With increased economic activity, shareholder disputes, especially in small private companies tend to be more common. The fundamental issue in any such dispute normally boils down to the question of share valuation. Mark Heslin examines the circumstances in which the Court will (and will not) apply a discount in relation to a minority shareholding, following a Petition (now under section 212 of the 2014 Companies Act).
Section 212 of the 2014 Act contains similar wording to its predecessor with the addition of an express provision
allowing the court to direct the payment of compensation. Often, a minority shareholder will be seeking an order directing the majority, or the company, to purchase their shares. The key issue in such a dispute, regardless of whether the parties opt for mediation, settlement discussions or litigation, will often concern the value to be placed on the shareholding in question.
Valuation “Gap”
Even where expert valuers have been retained, one routinely sees a major “gap” between the valuations proffered on both sides. In Re Emerald Group Holdings Ltd [2009] IEHC 440 (EGHL) Finlay Geoghegan J. found that the respondents, as directors of EGHL, allowed the business of that company, and the right to participate in profits, to be carried on by a separate company, known as Best Christmas Trees Limited (BCTL), to the exclusion of the petitioner, who held approximately 19.5% of the issued share capital of EGHL. The court was satisfied that the petitioner had made out an entitlement to relief under section 205 of the 1963 Act and that the appropriate order was to direct the purchase, by BCTL, of the petitioner’s shares held in EGHL. Comments by Finlay Geoghegan J. in that case illustrate the difficulties which can arise in relation to the crucial issue of share value.
Minority Interest
Ms. Justice Finlay Geoghegan carefully analysed each element of disagreement, accepting or rejecting, as she
saw fit, the various propositions put forward by both valuers and ultimately came up with a valuation which the court felt was fair. Perhaps unsurprisingly, neither of the valuations submitted by the parties to the dispute was fully accepted and the court came to its own conclusion on the matter. The respondent’s valuer also argued that
the 100% value of BCTL should be discounted by 30%, given that the petitioner’s shares constituted a minority interest, an approach which was opposed on behalf of the petitioner. On the particular facts, Finlay Geoghegan J. concluded that it would be reasonable to apply a reduction of approximately 20%. A fundamental question arises as to the circumstances in which a minority shareholding will, or will not, be discounted.
Applying a “Discount”
In Irvine v Irvine, [2006] 4 All E.R. 102, the court held that the petitioner was entitled to relief under equivalent English legislation. The petitioner was a minority shareholder in the relevant company but only by one share less than 50%. The court ordered that the minority’s shares be purchased. As Mr. Justice Blackburne explained in his 23 March 2006 decision:
“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…”.
His Lordship observed that most of the authorities which addressed the question of whether shares in a company, the subject of such a petition, should be valued on a pro-rata or on a discounted basis had been cases where the company was, or was alleged to be, a quasi-partnership.
30% Discount
In a later decision in the same case, delivered on 24 July 2006, Mr. Justice Blackburne considered the extent of the
discount which it was appropriate to apply in respect of a minority shareholding. Different experts representing the
parties had suggested a range as low as 10% and as high as 40%. The Trial Judge was satisfied that a discount of 30% was appropriate to adopt. Quasi-Partnership We see from the foregoing that, whether or not a company can properly be regarded as a quasi-partnership, may be of fundamental relevance to whether a discount should be applied to a minority shareholding. Thomas B. Courtney’s book “The Law of Companies” (4th edition) contains the following description of a quasi partnership and its consequences:
“Where a relationship of “equality, mutuality, trust and confidence”, based on a personal relationship, subsists in a private company it may be appropriate that the relationship between its shareholders be described as a quasi-partnership. Such a finding may result in members and directors being found to be restrained on equitable grounds from enforcing rights found in the “black letter of the law”. In such companies, acts and omissions may be found
to amount to oppression or disregard of members’ interests, by reason of equitable considerations. Formal rights may be forced to give way to equitable principles implied from the law of partnership.”
In his 2013 decision in Re Dublin Cinema Group, [2013] IEHC 147, Mr. Justice Charlton, who was then in the High Court, suggested that a quasi-partnership could exist in a company when:
“…its background is of two or more friends, two or more family members, two or more business partners operating together through a limited liability or other corporate vehicle for the purpose of carrying on their business…In other words…where behind the company there are a small number of investors who have gotten together through a less
than formal start and who have operated not at arm’s length but, because of the ties of family or affection, based on long mutual co-operation between them. When that kind of governance breaks down, it can be just and equitable to wind up such a company.”
Denying a Discount
The authorities suggest that, where a company is found to be a quasi-partnership, it may be appropriate for the court to refuse to apply a discount in respect of a minority shareholding. The reason for this approach was very clearly outlined by Lord Millet in CVC/Opportunity Equity Partners Ltd. v Demarco Almeida [2002] UK PC 16; [2002] 2 BCLC 108 and is worth referring to.
General Rule
It seems fair to say that refusing to apply a discount for a minority holding in a quasi-partnership company may be regarded as a general rule. This was certainly the thrust of the observations by Lord Justice Ardan in his 2006 decision in Strahan v Wilcock, 2 BCLC 555; [2006] EWCA Civ 13. It seems worthwhile observing that, if the general
rule is not to discount a minority shareholding in a quasi-partnership context, the fact that a company is found to be a quasi-partnership will, itself, be exceptional. Under normal circumstances, the relationship between members of a company is governed by the relevant Articles of Association and by statute. The 2010 decision in Fowler v Gruber, [2010] 1 B.C.L.C. 563 explains the approach in the absence of exceptional circumstances.
Irish Approach
In re Skytours Travel Ltd. [2011] IEHC 517; [2011] 4 I.R. 651, Laffoy J. dealt with a petition under section 205 of the 1963 Act where the respondent had fraudulently operated a secret bank account into which monies, properly due to the company, had been lodged for the respondent’s benefit. Laffoy J. held that the affairs of the company were conducted in a manner oppressive to the petitioner and ordered that the respondent purchase his shares. The question arose as to whether a discount should apply to the value of the petitioner’s minority shareholding. Having reviewed a number of authorities, Laffoy J. came to the following conclusion:
“I am persuaded by the decisions of the courts of the United Kingdom, to which I have referred above, that it is only in the case of a quasi-partnership company or where some other exceptional circumstance exists that a minority shareholding should be valued on a non-discounted basis where the court has directed that the petitioner’s minority
shareholding should be purchased by the respondent shareholder or by the company pursuant to s. 205(3) of the Act of 1963. In this case, the company is not, and never was, a quasi-partnership company. There is nothing in the circumstances of the case which would justify a non-discounted basis of valuation of the petitioner’s shareholding. Accordingly, in the valuation process, in order to fix a fair price, the appropriate discount, having regard to the minority nature of the petitioner’s shareholding, must be applied.”
Conclusion
In light of the foregoing, it appears to be settled law that a discount will normally apply to the valuation of a minority shareholding in the context of an order for the purchase of shares pursuant to section 212 of the Companies Act, 2014. As practitioners will be aware, many companies in Ireland are small, private, limited companies, often owned and controlled by family members. Where a relationship of equality, trust and confidence exists between individuals who have chosen to conduct business using a corporate vehicle but in circumstances where the facts reveal a quasi-partnership relationship, no discount will apply to a minority shareholding. As the economy recovers and commercial activity increase, one would not be surprised to see an increase in disputes for which section 212 is designed to provide a remedy. Given that share valuation will be at the heart of any such dispute, the above guidance in relation to the circumstances in which a discount will apply may well be of some interest to readers.