Court settles couple's dispute over value of company shares
The High Court has settled a dispute between a couple who were separating and needed to value the shares in their company.
The case involved Solent Garage Services Ltd and its two directors, Claire Lewis and Philip Clarke.
The couple had established the garage while living together and bringing up their three children.
They were equal shareholders. Their relationship broke down in 2016. The business continued trading until it was transferred by Mr Clarke to a new company without Ms Lewis’ agreement.
Lewis took legal action and Clarke was ordered to purchase her 50% shareholding in the new company, which could be treated as the same as the original company for the purposes of valuing her shares.
An independent expert valued the business at between £25,000 and £30,000.
However, it raised certain issues, including the possibility that the lease for the business premises might not be renewed when it expired at the end of October 2020.
Further, the expert had not been provided with financial statements beyond draft accounts for the period up to 31 May 2018.
The court said that had it not been for the issue concerning the termination of the lease in October 2020 and the absence of expert evidence concerning a multiplier, the court would have applied an earnings/income-based valuation taking into account the profits to be received for the year ending 31 May 2019.
The termination of the lease meant that there was the potential for the business to lose its current premises. There was no suggestion of alternative premises or plans.
However, it would be unfair to conclude that that was more than a possibility or chance, Clarke having merely made a vague assertion concerning the landlord's position.
If he decided not to investigate or not to provide adequate detail of his investigations, he could not expect the court to approach the valuation on the basis that the business would end.
In the circumstances, it was appropriate to use the dividend-based approach argued for by Lewis. That approach was right and fair. With a multiplier of 1.5, it produced a figure of £45,500.
Please contact Sing Li if you would like more information about the issues raised in this article or any aspect of company law.