The valuation of unlisted shares in the statutory open market
[for example section 272 TCGA 1992] is made on the basis of a
hypothetical sale in the open market between a hypothetical willing
seller and a hypothetical willing buyer. The vendor is endowed only
with the characteristic of owning the block of shares in question.
He may or may not be a director of the company.
One of the factors which will determine the price a prudent
prospective purchaser is prepared to pay is what he knows, or
thinks he knows, about the company in question.
In the case of In re Holt [1953] 1 WLR 1488 and [1953] 2 All ER 1499 it was held that the investor in an unquoted company will be the exceptional kind of investor with some special reason for putting his money into that particular company and will require the fullest possible information about:
In other words, the directors would provide such information
about the company's trading position and prospects at the date of
valuation which would have been disclosed to a reputable firm of
accountants acting on behalf of the purchaser, in confidence.
This was the position until the matter was comprehensively
reviewed in the leading case of Re Lynall [1971] 3 All ER 914 and
[1972] AC 680 and [1971] 47 TC 375.
Very briefly, the facts are as follows.
It was accepted that the 1961 accounts would be available, but
the "Category B" documents were excluded on the grounds that this
information was not published, nor would this information be
disclosed by the Board of Directors on enquiry.
The price was fixed at £3.50 per share although the
judge added that if the "Category B" documents had been admissible
then the price would have been £4.50 per share.
It was accepted that when substantial blocks of shares in
private companies changed hands, the practice was for directors to
answer the reasonable questions of the parties and their advisers,
in confidence.
As Widgery L J said:-
"it must be assumed that the purchaser would make all reasonable enquiries from all available sources, which a prudent purchaser of the property would wish to make and it must further be assumed that he would receive true and factual answers to all such enquiries".
Reversing the decision of the High Court, the "Category B" documents were to be admitted and the price was fixed at £4.50 per share.
Their Lordships looked at a basic premise of the open market,
namely that it is open to all potential bidders with the same
information. It was not relevant to consider evidence concerning
the sale by private treaty of substantial shareholdings, nor was it
necessary to take account of the information the Board of Directors
would make available only to certain possible purchasers, unless it
could be assumed that the information would be disclosed to
everyone.
It was held that the available information was restricted to
that which was generally available so that none of the confidential
information concerning the possible flotation would be available to
any purchaser. The availability of information should not depend
upon the attitude of a particular Board of directors to a
particular purchaser.
The original valuation at £3.50 per share was
restored.
The House of Lords did not say precisely what information could be taken into account in the valuation of shares on the statutory open market basis above and beyond published information, but the following is regarded as the minimum available under the Lynall standard.
| Additional Guidance: SVM150000 |
