Part two of the Financial Technology Ventures II v ETFS Capital review dives into the valuation of a 9.9% Nasdaq holding, the limits of option model DLOMs and why the court ultimately split the difference between blockage discounts and influence premiums – adding another key precedent to the growing body of equitable value case law.
Introduction
This is the second of two articles looking at technical valuation issues in this case.
This was a dispute relating to a private equity funded transaction. Mr Tuckwell was the founder and he retained a majority shareholding in the company. There were two private equity investors who were in dispute with Mr Tuckwell.
The company had two assets: shares in a company called Wisdom Tree Inc and cash. It was intended that the cash would not be distributed but would instead be invested in various companies.
Wisdom Tree Inc
The holding in Wisdom Tree Inc (a company on Nasdaq) was 30 million shares out of just over 300 million shares in issue.
Should the value of shares be discounted if they represent a significant holding in public companies? Does the fact that it may take some time to realise the holdings without distorting the market mean that they are less liquid and should be discounted? Alternatively, is a larger shareholding more valuable due to the influence that it carries?
The shares in Wisdom Tree Inc were traded on Nasdaq. Inevitably, it would take time to realise a holding of just under 10% of the equity.
In the 2021 case of Byers v Samba Financial Group ([2021] EWHC 60), this question arose in respect of significant holdings in five Saudi banks, all listed on Tadawul, the Saudi Arabian stock exchange.
In that case, one of the experts used a put option model (the decision does not elaborate on which model was used) to calculate an illiquidity discount.
This chimes with the Baa Bar case (referred to in part one), in which one expert used the Chaffe protective put option model in calculating the DLOM.
The case of Estera Trust and Singh is seminal in many ways, in respect of section 994 valuations. That case is, once again, relevant: one of the experts in that case used an earlier version of the Finnerty average strike model to try and calculate the DLOM.
It is noteworthy that the Jersey Court cited the case of Estera Trust and Singh on several occasions. They clearly considered this to be an important precedent.
Trading volumes
One of the experts did a lot of work on the share transactions of Wisdom Tree: he considered the average daily trading volumes, the relative volatility and the number of market makers.
The average volume was 1.5m shares, so 0.5% a day. The shares were therefore not unusually illiquid.
He considered that a dribble out of the shares at 150,000 a day would mean 200 days to realise the total investment.
He then considered the cost of a put option as a means of measuring this period of illiquidity. It is possible that he chose the Chaffe protective put option model. He derived a discount of 18.2%, equivalent to a reduction in value of the investment of $12.72 million.
The challenge with Chaffe
The technical sources
The expert also looked at various technical sources. These included the “Handbook of Advanced Business Valuation” by Reilly and Schweihs. This included the comment that pure blockage discounts typically fall within a range of 0% to 15%, most often in the lower end of that range.
The decision of the court
This was not a quasi-partnership but an ordinary minority shareholding.
In line with Estera Trust and Singh, they decided that it was not a binary choice between no discount and a full discount when considering shareholder disputes.
They stated that the normal minority discount for a 35% holding would be 40%. They then halved this to a discount of 20%. Once again, as with Estera Trust and Singh, the language of marriage value was deployed to explain the concept.
This therefore is consistent with other cases in which equitable value is to be applied. We therefore now have the precedent of at least four cases as to how equitable value should be calculated.
The first three were noted in part one. They are:
- Ingram and Hall v Ahmed
- Estera Trust and Singh
- Monaghan and Gilsenan
One expert said that a sizeable shareholding of 9.9% in Wisdom Tree would attract a premium due to the influence that it gave the purchaser. The other expert had argued for a large blockage discount as noted above. The court decided that justice was delivered by serving down the middle: there was to be no blockage discount and no premium.
*the views expressed are the author’s and not ICAEW’s