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HMRC internal manual

Shares and Assets Valuation Manual

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 two valuation 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.

The degree of trading information reasonably available when valuing a small minority holding was also considered in:

S Patrick Erdal v Commissioners for HMRC

In this case, reported in 2011, the First Tier Tribunal considered what trading information should be taken into account when valuing small minority holdings of 1.2% and 1.6% in a trading company, Tullis Russell and Company Ltd, at 31st March 1982.

The holdings were determined at values of £41,000 and £129,000 with the same information standard applying to both.

The Tribunal determined that cash flows and management accounts which would have been available immediately prior to the valuation date were information which a prudent prospective purchaser would reasonably have required.

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.

See also SVM113100, Stephen Marks v HMRC [2011] UKFTT 221 (TC), regarding information that was not in fact available at the date of valuation.

Nicholas Green v Commissioners of HMRC

In the First Tier Tribunal Case of Mr Nicholas Green and The Commissioners of HMRC [2014] UKFTT 396 (TC) the company’s shares were listed for trading on the Channel Islands Stock Exchange (CISX), a recognised stock exchange. Accordingly section 273(3) TCGA did not apply for the purposes of the information available to our prospective purchaser. HMRC’s expert witness argued that the information available was limited to documents filed at Companies House and such information as was accessible on the CISX website.

In that case the Judge concluded that a mere two trades on that recognised stock exchange (an illiquid market), did not represent evidence of open market value and that a prudent purchaser would look beyond them and look for other available information for confirmation or corroboration of the price that they should pay. A prudent purchaser would look to the information that was available about the company as a consequence of the listing of its shares on the CISX.

The Judge however held that the listing meant that more information relating to the company and its subsidiaries would have been available to any “prudent and careful” potential purchaser of the shares in question. In particular:

  • The memorandum and articles of association of the Company;
  • All reports, letters and other documents, balance sheets and valuations, any part of which is extracted or referred to in the Listing Document;
  • The material contracts referred to in section G of the Listing Application;
  • The Placing Memorandum, incorporating the Accountant’s report on the Issuer from 6 November 2007 to 1 February 2008;
  • The Accounts;
  • Any contracts in which the Directors have material interests, in relation to the business.

The Judge further held that, even if the information above were not generally available it would not have been regarded as confidential so that it would have been supplied to any potential purchaser who requested it.

Jonathan Netley v Commissioners of HMRC

In the First Tier Tribunal case of Jonathan Netley and The Commissioners of HMRC [2017] UKFTT 0442 (TC) (Frenkel Topping) the shares in question were listed for trading on the Alternative Investment Market (AIM) and so were held not to have been listed on a recognised stock exchange. Accordingly it was held that the information standard in section 273(3) applied for the purposes of the valuation exercise. The Judge concluded that it was difficult to see why, in relation to a holding in an AIM company which is small both in terms of value and percentage (0.18% of the issued share capital which had cost just £10,000 a few weeks before the valuation date), a reasonable board of directors would be concerned to reveal any information which was not otherwise public information.

The Judge endorsed the approach of the Special Commissioner in Caton’s Administrators that the question of what a prudent purchaser would reasonably require is essentially a value judgment, informed by the expert evidence.

The expert for the appellant, relying partly on a Guidance Note in the SAV Manual, argued that a ‘Working Capital Report’ that contained detailed forecasts of the Company’s future performance including turnover, operating profit and cash flow based on assumptions about increased business for a period ending some 18 months after the valuation date, would reasonably be required on the basis that the Company’s shares were “growth shares”.

The Judge found that reference to growth shares in the SAV Manual is to a particular type of share which obtain rights or are relieved of restrictions on the occurrence of some future event. He said:

“The value of such shares is wholly or mainly defined by the occurrence of that event and therefore by the prospect of future growth. No-one would purchase such shares without having information about future growth prospects.”






  Additional Guidance: SVM150000