McKinlay v Nexia Smith & Williamson Audit Ltd

A negligent valuation does not automatically establish recoverable loss where the valuation falls within the range that a reasonably competent valuer, acting properly, could have reached. The claimant must show that the certified figure was below that range. In valuing a minority shareholding in an unquoted company, the court may consider maintainable dividends, the required dividend yield, marketability and the reasonably foreseeable prospect of a sale or flotation of the company. Later events may be considered only to assess what forecasts could reasonably have been made at the valuation date. A valuer must maintain an independent balance between the competing interests affected by the valuation.

The claimant held a minority shareholding in L&M Food Group Ltd. Under the company’s articles, the defendant auditor was required to certify the fair value of the shares when the claimant ceased to be a director and employee. The defendant valued the holding at £128 per share. It admitted negligence in failing to consider an earlier share transaction and the possible adjustment of dividends for exceptional charges, but argued that its figure remained within the range open to a reasonable valuer.

The central issues were whether the negligent valuation fell below the reasonable range and, if so, what the shares were worth at the relevant date.

1. The claim succeeded. The court held that the defendant’s admitted negligence caused the valuation to fall below the lowest figure that any reasonably competent valuer, acting properly, could have certified. The range-of-reasonable-values approach in Merivale Moore Construction Ltd v Strutt and Parker (a Firm) [2000] PNLR 498 was treated as binding, although the judge expressed difficulty with its underlying rationale. The point did not affect the result because the £128 figure was below the reasonable range.

2. The valuation had to be made as at 15 June 2004, applying the fair-value requirement in article 37(C) of the company’s articles. Relevant considerations included maintainable dividends, the dividend yield required by a hypothetical purchaser, the limited marketability of a minority holding and the prospect of a sale or flotation of the company.

3. Following the approach accepted in Buckingham v Francis, Douglas & Thompson [1986] 2 All E.R. 738, later events could be used to test the reasonableness of forecasts available at the valuation date, but not as facts directly determining value at that date. The later sale of L&M supported the reasonable prospect of a sale or flotation, without itself being treated as part of the 2004 valuation.

4. The judge preferred the claimant’s expert evidence. The appropriate maintainable dividend was assessed at approximately £33.83 per share, a 7 per cent dividend yield was reasonable, and substantial weight could be given to the prospect of a company sale or flotation. The resulting value was £635 per share. The defendant’s approval of Trustco’s shares at £620 per share was materially inconsistent with its valuation of the claimant’s shares at £128 per share and demonstrated the lack of proper independent balance in the valuation process.

5. Judgment was entered for the difference between the amount received and the amount that should have been received: £509,535. The precise order, including interest and costs, was left to be settled by counsel. Permission to appeal was refused because the decision was based on the evidence and there was no realistic prospect of success.