SVM114060 - Information Standards:
Relevant Cases
Two cases were heard before the Special Commissioners in
December 1994 in which the question of information standards was
considered.
Caton deceased v Couch (HMIT) and Clark deceased v Green
(HMIT)
These cases concerned the value of shareholdings comprising
14.02% and 3.16% in an unquoted company, Yorkshire Switchgear Ltd,
as at 7 September 1987 and 28 September 1987 respectively.
The current financial year had only just commenced at the
twovaluation dates. The company was sold on 15 April
1988. Important facts were
- the holding of 14.02% was the largest
single holding, the next largest being of 8%.
- By 1987 the company was the sole
significant independent company in its market, which was dominated
by a small number of major groups.
- Major companies had previously approached
the company with a view to a take-over, but had been rebuffed.
However, in 1987 the board had decided to explore the possibilities
of a sale.
- On 24 August 1987 a letter was received
from an American company requesting discussions leading to the
acquisition of an equity interest in the company.
- On 17 September 1987 another company wrote
to the effect that it would like to acquire the company.
- On 25 September 1987 yet another company
wrote to say they understood that it was the intention to sell the
company and wanted to register a firm interest with the intent of
making a bid.
- Discussion took place at the board meeting
on 25 September 1987 about future trends affecting the company,
including the possibility of permitting the group to be acquired.
The board agreed that discussions should take place to explore the
options.
- On 29 September 1987 letters were sent to
the three interested companies with a view to opening
discussions.
- The board had kept the prospect of a sale
confidential.
- Monthly management accounts were
prepared.
- At the board meeting on 27 July 1987 it
was noted that pre-tax profits of £2,030,000 should be
achievable for the year ending on 31 August 1987.
- At the same meeting the budget for 1987/88
was discussed and a pre-tax profit of £3m was being projected
for the year ending on 31 August 1988.
- Although the accounts were not finalised
on 28 September unaudited financial information as to the
approximate results of the year's trading was available to the
board at their meeting on 25 September 1987, and the estimate was
of profits of £2.6m.
In reaching her decision on values the Commissioner decided
-
- "S.152(3) is effective to provide that any
information, including unpublished confidential information, and
even information which might prejudice the interests of the
company, is assumed to be available in the hypothetical sale if it
would be reasonably required by a prudent prospective purchaser of
the asset in question. It is therefore necessary to consider, in
each case, what information a prudent prospective purchaser of the
asset in question would reasonably require. In the context of
s.152(3) I understand the word 'require' to mean 'demand as a
condition of buying'; information is 'required' if the purchaser
would not proceed without it".
- "It shall be assumed that confidential
information "is available" if it is reasonably required. This gives
effect to the findings of the Court of Appeal [In Lynall] that it
has to be assumed that any provisions in the articles which
prohibits the directors from supplying confidential information are
waived for the purposes of the hypothetical sale in the same way
that any provisions in the articles restricting the transfer of the
shares are also waived for the same purposes".
- In CLARK "the size of this holding, and
the size of the outlay required to purchase this holding are not
sufficiently large to lead me to conclude that a prospective
purchaser of this holding could reasonably require information
about a possible sale of the company". The value of the CLARK
holding as determined by the Commissioner was £168,000. The
value of the CATON holding was £1.4m.
- "A figure for earnings in the region of
£2.25m might have been supplied" for the year ending 31 August
1987 in both valuations. The up to date estimate was £2.6m.
But when the audited accounts were published on 16 November 1987
the figure for pre-tax profits was shown as £2,352,000. The
£2.25m was the figure suggested by the expert witness for the
CATON estate. In CLARK the Commissioner said "there may have been
some caution" in releasing the figure of £2.6m.
- No information about budget forecasts (for
1988) would be available in CLARK but the Commissioner did say "a
prudent prospective purchaser .... would reasonably require up to
date information about profits and also information as to whether
that level of profits was maintainable". Information about
forecasts for 1988 would be available in CATON. (This information
was an important factor in CATON because of the anticipated impact
on future dividends).
It is important that each case is judged on its merits. The
values in CATON and CLARK should not be regarded as providing a
benchmark by which to determine whether or not particular
information should or should not be taken into account.
Where there is a disagreement as to the level of information
deemed to be available, the parties should be asked to support
their contention by reference to evidence of market practice.
