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JENNY NELDER BA, FCA, ATII takes up the baton regarding the value of a shareholding held by a quasi-partner. ROBIN MATHEW QC suggests in an article entitled 'Statutory Fiction' (Taxation, 30 January), that the value for capital gains tax and for inheritance tax of a shareholding, held by a quasi-partner, should always reflect a rateable proportion of the total value of the company as a going concern and not a discounted value.
JENNY NELDER BA, FCA, ATII takes up the baton regarding the value of a shareholding held by a quasi-partner. ROBIN MATHEW QC suggests in an article entitled 'Statutory Fiction' (Taxation, 30 January), that the value for capital gains tax and for inheritance tax of a shareholding, held by a quasi-partner, should always reflect a rateable proportion of the total value of the company as a going concern and not a discounted value. At first, this might have immense appeal as a concept when one is faced with the negotiation of a base cost valuation at 31 March 1982. However, would this be desirable on the death of a quasi-partner, or an occasion of charge? Mr Mathew suggests that 'there will always be debate on an issue such as this'. The following may be part of this debate.
Unfair prejudice
The case, CVC /Opportunity Equity Partners Ltd v Demarco Almeida [2002] 2 Butterworths Company Law Cases 108, quoted by Mr Matthew and on which he bases his proposition, concerned the valuation of a minority holding of shares, held by Mr Demarco who had been dismissed for 'bad performance'. The company was incorporated in the Cayman Islands, where there was no statutory equivalent of section 459, Companies Act, the 'unfair prejudice' legislation. The only remedy available to the quasi-partner shareholder who had been excluded from management was a winding-up. In order to prevent the winding-up of the company, which would otherwise continue as a going concern, an offer was made to buy the 'excluded' shareholder's interest at a value based on what would have been received on a winding up. The Privy Council said the offer was not fair, that the shares should be valued on a going-concern basis and, following precedent, that, in such a situation as Mr Demarco's, 'normally the shares should be valued without any discount'.
Definitive principle
If Mr Mathew's argument is correct, the definitive principle for the valuation of a shareholding in a quasi-partnership is that given in the CVC/Opportunity case. If so, should this be the basis of valuation for a quasi-partnership shareholding under any circumstances? If, for example, the shareholder voluntarily 'excludes' himself from the company by leaving of his own volition, perhaps a situation more analogous with that in a tax valuation, should the valuation always reflect a rateable proportion of the total value of the company? Even in the context of section 459, Companies Act 1985, the courts have recognised that a quasi-partner does not have an unqualified right to have his shares purchased at a price which is the value of his holding, pro rata that of the company as a whole.
No draconian effect
In the recent case of Phoenix Office Supplies Ltd v Larvin [2003] BCC, Lord Justice Jonathan Parker said: 'Thus the issue that lies at the heart of this appeal, as I see it, is whether section 459 extends to affording a member of a quasi-partnership company who wishes, for entirely his own reasons, to sever his connection with the company - and who de facto has done so - an opportunity to "put" his shareholding onto the other members at its full, undiscounted, value when he has no contractual right to do so. I can for my part see no basis for concluding that section 459 can have such a draconian effect.' He also summarised Lord Hoffmann's judgment in O'Neill v Phillips [1999] 2 BCC 600:
Willing or unwilling
Under the statutory provisions for fiscal valuations, we have to envisage an imaginary sale of the shareholding (Attorney General v Jameson [1905] 2 IR 218) to which the parties are imaginary, unless there is a special purchaser present. In the CVC/Opportunity case, Lord Millett discussed the possible bases of valuation and the different contexts of valuation. In particular, he differentiated between a willing seller and an 'unwilling' seller, as was Mr Demarco. He stated further that 'to require Mr Demarco to submit not only to his exclusion from the company, but to the acquisition of his shares at less than their going concern value by a purchaser which intends to carry on the business, is hardly less fair'. It was in this context that Lord Millett said '... the basis of valuation is not a notional sale of the outgoing partner's shares to the continuing partners who, being the only possible purchasers, would offer relatively little. It is based on a notional sale of the business as a whole to an outside purchaser'. Nowhere in the legislation regarding tax valuations is there any reference to the management position of the shareholder or the word 'fair'.
Transferring shareholder attributes
We are not aware of any case where the attributes of a particular shareholder, e.g. his position as a quasi-partner, can be transmitted to another. Hence, on the death of a quasi-partner, the value which the executors of his estate might realise for the deceased quasi-partner's shareholding, in the absence of an appropriate shareholders' agreement, may well not reflect the deceased's position as a quasi-partner (see Murray's Judicial Factor v Thomas Murray & Sons (Ice Merchants Ltd) [1993] BCLC 1437). Why, therefore, should the inheritance tax value reflect such a concept? Given the personal nature of quasi-partnership, i.e. attributes attaching to the particular person, such as involvement in management, it is difficult to see how these personal attributes can be transferred to the hypothetical purchaser for tax purposes. The only circumstances when 'personal' attributes may be imputed to the purchaser is where a special purchaser can be identified for whom the property has a special value. I agree with Mr Mathew that Hawkings-Byass v Sassen [1996] SpC 88 is helpful in this respect. However, the special value is related purely to the shareholding, and not to questions of mutual trust between the parties, involvement in management, etc. which may exist between actual partners.
Emerging thoughts
In the light of the above, it is suggested that the following considerations emerge. Even in the real world a quasi-partner cannot expect to be able to realise pro rata value for his shares unless: If a quasi-partner leaves voluntarily, in the absence of such an agreement, the courts have held that he is only entitled to a discounted value. Indeed if he had acquired the shares at a discounted price, it appears that he could not expect pro rata value even on unfair exclusion (Re Bird Precision Bellows Ltd [1984] 3 All ER). Mr Mathew himself quotes Lord Russell's words in Commissioners of Inland Revenue v Crossman [1936] 15 ATC 94 where he said that, for tax purposes, it is not a question of ascertaining the actual value or the fair value but the statutory value, 'the price which those assets might reasonably be expected to fetch on a sale in the open market'. The debate continues. Jenny Nelder BA, FCA, ATII is a partner in Bruce Sutherland & Co, Share Valuation Specialists, Moreton House, Moreton in Marsh, Gloucestershire GL56 0LH, tel: 01608 651091, fax: 01608 651973 e-mail: jenny.nelder@brucesutherland.com.
