert accountancy witness is that, by definition, diverted sales will not be evident from a review of the accounting records of the company from which the sales have been diverted. They will only be capable of being assessed by reviewing the accounting records of the company to which they have been diverted. However that company is unlikely to be a party to the proceedings which raises the question as to how a claimant can persuade a court to order the relevant disclosure. 
19. All too often a Catch-22 situation arises in which, the claimant needs to put before the court evidence of the diversion in order to get access to the accounting records of the company that has benefitted from it but without that access it is difficult to obtain the evidence required to persuade a judge to order disclosure.
20. Different bases of valuation
21. Before any valuation is made the basis of the required valuation needs to be identified. Generally, the basis of the required valuation is either a “market valuation” or a “fair” or “equitable” valuation.
22. As far as claims under s994 are concerned, the value to be identified for the purpose of any purchase order that might be made is the “fair value” or “equitable value” of the relevant shareholding: see Re Bird Precision Bellows [1986] Ch 658; Re London School Of Economics Ltd [1986] Ch 211; Re Elgindata [1991] BCLC 959; and Re Sunrise Radio [2014] 1 BCLC 427.
23. In contrast, in claims for “compensation” under the Commercial Agents (Council Directive) Regulations 1993 (as amended) the value which serves to identify the level of any “compensation” payable is the “market value” of the commercial agency as at the date of its termination: see Lonsdale v Howard & Hallam Limited [2007] UKHL 32.
24. Valuations for financial adjustment orders in matrimonial proceeds also tend to be “market valuations”.
25. The important point to note is that the“fair value” and the “market value” of a shareholding in a company or of an interest in a business may be substantially different.
26. [Roger, how do valuation experts view the difference between fair and market value?] Essentially the difference is that the fair value concept allows a valuer to take into account the existence of the so-called Special Purchaser.
27. International Valuations Standards Council has renamed “fair value” as “equitable value” and states:“Equitable Value requires the assessment of the price that is fair between two specific, identified parties considering the respective advantages or disadvantages that each will gain from the transaction. In contrast, Market Value requires any advantages that would not be available to market participants generally to be disregarded. Equitable Value”is a broader concept than market value. Although in many cases the price that is fair between two parties will equate to that obtainable in the market, there will be cases where the assessment of Equitable Value will involve taking into account matters that have to be disregarded in the assessment of market value, such as certain elements of Synergistic Value arising because of the combination of the interests.”An example of the use of Equitable Value includes “the determination of a price that is equitable for a shareholding in a non-quoted business, where the holdings of two specific parties may mean that the price that is equitable between them is different from the price that might be obtainable in the market.”
28. The starting point
29. Whether a “market valuation” or a “fair valuation” (or “equitable valuation”) is ultimately required the starting point is generally the identification of the “market value” of the company or business as a whole. 
30. “Market value” can be satisfactorily defined as the price that would be agreed assuming a hypothetical willing (but not anxious or forced) seller and buyer: see Holt v Holt [1990] 1WLR 1250.
31. The alternative bases for identifying “market value”
32. In valuing the whole of the company or business there are essentially two competing approaches that can be adopted; an “earnings/income basis” or an “assets basis”.
33. Which basis is appropriate in any particular case is, itself, likely to be the subject of expert evidence itself.
34. Generally, where the company or business is trading and is a “going concern” an “earnings/income basis” is likely to be considered more appropriate: see Re Bird Precision Bellows [1984] Ch 419; Buckingham v Frances [1986] 2 All ER 738 and CVC v Demarco Almeida [2002] BCC 684. 
35. On the other hand, an “asset basis” may be more appropriate where, for example, the company or business is not trading but comprises an investment vehicle or is trading but at a low profit level that does not represent an economic return on the capital invested: see Dean v Price [1954] Ch 409; Shah v Shah [2012] WTLR 165.
36. “Asset basis” valuations
37. Essentially an “asset basis” valuation is a balance sheet valuation with suitable adjustment being made for assets and liabilities that are not reflected in or are identified at values below their true current market values in the balance sheet.
38. An “asset based” valuation may not equate to a “break up” valuation: see Shah v Shah [2012] WTLR 165. In particular, the value of the whole business may be greater than the value of its individual parts.
39. An “asset based” valuation will require revaluation of the assets and liabilities recorded in the balance sheet otherwise than at their current market values.
40. Again expert assistance may be required in carrying out those revaluations both as regards current market values and anticipated dilapidation or maintenance costs.
41. [Roger, when would you use a net asset valuation?] Property investment companies are typically valued with reference to their net assets as are farms.
42. In addition, the definition of goodwill is the amount by which the value of a company exceeds its net asset value.
43. That means that if a business is valued at net asset value, by definition the value of its goodwill is ￡nil.
44. An extension of this is that to ascribe a value to a company of less than net asset value is to suggest the existence of negative goodwill.
45. Negative goodwill typically only arises in the event of insolvency or a distressed sale.
46. Accordingly valuation theory dictates that it is difficult to justify valuing a profitable going concern at less than net asset value if its assets are fairly recorded in its balance sheet.
47. “Earnings/income basis” of market valuation
48. Where an “earnings/income basis” is to be adopted, the precise methodology can be one that involves either analysing forecasts of “future cash flow” anticipated from the business against the rate of return that might reasonably be required in the circumstances of the particular case or by forecasting “future annual maintainable profits” and applying a suitable “multiple” to those profits: see Gillatt v Sky Television [2000] BCLC 103.
49. Whether an analysis of “future annual maintainable profits” or “future cash flow” is to be preferred as a starting point in any assessment of value is, in any case, again likely to be a matter of expert evidence. 
50. To some extent the “future annual maintainable profits” and “future cash flow” approaches are one and the same thing though viewed through different sides of a prism or magnifying glass and can be expected to produce similar results.
51. Theoretically at least, the most reliable valuation evidence would be achieved through an analysis of anticipated “future cash flow” and the rates of return on investment that might reasonably by required by a hypothetical purchaser. However, the application of that methodology is often problematic in practice due to the absence of reliable future cash flow forecasts or the difficulty in identifying the rate of return on capital invested that might reasonably be required by a hypothetical purchaser. 
52. Consequently, in practice expert valuers tend to value trading companies and businesses on an “earnings/income basis” that involves identifying “future annual maintainable profits” and applying a suitable “multiplier” to those profits.
53. [Roger, when would you use a DCF rather than applying a multiple to future maintainable earnings?] The application of a multiple to future earnings is only ever a proxy for the DCF approach. 
54. A DCF approach must be used if earnings are expected to grow or shrink. For example a start-up may be expected to incur losses for several years before becoming profitable. In those circumstances there will be no single figure for future maintainable earnings. Instead a discount is applied to each year’s future expected earnings to derive their aggregate net present value.
55. A DCF approach can only ever be used if reliable long-term cash flow forecasts are produced.
56. It is important to bear in mind that the DCF approach applies to earnings after tax, loan repayments and capital expenditure. By contrast, if a multiple is applied to earnings, it is often applied to Earnings Before Interest, Tax, Depreciation and Amortisation “EBITDA”) 
57. Identifying “future annual maintainable profits”
58. If “future annual maintainable profits” is to be used as the starting point in an “earnings/income basis” valuation those “future annual maintainable profits” can be identified either before or after tax is charged on those profits. 
59. The appropriate “multiplier” to be applied to those “future annual maintainable profits” will vary dependent on whether pre or post tax figures are used.
60. “Future annual maintainable profits” are assessed from the perspective of a hypothetical purchaser: Re Sunrise Radio [2014] 1 BCLC 427. The question is: “what would a hypothetical purchaser assess those future annual maintainable profits at?” 
61. Any hypothetical purchaser will, of course, identify “future annual maintainable profits” only after deducting all costs associated with the earning of those profits. Those costs will include the costs of all property, assets and goods utilised in the business and the costs of obtaining the services of persons needed to generate those profits. Consequently, for example, hypothetical market rental costs in respect of premises will need to be deducted even if the business currently pays no rent and hypothetical market salaries will have to be deducted even if the current owner/manager does not charge for his services or charges at less than the rate that might be expected between persons dealing at arm’s length.
62. [Roger - in practice what resources do you tend to use when assessing what cost to include in respect of the services provided by the owners of the company or business?]
63. The assessment of such costs is notoriously subjective but a good starting point is the Annual Survey of Hours and Earnings (ASHE) that is published by the Office of National Statistics. It provides an analysis of earnings by job title.
64. Another good source of information is the survey of directors’ remuneration published by Croner-I which provides an analysis of directors’ remuneration packages broken down by geographical location, industry sector and size of company.
65. Neither of these benchmarks should in my view be used in isolation. What is important is to recognise what work is actually done by the agent, how many hours are devoted to the agency each year and what particular skills or qualifications does the agent require to undertake those tasks. These factors all inform the choice of the notional cost.
66. In a recent valuation case, the respondents tried to argue that a director who undertook several roles (finance, sales, marketing, administration and operations) should be entitled to a full time equivalent salary for each. That approach is in my view fundamentally flawed.
67. Identifying the appropriate “multiplier”
68. As a matter of mathematics, the appropriate “multiplier” is the reciprocal of the yield that is reasonably required by the hypothetical purchaser. So, for example, if the hypothetical purchaser would expect a yield on his investment of, say, 25% then the value of the company or business is likely to be 4 times its “future maintainable profits”).
69. In practice, in the context of unquoted companies and businesses, in identifying the appropriate “multiplier” reliance is often placed on information published by accountants as to prices achieved on sales of comparable unquoted companies or businesses and even, sometimes, on comparable, quoted companies: see Re Planet Organic [2000] BCC 610.
70. In appropriate cases, an allowance may be made for the potential for growth or for the risk of contraction if it is not already accommodated for within the identification of “future annual maintainable profits” (see Re Bodaibo (1992) 10 ACLC 351) (though it is not clear to me why that potential or risk should not already have been accounted for within the identification of the likely “future annual maintainable profits” unless that growth or contraction is anticipated as arising beyond the period for which “future annual maintainable profits” has been assessed).
71. [Roger, how do you go about assessing the multiple?] There are a number of quoted indices that serve as a useful starting point including BDO’s Private Company Price Index (“PCPI”) and the UK200 Groups SME Valuation Index but these should be treated with caution because the data on which they are based is not published.
72. Ultimately the choice of multiple relies on an analysis of the Strengths, Weaknesses, Opportunities and Threats of the Company. It is this which is, more than anything else, a matter of professional judgement.
73. [Roger, and what about the choice of discount rate if you are using a DCF method of valuation?] In theory the discount rate is a matter of arithmetic calculation and some argue that it is more objective that the subjective selection of a multiple.
74. However, in practice, if a DCF is applied to an unquoted family company, the inclusion of an adjustment to reflect the so-called asset-specific risk undermines the objectivity of the other elements that go into the calculation of the discount.
75. An example of this is the application of the “alpha” adjustment in the Capital Asset Pricing Model that states that the discount rate is calculated by:
76. Starting with the risk free rate of return, typically the rate applicable to long term government bonds
77. Add the Equity Risk Premium, being the rate of return that investors require generally from equity investments and which can be obtained from various published sources
78. Adjusting for the “Beta” that reflects the volatility or risk specific to the sector in which the company trades being an uplift or discount to the Equity Risk Premium typically of between 50% to 150%
79. And finally adding the “alpha” which reflects the specific risks attaching to the company being valued.
80. Use of available comparators
81. Once a preliminary valuation has been made (on whatever basis) the reasonableness of that preliminary valuation is to be checked by reference to suitable comparators.
82. Market quoted valuations of comparable quoted companies may be used to corroborate valuations of unquoted companies and businesses where there exist reasonable quoted comparators but that is not often the case .
83. If market quoted valuations are used to corroborate valuations of unquoted companies and businesses they may need to be discounted somewhat to reflect the unquoted and possibly riskier nature of the company or business being valued.
84. Reference is also generally to be had to the values achieved in sales of comparable unquoted companies and businesses. Such data may be within the knowledge and experience of the valuer or his firm and is published by various accounting firms.
85. Surplus assets and funds and liabilities
86. Any property, assets or funds surplus to the requirements of the business will be added to the value determined as the “market value” of the company or business on an “earnings/income basis” as those assets or funds are not required by the company or business to generate the “future cash flows” or the “future annual maintainable profits”: see Re Scitec Group [2012] EWHC 661.
87. Similarly, in Re Sunrise Radio [2014] 1 BCLC 427 it was held that an allowance ought also to be made for specific liabilities that would be paid off on completion of the proposed purchase: see also Wann v Birkinshaw [2017] EWCA Civ 84.
88. [Roger, what sort of assets typically comprise surplus assets?] A common example is a director’s loan account but also many companies choose to hold substantial cash deposits for tax-planning reasons.
89. A valuer should assess the extent to which cash deposits exceed the company’s working capital requirement.
90. One of the most challenging issues in business valuation is the assessment of so-called normalised working capital.
91. In practice, when companies are sold, the buyer will often agree to pay the seller, following completion, a “Net Asset Value” adjustment being the sum by which the company’s net assets exceed that required for working capital purposes.
92. Similarly, any long term borrowings often have to be repaid at completion.
93. This introduces the concept of the deduction of Net Debt in valuation theory. If a company is valued by applying a multiple to EBITDA the result is its so-called Enterprise Value. The valuer must deduct the Company’s Net Debt to derive the Equity Value which is the value attributable to the shares.
94. In practice the Net Debt calculation can be complicated because it is not always easy to identify which liabilities are in the nature of structural debt and which are in the nature of working capital.  
95. Businesses dependent on an individual(s)
96. Where the fortunes of a company or business are intrinsically dependant on an individual who might possibly leave the company or business in the future that is likely to be reflected in the final valuation of the company or business. It is likely to be reflected in either the application of a reduced “multiplier” or an increased required rate of return on capital invested: see Re Eurofinance Group Ltd [2001] BCC 551; Vadori v AAV Plumbing 77 ACSR 616 and Re Scitec Group [2012] EWHC 661. 
97. That approach is readily understandable in circumstances where that individual is not the same person as the proposed purchaser but perhaps less easy to understand where that individual and the proposed purchaser are one and the same person.
98. [Roger, how do you deal with this in practice?] Business-owners often believe that their companies are entirely reliant on them and in some instances that may be true. However, there are few more personal businesses than sole practitioner accountancy firms in which the principal has often been a trusted business adviser to his or her clients for decades. 
99. Despite that fact, there is a vibrant market for such firms which proves that even this apparently personal goodwill is capable of being transferred to a new owner as long as the seller cooperates with the process.
100. By contrast it is virtually impossible to sell a business for more than net asset value if the seller is not cooperative and, at the very least, willing to agree to be bound by appropriate restrictive covenants. 
101. The valuation of the appropriate fraction of the issued share capital or of the business
102. After valuing the whole of the company or business the next stage in the determination of both a “market value” or a “fair value” is the determination of the appropriate fraction of the value of the whole undertaking. 
103. The appropriate fraction generally depends on the percentage of the company’s share capital or the percentage of the business that is to be valued and is really a mathematical exercise of proportionality.
104. Adjustments to the “market value” of the shareholding or business interest to achieve a “fair value” or “equitable value”
105. Once the “market value” of the shareholding or business interest has been identified there may then need to be further adjustment to that “market value” to arrive at a “fair value” or “equitable value” if that is what is required.
106. So, for example, where relief is given in respect of unfairly prejudicial conduct of a company’s affairs in the form of a purchase order that will be at a price equal to the “fair value” of the interest to be purchased and in order to arrive at that “fair valuation” or “equitable valuation” there may well need to be adjustments made to reflect the consequences of the unfairly prejudicial conduct that has been exhibited or to reflect any other factor that might need to be taken into account in reaching a “fair” or “equitable” value or price to be paid for the victim’s shareholding.
107. One adjustment that is often considered is the application of a “discount” to reflect the minority status of the shareholding or other business interest or the application of a “premium” to reflect, say, a “marriage value” that the shareholding or business interest has with the purchaser’s existing shareholding or business interest
108. In order to arrive at a “fair value” of a shareholding or business interest a “discount” or, indeed, a “premium” may need to be applied to the proportional value of the interest in the company or business that is to be valued reflective of its minority status and any consequences that might flow from the purchaser’s acquisition of that interest: see CVC v Demarco Almeida [2002] BCC 684.
109. This is often a central issue in disputes and the reason why many negotiations toward settlement break down. It is therefore disappointing to find considerable continuing uncertainty as to the correct approach though that clarity may be somewhat closer these days than previously.
110. A discount may be applied where the interest in the company or business was acquired purely for investment; particularly if the investment was acquired at a discount reflective of the minority nature of the interest acquired: see Re Company (No. 007623 of 1984) [1986] BCLC 362; Re DR Chemicals Ltd (1989) 5 BCC 39; Re Macro (Ipswich) Ltd [1994] 2 BCLC 354 and Re Planet Organic [2000] BCC 610.
111. The extent of any discount that might be applied depends on the particulars facts of the case and seems to vary widely.
112. In the case of “quasi partnership” companies there appears to be a strong presumption against applying any discount to reflect the minority status of the shareholding to be acquired: see Re Bird Precision Bellows [1984] Ch 419; Re Company (No. 00789 of 1987) [1990] BCLC 384; Verdi v Abbey Leisure [1990] BCLC 342; Ex parte Holden [1991] BCC 241; Howie v Crawford [1990] BCLC 686; Re Ghyll Beck Driving Range [1993] BCLC 1126; Quintana v Essex Hinge Co Ltd [1997] BCC 53; Strahan v Wilcox [2006] BCC 320; Re Sprintroom Ltd [2019] EWCA Civ 932; Dinglis v Dinglis [2019] EWHC 1664.
113. In the case of a company not in the nature of a “quasi partnership” the rule used to seem to be that, ordinarily, a discount was to be applied as that was said to be reflective of the true value of the minority interest: see Strahan v Wilcox [2006] BCC 320; Irvine v Irvine [2007] 1 BCLC 445. However, that position has come under criticism over the years. The current approach seems to be that what is required for the purposes of a purchase order under section 994 Companies Act 2006 is a “fair value” which does not involve conferring any unjust enrichment on the purchaser and that such a “fair value” may often involve valuation without the application of any discount to reflect the minority nature of the interest: see Re Sunrise Radio Ltd [2009] EWHC 2893; Re Blue Index [2014] EWHC 2680; Re Scientific Management Associates [2019] NSWSC 1643; Re AMT Coffee Ltd [2019] EWHC 46. Most recently the court’s approach in cases of non “quasi partnership” seems to be that there should be no presumption for or against the application of a discount to reflect the minority status of the interest to be acquired and a discount should be applied if, but only if, it is required to arrive at a “fair value” in all the circumstances of the case: see Re Edwardian Group Ltd [2018] EWHC 1715; Re Lloyds Autobody Ringway Ltd [2018] EWHC 2336; Dinglis v Dinglis [2019] EWHC 1664.
114. When seeking to identify the value of a minority shareholding it may well be inappropriate to apply a discount to reflect that minority status if the circumstances of the case are such that the minority shareholder might otherwise have been entitled to a winding up order on the “just and equitable” basis and vice versa: see Dinglis v Dinglis [2019] EWHC 1664.
115. In Re Blue Index [2014] EWHC 2680 it was suggested that a discount might be justified in valuing a minority interest in a non “quasi partnership” when the vendor himself acquired his shareholding at a discount to its then market value. The position might reasonably be expected to be that if no such discount was enjoyed by the vendor when he acquired his interest it may be that no discount to reflect the minority status of his interest is justified.
116. In appropriate cases the “fair value” or “market value” may even be considered to be or to reflect the value to the actual purchaser himself rather than a hypothetical third party purchaser: see Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 33. So, if the acquisition of the shareholding is likely to confer a “marriage value” when combined with an existing shareholding, that may result in the desirability of the application of a premium (as opposed to any discount): see Re Eurofinance Group Ltd [2001] BCC 551. So, for example where a 40% shareholder is to acquire a further 15% shareholding the latter may be considered to have a “fair value” to the proposed purchaser in excess of the value of a 15% shareholding to a purchaser who had no existing interest.
117. Perhaps what can be said with relative certainty is that when asked to identify a “fair value” a court is unlikely to apply a discount where to do so would be to confer a windfall. So, for example, in circumstances where a person is ordered to purchase a shareholding as a result of his conduct of the affairs of the company in a manner unfairly prejudicial to the interests of the vendor he is unlikely to be afforded a discount in this regard and might have to face paying a premium.
118. [Roger, how do you go about assessing what minority discounts to apply?] There is relatively little published guidance on the issue of discounts other than in tax cases which do little to inform as to the discounts that might be applicable in shareholder disputes.
119. Some valuers use rules of thumb such as the rule of 85, which says that the sum of the size of the shareholding and the discount should be 85. In other words a 60% shareholding should be discounted by 25% and a 20% shareholding should be discounted by 65%. 
120. If a “fair value” assessment is being made consideration needs to be taken of the value that will be gained by existing shareholders in the event of a share sale, especially if the Articles of Association provide for pre-emption rights.
121. Adjustment to reflect the consequences of any unfairly prejudicial conduct
122. In cases where a purchase order is made under section 994 Companies Act 2006 in light of unfairly prejudicial conduct the court will generally identify the “fair value” of the shareholding as the “fair value” that shareholding would have had if the unfairly prejudicial conduct had not taken place and its affects had not been felt: see Scottish Wholesale Co-operative Society v Meyer [1959] AC 324.
123. Consequently, in identifying a “fair value” of a shareholding or other business interest allowance may have to be made for the consequences of any unfairly prejudicial conduct (alternatively, the court may order that the relevant valuation should be made at a date that predates the unfairly prejudicial conduct): see Lloyd v Casey [2002] 1 BCLC 454; Re Annacott Holdings Ltd [2012] EWCA Civ 998.
124. However, if the company or business has not actually suffered any financial loss as a result of the conduct complained of then it will generally be inappropriate to apply any adjustment even if unfairly prejudicial conduct has taken place: see Re Home & Office Fire Extinguishers Ltd [2012] EWHC 917.
125. The date of valuation
126. The appropriate date for valuation is a matter that again lies within the discretion of the court but it is generally the date of the court’s order: see Profinance Trust v Gladstone [2002] 1 WLR 1024.
127. However, an earlier date for valuation may be appropriate if there is a significant deterioration in the fortunes of the company or business following, or even as a result of, the purchaser’s actions: se Re Cumana Ltd [1986] BCLC 430.
128. Events that take place after the date fixed for valuation are generally irrelevant to valuation: see Re Blue Index [2014] EWHC 2680; Joiner v George [2003] BCC 298. But this is not apparently always the case for in assessments of “compensation” payable under the Commercial Agent (Council Directive) Regulations 1993 it has been suggested at the highest level, indeed in the House of Lords, that events that take place after the date of valuation might be considered relevant: see Lonsdale v Howard & Hallam Ltd [2007] UKHL 32.
129. [Roger, what are your thoughts on Commercial Agency valuations?]
130. I suppose the first question is to what extent and for how long Commercial Agencies will feature in the legal landscape post-Brexit.
131. To some extent they were an anathema to the English legal system which has traditionally provided statutory protection for consumer and employees but has avoided interfering in the contractual relationships between commercial entities. That said, the concept of the commercial agent has now become so well established that it may be difficult to abolish it.
132. In any event one suspects that the UK government will have other priorities for several years to come that mean that early consideration of the status of the humble commercial agent is unlikely.
133. On the specific issue of the use of hindsight in the assessment of compensation, I personally think the courts will tend to be relatively cautious. That said, if an industry or sector is on a trajectory of sustained growth or decline, any compensation is likely to take that into account.
134. Perhaps most significantly, a commercial agent who was selling, say conference stands and whose agency was terminated on the eve of the global pandemic is likely to be entitled to relatively little compensation on the basis that the court will recognise that, with the benefit of hindsight, no one in the conference sector will have been able to do any business for most of 2020 or 2021.
135. [And Roger, whilst we are on the subject of the valuation of commercial agencies for the purposes of assessing compensation could you just give us an insight into your approach to (1) identifying the appropriate notional costs of the services of the agent himself to be deducted when assessing future maintainable profits of a commercial agency; and (2) how do you go about apportioning overhead expenses where the agent carries on multiple agencies?] The assessment of the notional cost of the agent is notoriously subjective but the usual approach is substantially the same as that used when assessing the market rates of remuneration payable in respect of the owners of companies and businesses. 
136. Again, a good starting point is the Annual Survey of Hours and Earnings (ASHE) that is published by the Office of National Statistics. Another good source of information is the survey of directors’ remuneration published by Croner-I that I mentioned previously. Once again what is important is to recognise what work is actually done by the agent, how many hours are devoted to the agency each year and what particular skills or qualifications does the agent require to undertake those tasks. These factors all inform the choice of the notional cost.
137. As for the apportionment of the notional cost of the agent and the other overheads between various agencies, there are two options. The simplest is to apportion in the ratio of sales. Alternatively an apportionment can be made based on the relative gross profits of each agency. Finally it is of course possible simply to divide the costs equally between the agencies but in my view that is seldom appropriate.
138. Ultimately the choice of the appropriate approach depends on an analysis of what best matches the commercial reality.
139. It is also important to recognise that some overheads may be capable of being apportioned on a specific basis, perhaps because they relate solely to specific agencies and not to others. For example if only one of several agencies requires overnight accommodation costs to be incurred, then all those costs should be apportioned to that agency.
140. Where an agreement between the parties identifies a particular method of or procedure for valuation
141. In some cases the courts have held that if, for example, the articles of association of a company provide a method of agreed “fair valuation” or “market valuation” of a shareholding for certain purposes then that method may be applied not only for those purposes but also when it is otherwise necessary to determine the “fair value” or “market value” of a shareholding. 
142. More recently that approach has been less in favour. It now seems to be the case that if the relevant circumstances contemplated by the agreement do not precisely pertain then it might not be appropriate to apply that agreed method of valuation: see Re Company (No. 004377 of 1986) [1987] 1 WLR 102; Viridi v Abbey Leisure [1990] BCLC 342; Re Company )No. 00330 of 1991) [1991] BCC 241; Re LCM Wealth Management Ltd [2013] EWHC 3957; Gray v Braid Group (Holdings) [2016] CSIH 68 (cf Isaacs v Belfield Furnishings Ltd [2006] 2 BCLC 705).

Andrew Marsden

Commercial Chambers, Bristol

Roger Isaacs

Milsted Langdon LLP

30 March 2021