Lewis v Clarke & Anor

The petition under section 994 of the Companies Act 2006 for unfair prejudice succeeded. The court exercised its wide discretion to order a buy-out and to determine a fair value for the petitioner’s 50% shareholding. The principal valuation issues were whether to adopt an earnings/dividend based approach or a net asset approach, the appropriate date of valuation, and how to treat the uncertainty as to renewal of the lease of the business premises. The judge rejected exclusive reliance on the joint expert’s net asset valuation because of inadequate up-to-date financial information and the possibility — but not certainty — of non-renewal of the lease. Applying the statutory equitable test of what is fair and equitable, the court fixed the valuation at £45,500 as at 1 September 2019, being a compromise combining historical dividends and a modest multiplier to reflect future profit potential while discounting the lease risk.

The petitioner and first respondent were equal shareholders and directors of a small motor repair business. Following a relationship breakdown the business was transferred without the petitioner’s agreement to a new company wholly owned by the first respondent, and the petitioner issued a section 994 Companies Act 2006 petition alleging unfairly prejudicial conduct. The court accepted jurisdiction and previously ordered the respondent to purchase the petitioner’s shares; the present hearing concerned the fair value payable.

(i) Nature of the claim/application: A section 994 petition for unfair prejudice seeking an order that the first respondent purchase the petitioner’s 50% shareholding.

(ii) Issues framed by the court:

• Appropriate valuation methodology (earnings/dividend, maintainable earnings multiplier or net asset/break-up).
• Appropriate date for valuation given the transfer of business and uncertainty over lease renewal.
• Weight to be given to the joint expert valuer's report and whether to depart from it.

(iii) Court’s reasoning: The court applied authorities recognising broad equitable discretion to do what is fair and equitable in remedying unfair prejudice and guidance on valuation methods. The joint expert reported a net asset valuation driven by the prospect of the lease not being renewed and identified deficiencies in up-to-date accounts. The petitioner challenged the expert’s assumptions and advanced a dividend-based approach using historic dividends multiplied to reflect lost future dividends and ongoing profit potential. The court found the expert’s net asset approach overly reliant on a speculative non-renewal of the lease and deficient because current financial data had not been provided; nevertheless the lease risk could not be ignored. Balancing the need for proportionality and fairness, and in the absence of further multiplier evidence, the court adopted a compromise: crediting dividends for 1 September 2017 to 1 September 2019 based on the 2016 dividend figure and adding a modest multiplier of 1.5 to reflect future profit potential, then discounting for the lease risk. The court fixed the fair value at £45,500 as at 1 September 2019 and directed the parties to arrange payment discussions, subject to the existing order that the respondent purchase the shares.

First instance: The petition was successful and the court determined the buy-out price for the petitioner’s 50% shareholding. Having considered expert evidence and submissions on valuation methods, and applying the equitable standard of what is fair and equitable, the court fixed the fair value at £45,500 and set the valuation date as 1 September 2019. The rationale was that the joint expert’s net asset approach overstated the effect of a speculative non-renewal of the lease and lacked up-to-date accounts, so a compromise combining historic dividends and a modest multiplier (discounted for lease risk) was fair and proportionate.