Valuing a company’s shares following unfair prejudice

Section 994 of the Companies Act 2006 provides protection for minority shareholders of a company where affairs of the company have been conducted in a manner which was unfairly prejudicial to their interests.

One of the remedies that a court may order on a successful unfair prejudice petition is for the purchase of shares. However, where such an order is made, how should the price of those shares be determined? This was the question before the Court of Appeal in the case of Wann v Birkinshaw [2017] EWCA Civ 84.

The case concerned the shares in Quarry Walk Park Limited (the ‘Company’) which owned and operated a lodge park providing self-catering holiday accommodation close to Alton Towers. The Respondent, one of four equal shareholders, brought an unfair prejudice petition in respect of his alleged exclusion from the management of the Company.

Following the hearing of the unfair prejudice petition, the Appellants (the three other shareholders) had been ordered to purchase the Respondent's shares at “a fair value, being a rateable proportion of the total value of the Company as at 10 April 2013". Further, the purchase was to be on certain assumptions, including that: the company was a going concern; the parties were a willing vendor and willing purchasers operating at arm's length; and without any discount to the value of the shares because they were a minority shareholding. A single joint expert provided a valuation of £2.85 million based on "multiple of earnings" or "profits" and which was said to reflect the trading potential of the business. The Judge accepted this valuation.

The Appellants argued that a deduction of £1.4 million should have been made from the £2.85 million to take into account the Company's net borrowings at the relevant time.

The Court of Appeal began by emphasising that such an order is for the purchase of shares in the company and not the company’s assets. In the Court of Appeal’s view, the phrase "the total value of the Company" had to be construed as a reference to the total value of the issued share capital of the company – and this meant the market value of the issued share capital. In the absence of a clear indication to the contrary, the "value" of the shares of a company, could refer only to the price that would be received for it on a sale.

On the facts, the critical question then arose of whether, in valuing the share capital of the company, a deduction should be made for the company's net borrowings of £1.4 million. In the view of the Court of Appeal, the company’s net borrowings as at the valuation date should be taken into account. The expert evidence justified a conclusion that a price of £2.85 million on an earnings basis for the entire share capital would be reduced in the course of negotiation by half the net borrowings (£700,000) to arrive at a value of £2.15 million, giving a fair value for the Respondent's shares of £537,500.

The court hearing an unfair prejudice petition has a wide discretion in determining the valuation methodology. While the decision is very much based on the facts, the Court of Appeal has indicated that clear words will be required to value a company’s share capital by something other than its market value.

It is therefore important for parties to give real thought to how the shareholding is to be valued, prior to the petition hearing, in the event that an order to purchase is granted.