England and Wales Court of Appeal (Civil Division) Decisions

Joiner & Anor v George & Ors [2002] EWCA Civ 160 (14th March, 2002)

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR JUSTICE PARK

		Royal Courts of Justice Strand, London, WC2A 2LL
		14th March 2002

Sir Christopher Slade:

INTRODUCTION

1. On 31^st January 2000 Park J delivered a judgment in which he held that the respondents to this appeal, Mr George and Mr Robinson, were in breach of contract by not causing a 51% shareholding in a company named Unigel Limited, but commonly known as “Unigel UK”, to be transferred to the appellant claimants, Mr and Mrs Joiner, when the appellants exercised an option to purchase that shareholding on 23^rd November 1994 (“the valuation date”). He declined to hold that they were entitled to specific performance, but held that they were entitled to damages.
2. The wording of the relevant part of the Order was:

“The first and second defendants do pay to the claimants damages equal to the value, expressed in money, which a 51% shareholding in the English company Unigel Limited would have had to the claimants on 23 November 1994, such value to be ascertained by an inquiry in accordance with the directions set out in Annex A hereto, together with interest at 8% per annum from 23 November 1994 until the date on which the value is determined by the court.”

3. The inquiry directed by the Judge took place before him over six days spread between May and June 2000. As before, Mr Joiner represented himself and his wife, and Mr George represented himself and Mr Robinson. Mr Joiner and Mr George also gave evidence, and each called evidence from an expert witness: Mr Fisher of Bruce Sutherland & Partners on behalf of Mr and Mrs Joiner, and Mr Faull of Hilton Sharpe & Clarke on behalf of Mr George and Mr Robinson.
4. By his second judgment delivered on 28^th July 2000, the Judge decided that the damages payable by the respondents to the appellants are £129,000, such damages to carry interest from 23^rd November 1994 to 28^th July 2000 at 8% per annum. He gave the appellants permission to appeal limited to the determination of the amount of damages.
5. The respondents sought permission to appeal out of time on liability and the amount of damages. On 29^th March 2001 Lord Justice Aldous granted them permission to appeal solely on the issue of the amount of damages. At a time when the respondents were still acting in person, Mr George settled grounds of cross-appeal. But counsel recently instructed on their behalf, Mr Peter Cranfield, has informed us that, having considered the cross-appeal with their legal advisers, the respondents have decided not to pursue it. Their case is that there was sufficient evidence to justify the Judge’s findings on each of the matters as to which the appellants make complaint. Correspondingly, though they disagree with his findings referred to in grounds 1 to 3 of their grounds of appeal, they now accept that they were within the legitimate range of the exercise of his judicial discretion.
6. As in the Court below, Mr Joiner has appeared in person, representing himself and his wife. He has presented their case with clarity and courtesy. Mr Cranfield, counsel for the respondents has also greatly assisted us with an excellent skeleton argument and his oral submissions.

THE FACTS

7. The background facts which are material for present purposes can be summarised relatively shortly. I extract them principally from the Judge’s two full and comprehensive judgments.
8. Mr Joiner is a specialist in the technology of thixotropic gels. A thixotrope is a substance which forms a stable gel structure when it is at rest, but which becomes fluid when it is stirred or subjected to some other kind of force. A particular application of such gels is their use in connection with fibre-optic cables, and this has been Mr Joiner’s field for about the last twenty years. He claims that he was originally involved in the invention of the concept. From the early 1980’s he has been concerned as an entrepreneur in a number of business ventures to exploit it, supported throughout by his wife, the second appellant.
9. In the mid to late 1980’s, he and a few other persons owned and ran a company called Synthetic Technology Limited (“Syntec”). Its product was known as “rheogel”. In 1989 it was placed in administration under Part II of the Insolvency Act 1986. The distributor of its rheogel was Astor Chemicals Limited (“Astor”), a large and financially strong company.
10. In December 1989 the administrators of Syntec sold the business of Syntec to Astor. Syntec was subsequently dissolved. In view of certain alleged aspects of Mr Joiner’s conduct while concerned with its management, the High Court, on 13^th April 1993, imposed on Mr Joiner a seven years disqualification from being a director pursuant to the Company Directors Disqualification Act 1986.
11. After they had been deprived of Syntec’s rheogel business, Mr and Mrs Joiner, in early 1990, acquired a new company, Gel Technology Limited (“Geltec”) to establish a new gel business. They owned this company in equal proportions. It called its product “unigel”. Like Syntec’s rheogel, the business of which had been bought by Astor, unigel is a thixotropic gel designed for use in connection with fibre-optic cables.
12. There was at least some degree of similarity between the two gels, rheogel and unigel. In February 1991 Astor began proceedings against Geltec, Mr Joiner and another director, Mr Bury, alleging that Geltec’s unigel business involved infringements of intellectual property rights which Astor owned in consequence of its purchase of Syntec’s business in 1989. Though Astor seems to have failed in an application for interlocutory relief, its action remained in existence and had some influence on the events which followed.
13. The respondents, Mr George and Mr Robinson, have at all material times been close business colleagues. In the late 1980’s, Mr Robinson was resident in Hong Kong, where he had established a company known as Arnhem Technology Limited (“Arnhem”) in 1987 or 1988. By the time that is relevant for this case, Arnhem was owned by himself and Mr George. They saw great opportunities for the optical fibre industry in Asian markets, particularly China, Taiwan and India. They wanted to develop Arnhem’s business so as to represent non-local manufacturers of various products used in the industry, such as thixotropic gels.
14. The respondents first met Mr Joiner during the later part of the Syntec period. After Syntec had gone into administration and its business had been sold to Astor and Mr Joiner’s new company, Geltec, started producing unigel, Arnhem became the Far East distributor for Geltec. In general it did not act as an agent remunerated by commissions. The usual pattern was that it bought quantities of unigel from Geltec and resold it to customers in China. Arnhem and its network of customers in China were one of the major sale outlets enjoyed by Geltec.
15. The respondents regarded unigel as an excellent product for exploitation within the fibre-optic cable market in China. In 1991 and 1992, there were a number of discussions between them and Mr Joiner about creating some more institutionalised relationship between them than the regular trading connection which had developed between Geltec and Arnhem. Meantime, however, the financial position of Geltec was deteriorating. A winding up petition was served on Geltec by a trade creditor in late 1991. Geltec was finally put into liquidation by an order of the Court on 29^th July 1992.
16. The more formal business connection between the appellants and the respondents began when, on 16^th September 1992, they signed a document entitled “Heads of Agreement”. It was for the most part drafted by Mr Joiner. The introductory paragraphs referred to Geltec and to Arnhem and recorded that the respondents were establishing a holding company named International Technology Group Limited (“ITG”) registered in Hong Kong. They stated that the parties had agreed “to cooperate together to form a new UK registered company in order to acquire such assets of [Geltec] as are necessary to continue the manufacture and distribution of cable filling gels under the name Unigel”. The stated terms of the Agreement included the following. The parties were to procure a shelf company which would have its name changed to “Unigel Ltd”. The appellants would initially subscribe for 51 shares of £1 each in this company, which came to be commonly referred to as “Unigel UK”. The opening directors would be the two respondents “on behalf of ITG”. Mr Joiner would be offered a position on the board “when his personal position with regard to past litigation with Astor Chemicals Ltd is clarified”. [The Judge found that the respondents were not at this time aware of Mr Joiner’s disqualification as a director]. Unigel UK would negotiate a loan of £45,000 from National Westminster Bank. The respondents would “negotiate the purchase from the receivers of all of [Geltec’s] manufacturing and laboratory equipment, all intellectual property rights including the UNIGEL trade name and all goodwill attached to [Geltec’s] business as per the attached Schedule 1”. Conditionally on the loan from the Bank being obtained, Unigel UK would purchase the scheduled assets for £150,000 and certain further issues of shares would be made to the appellants and the respondents and/or ITG. If the loan was unobtainable, the provisions referred to in the last sentence were to be adjusted by “mutual agreement”. Clause 18 recorded the parties intention to complete a “shareholders agreement”, but they never did.
17. On 7^th November 1992 the appellants and respondents entered into the Agreement which has given rise to the present proceedings (“the Option Agreement”). Clause 1 varied the Heads of Agreement by providing that Mr George would be the sole director, “appointed on behalf of ITG”. Clause 2 varied them by providing that all the shares in Unigel UK would be held by ITG, but that the appellants “will have the option to acquire ordinary shares in [Unigel UK] representing up to 51% of the equity ….” The option was to be exercisable at any time and no monetary consideration was to be payable.
18. The contemplated shelf company having been acquired, matters proceeded on the basis provided for by the Option Agreement. Mr George was the sole director of Unigel UK, and remained such throughout the years which are relevant to the case. Neither Mr Joiner nor Mrs Joiner ever became a director. Mr Joiner, however, in the capacity of a consultant to ITG, provided services to Unigel UK. He had an office at the factory. The two issued shares in Unigel UK were acquired by ITG, which in its turn was owned by the respondents. That remained the position for several years. The appellants had such rights, if any, as were conferred on them by the Option Agreement and by such provisions of the Heads of Agreement as survived the Option Agreement.
19. Mr Joiner continued to be involved with Unigel UK and its business for about another two years. Over this period unigel was produced at the factory. By far the largest customer was Arnhem, for resales to customers in China. Arnhem did a good job in China. Unigel UK’s turnover increased and for most of the time the factory was busy.
20. Not later than 8^th December 1993, ITG (which was wholly owned and controlled by the respondents) acquired a shelf company which, after about two months, changed its name to “Unigel Limited”. I shall follow the Judge in referring to it as “Unigel HK”, so as to distinguish it from Unigel UK, the corporate name of which was and is also Unigel Limited.
21. On 7^th February 1994, Unigel HK entered into an agreement with the liquidator of Geltec (“the Geltec Agreement”) to purchase whatever interest the liquidator owned in the assets which had been used by Geltec in its thixotropic gels business. The Judge found that the business assets of Geltec thus sold consisted in effect of (i) the product name UNIGEL; (ii) any other intellectual property rights of the unigel business which Geltec may have had; and (iii) miscellaneous items of equipment of that business which had remained in the factory. The items thus sold to Unigel HK had in practice been used by Unigel UK with the acquiescence of the liquidator since the autumn of 1992. After they had been sold, Unigel UK continued to use them. Eventually, as will appear below, a royalty was introduced to be paid by Unigel UK to Unigel HK.
22. Relationships between the appellants and the respondents, which had originally been good, began to deteriorate fairly early in 1993 and got progressively worse over the rest of the year and into 1994. The appellants disliked the shareholding and management structure of Unigel UK. They had no shares. Neither of them was a director; Mr George as the single director was in sole management control of the company’s business. There were other matters which caused friction. Mr George and Mr Joiner were working in the same building and did not get on.
23. In late 1993 and early 1994 there were exchanges about the possibility of the appellants being bought out. These culminated in two alternative offers made by the respondents on 1^st March 1994. The Judge, in para 21 of his second judgment, described these offers as “US$220,000 if Mr Joiner was not locked in to Unigel UK or otherwise precluded from competing, and US$540,000 (partly by instalments over five years) if Mr Joiner was locked in”. Neither of these offers was accepted.
24. As 1994 progressed, things got steadily worse. On 23^rd November 1994 solicitors acting for the appellants gave formal notice of exercise by their clients of their rights under the Option Agreement to acquire a 51% shareholding in Unigel UK. On 2^nd December 1994 ITG, in a letter signed by Mr Robinson, gave Mr Joiner one month’s notice of termination of his consultancy agreement and instructed him no longer to attend at Unigel UK’s premises. The locks in the building were changed.
25. On 3^rd September 1995 the appellants instituted proceedings against the respondents seeking specific performance of the Option Agreement. The outcome of those proceedings has been described in the Introduction to this judgment. It is now necessary to summarise the judgment which is under appeal.

THE JUDGMENT ON DAMAGES

26. The Judge began (paras 4-6) by explaining the origin and effect of the words from the Order: “the value, expressed in money, which a 51% shareholding in …. Unigel Limited would have had to the claimants on 23 November 1994”. Those words merely reproduced the words in the judgment itself, as handed down. In the first draft of the judgment, circulated to the parties for minor corrections to be notified, the Judge had simply referred to “the market value” of a 51% shareholding on the valuation date. However, Mr Joiner represented to him that that form of wording might have precluded him from arguing that, if he and his wife had acquired 51% of the shares on that date, they would not have wanted to sell them, but would have wanted to keep them and to exercise the control which they would thereby have over the company’s affairs. According to this argument, the real value to them of getting the shares would not have lain in their market value, but in the ability to take charge of the business themselves and to run it successfully and profitably in the future. In fairness to Mr Joiner, the Judge accordingly amended the wording of his judgment, so as to enable him to advance this line of argument, to which the Judge aptly referred as the “lost opportunity” argument (though Mr Joiner himself preferred a different description) if he thought fit. The Judge further caused the essence of such wording to be reproduced in the consequential Order.
27. Before the hearing began and at early stages in it, Mr Joiner had ambitions to develop the “lost opportunity” argument: (see para 7). In the end, however, while the Judge left it open to him to develop it, he did not press it: (see para 12). In any case, the Judge thought there were two specific factual points which effectively ruled it out: (see paras 8-11). First, Mr Joiner was subject to the director’s disqualification order, which had the best part of six more years to run and restrained him from taking part in the promotion or management of the company. This would have precluded him, in the Judge’s view, from exercising any control of the company in practice. Furthermore, in the Judge’s view, while it would have been vital for Unigel UK to have access to borrowing facilities, no lending institution would have been likely to offer worthwhile facilities to a company whose controlling shareholder and moving spirit, even if not a director, was under a disqualification. Secondly, even apart from the disqualification order, Mr Joiner would not have been able to make a success of running Unigel UK, if he had obtained 51% control. For the minority shareholders controlled the distributor, Arnhem, through which the great majority of Unigel UK’s sales were made.
28. Having rejected the “lost opportunity” argument as the way to measure the damages, the Judge (para 12) said he had to fall back on the market value of the 51% shareholding. For this purpose, he thought it necessary to consider what would most probably have happened if the respondents, in accordance with their contractual obligations, had caused a 51% shareholding to be transferred to the appellants. His conclusion (para 13) was that the appellants would most probably have sold the shares. The Judge thus needed to determine a figure at which the appellants would have been able to sell them -–a question which had to be answered, in his view, by considering what in the “real world”, as opposed to the “hypothetical world”, they would have done if they had got them on 23^rd November 1994.
29. The Judge’s answer to this question was that the appellants would have sold them to the respondents or to ITG or to “some other George/Robinson vehicle”. The Judge set out a number of reasons for reaching this finding of fact in paras 14 to 22 of his judgment, but since neither side has challenged it, these reasons need not be summarised in any detail. Essentially they were the following. On the one hand, the appellants would in practice have needed to sell their shareholding if they were going to get any value out of it, and the only realistic possible purchasers would have been the respondents or a company, like ITG, controlled by them. On the other hand, it was no less realistic to suppose that the respondents would have wanted to retrieve control of Unigel UK for themselves and would have recognised the necessity of paying a reasonable price to achieve that result.
30. The Judge (para 20) pointed out that, if the appellants had obtained 51% of the shares in Unigel UK on the valuation date, the respondents would have had to come to some sort of terms with them or suffer a serious rupture in their supply arrangements for a significant item of the specialist goods which Arnhem held itself out as being able to supply to the Far East market. Furthermore, the offers which the respondents had made to the appellants to buy them out earlier in 1994 showed that they had been prepared to raise and pay quite substantial sums to be left in undisputed sole control of Unigel UK: (para 21).
31. In the Judge’s view, however, (paras 23 and 24), two factors in particular would have prevented the appellants from effectively holding the respondents to ransom and demanding an excessive price for their shares in Unigel UK. First, if pushed too hard, the respondents could have caused Arnhem to withdraw from selling gel for as long as it took to get a new manufacturing facility established and in production. Secondly, prospective lenders would not have been willing to lend them money if they had thought they were overpaying for what they were buying; and the respondents would have been dependent on borrowing facilities. The sale would thus have had to be at a “sensible” price: (para 25). The Judge (para 26) summarised his approach by saying that he proposed to form a view of “what the value of a 51% holding in Unigel UK would have been agreed to be in a sale where all personal antipathies were put aside and where both parties recognised the reality that they would need to come to terms”. Both experts agreed (para 27) that, in determining a value for the holding, it would first be necessary to determine what would have been the value of a 100% holding. The Judge rejected a submission by Mr Joiner that the purchasers would have been willing to pay a price above 51% of the value of the entirety. The 51% holding in his view fell to be valued at “a straight 51% of the value of 100%” (para 28).
32. In calculating the final figure which he reached, the Judge was guided by the valuation techniques explained by the experts (para 29). He identified three reasons for optimism as at the valuation date. First, Unigel UK was a supplier to the telecommunications industry which was then a high growth sector. Second, its principal product, unigel, was of a high quality. Third, the respondents believed that the market for it, particularly in the Far East, was promising and they wanted to have a major presence in it.
33. On the other hand there were reasons for caution (paras 30 to 33). Unigel UK was a young company which had been in business for only about two years and two of its predecessors, Syntec and then Geltec, had failed. Furthermore the purchasers would be constrained to quite some extent by the attitude of their prospective lenders. Any price paid at the valuation date would have to be based on hopes for the future, since the break-up value of the company was negligible. It had a share capital of £2 and its last published balance sheet showed a small deficit on shareholders’ funds. After further observations on the prospects of the company as at the valuation date, the Judge concluded that “there would already be a worthwhile goodwill value in it but not an extravagant amount”.
34. Before coming in detail to the expert evidence, the Judge directed his attention to one specific aspect of Unigel UK’s position at the valuation date, namely the existence or otherwise of a liability, actual or potential, to pay licence fees to Unigel HK for the use of intellectual property. In this context the Judge (paras 34 to 36) expressed his findings of fact as follows:

“On 7 February 1994 the liquidator of Geltec had made an agreement with Unigel HK to sell to it various assets of Geltec’s former business, including ‘the intellectual property’ as defined. The idea was for Unigel HK to license the IP rights to Unigel UK in return for licence fees. Mr Joiner was aware of this even if he was unenthusiastic about it. One of the meetings in September 1994 when Mr Robinson was in the country took place at the offices of Unigel UK’s auditors. Mr Joiner was present. The principal subject matter of the meeting was to seek advice about the payment of licence fees from Unigel UK to Unigel HK, and the level at which they should be charged. However, at the valuation date there was no licence agreement in place, and in practice Unigel UK was using the product name ‘unigel’ without payment to Unigel HK or anyone else. This did not necessarily mean that it could go on doing that for ever, but it was the factual situation at the valuation date.

On the face of it there was also a UK trade mark application for ‘unigel’ in the name of Unigel HK. There is some doubt as to the validity of this, because Mr Joiner’s diligent and impressive researches have shown that it was filed before the company which eventually became Unigel HK even existed, let alone before it changed its name to Unigel HK. However, if any point had been taken about this I assume that Unigel HK could always have made a new application which would not have been subject to the same possible challenge.

On 1 January 1995, after Mr Joiner had been excluded from the factory and from the affairs of Unigel UK generally, a licence agreement was entered into between Unigel HK and Unigel UK. It purported to license Unigel UK to use a large range of rights or property which the agreement said were rights or property owned by Unigel HK, including even the right to use any future name used by Unigel UK. The licence fee was set at the high rate of 7½%. On 3 April 1995 it was replaced by a new licence agreement which was identical except that the licence fee was reduced to 5%.”

35. The Judge, however, expressed “major misgivings” about these agreements as follows (para 37):

“I am prepared to accept that Unigel HK may have had justification for charging a licence fee to Unigel UK for the use of the product name ‘unigel’, although even that might have been debatable given Mr Joiner’s discovery about the date of the trade mark application and the fact that Unigel UK was only applying its own corporate name to the product. Apart from a fee for the use of the name I cannot see on what basis the licence fee could realistically be justified. There were no patents or other established forms of intellectual property in existence. The licence agreements said that they applied to ‘formulations’. But if Unigel UK knew what the formulations were – and it certainly would have done if Mr Joiner had continued to be involved in it – I believe that it was entirely free to use them and did not need any licence from Unigel HK before it could use them. The licence agreements purported to give to Unigel UK the right to exploit the name ‘Unifil’, and presumably the associated right to market the Unifil equipment. However, on the basis of the evidence which I have heard I believe that the Unifil equipment was developed by Unigel UK, in the persons of Mr Joiner and Mr Sohal, and not by or on behalf of Unigel HK.”

36. In the face of these problems, the Judge (para 38) indicated that, for the purpose of his valuation exercise, he proposed to deal with the question of licence fees as follows:

“I believe that the value of Unigel UK at the valuation date ought to be ascertained on the basis that, despite some uncertainties, it would have to concede a licence fee payment if it wanted to go on using the name ‘unigel’ for its product, or at least wanted to go on using the name without facing troublesome legal challenges. However the right to use the name was the limit of what it could plausibly be charged a licence fee for. As to the rate of fee, I think that, for the purpose of agreeing a share sale price in a transaction such as I postulated in paragraph 26 above (with vendors and purchasers both being prepared to give way to some extent in order to reach an agreement), a rate of 2½% would have been adopted.”

37. Then turning more specifically to the valuation process (para 39), the Judge indicated that he would “endeavour to arrive at a price by a structured approach, guided by the expert evidence, and not simply by some sort of intuition”. It was common ground that the price should assume that Unigel UK was a going concern. “On that basis” he said “the core of the value lay in the expectation as at the valuation date of future profits from its business”.
38. Though there were differences between their detailed valuations, both the experts, Mr Fisher and Mr Faull, had accepted, as a norm, the basic concept of estimating a figure for “maintainable profit” and multiplying it by a price-earnings ratio. Mr Faull had described a valuation carried out simply by that process as a “capitalised earnings valuation”. This was the sole method advocated by Mr Fisher. Mr Faull, however, referred to an alternative valuation method which he called “the adjusted net asset valuation” method. This differs from the capitalised earnings valuation method in that the maintainable profit times price-earnings formula is used to value not the company as a whole, but the goodwill of its business. The net book value, positive or negative, of the company’s other assets and its liabilities is then added or deducted to arrive at a value of 100% of the shares. Mr Faull favoured the adjusted net asset method for Unigel UK, because he took the view that if a balance sheet had been drawn up at the valuation date it would have shown net liabilities rather than net assets (para 40).
39. The Judge, however, (para 42) did not adopt Mr Faull’s view on this point. It took into account a proportion of the licence fee of 7½% of payable by Unigel UK to Unigel HK. At the valuation date, no licence agreement existed and, even if one had existed, the highest fee which the Judge would have considered justifiable would have been 2½%. At that level of fee Unigel UK’s balance sheet would have shown no or negligible net liabilities. In the circumstances the Judge thought it right to adopt the capital earnings valuation method.
40. For this purpose (para 43) he had to begin by estimating the maintainable profit, which fell to be calculated in three stages:

(1) Take an item for maintainable revenue, anticipated as at the valuation date.

(2) Deduct the direct costs of sales, to arrive at the “gross profit”.

(3) Deduct an appropriate amount for overheads.

41. The experts differed on some of these three components of the calculation. As to the first, Mr Fisher (using the “Discounted Future Earnings” method) had based his calculation of the level of maintainable revenue on a forecast of future revenues made by Mr Joiner in January 1994, (see para 54 below) so far as the forecast related to the three years ahead. He had then made deductions from those forecast revenues of three years ahead for direct costs and overheads, so as to produce a forecast of future profit. From that last figure, he had discounted back at 10% per annum to the valuation date, to give his figure of anticipated revenue. Mr Faull, on the other hand, had derived his figure of anticipated revenue from the actual trading figures of the accounting period which was current at that date, taking the period from the last accounting date (31^st March 1994) back to the valuation date and then annualising the figure.
42. The Judge (paras 44 and 45) preferred Mr Faull’s approach to the calculation of revenue, saying this:

“... He [Mr Faull] says that actual figures are better than forecasts, and in any case Mr Joiner had a poor past record as a forecaster. I do not want to go into this last point. It is something of a sore point with Mr Joiner, particularly because the forecasts of future sales which he made in 1994 turned out with hindsight to have been reasonably accurate. However, hindsight ought to be excluded. Further, as matters appeared at the valuation date a valuer then might well have thought that there was something in the assertion that Mr Joiner was a poor forecaster. In any case I accept Mr Faull’s view that the actual figures should be preferred to a forecast.

In terms of figures there turns out not to be much difference between the amounts which the two experts would take for the revenue, though as I have explained they get to their respective amounts by different routes. I prefer Mr Faull’s route on this aspect of the valuation. His figure for annual maintainable revenue, before direct costs and overheads, as perceived at the valuation date is £1m, and that is my figure also.”

43. The Judge then (para 46) considered the second element in the calculation of maintainable profit, namely the deduction of the direct costs of earning the revenue. This he treated as comprising three elements, of which only the third was controversial:

(1) All direct costs other than elements (2) and (3). It was agreed that, in the trading period up to the valuation date, these direct costs were running at the rate of 60.93% of sales. So, on the Judge’s assumed revenue of £1m, they would be £609,300.

(2) Commissions, which Unigel UK paid on some of its sales. Scaling up the commissions on the actual sales down to the valuation date, so as to assume they would apply comparably to sales of £1m, gave assumed commissions of £57,524.

(3) Licence fees. This was a disputed item. Mr Faull had deducted licence fees at 5% on sales. Mr Fisher had deducted nil. In accordance with his previous conclusions, the Judge considered a deduction of 2½% appropriate, producing a figure of £25,000. After deduction of these three sums representing direct costs from the assumed annual revenue of £1m there was left a gross maintainable profit before overheads of £308,176.

44. As to the deduction for overheads, the third element in the calculation of maintainable profit, the Judge (para 48) recorded that there was a marked difference between Mr Faull and Mr Fisher. Mr Fisher based his provision for the overheads required to run the business on the evidence of Mr Bury, a friend and former colleague of Mr Joiner. Mr Faull had taken the actual overheads in the accounts for the accounting period current at the valuation date, with certain adjustments. Mr Fisher and Mr Joiner suggested that a number of the expenses envisaged by Mr Faull were too high, in particular for remuneration for directors and employees and for travel and subsistence. The Judge, however, (paras 48-51) ultimately accepted Mr Faull’s figure for overheads which was £256,327.
45. Deduction of that sum of £256,327 from the gross profit of £308,176 gave a maintainable pre-tax profit of £51,849. Allowing for tax at the small companies rate of 25% applicable at the valuation date produced a post-tax maintainable profit of £38,887: (para 51).
46. The Judge said (para 52) that the next major stage in the valuation exercise was to select a price-earnings ratio by which to multiply the post-tax maintainable profit. It was more or less common ground that for this purpose the basic approach was to take an average price-earnings ratio from the price-earnings ratios applicable to comparable quoted companies and then to discount it to reflect the differences between such quoted companies and a company like Unigel UK. However, the two experts differed as to the kinds of quoted companies to take as comparables and also as the extent to which the average of quoted price-earning ratios should be discounted.
47. The Judge (paras 53 and 54) agreed with Mr Fisher’s view that, having regard to the nature of the business of Unigel UK, quoted companies in the general manufacturing and chemicals sectors should be taken as comparables, in preference to Mr Faull’s view that the comparables should be taken from the chemicals and telecommunications sectors. Mr Fisher took the average price-earnings ratios of companies in his chosen sectors at the valuation date and then took the average of those two averages – a process which gave him a ratio of 25.05. The Judge accepted and applied this figure of 25.05. However he thought that the appropriate discount to apply to it was 75%, as suggested by Mr Faull, rather than 60% as suggested by Mr Fisher, to reflect the unquoted status of Unigel UK and all the other factors which would tend towards caution for the company as it existed at the valuation date.
48. Accordingly, the Judge concluded (para 56) that if the applicable price-earnings ratio was to be derived from the average of two quoted sectors less a discount, he would take 25.05 less a discount of 75%. This, rounded up to the nearest half produced a figure of 6.5%, which he adopted.
49. The conclusion of the Judge’s exercise involved a simple calculation which (at para 61) he summarised as follows:

“The post-tax maintainable profit must be multiplied by the selected price-earnings ratio to give a value for 100% of the shares in the company. So £38,887 is multiplied by 6.5 producing £252,766 for 100%. I have already said that, to scale this down to a value for Mr and Mrs Joiner’s 51% interest, I will simply take 51% of it …… Therefore I value their interest at £128,910, which I round up to £129,000."

50. In an Appendix to his judgment, the Judge set out the stages of his calculation in summary form. For ease of reference, I repeat this summary:

1. Estimate of annual revenue	£	£ 1,000,000
2. Deduct direct costs of earning revenue Costs other than (ii) and (iii) below (60.93%) Commissions on revenue of £1m Licence fees at 2½%	609,300 57,524 25,000
		(691,824)
3. Gross profit before overheads		308,176
4. Deduct estimate of annual overheads	(256,327)
5. Pre-tax maintainable profit		51,849
6. Deduct tax at 25%		(12,962)
7. Post-tax maintainable profit		38,887
8. Select appropriate price earnings ratio: 6.5
9. Multiply post-tax maintainable profit (line 7) by price earnings ratio of 6.5 (line 8) to give value of 100%		252,766
10. Multiply by 51% to give value of a 51% holding		128,910
		SAY 129,000

51. The Judge (para 64) compared his valuation with the two offers which had been made to the appellants in early 1994 and were not accepted (see para 23 above). He said this:

“As I said in paragraph 21 above there were two of them. Mr Joiner has understandably concentrated on the offer which aggregated to US$540,000. But that was the offer on the basis that Mr Joiner would be tied in for 5 years in such a way that he could not compete with Unigel UK. The other offer was on the basis that Mr Joiner would not be tied in, so that he would have been free to compete or work for a competitor. That is the offer which should be compared with my valuation, because in the events that happened, once Mr Joiner had been dismissed by ITG and excluded from Unigel UK’s factory on 4 December 1994, he was free to compete and to work for competitors. Indeed he established his own consultancy, and I believe that he has acted as a consultant to at least one competitor, an Indian company called Savita. The offer which was made and not accepted was US$220,000, which at the exchange rate at the time was equivalent to £148,048.”

THE GROUNDS OF APPEAL

52. In his notice of appeal Mr Joiner relies on five grounds:

(1) “The Judge was wrong not to take into account the forecast growth potential of the company.”

(2) “The Judge was wrong to exclude all hindsight.”

(3) “In light of the unchallenged evidence of Mr Bury the Judge was wrong to follow the principles on which Mr Faull calculated overheads.”

(4) “The Judge was wrong to allow licence fees as it was contrary to the heads of agreement.”

(5) “The Judge gives no reason for assessing the value as at 11/94 lower that defendants open offer of 3/94.”

53. I shall begin by considering the fifth ground of appeal since that was the ground with which Mr Joiner himself, after some introductory observations, began his address to us.

THE RESPONDENTS’ OFFERS OF MARCH 1994

54. Mr Joiner referred us to some of the background to the offers. On 16^th January 1994, he had sent a telefax to Mr Robinson indicating that “if you make me the right offer for shares with a suitable consultancy contract and it can be done quickly”, he would accept. For this purpose, he supplied his own share valuation, his method being to value the company in five years time, based on forecasts and the current business plan, and then (by the Discounted Future Earnings method) to discount it back to give a current value. For this exercise he assumed that the average selling price of gel was £3,500 per MT at a gross profit on raw material cost of 40%. His figures were as follows:

“FORECAST

	MT	£ REVENUE	G/PROFIT	OVERHEAD	NET PROFIT
Year 1	300	1,050,000	420,000	200,000	220,000
Year 2	400	1,200,000	480,000	350,000	130,000
Year 3	500	1,750,000	700,000	360,000	340,000
Year 4	600	2,100,000	840,000	380,000	460,000
Year 5	700	2,450,000	980,000	400,000	580,000

Note: The overhead increases in year 2 to take account of additional production facilities. (Either expansion of UK or new plant in China for example).”

[As Mr Joiner pointed out to us, the figures of £1,200,000 and £480,000 relating to Year 2 were an obvious arithmetical error. They should have read £1,400,000 and £560,000].

55. The next stage in the negotiation was a Memo dated 25^th February 1994 sent to Mr Joiner by Mr George, setting out, “only as an initial guideline for general discussion and understanding” some suggested terms that might be required in any proposed agreement for the sale by the appellants of their shares in Unigel UK. Clause 1 of these proposed terms embodied a restrictive covenant which would in effect have precluded the appellants from competing in the relevant market for five years. Clause 2 would have tied Mr Joiner into a contract of employment for five years.
56. Mr Joiner responded in a Memo dated 27^th February 1994. In the last two paragraphs on page 1 and the first paragraph on page 2 of that Memo, he suggested that as a matter of law an effective restraint could not be imposed on him, “locking him out” of the gel market, but that the best protection for the respondents would be to “lock him in” to Unigel by providing sufficient incentive in a consultancy agreement.
57. There followed a Memo dated 1/3/94 sent by the respondents “for and behalf of ITG [sic]” and addressed to Mr Joiner which contained the two offers which the respondents said their backers had authorised them to make. It was not drafted by the respondents’ legal advisers. It contemplated that the parties’ respective legal advisers would be instructed if matters proceeded. Some of its provisions showed a certain lack of clarity. “Offer No 1” contained seven paragraphs. The first two paragraphs offered a purchase price of US$220,000 payable in two instalments. Offer No 1 continued:

“The agreement would limit your ability to compete in any manner in the best possible way and in the best interests of ITG/UNIGEL. However, everyone does recognise what you have said on this matter.

[This is the third paragraph of the offer, referred to in para 61 below]

There would also be a consultancy agreement that specified an agreed schedule of payments on a $ x / hour / day / week basis geared to the actual amount of work undertaken in response to specific work requests from UNIGEL / ITG.

We realise that perhaps the price in this offer may not be acceptable to you but this is all our backers / bankers would be willing to risk given your requests to be free to pursue other business interests and other statements.”

58. The remaining paragraphs of Offer No 1 introduced Offer No 2 as follows:

“They have said that a far better option for both parties is one whereby you are more firmly locked into ourselves and locked out of competing by a more financially rewarding consultancy contract.

Unfortunately, this is more along the lines of the type of offer that you said in the past you would prefer not to take. However, it does tend to meet the requirements you mention in the first paragraph of page 2 of your memo of 27/02/94 so it may well be acceptable to you.”

“Offer No 2 offered a purchase price of US$540,000 payable by instalments and, so far as material, continued as follows:

“There would be a term consultancy of 5 years with annual payments of $52,000.00 in return for 4% of the shares such that by the end of the consultancy ITG holds 100% of the shares.

The consultancy agreement would also specify an agreed schedule of payments on a $ x / hour / day / week basis geared to the actual amount of work undertaken in response to specific work requests from UNIGEL / ITG.

This amounts to a total of $540,000.00 payable to you plus the payments from the actual work performed under the consultancy agreement.”

59. The last page of the Memo dated 1/3/94 included the following paragraph:

“The above offers are dependent upon us supplying the bank with a detailed sales forecast by geographical area with justifications and a breakdown of what working capital is required and how it is to be spent and being accepted as reasonable.”

60. The Judge (see para 51 above), having reached his final valuation figure, simply referred to the two offers by way of a comparative test. He regarded the lower Offer No 1 as the relevant one because it had been made on the basis that Mr Joiner would not be “tied in so that he would have been free to compete or work for a competitor”. In para 21 of his judgment he had similarly described Offer No 1 as having been one of US$220,000 “if Mr Joiner was not locked in to Unigel UK or otherwise precluded from competing”.
61. Mr Joiner, who appeared to attach some importance to this point, suggested that these descriptions of Offer No 1 were wrong. The third paragraph of Offer No 1 in his submission demonstrated that Offer No 1, as well as Offer No 2, was made on the footing that Mr Joiner would be precluded from competing with Unigel UK, and that correspondingly, if the Judge was to approach his valuation on the realistic basis which he postulated, he should have done so on the hypothesis that Mr Joiner would be “locked into” the company, because that was what the parties had contemplated in March 1992.
62. I am unable to accept this submission, which picks the rather vague wording of the third paragraph of Offer No 1 out of its context and attaches undue weight to it. When the last five paragraphs of Offer No 1 are read as a whole and in conjunction with the last two paragraphs of page 1 and the first paragraph of page 2 of the Memo dated 27^th February 1994, it is in my judgment reasonably clear that the Judge was right in saying that the first offer, unlike the second, was made on the basis that Mr Joiner would not be locked into the company (either by a full-time consultancy agreement or otherwise).
63. Having made this submission in regard to Offer No 1, Mr Joiner went on to submit that the Judge, in effecting his valuation, was wrong to disregard Offer No 2, as being immaterial. On the contrary, he submitted, that offer, being a bona fide offer made by the respondents only a few months before the valuation date, should have been taken as the basis or yardstick for the price which the respondents would have been willing to pay for the appellants’ shareholding as at the valuation date.
64. There are in my judgment a number of reasons why this submission must be rejected. I need refer to only two of them, given by Mr Cranfield on behalf of the respondents. First, Offer No 2 was clearly no more than a tentative offer intended as a mere prelude to later negotiations and dependant on the respondents’ bank being satisfied as to a large number of matters, set out on the last page of the Memo. Secondly, and conclusively, whatever may be the true construction of Offer No 1, Offer No 2 was made on the basis that Mr Joiner would be locked into Unigel UK. However, in paras 28 to 30 of his judgment on liability, the Judge described the rapidly deteriorating relationship between the parties. Indeed in para 30, he went so far as to describe the relationship between Mr Joiner and Mr George during the weeks immediately preceding the valuation as having become “poisonous”. In those circumstances it is fanciful to suggest that, as at the valuation date, the parties would have come to an arrangement which locked Mr Joiner into Unigel UK. The clean break which in the event occurred was bound to happen.
65. I would therefore reject Mr Joiner’s submissions based on the two offers of March 1994.

HINDSIGHT

66. Mr Joiner’s complaint concerning hindsight relates to the Judge’s calculation of future revenue. Mr Fisher, in para 6.6 of his Report, reproduced (without correction of the arithmetical error) the forecasts (set out in para 54 above) made by Mr Joiner in January 1994, when negotiating for the sale of his shares. In para 6.21 of his Report, he expressed the opinion that “the profits forecast by Mr Joiner in 1994 could at November 1994 be regarded as sustainable.” He therefore adopted the forecast pre-tax profit for the year to 31^st March 1997 of £340,000 as maintainable and discounted this at a rate of 10% to arrive at a net present value. (He did not go beyond 1997 because he said that the actual trade figures were distorted due to the establishment of manufacturing facilities in China).
67. The manner in which the Judge dealt with this matter of forecasts is summarised in paras 41 and 42 above. Mr Joiner submitted that he was wrong in rejecting Mr Fisher’s approach to the estimate of revenue. He pointed out, as had Mr Fisher, that the sales revenue forecasts which had been made by Mr Joiner in 1994 had in the event proved very accurate. Taking into account the arithmetical error referred to in para 54 above, the three years sales forecast by Mr Joiner amounted to £4,200,000. The actual sales figures were £4,022,000. He submitted that Mr Faull, in basing his valuation on actual trading figures as at November 1994, had taken a “blinkered” view. Mr Fisher, he submitted, had been right in thinking it appropriate to test the reasonableness and reliability of Mr Joiner’s forecasts against the actual trading results for the company for the years ending March 1995, 1996 and 1997 and, having done so, to adopt those figures.
68. Mr Joiner, while accepting that the basic rule in valuing shares in a company is to reject evidence of events which occurred after the valuation date (see Re Holt [1953] 2 A.E.R. 1499), relied on certain cases in which the courts have held that it was legitimate to look at later events for the purpose of the particular valuation exercises they were called on to perform. He placed particular reliance on the decision of the House of Lords in Bwllfa and Merthyr Dane Steam Collieries v The Pontypridd Waterworks Company [1903] A.C. 431.
69. In that case owners of coal mines under and near waterworks had given the undertakers notice under s.22 of the Waterworks Clauses Act 1847 that they intended to work the coal. The undertakers replied by a counter-notice requiring the mine owners not to work. Questions arose as to the amount of the compensation properly payable to the mine owners. There were long delays before the arbitration was completed. The House of Lords held that the statutory compensation was to be assessed not by reference to a fixed date, the date of the counter-notice, but by reference to what the coal owners would have made out of the coal during the whole time it would have taken them to get it, so that evidence was admissible before the arbitrator showing that coal rose in value after the date of the counter-notice. In a passage particularly relied on by Mr Joiner and Mr Fisher, Lord Macraghten (at p 431) said:

“Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark?”

However, by way of contrast, in the present case the damages do fall to be assessed by reference to a fixed date, namely 23^rd November 1994. The Bwllfa decision is therefore of no assistance to the appellants.

70. A very recent decision, also relied on by Mr Joiner, was that of the House of Lords in Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143. This concerned the valuation of a covenant to make four annual payments in a sublease of equipment for the purpose of identifying the “consideration” for a transaction within section 238(4)(b) of the Insolvency Act 1986. Lord Scott of Foscote said at p 153:

“Mr Mitchell submitted that these ex post facto events ought not to be taken into account in valuing PCG’s sublease covenant as at 10 November 1989. I do not agree. In valuing the covenant as at that date, the critical uncertainty is whether the sublease would survive for the four years necessary to enable all the four £312,500 payments to fall due, or would survive long enough to enable some of them to fall due, or would come to an end before any had fallen due. Where the events, or some of them, on which the uncertainties depend have actually happened, it seems to me unsatisfactory and unnecessary for the court to wear blinkers and pretend that it does not know what has happened. Problems of a comparable sort may arise for judicial determination in many different areas of the law. The answers may not be uniform but may depend upon the particular context in which the problem arises. For the purposes of section 238(4) however, and the valuation of the consideration for which a company has entered into a transaction, reality should, in my opinion, be given precedence over speculation.”

71. The particular context in which Lord Scott had regard to events which occurred after the date of the sublease was for the purpose of confirming that the covenant, which could already be seen as “precarious” from the outset, in fact had a nil value. He recognised that the approach which he adopted might not be applicable in other areas of the law. He was not stating any general principle with regard to valuation, still less with regard to the valuation of shares in a company.
72. In Buckingham v Francis [1986] 2 A.E.R. 738, Staughton J, in valuing the shares in a company at a fixed date, (at p 740a) reiterated the basic rule in saying “The company must be valued in the light of the facts that existed at 24 March 1981”, but added “regard may be had to later events for the purpose only of deciding what forecasts for the future could reasonably have been made on 24 March 1981”. This addition was perhaps the judicial dictum most helpful to Mr Joiner. He relied on it in support of his submission that regard might be had to the post-November 1994 sales figures for the purpose of demonstrating that his forecasts of sales figures made in January 1994 had been fairly accurate.
73. The latter case, however, is certainly not authority for the proposition that forecasts of future trading made before the valuation date should be preferred to the actual trading results of the company for its most recent period of trading merely because, in the event, such forecasts happen to tally reasonably well with the company’s subsequent trading results. None of the authorities on which Mr Joiner relies support the proposition that, for the purpose of valuing shares in a company at a fixed date, its trading results after the valuation date should be preferred to its trading results actually known at the valuation date.
74. In all the circumstances, I accept Mr Cranfield’s submission that the Judge was fully entitled to conclude that a valuer instructed on behalf of the respondent purchasers in November 1994 would in the real world have preferred Mr Faull’s approach, which, in accordance with the standing practices of valuation, was tied to the most recent actual trading results, to Mr Fisher’s approach which was based simply on Mr Joiner’s best guess as to how Unigel UK was likely to perform in the future. Mr Joiner criticised the Judge’s short statement in para 44 of his judgment that “hindsight ought to be excluded”, because the Judge did not support it by reference to reasons or decided cases. The Judge, however, can in my opinion readily be excused for failing to spell out reasons for what he regarded as a statement of the general legal principles of share valuation so well established as to require no amplification.
75. I would therefore reject Mr Joiner’s submissions based on hindsight.

GROWTH POTENTIAL

76. Before selecting his choice of method of valuation, the Judge had said (para 39): “Both sides agree (and so do I) that the price should assume that Unigel UK was a going concern. On that basis the core of the value lay in the present expectation (as at the valuation date) of future profits from the company’s business.” Both experts agreed that the company had growth prospects. Mr Faull himself had observed (para 6.8(i) of his Report) that “the company was engaged in a business that had significant potential for future growth”. Mr Joiner again criticised the Judge for following Mr Faull’s approach in basing his estimate of the future profits of the company on its actual recent trading results. The Judge in adopting this course, Mr Joiner suggested, entirely overlooked the growth potential of the company. The right course to follow in his submission would have been to adopt Mr Fisher’s approach of using a forecast of the profit figures for three years forward (1997), based on Mr Joiner’s forecast in January 1994 that the company’s revenues would increase year on year from £1,050,000 in “year 1” to £1,750,000 in “year 3”.
77. Under the previous heading “Hindsight”, I have already given reasons for concluding that the Judge was entitled to decline to base his valuation on Mr Joiner’s forecasts. However, I do not think it correct to say that the Judge overlooked the growth potential of Unigel UK in reaching his ultimate figure for the valuation of the shares. In para 29 of his judgment, as a ground for optimism, he specifically referred to the fact that the company was a supplier to the telecommunications industry “which was very much a growth sector at the time”. In para 32, however, he pointed out that while business sales had been on an upward trend over the two years that the company had been in business, “orders appeared to be erratic” and “there certainly was not a steady and consistent flow”; he there gave a number of reasons for caution in estimating future profits.
78. The observation made by Mr Faull quoted in para 76 above was made by him in the part of his Report where he was considering what was the appropriate price-earnings multiple to be applied to his figure for maintainable profit. But, as Mr Cranfield submitted in his skeleton argument, Mr Faull specifically took the growth potential of Unigel UK into account in giving his opinion as to where the price-earnings multiple to be applied to the company should fall within the range which he considered suitable for a company such as Unigel UK with a high turnover and low profit: (see paras 6.7-6.10 of his Report). For the reasons given in paras 52-53 of his judgment, the Judge considered that Mr Faull’s multiplier of 5 was too low and increased his figure to 6.5. Paras 53 and 54 of his judgment, while not referring in terms to the company’s growth potential, in my opinion show clearly that he had such potential in mind, (as well as the reasons for approaching it with caution), in reaching his figure of 6.5. The appellants do not challenge this particular exercise of his discretion: (see para 24 of their skeleton argument). However, as Staughton J observed in Buckingham v Francis (supra at p 741i):

“What one must guard against is making allowance for the same risks twice over i.e. in the assessment of future profits and also in the choice of a price/earnings ratio.”

It is in my judgment no less necessary to avoid making allowance twice over for the same growth potential. This the Judge in the present case rightly avoided.

79. In my judgment therefore the judgment cannot be faulted by reference to Mr Joiner’s submissions under the heading of growth potential.

LICENCE FEES

80. The manner in which the Judge dealt with the question of the existence or otherwise of a liability on the part of Unigel UK as at the valuation date to pay licence fees to Unigel HK for the use of intellectual property rights has been fully set out in paras 34 to 36 above. As will have appeared, his conclusion was that, for the purpose of agreeing a share sale price in a transaction such as he postulated, a rate of 2½% would have been adopted. He made a corresponding deduction from his estimate of Unigel UK’s revenue, as a direct cost of earning that revenue.
81. Mr Joiner submitted that this conclusion was wrong because the charging of any licence fee to Unigel UK would have been contrary to the Heads of Agreement dated 16^th September 1992. The provisions in the Heads of Agreement, summarised in para 16 above, had appeared to contemplate that (conditionally on the loan from National Westminster Bank being obtained) Unigel UK rather than Unigel HK would be the ultimate purchaser from Geltec’s liquidator of its intellectual property rights and the UNIGEL trade name. Mr Joiner submitted that the Heads of Agreement were still in force at the valuation date and would have precluded the respondents through Unigel HK, of which they had control, charging Unigel UK with any licence fee for intellectual property rights.
82. This submission, however, attaches no weight to the Geltec Agreement, made before the valuation date on 7^th February 1994 by which Geltec’s liquidator agreed to sell to Unigel HK various assets of Geltec’s former business, including the “intellectual property” as defined. Though the appellants at the trial on liability attempted to argue that, without their prior consent, Unigel HK should not have been set up at all or at least should not have been a party to the Geltec Agreement, this argument met with no success: (see pages 30 et seq. of the judgment on liability). There has been no appeal on this point. For present purposes therefore it has to be assumed that the Geltec Agreement, so far as it extended, was a valid agreement which did not infringe the appellants’ rights.
83. In regard to the Geltec Agreement, the Judge found as facts (para 34 of his judgment on damages) that the idea was for Unigel HK to license the intellectual property rights to Unigel UK in return for licence fees, that Mr Joiner was aware of this idea, and that in September 1994 he attended a meeting at which the principal subject matter was to seek advice about the payment of licence fees by Unigel UK to Unigel HK and the level at which they should be charged. True it is that at the valuation date no licence agreement was yet in place and in practice Unigel UK was using the product name UNIGEL without payment to Unigel HK or anyone else. True it also is that the legal right of Unigel HK to charge a licence fee for the use of this product name was debatable for the reasons given in para 37 of the Judge’s judgment. But, as the Judge pointed out, the mere fact that at the valuation date Unigel UK was using the product name without payment did not mean that it could go on doing so for ever. The whole legal situation was complex and problematic.
84. Taking all the circumstances into account, the Judge was in my opinion amply justified in concluding that the value of Unigel UK at the valuation date should be ascertained on the basis that, despite some uncertainties, it would have to concede a licence fee payment if it wanted to continue using the name UNIGEL for its product, or at least wanted to do so without facing troublesome legal challenges. Nor do, I think, he can be said to have erred when, as a matter of judgment, he decided that for the purpose of agreeing a share sale price in a transaction such as he postulated, a rate of 2½% would, as a matter of compromise, have been adopted. Such figure, it will be noted, was far lower than the licence fees of 7½% and later 5% agreed between Unigel UK and Unigel HK, albeit in different circumstances, after the valuation date.

OVERHEADS

85. As will have appeared from paragraph 44 above, the Judge accepted Mr Faull’s ultimate figure for overheads at £256,327. The sources of this figure appear for the greater part from his original Report. Using his “capitalised earnings” method he derived his figures for overheads from Unigel UK’s March 1995 accounts. In Appendix 2 he set out the trading and profit and loss account of the company for the year ended 31^st March 1995 (the accounting year in which the valuation date fell). This included a particularised list of overheads totalling £279,634. He used these figures in Appendix 3 to calculate the annualised trading figures of the company, and in Appendix 4 to calculate the “maintainable profit” at the valuation date. In Appendix 4 he derived a final figure of £313,851 as the appropriate figure for overheads. Subsequently, Mr Faull deducted from this last figure the figure of £50,073 for sales commissions shown in Appendix 2 and the figure of £7,451 for additional commission shown in Appendix 4, and added them as costs of sale. These deductions left the sum of £256,327 adopted by the Judge.
86. In contrast, Mr Fisher, for the purpose of carrying out his calculations under his Discounted Future Earnings method, had made his estimate of the potential level of overheads required by the business primarily on the basis of the figures given by Mr Bury. He was a chartered chemist and former business colleague of Mr Joiner with experience in gel manufacturing, who had been asked in particular to give his opinion as to the resources required to manufacture gels.
87. In his witness statement, Mr Bury gave detailed evidence about the production capacities and appropriate staffing levels for gel production. He exhibited a schedule setting out his estimate of the operating costs required to manufacture unigel and operate Unigel UK. In it he used the same line items as appeared in the audited profit and loss account of the company for the year ended March 1997. He gave two estimates, one for up to 500 MT per year, using a small reactor, and one for up to 1000 MT per year, using a larger reactor. For comparison he included a column showing the actual operating expenses incurred by the company during the year ended 31^st March 1997 (£666,609) which exceeded his estimate of £385,400 by £281,209. Mr Bury concluded that this excess represented excessive expenditure on overheads. Mr Fisher in his report (para 6.16) accepted Mr Bury’s figures. In reliance on his estimate of £385,400, he then produced his subsequent figures.
88. Mr Joiner’s first submission under this head was that the Judge erred in preferring the figures produced by Mr Faull to those produced by Mr Fisher, based on the evidence of Mr Bury, on which Mr Bury had not been cross-examined. There are in my judgment at least two reasons why this submission must be rejected. First, the Judge was not obliged to accept Mr Bury’s opinion (which was merely opinion) as to the costs of the future likely overheads of Unigel UK in carrying on the business of manufacturing and selling Unigel products, when there was other evidence of opinion, namely that of Mr Faull, which he preferred. Secondly, the Judge was entitled to find that, looking at the matter realistically, a purchaser in the position of the respondents (or their valuer) would have preferred Mr Faull’s overhead figures, which were taken from Unigel UK’s actual trading overhead figures and were thus tied to reality, to Mr Fisher’s approach, which was based simply on Mr Bury’s opinion as to the future overheads of a company engaged in a business of this nature.
89. Mr Joiner, recognising the difficulties facing his first submission referred to in para 88 above, while not abandoning it, directed the greater part of his argument before us under this head to the Judge’s approach to the matter of overheads, based, as it was, on that of Mr Faull. That approach, he submitted, was inconsistent. On the one hand, the Judge disclaimed the use of hindsight. On the other hand, he invoked hindsight at least to the extent that he took into the reckoning the overheads of Unigel UK incurred during the period from the valuation date up to 31^st March 1995.
90. I do not think there is any substance in this point. Any splitting up of the overheads for the year to March 1995 would inevitably have been a quite arbitrary and artificial operation. Furthermore, looking at the matter realistically, the appellants and the respondents, in negotiating a sale and purchase as at the valuation date in November 1994 would not in practice have been likely to conclude their negotiations until the overheads for the whole year had been ascertainable.
91. A further criticism of the Judge’s approach, relied on more strongly by Mr Joiner, related to his treatment of salaries, wages and directors’ fees. He pointed out that Mr Faull in his Report (para 5.4) had proceeded on the assumption of projected annual sales for Unigel of £1m at the valuation date.
92. In para 5.8 of his report, after referring to his calculation of overheads as set out in Appendix 3, Mr Faull had said:

“That figure includes commission and the appropriate adjustment in respect of commission on a higher level of sales is shown at appendix 4. Certain other overheads could also be higher on a projected level of sales of £1m, but, as orders had been received and accepted of over £500,000 in the first six months of that accounting year …… it would have been reasonable to assume at that time that no other overheads would significantly increase to achieve annual sales of £1m.”

93. That was the assumption on which Mr Faull said he would proceed. However, as Mr Joiner pointed out, as Appendices 1 and 2 to the Report had shown, while the salaries and wages paid by Unigel UK in the year ending 31^st March 1994 had been £25,867, those paid in the subsequent year ending 31^st March 1995 had been £60,300. On the assumption made by Mr Faull, the difference of £34,433 between these two figures must, it was submitted, have represented an excessive payment on overheads. To this latter sum had to be added a sum of £2,919 representing the difference between National Insurance contributions paid in the first year (£2,510) and those paid in the second year (£5,429).
94. To that sum of £2,919, it was submitted, further sums should be added because Mr George’s evidence showed that after the valuation date two of his associates, Mr Coates and Mr Booker, had joined the company as consultants. Mr Coates had been paid £5,990 (rounded up) in respect of the year to 31^st March 1995, and Mr Booker had been paid £400.
95. All these above-mentioned sums of £34,433, £2,919, £5,990, and £400 (totalling £43,742) in Mr Joiner’s submission represented excessive expenditure by Unigel UK during the period between the valuation date and 31^st March 1995, and should be deducted from any estimate of overheads accordingly.
96. Before the Judge, Mr Joiner had further argued that the figure for overheads should be reduced so as to reflect travel and subsistence at a level sharply below that which Unigel UK was in fact incurring. This argument was rejected by the Judge and was not pursued before us. Ultimately too, Mr Joiner did not pursue his earlier argument that one director, rather than two, would have sufficed after his departure.
97. At the conclusion of his opening address, Mr Joiner handed up to us a helpful revised version of the Appendix to the judgment, which showed what in his submission would have been all the appropriate figures on the basis of the Judge’s general approach to the question of valuation. This revised version showed simply a deduction of the above-mentioned figure of £43,742 from the Judge’s estimate of overheads (£256,327). This represented his final response to the Judge’s estimate.
98. Having summarised, I hope fairly, what became Mr Joiner’s ultimate submissions on the question of overheads, which I recognise as being of great importance to the appellants, I hope that it will not seem discourteous if I deal with them quite shortly. It is quite clear from paras 48-49 of the judgment that the question of staff costs had been fully ventilated in argument before the Judge and had been fully considered by him. In para 49, having said that he accepted the principles on which Mr Faull calculated his deduction of overheads, and that he accepted his figures, the Judge said:

“It would be excessive for me to go through all the contested items one by one. However, by way of example, I accept Mr Faull’s view that a company which was carrying on an export business with a turnover of £1m or more a year ought to have two directors. And I accept that his figure of £38,000 a year for each director is realistic. On staff costs more generally, I do not accept Mr Joiner’s assertion that Mr George and Mr Robinson introduced a “jobs for the boys” culture and employed too many people at too high salaries.”

99. Though Mr Joiner told us that his reference to the introduction of a “jobs for the boys” culture had been directed to a period after 31^st March 1995, it is in my judgment clear that, in the sentence last quoted, the Judge was finding as a fact that, contrary to Mr Joiner’s claim, Unigel UK had not employed too many people at too high salaries at any relevant time. I can see no grounds on which we can properly interfere with that finding of fact. Nor do I think that it was incumbent on the Judge, having decided the issue of principle in favour of Mr Faull’s approach, to go through each item of overheads and say why he preferred his figure to that of Mr Fisher (derived from Mr Bury).
100. In my judgment therefore the appellants’ submissions under that head must also be rejected.

CONCLUSION

101. In conclusion, I would make these general observations. The process of valuation of a shareholding in a case such as this cannot be an exact science. Though it ultimately involves a finding of fact, elements leading up to such finding may well involve points on which different minds, approaching the matter judicially, could quite properly take different views – in other words, points to which there cannot be said to be exclusively one correct answer. It could be that, on some of the conclusions of fact reached by the Judge in his judgment on valuation, other minds would have taken different views. A figure substantially higher or lower than £129,000 might have been the result. But the Judge considered all the issues with great care and his judgment seems to me to have been conspicuously clear, logical and fair. I can see no substance in the criticisms of it based on the decision of this court in Flannery v Halifax Estate Agencies Ltd [2000] 1 WLR 377, relating to the duty of the court to give sufficient reasons. This is not a case in my judgment which would justify any interference with the Judge’s decision.
102. For the reasons given, I would dismiss this appeal.

Lord Justice Keene:

103. I agree.

Lord Justice Aldous:

104. I also agree.
Order: Appellant's appeal against the judgment of Park J dated 28th July is dismissed with costs on the standard basis to be subject of a detailed assessment if not agreed; the respondent's cross-appeal is dismissed with costs on an indemnity basis, to be the subject of a detailed assessment if not agreed; application for permission to appeal to the House of Lords refused. (Order not part of approved judgment)