‘Common law is shifting under our feet, so this is an interesting time to do valuations in contentious situations, whether it’s a family or a non-family situation,’ Andrew Strickland (Scrutton Bland) told BVWire—UK last month. He particularly noted the evolution from the ‘three tests’ 1973 House of Lords decision in Ebrahimi v Westbourne Galleries Limited, which established some standards for quasi-partnership holdings. This decision originally offered special protections to family businesses in certain prejudicial behaviours such as not paying dividends to shareholders. A business holding was deemed a quasi-partnership if:

1. The association formed or continued based on a personal relationship involving mutual confidence;
2. An agreement existed indicating that some or all of the shareholders would participate in the conduct of the business; and
3. The agreement places restrictions upon the transfer of the members’ interest in the company.

These standards were refined by Section 994 of the Companies Act of 2006, which sought to clarify business actions ‘conducted in a manner that is unfairly prejudicial.’

Strickland notes that business valuators—and the High Court—have struggled to refine the definition of ‘mutual confidence.’ ‘It matters whether it’s a family business or not, for instance. Are relationships between siblings always based on mutual confidence? That’s not always true when families are dysfunctional, but the courts seem to conclude based on personal relationships that there is mutual confidence,’ he says.

Not always, however. There are cases such as Booth and Booth [2017] EWHC 457, where minority discounts of 30% made sense since extended family ownership was so distant that the quasi-partnership test didn’t hold.

Nonfamily relations are different. In these situations, discounts may be ended when quasi-partnership status ceased for reasons such as new shareholders. However, excess remuneration is often added back, both in family and nonfamily cases, Strickland comments.

One current example of section 994 actions Strickland cites is McCallum-Toppin and McCallum-Toppin [2019] EWHC 46. Here, the High Court specifically saw prejudicial conduct in lack of dividends, excessive directors’ compensation, and unfair use of directors’ loan accounts. The court disallowed discounts, saying, ‘A sale at a discounted value would present an undeserved windfall to the purchasing respondents.’

Strickland summarizes the fairness trend as a desire by the courts to evolve, slowly, toward basic principles. ‘Fairness is the lodestone and guiding principle of the courts. Did people pay full price to enter? What was the behaviour—good and bad? These questions challenge the quasi-partnership standard, and whether or not minority shares should be discounted.’