Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.
Accounting for Value
As is the nature of human frailty, the bitter gall between the two main shareholders became ever more acidic as they had been in both a personal as well as a business partnership.
It is a matter of concern for us all that the Judge stated the following in respect of a Chartered Accountant involved in this case: “I am not prepared to accept his word unless it is supported by a document.” The Judge also stated that this person had a highly manipulative side to his character.
Legal and Beneficial Ownership
Ms Sudicka was a Czech national and was not a Chartered Accountant. As it was felt that there was a benefit to having the firm described as Chartered Accountants, she held a legal interest of 49%, but with a beneficial entitlement to 50%. She also held a beneficial interest of 50% in another accountancy business within the same group, with her interest also being clouded; the mist of uncertainty was caused both by a device similar to the above and also by the arguable status of the holding of another shareholder, as the purchase by the company of its own shares had not complied procedurally with the Companies Act 2006.
Mr Morgan tried to maintain that the interest of Ms Sudicka in one of the companies was only 11%, due to the legal fog described above. The Written Decision includes the following startlingly terse statement: “Ms Sudicka called Mr Morgan a liar. Given what he was now saying about her shareholdings, that was justified.”
Unfairly Prejudicial Conduct
Following the breakdown in relationships, the following actions were taken which were claimed as unfairly prejudicial conduct:
- Ms Sudicka was removed as a director;
- £70,000 was withdrawn from the bank account by Mr Morgan;
- Client records were removed from the office in which Ms Sudicka worked;
- The business and assets were transferred to an accounting practice owned by Mr Morgan;
- Two associates of Mr Morgan were appointed directors;
- Once the company was bereft of assets, they placed it into liquidation.
The Two Stooges
The Judge reserved some of his most pungent comments for the two people who were appointed directors and their rather too obliging ways in carrying out the bidding of Mr Morgan. These two directors had no relevant business experience and it seems that they followed almost slavishly the directions of Mr Morgan.
The Judge found that they had both acted in breach of their duties as directors. The activities of the company under the directorship of these two individuals amounted to the conduct of the affairs of the company in a manner prejudicial to the interests of Ms Sudicka as a shareholder.
The Valuation Experts in the Tub
Two Chartered Accountants with relevant valuation experience were appointed as experts by the two sides. The experts met and produced a joint statement summarising their views and the points of difference.
The Judge commented pleasingly at some length on the procedure used for hearing their evidence: “In court their oral evidence was conducted as a concurrent evidence session or “hot tub”. This involved taking series of topics which were the major points in issue. Each witness had the opportunity to express a view about the topic and counsel and the parties had a chance to ask questions on that topic (and going to expertise generally). I also was able to ask question to clarify matters. For this sort of evidence it was a very effective way of proceeding.”
The main valuation method applied by both experts was to use a multiple of fees: one expert looked at the actual fees raised from year to year whereas the other stripped out those fees which were not from continuing clients or which were non-recurring in other ways. One expert applied a revenue multiple of 1 times, whereas the other applied a GRF multiple of 0.65 or 0.7 times. The Judge settled on what was a multiple of revenue of 0.9. He accepted the revenue figure of one of the experts of £450,000 and derived a value for the goodwill of £405,000.
The EBITDA Alternative
The experts had also applied an EBITDA multiple method. One expert used a multiple of 2.8 and derived a value of £448,000 compared to a revenue multiple value of £450,000. the other expert used a somewhat lower multiple of 2.5. The derivation is not stated. The EBITDA figures were 36% and 28% respectively of the relevant revenue figures. It therefore seems likely that the EBITDA figures were before making allowance for notional partner remuneration, but this is not stated. The Judge settled on an EBITDA multiple of 2.7.
We can all recognise that EBITDA multiples derive an enterprise value. It is difficult to discern from the written Decision the exact treatment of the net assets within the business. One expert considered that the assets were broadly matched by liabilities and that there was no impact on value; the other was concerned as to the recoverability of the work in progress and also felt that any transaction would be an asset purchase rather than a share purchase.
It was the decision of the Judge that the value of the entire share capital was the same as the value of the goodwill, namely £405,000.
The Decisions
In view of the excoriating comments aimed at the conduct of Mr Morgan and his associates, the written Decision leads to the expected conclusion: the Judge stated: “What I have accepted amounts to a litany of events which involve the management of the affairs of the company orchestrated by Mr Morgan. That conduct was prejudicial to Ms Sudicka as a shareholder and that prejudice is plainly unfair.”
He therefore directed that Ms Sudicka was to be paid £202,500 for her shareholding interest, namely 50% of £405,000.
Rather more of a surprise was that this was an obligation placed not only on Mr Morgan but also upon his two business associates on a joint and several basis. The business associates had profited from doing the bidding of Mr Morgan; however, their liabilities were not limited to the extent of that profit but were related to the whole sum. A former shareholder who had added to the problems of Ms Sudicka was also found liable but only to the extent of one third, namely £67,500.
Andrew Strickland, Consultant
Scrutton Bland
Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.
