HMRC internal manual

Shares and Assets Valuation Manual

The Statutory Open Market: Case Law - Share Transfer Restrictions

Attorney-General for Ireland v. Jameson [1905] IR 218

A fundamental difficulty with the application of the statutory open market basis of valuation to unquoted shares is that many of them are subject to restrictions on transfer. The question of how an open market value can be fixed for unquoted shares that the shareholder is not free to sell on the open market was first addressed in the Irish Court of Appeal case of Attorney-General for Ireland v Jameson [1905] 2 IR 218. Fitzgibbon LJ said:

“In my opinion s7(5) turns ‘value’ into ‘price’ for the purpose of estimating its amount: that price is to be ascertained upon a sale assumed to take place where it was open to everyone, who had the will and the money, to offer the price which the property of Henry Jameson in the shares was worth as he held them. The price was to be that which a purchaser would pay for the right ‘to stand in Henry Jameson’s shoes’, with good title to get into them, and to remain in them, and to receive all the profits, subjects to the liabilities of the position.”

This means that the valuation is undertaken on the basis of the price that someone would pay in an open market transaction to be registered as the owner of the shares, bearing in mind that the purchaser will become subject to the effect of any restrictions on transfer once the transaction has taken place. So the open market price is not necessarily fixed at what the Articles may refer to as “fair value”.

The point established in Jameson is now a settled principle of law. It was upheld by the House of Lords in Re Crossman [House of Lords] [1937] AC 26 and in Re Lynall.

The purchaser has the right to stand in the vendor’s shoes. In these circumstances the valuer must consider the rights as well as the duties contained in the Articles, including:

  • the right to receive declared dividends
  • the right to transmit shares to relatives
  • the right to bequeath shares on death
  • the right of pre-emption.

Clearly however the shares cannot be worth as much as shares which may be freely sold.

Also in Jameson Lord Ashbourne at page 226

“How can such shares in such a company with such articles have their value estimated at the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market? An actual sale in the open market is out of the question. A feat of imagination has to be performed.”

Re Crossman [House of Lords] [1937] AC 26

Re Crossman is an Estate Duty case turning on the application to unquoted shares of section 7(5) of the Finance Act, 1894: “the principal value of any property,” which passes on the death of a person “shall be estimated to be the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market at the time of the death of the deceased.” A testator at the time of his death was entitled to a number of ordinary shares of £100 each in a company the articles of association of which imposed rigid restrictions upon the alienation and transfer of the shares in the Company. It was held by a majority in the House of Lords that the value of the shares for the purpose of estate duty was to be estimated at the price which they would fetch if sold in the open market on the terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject to the provisions of the articles of association, including those relating to the alienation and transfer of shares in the company.

This case also considered the position of a possible special purchaser (see SVM113070 below)

In Salvesen’s Trustees v IRC [1930] SLT 387 - another Estate Duty case, the company’s articles contained transfer restrictions and the members had the right to pre-empt at par unless the shares were being transferred to either an existing member or a member of the Salvesen family. There was also a provision that if a member’s holding fell below ten per cent of the issued capital the other members could acquire his shares at par. The Jameson principle was applied so that the restrictions were set to one side to enable a hypothetical sale open to the whole world and all prospective purchasers although the purchaser, once registered, held the shares subject to the articles.

In this case Lord Fleming said:

“….under the circumstances I think that there is no escape from the conclusion that any restrictions which prevent the shares being sold in the open market must be disregarded so far as the assumed sale under s.7(5) of the Finance Act 1894 is concerned.”

[1930] SLT p391

Lynall v Inland Revenue Commissioners [House of Lords] [1972] AC 680

The valuation dispute rehearsed in the High Court and Court of Appeal in Lynall primarily centred on the availability to the valuation exercise of certain confidential information (see SVM114010). It was only when the case went on appeal to the House of Lords that the appellants sought to undermine the principle established in Jameson and Crossman with regard to how shares subject to restrictions on transfer should be accorded an open market value. Lord Reid said:

“The appellants urged your Lordships to accept the view of the minority in Crossman’s case [1937] AC 26. They appear to assume that there could be a sale by a shareholder of shares subject to a right of pre-emption. In my view it is legally impossible for the shareholder to sell such shares in the open market or otherwise without first obtaining from the holder of the right of pre-emption an agreement not to exercise that right. I agree with Lord Roche [in Crossman] that sale means a transaction which passes the property in the thing sold. All that the shareholder could offer would be an undertaking that if the right of pre-emption was exercised he would assign to the “purchaser” his right to receive the pre-emption price and that if the right of pre-emption was not exercised he would transfer the shares to the purchaser so that if the directors registered the transfer the property in the shares would pass but if they did not he would hold the shares in trust for the purchaser. In my view that would not be a sale. I support the view of the majority on the ground that section 7 (5) is merely machinery for estimating value, that it will not work if section 7 (5) is read literally, that it must be made to work, and that the only way of doing that is the way adopted in Crossman’s case.”

Lord Morris of Borth-y-Gest said:

“My Lords, the first submission that was made on behalf of the appellants was one that was not open to them in the courts below. It was that we should depart from the decision of this House in the case of Inland Revenue Commissioners v. Crossman [1937] A.C. 26 by preferring the opinions expressed by the minority in that case to those expressed by the majority. Even if we were persuaded that the minority opinions were to be preferred the question would arise whether it would be right to depart from the decision. It was given as long ago as March 1936, and it must on numerous occasions have been acted upon. It was in accord with the decision of the Court of Appeal in Ireland in the case of Attorney-General v. Jameson [1905] 2 IR 218 and the reasoning in that case had guided practice in subsequent years: see also Salvesen’s Trustees v. Inland Revenue Commissioners, 1930 S.L.T. 387. It has been open to Parliament at any time since 1936 to amend section 7 (5) of the Finance Act 1894 if it had been considered that that section (as interpreted in this House) ought to be amended or supplanted. But, having considered the arguments attractively presented on behalf of the appellants, I have not been persuaded that the decision in Crossman’s case was erroneous. Section 7 (5) requires an estimate to be made of the price which the property would fetch “if sold” in the open market. So a sale in the open market must be assumed and this in some cases will involve an assumption of the satisfaction of such conditions as would have to be satisfied to enable such a sale to take place.”

  Additional Guidance:SVM150000