Re Blue Index Limited

The Court determined the fair value of the petitioner’s 3% shareholding as at the agreed valuation date of 1 November 2006 and found that the two majority directors had acted in a manner unfairly prejudicial to the petitioner. The judge applied the established authorities on valuation in unfair prejudice cases, in particular Re Bird Precision Bellows and O’Neill v Phillips, and concluded that the general rule is that no minority discount should be applied unless the petitioner had acquired his shares at a discounted price. On the facts the petitioner had paid a substantial premium for his shares; the court therefore applied no discount and valued the holding by a capitalised earnings approach (adjusting directors’ remuneration to a commercial level and applying an appropriate earnings multiple).

The court made specific subsidiary findings that: the issue of 1,000 shares in 2002 and the 2003 amendment of the articles were deliberately prejudicial acts; the majority directors breached their fiduciary duties in determining their own remuneration for the financial years from 2003 onwards; events after the valuation date were excluded from valuation except in ordinary valuation principles; and the petitioner was entitled to a share purchase order (as already ordered by the Registrar).

Applying a commercial remuneration figure (assessed at 10% of turnover) and a multiplier of 12, the judge fixed the fair value of the 3% holding at £300,000, awarded interest at a commercial rate for 18 months, and directed a separate calculation to compensate the petitioner for excessive directors’ remuneration for the years ending 30 September 2004, 2005 and 2006 (with a formula specified in the judgment).

Background and parties. The petitioner, Paul Murrell, invested in Blue Index Limited in April 2002 and acquired a 3% shareholding. The first and second respondents, James Swallow and James Sanders, were the majority shareholders and directors. The petitioner presented a petition under the companies legislation seeking an order for purchase of his shares on grounds of unfair prejudice. A previous Registrar order had found facts (including deliberate issue of shares in 2002 and changes to the articles in 2003) which the court treated as established.

Nature of the application. The petitioner sought a purchase order and a court-determined fair price for his 3% holding as at 1 November 2006. The primary contested issues were (i) whether a discount for a minority shareholding should be applied, (ii) the correct valuation methodology and commercial level of remuneration for the majority directors, and (iii) whether the majority directors breached fiduciary duties by paying themselves excessive remuneration and paying inadequate dividends.

Issues framed by the court.

• Whether the general rule in unfair prejudice share valuations requires no minority discount, or whether a discount should ordinarily be applied outside quasi-partnership cases.
• The appropriate valuation methodology and the correct assumptions for directors’ remuneration and the earnings multiple.
• The consequences and remedy for breaches of fiduciary duty as to directors’ remuneration for specified financial years.

Court’s reasoning and findings. The judge canvassed and applied authorities including Re Bird Precision Bellows and O’Neill v Phillips, accepting the proposition that, ordinarily, a minority discount is not appropriate where the petitioner had not acquired shares at a discounted price or where it would be unfair to treat him as a willing seller. The judge rejected the respondents’ submission that a minority discount should routinely apply in non-quasi-partnership cases and held that, on the facts, the petitioner had not acquired the shares at a discount but rather paid a substantial premium. The court found that the majority directors had breached fiduciary duties in determining their remuneration from the financial year ending 30 September 2004 onwards (though not necessarily in conscious bad faith) and that the 2002 share issue and 2003 changes to articles were deliberate and prejudicial.

On valuation the judge preferred a capitalised earnings methodology. He adjusted the commercial level of directors’ remuneration to 10% of turnover (citing past practice and business model) and adopted a multiplier of 12 (rounded from expert evidence). Applying those assumptions produced a fair value for the petitioner’s 3% holding of £300,000 as at 1 November 2006. The judge awarded interest at a standard commercial rate on that sum for 18 months (to the date of judgment) and described a method by which the petitioner should be compensated for excessive director remuneration in the financial years ending 2004–2006 (calculating additional dividends that would have been paid and awarding 3% of those dividends). The judge left detailed arithmetic of the compensation calculation to the parties to agree.

Procedural posture. This was a first-instance Companies Court hearing of a petition for unfair prejudice and determination of purchase price; the court treated Registrar Derrett’s earlier findings as established and made the valuation and remedy determinations.

The petition succeeded. The court held that the petitioner’s 3% shareholding was fairly valued at £300,000 as at 1 November 2006 and ordered the purchase at that price. The court declined to apply a minority discount because the petitioner had paid a substantial premium for the shares and because the respondents had acted in ways unfairly prejudicial to him, including breaches of fiduciary duty in setting their own remuneration. The court awarded interest at a commercial rate for 18 months on the purchase price and directed a separate calculation to compensate the petitioner for excessive directors’ remuneration for the years ending 30 September 2004–2006, using a formula specified in the judgment.