Timothy McMonagle v Lee Harvey & Ors

This is a first instance valuation judgment following the court's Liability Trial. The court accepted the joint expert's enterprise valuation approach, including EBITDA normalisations, application of an EBITDA multiple and adjustments for director remuneration, VAT, warranty provisions and bad debts. The expert's selected EBITDA multiple of 5 was held to be reasonable. The court adjusted the minority discount applied to the 25% shareholding to 15% because the petitioner effectively controls 50% of the shares through the linked shareholding of his wife. The court directed the parties to agree the final purchase figure (with the assistance of the expert if necessary) and left costs to be determined later.

Background and parties: This valuation hearing followed the court's earlier Liability Trial ([2021] EWHC 1374 (Ch)). The petitioner was Mr Timothy McMonagle and the respondent whose shares were valued was Mr Lee Harvey; two other respondents included Mrs Tracey McMonagle and Ms Maria Harvey and the company was Integrated Control Solutions (Eastern) Limited. The parties had jointly instructed a single expert valuer, Mr Stephen Reed of Price Bailey LLP, who produced an Original Report, an Addendum, a Final Report and CPR 35 responses.

Nature of the application: The court was required to determine the market value of the company and the price payable by Mr McMonagle for Mr Harvey’s 25% shareholding, taking into account the determinations made in the Liability Trial and the expert evidence.

Issues framed:

• whether the expert’s normalisations to EBITDA (notably the use of a market-rate director salary of £75,000) were appropriate;
• whether accounting adjustments made when restating the company accounts (VAT interest/penalties, warranty provisions, bad debt provisions) should be excluded as errors attributable to others;
• whether the EBITDA multiple selected by the expert was correct;
• the appropriate minority discount to apply to a 25% shareholding in the circumstances of the case; and
• treatment of the director’s loan account and unauthorised withdrawals.

Reasoning and findings: The judge emphasised the court’s wide discretion in share valuation and that valuation is an art not a science. On director remuneration, the court accepted the expert’s professional judgement to normalise to a market-rate salary rather than simply adopt historic low drawings, and accepted the expert’s 50% reduction in the market-rate allowance for the five-month period during which Mr Harvey’s contribution fell. On VAT, warranty and bad-debt adjustments, the court found no basis to assume culpability by the petitioner alone or to exclude the expert’s adjustments; the adjustments were treated as reasonable professional judgements made after further investigation and restatement. The expert’s evolution on comparables was accepted: having considered a range of comparators (including BBL and ETON) and the identified anomalies in the company’s financial data, the expert’s selection of an EBITDA multiple of 5 was upheld. On minority discount, the judge concluded that the petitioner effectively controlled 50% of the shares through his wife’s shareholding and therefore a 15% minority discount applied to the 25% shareholding. The expert’s treatment of the director’s loan account was accepted and the small net balance was added to the purchase price. The judge directed the parties to agree the final figure, with assistance from the expert if required, and left costs to be determined.

This first instance valuation exercise resulted in the court accepting the joint expert's enterprise valuation methodology and EBITDA normalisations, endorsing an EBITDA multiple of 5, accepting the expert’s treatment of accounting adjustments and the director’s loan, but reducing the minority discount applied to the 25% holding to 15% on the ground that the petitioner effectively controlled 50% of the shares. The judge directed the parties to agree the final purchase figure (with the expert’s assistance if necessary) and reserved costs.