England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		23 March 2006

Mr Justice Blackburne :

1. On 10 March 2006 I handed down judgment on this section 459 petition. I found that unfair prejudice had been established and ordered the first respondent ("Ian") to buy or procure the purchase of the petitioners' shares in the second respondent ("CIHL"). I expressed the view that in valuing the shares there should not be any minority discount but stressed that I had not heard argument on the point. The matter has since been argued.
2. The petitioners' shares together represent 49.96% of the issued shares in CIHL. Of that 49.96% just under half are held by the first petitioner ("Patricia") and the balance by the second petitioner ("the Trust"). The shares were acquired from the 50% holding in CIHL formerly owned by Malcolm Irvine ("Malcolm"), Patricia's late husband and Ian's younger brother. Malcolm died on 1 March 1996. In August 1994 Malcolm had given half of his shareholding to the Trust. By his will, Malcolm had given one share to Ian and the remainder to Patricia. Patricia is one of the two trustees of the Trust. The other trustee, Michael Thatcher, has "delegated" his powers as a trustee to Patricia in relation to the Trust. The Trust is for the benefit of Patricia's three sons who are all now adults. For all practical purposes Patricia and the Trust speak as one voice.
3. The question which I have to decide is whether in the working out of the buy-out order the 49.96% shareholding (as effectively it is) is to be valued on a pro-rata, non-discounted basis to reflect the fact that it is a minority holding. Miss Catherine Roberts, appearing on behalf of the petitioners, submitted that it should; Mr Nigel Dougherty, appearing on behalf of Ian, submitted that it should be valued on a discounted basis.
4. Most, if not all, of the authorities in which the question has been raised whether the shares in a company which is the subject of a section 459 petition should be valued on a pro-rata or on a discounted basis have been cases where the company is or is alleged to be a quasi-partnership. Certainly, Miss Roberts was unable to draw my attention to any in which a non-discounted basis of valuation has been applied to a minority holding in a company which is not a quasi-partnership.
5. The legislation does not stipulate how the matter is to be approached. On the other hand, the courts have repeatedly emphasised that the overriding requirement in quasi-partnership cases is that the price to be paid, where a buy-out order is made, should be fair. In Re Bird Precision Bellows Ltd [1984] Ch 419 (a case under section 75 of the Companies Act 1980, the predecessor to section 459) Nourse J said (at 431D):

"In the case of the shareholder who acquires shares from another at a price which is discounted because they represent a minority it is to my mind self-evident that there cannot be any universal or even a general rule that he should be bought out under section 75 on a more favourable basis, even in a case where his predecessor has been a quasi-partner in a quasi-partnership. He might himself have acquired the shares purely for investment and played no part in the affairs of the company. In that event it might well be fair - I do not know - that he should be bought out on the same basis as he himself had bought, even though his interests had been unfairly prejudiced in the meantime. A fortiori, there could be no universal or even a general rule in a case where the company had never been a quasi-partnership in the first place.

In summary, there is in my judgment no rule of universal application. On the other hand, there is a general rule in a case where the company is at the material time a quasi-partnership and the purchase order is made in respect of the shares of a quasi-partner … It seems clear to me that … that is [namely, a valuation on a non-discounted basis], in general, the fair basis of valuation in a quasi-partnership case, and that it should be applied in this case unless the respondents have established that the petitioners acted in such a way as to deserve their exclusion from the company."

6. In Strahan v Wilcock [2006] EWCA Civ 13 (at [17]) Arden LJ stated that:

"Shares are generally ordered to be purchased on the basis of their valuation on a non-discounted basis where the party against whom the order is made has acted in breach of the obligation of good faith applicable to the parties' relationship by analogy with partnership law, that is to say where a "quasipartnership" relationship has been found to exist. It is difficult to conceive of circumstances in which a non-discounted basis of valuation would be appropriate where there was unfair prejudice for the purposes of the 1985 Act but such a relationship did not exist. However, on this appeal I need not express a final view on what those circumstances might be."

7. The reason for so treating the valuation of shares on a buy-out order in a quasi-partnership case was offered by Lord Millett in CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16; [2002] 2 BCLC 108 (at [41]):

"The rationale for denying a discount to reflect the fact that the holding in question is a minority holding lies in the analogy between a quasi-partnership company and a true partnership. On the dissolution of a partnership, the ordinary course is for the court to direct a sale of the partnership business as a going concern with liberty for any of the former partners who wish to bid for the business to do so. But the court has power to ascertain the value of a former partner's interests without a sale if it can be done by valuation, and frequently does so where his interest is relatively small: see Syers v Syers (1876) 1 App Cas 174. But the valuation is not based on a notional sale of the outgoing partner's share to the continuing partners who, being the only possible purchasers, would offer relatively little. It is based on a notional sale of the business as a whole to an outside purchaser.

In the case of a company possessing the relevant characteristics, the majority can exclude the minority only if they offer to pay them a fair price for their shares. In order to be free to manage the company's business without regard to the relationship of trust and confidence which formerly existed between them, they must buy the whole, part from themselves and part from the minority, thereby achieving the same freedom to manage the business as an outside purchaser would enjoy."

8. Is there any reason in the present case for concluding that, although it is a minority holding and although CIHL is not a quasi-partnership, fairness requires the petitioners' shares to be valued on a non-discounted basis? Or, taking up the comment of Arden LJ, are there present in this case circumstances (which she considered difficult to conceive) that would make it appropriate for the petitioners to receive a non-discounted valuation for their shares?
9. Miss Roberts advanced the following considerations for submitting that such circumstances do exist. Although, since Malcolm's death CIHL had not been a quasi-partnership, the company remained nevertheless a "family company" in that all the shares were held by or for the benefit of members of the Irvine family. The articles contained restrictions on the transfer of shares and there is no open market for their disposal. Treating the shareholdings of Patricia and the Trust as a combined holding the difference between that holding and Ian's is only one share (in that the petitioners' holding is 50% less one share and Ian's is 50% plus one share). If only proper dividends had been paid and Ian had been less greedy in the remuneration which he drew for himself the petitioners would have been content to remain shareholders of the Company. It is only because over several years Ian has behaved in the way that he has that the petitioners have been driven to seek an exit from the company by means of a buy-out order. If this was not a case where a pro-rata basis of valuation should apply, it would be difficult to think that any such case would ever arise, and there would be a risk therefore that the court's discretion in fixing the basis of valuation for a minority holding in a company which was not a quasi-partnership would be atrophied.
10. Mr Dougherty submitted that the matter was one of principle. CIHL was not a quasi-partnership. As a result of the gift by Malcolm to Ian of the single share, control of CIHL passed to Ian. No conditions were attached to the gift of that share. Ian was not subject to any restrictions, over and above those contained in CIHL's articles, against disposing of his majority holding to an external purchaser. The petitioners' shareholdings constituted a minority holding even though the difference between them and Ian's is so small. There were no circumstances which could be described as exceptional so as to justify a departure from the ordinary assumption that a minority shareholding is valued as such. The fact that the court has found that the manner in which Ian has conducted CIHL's affairs was unfairly prejudicial to the interests of the petitioners so as to establish their entitlement to a buy-out order cannot, of itself, determine the basis of valuation of the petitioners' shares.
11. I accept Mr Dougherty's submissions. A minority shareholding, even one where the extent of the minority is as slight as in this case, is to be valued for what it is, a minority shareholding, unless there is some good reason to attribute to it a pro-rata share of the overall value of the company. Short of a quasi-partnership or some other exceptional circumstance, there is no reason to accord to it a quality which it lacks. CIHL is not a quasi-partnership. There are no exceptional circumstances. The shareholdings must therefore be valued for what they are: less than 50% of CIHL's issued share capital. The extent of the discount to be applied will be a matter for the valuers.