Wann & Ors v Birkinshaw & Anr

This appeal concerned the proper basis for valuing shares following an order under section 994 of the Companies Act 2006 for the purchase of a petitioner’s shares. The court held that the Order required a market valuation of the issued share capital and not a separate valuation of the company’s principal asset irrespective of liabilities. The joint expert had valued the lodge park business at £2.85m on a multiple of earnings basis, but accepted that a purchaser of the share capital would negotiate a reduction to reflect the company’s net borrowings. On the evidence the court reduced the gross earnings-based valuation by half the net borrowings (£700,000) to arrive at a valuation of £2.15m for 100% of the share capital, giving a 25% share value of £537,500.

Background and parties

The respondent shareholder petitioned under section 994 of the Companies Act 2006 alleging unfairly prejudicial conduct. The company, Quarry Walk Park Limited, had four equal shareholders; the respondent had been removed as a director in 2009. A Recorder found in the petitioner’s favour and ordered the other shareholders to purchase his shares.

Procedural posture

• The Recorder determined liability and ordered purchase of the petitioner’s shares. A joint expert was appointed under a timetable and a letter of instruction annexed to the order.
• Colliers (property valuers) prepared a report valuing the park on a multiple of earnings basis at £2.85m. The joint expert, Mr Handley, adopted that valuation for the company and produced a share valuation of £712,500 for the petitioner’s 25% holding.
• HH Judge Kaye accepted that approach and fixed the price at £712,500. The appellants obtained permission to appeal to the Court of Appeal and challenged whether net borrowings should have been taken into account in valuing the issued share capital.

Issues framed

• Whether the Order required valuation of the issued share capital or instead permitted valuation of the company’s property/business without deduction of liabilities.
• Whether and to what extent the company’s net borrowings should be deducted from a multiple of earnings valuation when valuing the share capital.
• The proper approach where expert evidence indicated negotiation would affect any realisation price but did not give a precise reduction.

Court’s reasoning and conclusions

• The court construed the Order as requiring the market value of the issued share capital: the reference to the "total value of the Company" and the assumption of willing vendor and purchasers operating at arm’s length pointed to valuation of the share capital, not merely of an asset.
• The court rejected the dichotomy drawn by the judge below between a valuation of "the company" and the price for 100% of the issued share capital and held those concepts were the same for the purposes of the Order.
• The impact of net borrowings on a share sale is a commercial question dependent on evidence. The joint expert had given evidence that a buyer would seek to reduce an earnings-based valuation by the amount of net borrowings and that any outcome would be negotiated; he suggested a potential reduction of about £1.4m but described the outcome as uncertain.
• Given the uncertainty, the Court of Appeal made the best commercial assessment on the available evidence and concluded that a reduction equal to half the net borrowings (£700,000) was justified, producing a 100% share capital value of £2.15m and a 25% value for the petitioner of £537,500. The court therefore allowed the appeal in part and substituted that figure for the judge’s figure.

Other matters

The appellants’ challenge to the costs orders failed because the substituted price remained significantly above a 2009 offer they relied on. The court also rejected the respondent’s alternative case limited to a deduction only for the cost of servicing the borrowings as unsupported by the evidence.

Appeal allowed in part. The Court of Appeal held that the Order required valuation of the issued share capital and that liabilities may affect the market price for 100% of the shares. On the evidence it was proper to reduce the earnings-based valuation by half the company’s net borrowings (£700,000), producing a substituted fair value for the petitioner’s 25% shareholding of £537,500.

Appeal from HHJ Kaye QC sitting in the High Court, Leeds District Registry, Chancery Division (valuation hearing held before HHJ Kaye on 14 April 2015). Recorder J. M. Holmes had tried the petition and ordered purchase of the shares in April 2013. Permission to appeal was initially refused by HHJ Kaye but granted on the papers by Lewison LJ. The Court of Appeal gave judgment on 21 February 2017 ([2017] EWCA Civ 84).