Timothy McMonagle v Lee Harvey & Ors

In a share valuation under Companies Act 2006, the court must determine a value that is fair and sensible in all the circumstances. A single joint expert’s valuation is important but not binding. The court may adopt a broad-brush approach where further investigation would be disproportionate. The usual starting point is the value of the company as a whole, assessed on a hypothetical willing buyer and seller basis. Section 994 permits an intermediate minority discount where neither a pro rata valuation nor a full minority discount would be fair. In this case, the petitioner’s and his wife’s linked shareholdings gave him effective control of 50% of the company, making a 15% discount appropriate.

The petitioner sought relief concerning the purchase of shares in Integrated Control Solutions (Eastern) Ltd following the liability judgment in [2021] EWHC 1374 (Ch). The remaining dispute concerned the value of the first respondent’s shares and the price payable by the petitioner.

A single joint expert valued the company and considered adjustments for directors’ salaries, VAT liabilities, warranty provisions, bad debts, the EBITDA multiplier, minority discount and the director’s loan account. The central issues were whether the expert’s valuation required adjustment and what minority discount fairly reflected the petitioner’s effective shareholding.

1. The court’s task was to establish a value that was fair and sensible in all the circumstances. Share valuation is an art rather than a science. The court was not bound by the single joint expert’s opinion and could depart from it where appropriate, although the expert’s professional judgment deserved weight.

2. The usual starting point was the value of the company as a whole, assuming a hypothetical willing but not anxious buyer and seller. Earlier decisions supplied only limited guidance because valuation cases turned on their facts and on the quality of the evidence.

3. Under the wide terms of s 994 of the Companies Act 2006, the court could order purchase of shares at an intermediate figure involving an intermediate discount. Such cases were likely to be rare, and the court should avoid an impressionistic approach unsupported by the evidence.

4. No adjustment was made to the expert’s EBITDA calculation. The assumed market-rate directors’ salaries, the treatment of VAT and warranty liabilities, and the bad-debt adjustment were not shown to be wrong in principle. Further investigation into responsibility for accounting errors or the underlying contracts would have been disproportionate.

5. The EBITDA multiplier of 5 was accepted as consistent, considered and coherent. The director’s loan account treatment was also accepted.

6. The petitioner’s and his wife’s shareholdings were linked. For practical purposes, the petitioner controlled 50% of the company’s share capital. Applying the relevant valuation guidance, a 15% minority discount was appropriate. The acquisition of the third respondent’s shares was left out of account because its terms were unknown and post-dated the valuation date.

7. The parties were directed to seek agreement of the final figure, with the expert’s assistance if necessary. No adjustment was made to EBITDA or the director’s loan account.

This was a first-instance valuation judgment following the liability judgment in the same litigation, [2021] EWHC 1374 (Ch).