Kohli v Lit & Ors

The court determined the fair value of the petitioner’s shares in Sunrise Radio Limited as at 13 November 2009, without any minority discount, following an earlier order requiring purchase of the shares. The principal valuation issues were the appropriate measure of maintainable earnings, the treatment of historic bank debt and interest, the handling of consultancy/directors' fees, the extent to which loss-making subsidiaries' liabilities should be reflected, and the correct price-earnings multiple.

The judge criticised and compared the two competing experts, preferring Ms Hindson’s overall methodology for weighting years and selecting a price-earnings ratio, but adopting adjustments urged by the petitioner’s counsel on the treatment of subsidiaries and realisable assets. The court held that the historic bank debt should be treated as payable by a purchaser (and therefore deducted), that continuing interest cost attributable to paid-off historical debt should be eliminated from maintainable earnings, and that consultancy fees could not be reduced without market evidence and therefore remained for valuation purposes. Applying those findings and discounting for private company ownership produced a total group value from which bank debt was deducted and the petitioner’s agreed percentage (14.78%) applied, resulting in a value for the petitioner’s shares of £700,000.

Background and procedural posture:

• The judgement is a first-instance valuation hearing following an earlier order (25 May 2010) that the respondents purchase the petitioner’s shares at the fair value as at 13 November 2009 without any discount for minority status.

Parties and experts:

• The petitioner was Geeta Kohli and the respondents included Avtar Lit and others. Each side instructed a valuation expert: Allan Thomson for the petitioner and Moira Hindson for the respondents.

Nature of the application:

• The court was asked to ascertain the fair value of Sunrise Radio Limited (Sunrise) shares, considering group structure, profitable and loss-making subsidiaries, historic bank borrowings of about £9.539 million, the value of charged property (Hayes Gate House), and appropriate valuation assumptions.

Issues framed by the court:

• Appropriate basis for calculating maintainable earnings and which historical years to include.
• Whether and to what extent subsidiaries’ liabilities should affect value and whether loss-making subsidiaries could be disregarded by a purchaser.
• Treatment of historic bank debt and whether interest charges linked to that debt should be excluded from maintainable earnings if the debt is to be repaid by a purchaser.
• Whether historical consultancy fees or directors’ remuneration should be adjusted to a market rate and, if so, on what evidence.
• Appropriate price-earnings multiple and allowance for private company status.

Court’s reasoning and conclusions:

• The judge evaluated the two experts’ credibility and methodologies. He found Ms Hindson to be balanced, well reasoned and persuasive on P/E multiple and year-weighting, though criticised her lack of market transaction experience for certain likelihood assumptions. He found Mr Thomson partisan, selectively using pre-2008 profits and excluding post-2007 management accounts without good reason.
• The court accepted that a purchaser would need to deal with the historic bank debt and therefore the full debt should be deducted in the valuation. Consequently continuing interest charges attributable to that historical debt should be eliminated from maintainable earnings.
• Loss-making subsidiaries could, in appropriate circumstances, be wound up or allowed to fail and should not automatically reduce value unless there was a legal obligation to meet their liabilities; the availability of charged assets (Hayes Gate House) to meet the bank debt was relevant to value.
• In the absence of market evidence to substitute lower consultancy/directors’ fees, the court declined to reduce the recorded consultancy fees from the maintainable earnings figure.
• The judge adopted Ms Hindson’s approach to year-weighting (four years with equal weight and treating 2009 as neutral) and accepted her P/E multiple of 12 reduced by 30% for private company discount to 8.4. Applying the adjusted earnings produced a group valuation figure for Sunrise and its profitable subsidiaries and a valuation of Hayes Gate House at £5.44 million; after deducting bank debt of £9.539 million the net group value was £4,755,446. Applying the agreed shareholder percentage of 14.78% produced a rounded value for the petitioner’s shares of £700,000.

Wider observations:

• The judge criticised the practice of competing single-party experts and urged earlier court-ordered appointment of joint experts in similar valuation disputes, citing guidance from previous authorities.

First instance: The court determined the fair value of the petitioner’s shares at the valuation date (13 November 2009) to be £700,000. The judge preferred the respondent expert’s overall methodology for year-weighting and price-earnings ratio but accepted petitioner’s submissions that loss-making subsidiaries’ liabilities need only be reflected where legally binding and that charged assets available to meet the bank debt should be taken into account. Historic bank debt was to be deducted and interest attributable to that debt excluded from maintainable earnings; consultancy fees were left unchanged in the absence of market evidence to reduce them. The arithmetic and application of a private company discount led to the final figure of £700,000.