Profinance Trust SA v Gladstone

Shares ordered to be purchased following an unfair prejudice petition should ordinarily be valued at the date of the purchase order. The overriding requirement is fairness on the particular facts, which may justify another date and compensating adjustments. A substantial increase in profits does not itself establish that the company has acquired a new economic identity.

The court's powers under section 461(1) of the Companies Act 1985 include increasing a historic valuation by the equivalent of interest. That power requires great caution. The claim must be clearly advanced and supported by evidence showing why it provides a fair result. Judicial discretion must rest on agreed or established facts.

Profinance Trust SA held 40 per cent of the shares in Americanino Ltd, a computer-memory business. Paul Gladstone held the remaining shares and managed the business. Profinance had supplied the start-up capital, which the company subsequently repaid. Its representative, Domenico Serra, resigned from the board after disagreements with Gladstone.

Profinance petitioned under section 459 of the Companies Act 1985. Before the hearing, the parties agreed valuations at several dates. Gladstone conceded that the petition was well founded, and Profinance accepted that the valuations removed depreciation attributable to the alleged misconduct. No witnesses gave evidence.

Mr Kim Lewison QC, sitting as a deputy judge in the Chancery Division, selected the petition-date valuation and added 45 per cent to compensate for delayed payment. His decision was reported at [2000] 2 BCLC 516. Profinance appealed. The principal issues were the power to include the equivalent of interest and the fair valuation date.

Per Robert Walker LJ, delivering the judgment of the court, the appeal on valuation was allowed. The appeal against the costs order was dismissed.

1. Section 461(1) of the Companies Act 1985 empowered the court to include the equivalent of interest when fixing a purchase price by reference to a historic valuation. Its broad discretion extended beyond the powers listed in subsection (2). Established valuation adjustments already permitted shares to be valued as they would have been without prejudicial conduct.

   The decisions in Re Bird Precision Bellows and Elliott v Planet Organic did not establish a general prohibition. Their treatment of interest reflected the restrictions imposed by an earlier consent order or judicial order. The observation in Re D R Chemicals that interest could never run before the purchase order did not establish the suggested restriction on the statutory power.

2. The power required great caution. Continued ownership of shares and receipt of benefits could weigh against an interest allowance. A petitioner seeking a historic valuation augmented by the equivalent of interest had to advance that claim clearly and establish by evidence that it was the only or best means of obtaining a fair result. Evidence supporting the amount was also required unless the claim sought only simple interest at a normal rate. The deputy judge's allowance lacked a solid evidential basis.

3. The starting point was that an interest in a going concern should be valued at the date on which its purchase was ordered. The overriding requirement remained fairness on the particular facts. Earlier dates could be appropriate where business had been diverted, the company had acquired a new economic identity, or a general market decline made an earlier date fair. These were illustrations, rather than an exhaustive list. A petitioner was not entitled to the most advantageous exit regardless of fairness to the purchaser.

4. The deputy judge had misassessed the original joint venture and placed excessive weight on unsupported explanations for the company's increased value. Repayment of the start-up capital did not sever Profinance's investment from the business's subsequent success. Increased profitability did not itself constitute the structural or business transformation described in the authorities as a sea change. Profinance could not fairly be criticised for rejecting offers while deprived of access to accounting records.

5. The court exercised its own discretion on the undisputed facts. Remittal would cause further delay and expense and give Gladstone another opportunity to introduce evidence after declining an adjournment below. The agreed value at the first-instance hearing was the fairest basis. An order was substituted requiring Gladstone to purchase Profinance's holding for £86,000.

• Court of Appeal: In [2001] EWCA Civ 1031 , allowed the valuation appeal and substituted a purchase price of £86,000. Dismissed the appeal against the costs order. Permission to appeal was refused.
• High Court, Chancery Division: Mr Kim Lewison QC, sitting as a deputy judge, ordered Gladstone to purchase Profinance's shares using the petition-date valuation with a 45 per cent uplift. Ordered Profinance to pay half of Gladstone's assessed costs. The judgment was reported at [2000] 2 BCLC 516.