‘There had been a consistent thread running through UK Court decisions of a preference for broad professional judgement over mathematical precision,’ says Andrew Strickland (FCA) in his new analysis, which appears in the July issue of Business Valuation Update. ‘The Judiciary appeared to recoil from any evidence which resulted in too many figures on the page. The greatest Jurists were known for their incisive legal wisdom rather than for their numeracy.’
In ‘A Quiet Revolution Is Going On in DCF Techniques in UK Cases,’ Strickland comments on the ‘long shadow into the future’ created by Practical Share Valuation by Eastaway and others. The book was updated in 2014 and again last year, but it’s particularly the 2009 original edition that stated ‘subjectivities within both the projections and also the discount rates’ caused the courts to reject the method.
‘As recently as the 2015 Tax Tribunal case of N Green and HMRC, Eastaway was used to ‘try and bludgeon a valuer who had the temerity to apply DCF within his valuation conclusions,’ Strickland recalls.
In the last 10 years, an initial cautious trickle of valuers using DCF in litigation work has broadened—in tax decisions, in shareholder disputes, and in contractual litigation.
Strickland credits this quiet revolution to ‘two forces:
- ‘Firstly, the desire of valuers to use various methods, including DCF, in their contentious valuations in the same way as they apply it in non-contentious work;
- ‘Secondly the inescapable realities of the valuation models used by private equity houses and others when valuing target companies.’
The BVU article reviews the successful use of the DCF in litigation, beginning with Saltri III and MD Mezzanine—the Stabilus Case in 2011. Strickland also considers several post-acquisition dispute cases such as Ageas v Kwik-Fit (GB), Hut Group v Cookson, Sycamore Bidco v Dunedin, and Triumph Controls v Primus International. DCF also appears in an increasing number of shareholder disputes, such as Arbuthnott v Bonnyman in 2015, VB Football Assets v Oyston, and others.
Strickland says that DCF is just the start. ‘The use of the capital asset pricing model is now featured in written decisions’ including a lengthy discussion of beta in Saltri III v MD Mezzanine and further analysis in the 2019 case of Burnden Holdings v Fielding.