England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
(His Honour Judge Boggis QC)

		Royal Courts of Justice Strand London WC2
		Tuesday, 20th February 2001

1. LORD JUSTICE HENRY: Lord Justice Buxton will give the first judgment.
2. LORD JUSTICE BUXTON:This is an application for permission to appeal on one point arising out of a decision given by His Honour Judge Boggis QC on 17th October 2000. Permission was originally sought on two points. One is a point arising out of the judge's decision as to interest under Part 36 of the Civil Procedure Rules, and on that point permission was granted by the single Lord Justice. The application before us today is on the second ground upon which complaint is made of Judge Boggis's decision, in respect of which the single Lord Justice on paper did not give permission.
3. It is necessary to say something of how this matter arose, though I shall only deal comparatively briefly with that because it is well set out, if I may say so, in the learned judge's judgment and of course well known to the parties interested in the matter.
4. The issue with which we are concerned today is the valuation of the shares of the applicant (as he then was), Mr Kirit Thakrar, in a family company called Ciro Citterio Menswear Plc ("CCM"). In circumstances that we need not go into, the question arose of valuing the 21.78% of the company's shares owned by him. The rest of the shareholding was mainly in the hands, in particular, of his elder brother, Mr Rasik Thakrar, with whom, unfortunately, Mr Kirit Thakrar had badly fallen out; hence the need for the valuation. The company is in the menswear business and the evidence before the court was that it had, from a small beginning, very recently become extremely successful, having a chain of some 170 shops and 1,000 employees.
5. After the two brothers fell out, proceedings were brought (I think under section 439 of the Companies Act) in which it was necessary for the shares to be valued. In January 2000 a consent order was made in the proceedings. The agreement was that the shares of the petitioner, Mr Kirit Thakrar, should be bought by the rest of those involved and the valuation was to be reached by a procedure specified in that order, on a willing buyer basis for the whole business. Each party was to appoint an accountant and full access was to be given to each accountant of the information he needed as to the company's business. If no valuation could be agreed, a third expert was to be appointed and he was to find the value: as I understand it, acting as an expert, not an arbitrator. Mr Kirit Thakrar appointed a Mr Burton of PricewaterhouseCoopers and the respondents appointed a Mr Ward of Ernst and Young, both of those of course being accountancy firms of the highest repute and expertise. The experts did not agree. The attempt to appoint a third expert came to nothing because the parties could not agree on the terms of his instructions.
6. The judge found that this breakdown had been caused by a very regrettable atmosphere of mistrust and hostility that had pervaded the whole exercise, the blame for that being placed by him very largely on the head of Mr Rasik Thakrar. Faced with this dilemma, the judge had to decide what to do. He said (at p.2 of his judgment)

"I decided that the best solution was for me to decide the value and in the process to resolve certain issues of fact underlying the accounts of the company upon which the parties could not agree and which lay at the heart of the disagreement between the experts."

7. And that is what he indeed decided to do.
8. I should at this stage say two things. The first is that, although I have mentioned the disputes, disagreements and obviously extremely contentious and disagreeable atmosphere of the case, that of course does not affect in any way the outcome or the way in which the judge conducted the exercise: that is background. Secondly, it is necessary to state the background in order to explain why the judge found himself in the position he did. It is, in my albeit limited experience, unusual for a court to find itself in the position of conducting a valuation of this sort. The judge took it on as a volunteer (and, if I may be permitted to say so, very helpfully to the parties, not least to the health of this company and the employees of the business) in order to resolve what had become an intolerable dilemma. In so doing, he was necessarily going to have to be strongly guided by the two accountants, one on each side, who had prepared voluminous reports and investigations, and of course by the searching inquiry that was conducted at the trial before him into the reliability and validity of their conclusions. I do not know exactly how long the proceedings lasted before Judge Boggis, but we are told, for instance, that Mr Burton, the expert appointed by the petitioner, Mr Kirit Thakrar, had been cross-examined for some day and a half. That is, I think, a sign of the care that was taken in this inquiry.
9. I come, then, to the matter of which complaint is made. The bundle of papers before us, I have to say, was not arranged in a particularly helpful way, though Mr Bompas, in his careful and restrained submissions before us this morning, has done his best to take us through a bundle that was not of his making. I make that point not just for the sake of complaining, but to explain that it really has not been easy to elucidate from the papers before us exactly the way in which the case before the judge developed. I say that because it appears to me at least that Mr Burton was, for a significant period of time, approaching the valuation exercise principally on a basis that does not, at the end of the day, seem to have been the agreed basis. I shall have to come back to that point in due time.
10. What was, at the end of the day, agreed should be the basis upon which the company would be valued was as follows. The valuation started off by assessing the maintainable - at least, I assume it was the maintainable - figure for the company of earnings before interest, tax, depreciation and amortisation for the most recently available relevant year. That figure I will abbreviate, as did the parties, to EBITDA. Armed with the EBITDA, there was then to be applied to that figure a multiple in order to reach the capital value of the business. That valuation by earnings and multiple is, in broad terms, a well known system of valuation. Having reached such a figure, there was then deducted the company's debt, for which it will be assumed a purchaser of the business would be responsible; and then there was added to that figure a further multiple described as "premium" or "discount". Broadly speaking, those figure were intended to place a premium over and above what would be the value of small traded parcels of shares, which was assumed would be the market valuation basis for what the exercise was intended to be - that is to say, the value of and therefore the purchase by a willing buyer of the whole company. Against that, some discount was imposed to take account of the fact that this was a closely held company and therefore the shares might not be easily tradable. That adjustment (the figure for which was, as I understand it, agreed between the parties) was then applied to the capital figure. There was then taken out the sum owing to the preference shareholders (not very large), and that resulted in a final willing buyer/willing seller valuation. To that the figure of 21.78% (that is to say, Mr Kirit Thakrar's shareholding) was imposed, giving the sum that he was entitled to under this agreement: in the event, £6.14 million.
11. In all those figures - and if anyone wants to see them in a much more elegant form than I have managed to describe them, they are to be found at p.12 of the judge's judgment - the only figure that is contested is the multiple. It is said that Mr Burton arrived at far too high a multiple and the judge was wrong, for reasons that I shall seek to explain shortly, in accepting, as he did, Mr Burton's multiple as against the competing multiple imposed by Mr Ward of Ernst and Young or some figure falling between the two of them.
12. As I have said, there is no complaint on the part of the applicants of any of this exercise, other than the figure for the multiple. I will, however, venture to say in passing that the nature of the process that I have described does in itself reveal some of the difficulties of this exercise. The parties embarked on what appears to be an open market valuation of a company that was not traded on the market. Therefore, certain adjustments necessarily had to be made to take account of those factors, and certain adjustments had to be made in order to reach a broadly correct figure. The way in which, broadly by agreement, the parties approached the question of the multiple was, however, by seeking to compare this company, CCM, with its most nearly equivalent co-comparators on the stock market. The most nearly equivalent comparators that were lit upon were two well-known traded companies, Moss Bros and Austin Reed.
13. It is apparent that for a substantial period of his advice, and in the earlier reports that he produced, Mr Burton was looking at, not principally the EBITDA ratio, but at a more conventional, as it would seem to me, price/earnings ratio calculated in the normal way according to the company's share price and profits. On that basis, in his report of 30th March 2000 (parts of which are to be found at p.131 and following of our bundle) Mr Burton looked at the P/E ratio of Austin Reed and Moss Bros and what he described as a wider group of clothing retailers and the general retail (non-food) sector. He set out, at para 7.55 of that consideration, how he thought CCM would be regarded by the stock market on the relevant valuation date, 6th February 1999. He set out a number of considerations in both directions and came to the conclusion, as he put it, in that paragraph:

"Overall, therefore, we believe CCM would be seen as a relatively attractive investment proposition."

14. He then went on to P/E ratios and pointed out that at that date Austin Reed would have a prospective P/E of 5 and Moss Bros of 10. He then looked at operating ratios to be drawn from the accounts of CCM on the one hand and Austin Reed and Moss Bros on the other and drew attention to a number of comparators between those companies and CCM, including, at para 7.58:

"CCM's gross profit margins, an important `yardstick' in the measurement of profitability of retailers, are significantly better than those of Austin Reed and Moss Bros."

15. He reached a prospective P/E ratio for CCM (a figure that, I emphasise, was necessarily hypothetical) of 8. Then, applying the premium and discount factors to take account of the fact that he was dealing with a privately owned company on the one hand, but with an adjustment for a total purchase on the other that had been apparently agreed between the parties, he reached a figure of 9.
16. He then took the step which is really principally criticised in this application, because his final conclusion was that the multiple relevant to his work should be, not 9, but 11. He explained that in para 7.68 of this first report. In particular, he said:

"Moss Bros and Austin Reed, although most comparable to CCM in terms of size, do not enjoy particular favour in the stock market when compared with the wider group of clothing retailers. This would argue for a higher equivalent P/E than the figure of 9 we reach at paragraph 7.62 above [the figure that I have already mentioned]."

17. He dealt, however, with other considerations and decided that the uplift should be to a figure of 11, giving a total figure, at that stage, of £48.4 million.
18. Criticism was made of some of the findings that he went on to make, in particular his comparison of the EBITDA figures or multiples for Austin Reed and Moss Bros.
19. Mr Burton then produced a supplemental report on 30th June. An extract from it is at p.140 of our bundle. In that he offered figures for the EBITDA multiples appropriate to Moss Bros and Austin Reed: Moss Bros 4.6 and Austin Reed 3.6. I do not understand those calculations to be criticised. He then said this at para 4.5 of that report:

"We explain ... [in] our First Report that Moss Bros and Austin Reed are, in the first instance, the closest comparators to the Company. For the reasons there set out, taking these two companies' multiples in the above table in isolation, would point to the Company having a `starting point' prospective EBITDA ... multiple of 4.4 ...

At paragraph 4.6 he said:

"At paragraph 7.68 of our First Report, we listed the factors for arriving at a P/E of 11. Many of these same factors apply in determining appropriate EBITDA ... multiples."

20. He then reiterated the point about Moss Bros and Austin Reed not enjoying particular favour with the stock market and compared the multiple he had reached with those of a wider group of retailers. He then said this at para 4.7:

"In addition to the above, we reiterate our view, based on the market research we have seen, that the Company would have a greater value attached to its brand than Austin Reed or Moss Bros. We believe that these companies have an older and less fashionable brand image than the Company. Therefore, we would position the Company higher than either Austin Reed or Moss Bros within the wider group of retailers."

21. On that argument, he reached the figure of 5.25, the EBITDA multiple which is now criticised.
22. As I say, the nub of this criticism seems to me to be that Mr Burton did not sufficiently explain - indeed, that he could have no explanation for it - the adjustment of his original calculations that, when he was dealing with P/E ratio, caused it to be raised from 9 to 11 and, by the same token, applying those same figures or those same arguments, caused his starting EBITDA multiple to be raised from 4.4 to 5.25.
23. For my part, I do not consider that those criticisms are justified; I certainly do not consider that they are so forceful as to undermine entirely both Mr Burton's argument and the judge's adoption of it. It seems to me that Mr Burton was saying no more than this, though having to express himself within the straitjacket of P/E multiples: that although Austin Reed and Moss Bros were the most immediate comparators, if one took a straightforward comparison with them to place CCM in its appropriate position in the stock market, the fact that, in particular, those companies were older and less fashionable than CCM and therefore did not, in Mr Burton's view, have the prospects for advancement which CCM had (and, I would say, in parenthesis, which it had shown over the previous years) meant that it was not appropriate to band them in the same way and to assume that the stock market would look at them in the same way as it looked at Austin Reed and Moss Bros.
24. In those circumstances it seems to me that the judgement which was made was well within the ambit of an accountant looking at the market, such as Mr Burton was, to be able to make. I cannot see that there was a fatal flaw in what he did. Nor can I see that his reliance on the wider market was shown to be significantly flawed. True it is that he was cross-examined as to one of the indices that he had used, but that was only a minor guide to a wider point that he was making: which was that, compared with other companies in the same market, Austin Reed and Moss Bros, the starting comparators, appeared to be significantly undervalued.
25. There was a further criticism made of Mr Burton that he had in an earlier report - we were never quite able to pin down when this was - advanced the view that the figure of the appropriate multiple on an EBITDA basis would be probably less than 5. Quite what he was saying in that report is not entirely clear because he was mainly concerned to criticise a view to the contrary - that is to say, supporting the 4 multiple that had been advanced by Mr Ward of Ernst and Young. Mr Burton was not cross-examined on that point. Had he been, we would have had a better idea of what he was saying at that time. Certainly the judge cannot be criticised for not taking that into account when he reached his judgment.
26. Finally, it is said that, if comparison is made with the P/E figure thrown up by Mr Burton's calculations and the earnings before interest and tax figure thrown up by him, it is clear that either that was too high or the judge did not engage in cross-checking against those ratios. Again I do not think that that is a correct criticism because, as I have sought to demonstrate, the point of dispute affects all the ratios, for the reasons that Mr Burton indicated in the passages from his report that I have read. Either he was entitled to say that or he was not. If he is entitled to say that, true it is that it raises the other ratios, but it does not in any way indicate that the original approach was wrong.
27. I have gone into all this in a good deal of detail because, first of all, it is obviously important to the parties and a substantial sum of money turns on a comparatively small change in the ratio; and secondly, out of deference to the arguments, both in writing and orally today, that have been addressed to us by Mr Bompas. But at the end of the day I have to say this. I have already indicated that the judge embarked on an unusual task. He was not, I accept, simply exercising a discretion, but he was undoubtedly called upon to exercise judgement - judgement that he had to form having read the reports and, more importantly, having heard the two experts cross-examined and having formed his own view, as he was bound to have to do, about the factual nature of the company's business prospects, having heard a very large amount of evidence about it. It was therefore appropriate that he should not be narrowly tied to the exercise of multiple and earnings, much less narrowly tied to the supposed comparators. This was an exercise in judgement, not a mechanical or arithmetical exercise, and one which all parties concerned had to look at in a broad and sensible way.
28. The judge said this (at p.12 of his judgment):

"One of the problems in fixing the multiple is that there is no close comparable. I accept that the experts have looked primarily to Moss Bros and Austin Reed, but in my judgment they are in a rather different market. ... In my judgment, a purchaser would be likely to view the company as an attractive target. It had a good place in the market and might be thought ripe for new management to take over and develop."

29. There was ample material, even within the small amount that I have read in this judgment, on which the judge could have formed that view.
30. Having set out the figures, the judge then said this:

"Having arrived at this figure the vendor and purchaser would then have stood back to take a view of the figure using other methods of valuation as cross checks and their own knowledge of the market.

Having heard the arguments and seen the ranges of figures proposed on both sides, my finding is that the vendor and purchaser would regard an overall value for the company somewhere between £25m and £30m to be about right."

31. That was an approach that the judge was well entitled to take. This court, in a case like this, would only be minded to interfere with his exercise of judgement if it could be shown that he had gone plainly wrong or that he had accepted evidence that he could not accept. I am afraid that, despite Mr Bompas's determined and helpful submissions, he has come nowhere near to demonstrating that the judge erred in that kind of respect.
32. For those reasons I do not think it would be appropriate for this matter to proceed before the Court of Appeal and I, for my part, would not grant permission.
33. LORD JUSTICE HENRY: I agree and there is nothing I wish to add.
Order:application for permission to appeal dismissed.