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International valuation standards gain ground in UK courts

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  • Publish date: 15 September 2017
  • Archived on: 15 September 2018

IVS 2017 hit the streets in January 2017, following the previous iteration which had been issued in 2013.

It is increasingly gaining traction as a source of guidance for those engaged in business valuation. As well as providing guidance on standards with which we should comply, it represents a codification of language: valuation approaches, bases, premises and methods are defined, dissected and illustrated. They will, I suspect, gain increasing currency.

A visible presence

In the 2014 shareholder dispute case of Arbuthnott v Bonnyman, the two experts locked horns on the nuances in the IVS definition of “market value”. The precise point at issue was whether or not the definition was inclusive of the pricing impact of a special purchaser. In the case of Premier Telecom Communication Group Limited (EWCA Civ 994) [2014], the valuer used, as the valuation basis, the definition of market value as given in IVS 2013 (and very substantially replicated in IVS 2017).

"The estimated amount for which an asset or liability should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing and where the parties had acted knowledgeably, prudently and without compulsion."

Arguing from different bases

In the case of Ingram and Hall and Ahmed (EWHC1536) [2016] both experts reached for the International Valuation Standards in defining the nature of the valuation. However, they used two different bases of value, namely market value, as defined above and what was, confusingly, previously labelled as fair value by the IVSC. 

“The estimated price for the transfer of an asset or liability between identified knowledgeable and willing parties that reflects the respective interests of those parties.”

It is excellent news that this basis of value is now defined as “equitable value” rather than “fair value” in IVS 2017, thereby avoiding entanglement with the IFRS 13 definition of fair value. 

The above case related to a claim brought by trustees in bankruptcy against various members of the Ahmed family, seeking the value that had been present in the shares of three trading companies which had been transferred to those family members. Some eight years later, and just before the trial, the shares, seemingly having lost a very large part of their value, were eventually transferred to the trustees. 

The main argument in this case was therefore the date of the valuation of the shares: should it be at the date of the bankruptcy or should it be the actual date of transfer? However, the choice of basis of value then also played a significant role as the drama was played in court. 

What is equitable value?

Equitable value has a very different basis from market value. Rather than the buyer and the seller being anonymous, they are identified. The transaction is not deemed to be at arm’s length subject only to the forces of the market. If there are benefits of synergy available to one of the parties, the values of these benefits are embraced within equitable value.

There is only modest guidance in IVS 2017. The Basis for Conclusions paper, issued by the IVSC in early 2017, is also short on guidance of the application of this valuation basis. 

IVS 2017 makes the initially surprising point that equitable value is a broader concept than market value. There is a narrowing of the market place to two known and identified participants, but the valuation basis has a potentially wider spread. The price that is fair between two parties will often equate to the market price. However, there will be circumstances in which the synergistic value arising from the combination of interests will be reflected in some way within the equitable value – hence the additional breadth. 

The implicit assumption is that there is a market value for the shares or other business interests. However, there is a special purchaser who is prepared to pay above that market value as there are benefits of ownership available to them which are not available to other market participants.  

In the case of Ingram and Hall and Ahmed, the valuers had agreed on a minority discount of 67.5% for the sizes of shareholding being considered (which were not stated in the decision). The expert for the trustees concluded that the equitable value was the mid-point between a pro-rata valuation and the discounted minority value. This therefore indicates a discount of some 34% from the pro rata valuation in that case. 

The strange case of Destiny Investments (1993) Limited and TH Holdings and Others (EWHC 657) [2017]

This was a shareholder dispute relating to a business which owned three high-end hotels. In that case, one expert used the IVS equitable value as described above and the other expert used the IFRS 13 definition of fair value. 

However, as the decision narrated the drama of the hearing it was the actual circumstances of the company which dominated the valuation judgements. Adjustments were made for matters such as realisation costs of the hotels and the costs of early settlement of related loans. These factors therefore dominated. They related very much to the actual transactions involving the known parties. They therefore reverberated with the concept of equitable value, but they served to reduce rather than enhance the valuations.

Commentary

Business valuation is infused with judgement and uncertainty. The valuation of a shareholding by reference to the equitable value reduces the market participants from the whole world to two identified parties. However, it also adds a further dimension to the valuation challenge. 

The concepts already exist in many fiscal valuations. The valuation of a minority holding in a family company will be subject to two conflicting forces which need to be balanced: the family will wish to repel boarders and they are unlikely to want a stranger in their midst. They are therefore special purchasers and this factor will be pulling the price in one direction. The recognition of the hypothetical buyer, that they will be in a permanent minority, faced by a solid phalanx of family members, will pull the price in the other.  


Andrew Strickland, Consultant, Scrutton Bland