Premier Telecom Communications Group Ltd & Anor v Webb

This is an appeal from the order of His Honour Judge Havelock-Allan Q.C., the Mercantile Judge at Bristol, giving judgment for the defendant, Mr. Webb, under Part 24 of the Civil Procedure Rules against the claimants, Premier Telecom Communications Group Ltd (“PTCG” or “the company”) and Mr. Ridge.

PTCG is a successful private company, 60% of whose shares are owned by Mr. Ridge and 40% by Mr. Webb. The success of its operations depends heavily on personal relationships built up between Mr. Ridge and senior representatives of various companies with which it does business. It is an unusual feature of the business that Mr. Ridge himself has no contract with PTCG or its subsidiary and the group has no contractual relationships with most of its principal business partners. Everything depends on trust and good working relationships.

Mr. Webb was a director of PTGC and was employed by it until October 2011, when there was a parting of the ways. He was accused of misconduct and his employment was terminated. He asserted that he had been unfairly dismissed, but that was denied and a dispute thus arose between him on the one hand and the company and Mr. Ridge on the other. Mr. Webb began proceedings before the Employment Tribunal and made it clear that he was also thinking of issuing proceedings under section 994 of the Companies Act 2006 on the grounds of unfair prejudice. However, in December 2012 the parties were able to reach agreement and the dispute was compromised on terms, among others, that the company and Mr. Ridge would buy out Mr. Webb’s shareholding.

Given the nature of PTCG’s business, valuing the shares was not a straightforward task. The parties therefore agreed to delegate it to Grant Thornton acting as expert valuers. On 4^th October Burges Salmon wrote to Grant Thornton on behalf of the appellants to enquire whether they would undertake the task. The solicitors made it clear in the letter that they were seeking to identify a valuer to produce a valuation:

“ . . . to reflect the remedy that might be applied by the courts in an unfair prejudice action of a minority shareholder.”

The valuation would therefore:

“ . . . seek to reflect the position which would exist if [Mr. Webb] had successfully brought a claim for unfair prejudice in the High Court.”

Grant Thornton accepted the appointment on the terms set out in a letter of engagement dated 4^th December 2012. It included the following provisions:

“You have asked us to undertake a valuation of the shares of PTCG on the following bases:

•

Fair value on a pro rata basis, i.e. no discount to reflect a minority shareholding,

•

As at 30^th June 2012, unless it is our opinion that attempts have been made to artificially manipulate the value of PTCG, whereby we would be entitled to make such adjustments as we see fit,

•

. . .

In valuing PTCG we will assume that the fair value is equal to the market value, which is defined by the International Valuation Standards Board as :

“the estimated amount for which as asset or liability should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after a proper marketing and where the parties had acted knowledgeably, prudently and without compulsion.”

Further, in performing our valuation we will assume that the relationships in place as at 30 June 2012 continue to exist for the purposes of the valuation; . . . ”

The letter of engagement also provided that, following meetings with the parties, Grant Thornton would produce a Factual Memorandum setting out the facts on which the valuation would be based.

On 21^st March 2013 Grant Thornton produced their report valuing Mr. Webb’s shareholding at £4.218 million and explaining how they had arrived at that figure. The report provoked an immediate protest from Burges Salmon on behalf of Mr. Ridge and PTCG which led in due course to the commencement of these proceedings, in which they seek to overturn Grant Thornton’s valuation. Mr. Webb’s response was to issue an application for summary judgment under CPR Part 24 on the grounds that the claim had no real prospect of success. Judge Havelock-Allan Q.C. granted the application and gave judgment for Mr. Webb dismissing the claim. This is the appeal of PTCG and Mr. Ridge against his decision.

Having considered the leading authorities on challenging expert valuations, including Jones v Sherwood Computer Services Plc [1992] 1 W.L.R. 403, Nikko Hotels (UK) Ltd v MEPC Plc [1991] 2 EGLR 103, Pontsarn Investments Ltd v Kansallis-Osake-Pankki [1992] 1 EGLR 148, the dissenting judgment of Hoffmann L.J. in Mercury Communications Ltd v Director General of Telecommunications [1994] CLC 1125, Thorne v Courtier [2011] EWCA Civ 460 and Barclays Bank Plc v Nylon Capital LLP [2011] EWCA Civ 826, [2012] Bus. L.R. 542, the judge summarised the relevant principles in paragraph 40 of his judgment as follows:

“40.

Drawing the threads of the cases together, it seems to me that they support the following principles:

(1)

Where the parties have chosen to resolve an issue by the determination of an expert rather than by litigation or arbitration, the expert’s determination is final and binding unless it can be shown that he acted outside his remit.

(2)

A distinction must be drawn between the expert who has misunderstood or misapplied his mandate with the consequence that he has not embarked on the exercise which the parties agreed he should undertake, and the expert who has embarked on the right exercise but has made errors in conducting that exercise and has come up with what is arguably the wrong answer.

(3)

A failure of the first kind means that the determination is not binding because it is not a determination of the kind that the parties have contractually agreed should be binding.

(4)

A failure of the second kind does not invalidate the determination, but may leave the expert exposed to a claim in negligence.

(5)

In deciding whether an expert determination can be challenged, the first step is to construe his mandate. This is ultimately a matter for the court.

(6)

The second step is to ascertain whether the expert adhered to his mandate and embarked on the exercise he was engaged to conduct by asking himself the right question(s) and applying the correct principles.

(7)

Once it is shown that the expert departed from his instructions in a material respect, the court is not concerned with the effect of that departure on the result. The determination is not binding.

(8)

Where the expert has made an error on a point of law which is not delegated to him, the error means that the determination will be set aside. (It has yet to be decided whether an error by the expert on any point of law arising in the course of implementing his instructions will also justify setting aside the determination – see Lord Neuberger MR in Barclays Bank v Nylon Capital).

(9)

Where a procedure has been laid down (e.g. to produce a draft memorandum) the expert must follow it. However, what the procedure requires the expert to do is an aspect of the mandate, and ultimately a matter for the court.”

Mr. Harrison for the appellants did not quarrel with the judge’s formulation of the applicable principles and I am content to accept them as a helpful summary. My only reservation concerns the suggestion that an error by the expert on any point of law arising in the course of implementing his instructions might justify setting aside the determination. The judge treated this as an open question on the basis of certain comments made by Lord Neuberger M.R. in Barclays Bank v Nylon Capital. It is necessary to remember, however, that those comments were obiter and that neither of the other members of the court expressed agreement with them. It is possible that the parties might by their agreement define the terms of the expert’s mandate in such a way that any error of law on his part rendered his decision invalid, but in many cases to do so would risk undermining the whole purpose of the reference. Ultimately, however, as Lord Denning observed in Campbell v Edwards [1976] 1 W.L.R. 403, 407 (and as Lord Neuberger himself was at pains to emphasise in Barclays Bank v Nylon Capital), it all comes down to the construction of the contract under which the expert was appointed to act. Only by construing the contract can one identify the matters that were referred for his decision, the meaning and effect of any special instructions and the extent to which his decisions on questions of law or mixed fact and law were intended to bind the parties.

Before turning to deal with the arguments advanced by the appellants it is necessary to remind oneself that the application before the judge was for summary judgment. It was therefore necessary for Mr. Webb to establish that the claim had no real prospect of success. The task was somewhat easier in this case than in many, however, because there was little, if any, dispute about the facts. Indeed, Mr. Webb accepted that for the purpose of the application the judge was bound to assume that all the facts alleged in the particulars of claim were true. There was, of course, a dispute about the meaning and effect of the letter of engagement, but the judge took the view that he had before him all the evidence that might have a bearing on that question. He therefore held that he could properly decide any relevant issues of construction without the need for a trial. In my view he was right to do so. When he was asked in the course of the appeal whether this court could properly decide any questions of that kind Mr. Harrison initially demurred on the grounds that if the case went to trial something might emerge that would cast a different light on them. However, he was quite unable to suggest what that might be and was eventually constrained to accept that we could properly decide such questions on the basis of the material before us. I think that is right. As will become apparent, the issues which divide the parties all turn on the construction of the letter of engagement, the background to which is apparent from the documents before the court. If there were any additional evidence of any potential relevance to its construction, its existence would be known to the parties who could (and should) have drawn attention to it. In those circumstances it is in the interests of all concerned that the court should decide such questions in the course of the appeal.

In the present case the appellants have identified four respects in which they say that Grant Thornton went wrong so that their valuation does not bind the parties. I shall in due course deal with each of them individually, but before doing so it is convenient to consider one submission that to a greater or lesser degree underpinned the whole of their case, namely, that the parties intended that the court should decide all questions of law bearing on the valuation, with the result that on none of them was the valuers’ decision intended to be binding. The references in the letter of enquiry to proceedings under section 994 of the Companies Act 2006 were said to support that conclusion.

I am unable to accept that submission, which in my view states the position far too broadly. Questions of law pervade many of the issues that are likely to arise on a valuation of this kind and it is inherently unlikely that the parties intended that on none of them should the valuer’s view be binding. Parties who refer a matter to an expert for decision usually do so in order to obtain a quick and relatively inexpensive decision of a binding nature on a matter that calls for informed judgment. Often that involves the application of principles and expressions that are familiar and well understood in the particular field of endeavour, whatever that may be. In such cases it would be surprising if they had intended the expert’s decision to be of no effect if it could be shown that he had made a mistake in the application of some well recognised principle. Parties who refer a dispute to an expert must be taken to have recognised that mistakes may be made, both of fact and law, but they are prepared to take that risk because they place a high degree of confidence in their chosen expert.

In the present case Mr. Harrison submitted that the references in the letter of 4^th October 2012 to the unfair prejudice procedure point to the conclusion that these parties intended the valuation to mirror proceedings of that kind and that any point of law that might arise in relation to it should fall outside the valuer’s mandate and be subject to the control of the court. In my view that proposition is unsustainable. The scope of Grant Thornton’s mandate was defined by the letter of engagement, the terms of which were agreed between the parties. It contains no reference to an unfair prejudice petition and nothing that would suggest that the parties intended that the court should exercise such a close degree of control over the performance of their functions. It must be borne in mind that the effect of a failure on the part of an expert to comply with the terms of his mandate is to render his decision invalid. That is a serious consequence which the parties are unlikely to have intended except in the case of an error that strikes at the root of the agreement.

“Willing seller”

The first ground on which the appellants sought to challenge Grant Thornton’s decision was based on paragraph 2.8 of the report. The paragraph forms part of a section in which they set out their approach to valuing PTCG. In it they state that they will assume that “fair value” (the expression used in the letter of engagement) is equal to market value as defined by the International Valuation Standards Board (“IVSB”). IVSB defines market value as the amount for which an asset or liability would change hands between a willing buyer and a willing seller. In the definition of “willing seller”, which is then set out in the report, it is made clear that the circumstances of the actual owner are not to be taken into account because the willing seller is a hypothetical owner.

Immediately after the reference to the definition of the willing seller Grant Thornton state in paragraph 2.8:

“Therefore, in valuing PTCG we will disregard the personal circumstances of Mr. Ridge, e.g. the fact that he does not have any contractual relationship with the Group, as the willing seller is a hypothetical owner.”

On behalf of the appellants Mr. Harrison submitted that that paragraph demonstrated a serious flaw in the valuation. He submitted that Grant Thornton should have applied what is known as the “principle of reality”, that is, that it should have valued the business of PTCG by reference to the position as it actually stood on 30^th June 2012. At that time the company did not have a contract with Mr. Ridge under which it could command his services and, he submitted, the absence of such a contract was a factor that should have been taken into account, since it was likely to have reduced the amount that a willing buyer would have agreed to pay for it. However, by their own admission Grant Thornton had not taken it into account.

In my view this submission is wrong on two counts. In the first place, I think it proceeds on a misunderstanding of what Grant Thornton are saying in this paragraph. Paragraph 2.8 is directed to the characteristics of the willing seller and to the relevance or otherwise of Mr. Ridge’s personal relationship with PTCG. All Grant Thornton is saying at this point is that Mr. Ridge’s personal circumstances are irrelevant when judging the attitude of the willing seller. Whether he would be more or less willing to sell because he did not have a contract with the company matters not. The lack of a contract between the company and Mr. Ridge might well affect the attitude of a willing buyer (because it renders the business more precarious), but that is not what is being considered in this paragraph. In the second place, the letter of engagement provided in terms for how the informal nature of the arrangements that underlay the business of PTCG was to be taken into account. That included the nature of the arrangements with Mr. Ridge, to which I shall come in a moment. For present purposes it is sufficient to say that in my view those provisions were complied with.

That makes it unnecessary to decide whether the interpretation of the IVSB principles was within the scope of the authority delegated to Grant Thornton as part of the valuation or whether, as Mr. Harrison submitted, it was a matter which the parties intended to be reserved for the decision of the court. The judge appears to have accepted that it was a matter for Grant Thornton and I agree with him. Their instructions were to value Mr. Webb’s shareholding on the basis of fair value on a pro rata basis, without discount to reflect a minority shareholding. Instructions given in such broad terms naturally invite the valuer to adopt whatever method he considers appropriate in order to produce a fair valuation. In this case it was agreed that the IVSB standards would be used and the parties must be taken to have assumed that Grant Thornton were familiar both with the principles they embody and their practical application. In those circumstances I think they must also be taken to have accepted that the interpretation of those standards was a matter for Grant Thornton in the performance of their functions as expert valuers. I am unable to accept the proposition that the interpretation of the IVSB standards lay outside the scope of their mandate.

By the letter of engagement Grant Thornton were required to assume for the purposes of the valuation that the relationships in place as at 30^th June 2012 continued to exist. Grant Thornton understood that to mean that they were to assume that the existing informal arrangements between PTCG and its business partners and the personal relationships between Mr. Ridge and those with whom he did business would continue unchanged. The judge held that they were right to do so, but the appellants submitted that Grant Thornton had misunderstood that requirement. They should have valued PTCG on the basis that its business relationships were precarious and might be severed at any time, which called for a significant discount in the value of the company. Mr. Nourse submitted that the construction of that expression was also a matter which fell within the scope of Grant Thornton’s mandate, that the appellants could not point to anything in the report itself which showed that they had departed from their instructions and that in any event Grant Thornton had construed it correctly.

Although Mr. Nourse did not place the question of construction at the forefront of his argument, it is in my view the most significant of his three points, since, if Grant Thornton applied the instruction correctly, that is the end of the matter. Mr. Harrison submitted that the purpose of the instruction to assume that the relationships in place as at 30^th June 2012 would continue to exist was simply to drive home the point that PTCG was to be valued as things stood on that date without taking into account anything that might have occurred in the meantime.

The fact that PTCG’s business depended heavily on informal arrangements between Mr. Ridge and others was well known to both parties. The valuation was a critical element in the compromise of a dispute that had already led to proceedings before the Employment Tribunal and might well have led to complicated and expensive proceedings in the Companies Court. The basis of the compromise was that Mr. Ridge would buy out Mr. Webb’s share of the company at a fair value. There is no reason to think that either of the parties expected Mr. Ridge to leave the company; the business had been very successful and there was every reason to think that he wished to keep it going. In those circumstances it is not surprising that the parties turned their minds to the rather unusual nature of PTCG’s business arrangements. If it had been their intention to value the company on the basis of how things stood on 30^th June 2012 (including the precarious nature of its relationships), there would have been no need to include in Grant Thornton’s instructions an additional express requirement to that effect couched in such obscure terms. If, on the other hand, they wanted to ensure that Mr. Webb obtained the full value of his share of what was (and was expected to continue to be) a thriving business, it was necessary to include an instruction to the valuer to ignore the precarious nature of the relationships on which the business rested. In my view the language of the instruction admits of only one meaning: it required Grant Thornton to assume that those relationships continued to exist into the future. The effect was to attribute to the business a degree of stability and permanence which its formal arrangements lacked, but which in practice it could be expected to enjoy. That is how the judge interpreted it and in my view he was clearly right.

It is clear from various passages in their report, in particular paragraphs 2.14, 2.33, 3.30, 3.38, 3.42 and 3.44, that Grant Thornton did understand and apply the instruction in that way. Although the relationship between Mr. Ridge and PTCG is not specifically mentioned in any of those paragraphs, the language of paragraph 2.33, in which Grant Thornton explain why they have chosen to value the company on an earnings basis, necessarily includes that particular relationship. (This is also an answer to the “willing seller” point, to which I have already referred.) I incline to the view that an instruction of this kind on a matter central to the valuation is one that goes to the heart of the valuer’s task and that the parties intended that any dispute about its meaning was to be decided by the court. However, it is unnecessary to resolve that question, because, for the reasons I have given, I think it is clear that Grant Thornton applied the instruction in the correct way and that is sufficient to dispose of this challenge to their report.

The appellants contended that Grant Thornton’s report disclosed a number of errors in their valuation, each of which involved an error of law of a kind that could only be finally determined by the court. In the event, however, only one of them was developed in argument. It concerned the treatment of a sum of £3.449 million held as cash at the bank. In paragraph 3.76 of their report Grant Thornton drew the threads together and set out the basis on which they valued Mr. Webb’s holding. That involved an assessment of maintainable EBITDA (earnings before interest, tax and amortisation) and the choice of an appropriate multiplier to arrive at an enterprise valuation of £9.029 million. From that figure they deducted various sums in respect of liabilities and added back the sum of £3.449 in respect of the cash. Mr. Harrison submitted that they were wrong to do so because the cash was needed to run the business; it was not spare cash that could be treated as an addition to the EBITDA. As such the directors could not remove it from the company and Grant Thornton had made an error of law in thinking otherwise.

In my view this is a good example of the kind of question that parties can generally be taken to have left to the valuer. How to treat various sums standing to the credit of the company is a matter which lies very much within the expertise of a firm of accountants such as Grant Thornton. I have already explained why I cannot accept Mr. Harrison’s submission that the valuers’ authority did not extend to deciding any of the questions of law that they might encounter in the course of carrying out their task. Whether the appropriate treatment of cash at the bank really raises a question of law might be a matter for debate, but it is precisely the kind of question that one would expect the parties to leave to the valuer, unless they have made their intention to the contrary quite clear. In the present case I think the letter of engagement makes it clear that the treatment of an asset of this kind was left entirely to the valuer. I therefore reject Mr. Harrison’s submission to the contrary.

The other errors on which the appellants relied below are of a similar nature. They concern

In my view these complaints all concern matters that were within the scope of Grant Thornton’s mandate. Their instructions were to produce a fair valuation of the company, which necessarily involved an element of judgment when deciding how to treat elements of the raw financial data. The preparation of the Factual Memorandum was no more than a step in a process that would lead to their report. It was not part of their instructions to adopt its contents without any analysis or evaluation. In the absence of detailed submissions I am not persuaded that Grant Thornton did make errors of the kind alleged, but even if they did, I do not think it is arguable that they thereby departed from their mandate.

Finally, the appellants submitted that Grant Thornton had failed to follow the prescribed procedure. The complaint is that, contrary to their instructions, Grant Thornton did not set out in the Factual Memorandum all the facts on which they intended to base their valuation, as was clear from the fact that in the report itself they had adopted different figures when making the actual valuation.

This seems to me to be no more than another way of putting the case based on the errors described in paragraphs 24-26 above. The judge rejected this complaint on the grounds that Grant Thornton were not required to explain in the Factual Memorandum how they would treat the raw data it contained. In my view that is right. It is now said that he misunderstood the point being made, namely, that the valuation report shows that Grant Thornton must have relied on other facts not mentioned in the Factual Memorandum. In my view, however, there is no substance to the complaint. There are no arguable grounds for saying that the apparent discrepancies to which the appellants point result from adopting different facts rather than from Grant Thornton’s applying their judgment to the data set out in the Factual Memorandum, which is what they were engaged to do. In my view, therefore, it is not reasonably arguable that in this respect Grant Thornton departed from their mandate in a manner that invalidates their decision.

For the reasons I have given, I am satisfied that the questions of construction which underpin the grounds of appeal can properly be decided without the need for a trial. Once they have been decided, I think it becomes clear that there is no real prospect that the claim would succeed at trial. For those reasons I think that the judge was right to grant Mr. Webb summary judgment and I would dismiss the appeal.

I agree.

I also agree.