Chilukuri & Anor v RP Explorer Master Fund

In valuing damages for failure to transfer a minority shareholding, the court must value the shareholding actually lost, rather than simply the underlying assets held by the company. The valuation must reflect commercial reality at the valuation date, including the shareholder’s lack of control, the company’s financial position and obstacles to realising underlying assets. A discounted cash-flow model cannot rest on unproved assumptions that finance, title, regulatory approvals or market conditions will permit an inactive project to begin. Specific risks cannot be absorbed into a generic discount rate without supporting evidence. After analysing individual factors, the valuer must stand back and ask whether the result makes commercial sense. An appellate court may intervene where the valuation falls outside the bounds of reasonable analysis.

The claim arose from breach of an escrow deed under which Ravi Chilukuri promised to transfer his 26% shareholding in SRM Exploration PVT Limited to a nominee as security for an investment. The deputy judge found breach and awarded substantial damages. He valued the shares as at 1 July 2009 by taking 26% of Exploration’s net asset value, less a minority discount. Exploration’s principal asset was a 51% interest in Cobit-SRM SPRL, whose alleged bitumen-mining rights in the Democratic Republic of Congo were valued by discounted cash flow.

The appeal was limited to quantum. The appellants challenged the treatment of the outstanding presidential decree, financing and political risks, title litigation and a winding-up petition against Exploration. The central issue was whether the valuation reflected the real market value of a minority holding at the valuation date.

1. Appeal allowed. The Court of Appeal unanimously substituted nominal damages for the substantial damages awarded below. The question of costs was left for further submissions.
2. Briggs LJ applied the established approach to an appeal against factual findings, bearing in mind the principles stated in Assicurazioni Generali SpA v Arab Insurance Group [2003] 1WLR 577 and approved in Datec Electronics Holdings Limited v United Parcels Service Limited [2007] UKHL 23. The appellate court should respect the trial judge’s overall assessment, but may intervene where the conclusion lies outside the bounds of reasonable analysis.
3. The valuation had to concern the 26% minority shareholding, not merely the value of the bitumen deposit or Exploration’s underlying assets. A purchaser would have had no management or board rights, no assured right to dividends and no ability to require a sale of Cobit’s interest. Those limitations materially affected value.
4. A discounted cash-flow valuation of an unexploited business had to reflect specific obstacles to commencing and conducting the business. The absent presidential decree could not be treated as a mere administrative formality without adequate evidence. The relevant market was one in which a prudent investor would conduct due diligence, including into title and regulatory approval. Article 11.1 of the joint venture agreement was only a qualified undertaking concerning currency regulation; it was not a positive guarantee that hard currency would be supplied.
5. The evidence of failed attempts to obtain finance, the deterioration in the political and economic conditions in the Democratic Republic of Congo and the absence of continuing efforts to fund the project made it unreasonable to assume that the required investment would be available. These project-specific risks could not be accommodated within the generic discounts used by the expert.
6. The outstanding winding-up petition was an immediate and potentially terminal impediment. A prudent purchaser of the minority holding would not rationally pay the proposed purchase price and also fund a settlement that principally benefited the other shareholders. Taking all matters together, no reasonably prudent purchaser would have paid anything for the shares.

Lewison LJ agreed, adding that the judge had valued the wrong subject matter and had lost sight of the reality principle: any departure from reality had to be compelled by the sale hypothesis or supported by solid evidence, rather than assumption or speculation. Rimer LJ agreed with both judgments.

• Court of Appeal (Civil Division): Appeal from the order of Mr Leslie Blohm QC, sitting as a deputy judge of the Chancery Division, made on 30 January 2013. The appeal concerned quantum only and was allowed, with nominal damages substituted.