ESO Capital Luxembourg Holdings II SARL v GSA Invest Management SA & Ors

Contractual damages are assessed by reference to the value of the benefit lost, ordinarily at the date of breach. An open-market valuation must reflect the real market and the price a reasonable purchaser would probably pay after proper inquiry. A speculative redevelopment possibility is excluded unless there is evidence of actual market demand and a reasonable purchaser would have contemplated it. In a discounted cash-flow valuation, the court must assess the assumptions in combination and stand back to test the result against reliable contemporaneous evidence. Contractual terms may be implied where necessary for commercial coherence, but the implied term cannot improve the claimant’s position beyond the loss caused by the breach.

The claimant held 30% of a Swiss company owning a luxury ski hotel. The defendants admitted breaches of a settlement agreement, including conduct that resulted in the claimant’s shareholding being diluted. The principal issue was the value of the claimant’s shares immediately before dilution, assuming compliance with the agreement.

The parties disagreed over whether the hotel should be valued on a discounted cash-flow basis or by reference to a possible conversion into a condominium-style serviced-apartment development. They also disputed adjustments for connected indebtedness, directors’ fees, a legal provision, incentive fees and taxation.

1. Valuation date and approach. Damages were to compensate the claimant for the contractual benefit lost and were assessed at 10 October 2012. The open-market exercise required a hypothetical reasonable vendor and purchaser, with the purchaser reflecting the actual demand existing in the market.
2. Condo-hotel proposal. The evidence did not establish any actual demand for conversion into a condo-hotel. The concept had no successful track record, involved substantial regulatory and commercial uncertainty, and presented significant risks and obstacles. A reasonable purchaser would therefore not have bid on that basis, and no blended uplift could properly be added to a conventional valuation.
3. DCF valuation. The court adopted the more conservative cash-flow projections, accepted a revenue-based CAPEX provision, included an allowance for PPE expenses, and applied a 6% post-tax discount rate and 5% capitalisation rate. The resulting market value of the hotel was CHF 27.5 million.
4. Contractual adjustments. The agreement prohibited GSA’s transaction that replaced UBS debt with connected indebtedness and contained a broad prohibition on payments to incumbent directors. However, the connected debt did not increase the company’s value because it replaced equivalent external debt. The full CHF 280,110 paid to incumbent directors was deducted. The CHF 1.5 million legal provision was released in the valuation, while the incentive fee was treated as included in transaction costs and no tax deduction was made.
5. Disposition. The claimant’s 30% share was valued at CHF 1,879,833. The court awarded that sum as damages and reserved interest and costs if not agreed.

First-instance judgment. No prior appellate decision is stated in the judgment.