Shareholders at war – Court influenced by Milsted Langdon accountant on true value of business
In a recent shareholder dispute case, the Court was persuaded by expert accountancy evidence given by our Forensic Partner, Roger Isaacs.
The case of Richard George v Robert McCarthy and Goss Interactive Limited (“the Company”) ( EWHC 2939 (Ch)), concerned a petition brought by a 50 per cent shareholder in the Company alleging unfair prejudice under Section 994 of the Companies Act 2006. Roger was instructed on behalf of the respondent and another 50 per cent shareholder.
As is common in such shareholder disputes, emotions ran high, causing the judge to observe that “at times the complaints have seemed more suited to a defended divorce than an unfair prejudice petition”.
In addition to having to consider whether the petitioner had been unfairly treated, the judge considered the value of the Company, which provided websites and digital platforms to customers that included a number of local authorities.
Both the petitioner and respondents had appointed forensic accountants to opine on the value of the Company and the petitioner’s shares therein.
The experts agreed that the Company should be valued by applying a multiple to the expected future earnings of the Company and that an adjustment was then needed to reflect the fact that it had surplus cash deposits.
However, the experts held widely differing views as to the level of the maintainable earnings, the appropriate multiple and the amount of surplus cash.
Consequently, the petitioner’s expert valued the Company at £5.8 million, which was a figure almost four times the value attributed to it by Roger on behalf of the respondents.
The huge difference in valuation was probably one of the reasons why the case did not settle at mediation and resulted in a fully contested trial.
Despite the experts having met to try to narrow the issues between them, the gulf remained unbridged and it fell to the court to make a determination.
When considering the value of the Company, the judge referred to Mr Isaacs’ “practical experience” which caused him to prefer his evidence and to conclude that the petitioner’s expert’s multiple of ten was too high for a business whose performance was “solid but unexciting”.
The petitioner’s expert had adduced “a wide selection of published figures showing actual figures paid for companies in the past” to support the choice of a high multiple.
However, the judge was persuaded by Roger’s “telling observation” that such quoted statistics are skewed because they reflect only those businesses that are sufficiently successful to have attracted buyers.
The judge also preferred Roger’s evidence in relation to the surplus cash deposits and ultimately concluded that the Company was worth £2.2 million, a figure that was much closer to the valuation given by Mr Isaacs and less than 40 per cent of the petitioner’s expert’s valuation.
Much to the respondents’ relief, the judge’s conclusions on valuation were moot because he determined that there had been no unfairly prejudicial conduct and that therefore the petition failed.
The case demonstrates that the combination of strong emotions and unrealistically high valuations is a potent mix. All too often, forensic accountants believe that they are doing their clients a favour by ascribing values to their claims at the top end (or even beyond) the range of what can reasonably be justified.
However, if these high values are not sufficiently robust to withstand cross-examination, the danger is that they do no more than unduly raise the expectations of claimants.
They also tend to frustrate the possibility of settlement and risk the claims ultimately collapsing at trial, with catastrophic adverse cost consequences.
It is, therefore, far better for valuations to be measured and defensible even if that means that clients may sometimes have to be given a message that is at odds with what they want to hear.