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TMI Blog1971 (7) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... ers redetermined the value at £ 5 10s. a share. Plowman J. fixed a value of £ 3 10s. a share. The Court of Appeal increased the value to £ 4 10s. a share. The executors appealed. The facts are set out in their Lordships' opinions and in the report at first instance [1969] 1 Ch. 421 ; [1969] 73 I. T. R. 657 (Ch. D). Raymond Walton Q. C. and Peter Gibson for the appellants. Jeremiah Harman Q. C. and Leonard Hoffman for the Crown. Their Lordships took time for consideration. October 27, 1971. LORD REID.- My Lords, Mrs. Lynall died on May 21, 1962. At her death she owned 67,886 shares in Linread, a private company, whose articles contained restrictions on the right of shareholders to sell their shares. The question at issue in this case is the proper value of these shares for estate duty purposes. At first the executors suggested £ 2 per share. The revenue claimed on the basis of a value of £ 4 per share which figure on obtaining further information they increased to £ 5 10s. Plowman J. fixed a value of £ 3 10s. On appeal the Court of Appeal increased this to £ 4 10s. Now the appellants claim that the value should be fixed at £ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere not transferable until they had been first offered to her husband at £ 1 per share and even if he did not want them they were only transferable to a purchaser accepted by the directors. A similar situation occurred in Inland Revenue Commissioners v. Crossman ([1937] A. C. 26 ; 2 E. D. C. 537 (H. L.). The appellants asked us to reconsider that decision. I have done so and I agree with the decision of the majority in this House. They followed the Irish case of Attorney-General v. Jameson ([1905] 2 I. R. 218). The most succinct statement of the ground of decision is that of Holmes L. J., at page 239 : " Turning to the 7th section of the Act, I find therein the very test of value which I should have applied in its absence. ' The principal value 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. ' The Attorney-General and the defendants agree in saying that in this case there cannot be an actual sale in open market. Therefore, argues the former, we must assume that there is no restriction of any kind on the disposition of the shares and est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly, that it must be made to work, and that the only way of doing that is the way adopted in Crossman's case ([1937] A. C. 26 ; 2 E. D. C. 537 (H. L.).). If Crossman's case stands then the first submission of the appellants fails. The parties admit that then the choice is between the valuation of £ 3 10s. and £ 4 10s. per share. We must decide what the highest bidder would have offered in the hypothetical sale in the open market, which the Act requires us to imagine took place at the time of Mrs. Lynall's death. The sum which any bidder will offer must depend on what he knows (or thinks he knows) about the property for which he bids. The decision of this case turns on the question what knowledge the hypothetical bidders must be supposed to have had about the affairs of Linread. One solution would be that they must be supposed to have been omniscient. But we have to consider what would in fact have happened if this imaginary sale had taken place, or at leastif we are looking for a general rule-what would happen in the event of a sale of this kind taking place. One thing which would not happen would be that the bidders would be omniscient. They would derive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant information about the company's affairs. Then the accountants acting in an arbitral capacity fix what they think is a fair price. Then the sale is made at that price. Obviously the working of this scheme depends on all concerned having complete confidence in each other, and I do not doubt that in this way the seller gets a better price than he could otherwise obtain. In my view this evidence is irrelevant because this kind of sale is not a sale in the open market. It is a sale by private treaty made without competition to a selected purchaser at a price fixed by an expert valuer. The Act of 1894 could have provided-but it did not-that the value should be the highest price that could reasonably have been expected to be realised on a sale of the property at the time of the death. If that had been the test then the respondents would succeed, subject to one matter which I need not stop to consider. But the framers of the Act limited the inquiry to one type of sale-sale in the open market-and we are not entitled to rewrite the Act. It is quite easily workable as it stands. No doubt sale in the open market may take many forms. But it appears to me that the idea behind thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at its disclosure could not possibly prejudice the interests of the company. But that would not be sufficient to enable the respondents to succeed. Not all financiers who might wish to bid in such a sale, and not even all the accountants whom they might nominate, are equally trustworthy. A premature leakage of such information as these reports disclose might be very damaging to the interests of the company, and the evidence in this case shows that in practice great care is taken to see that disclosure is only made to those of the highest repute. I could not hold it right to suppose that all reasonable directors would agree to disclose information such as these reports so widely as would be necessary if it had to be made available to all who must be regarded as genuine potential bidders or to their nominees. So in my opinion the respondents fail to justify their valuation of £ 4 10s. I would therefore allow this appeal. LORD MORRIS OF BORTH-Y-GEST.- 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 Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to investigations made by the board into possible ways and means of raising money to pay prospective death duties which would be payable on the death of a shareholder and showing that the board were actively contemplating a public issue ; (ii) a report made in July, 1960, by Messrs. Thomson McLintock (who had been asked to carry out a survey of the company's undertakings with a view to a public issue) and papers recording their views as to a possible flotation ; (iii) a report made in March, 1962, by Messrs. Cazenoves & Co., in regard to the method of flotation and (iv) various kindred documents and also statements showing month by month the progress made by the company. The learned judge decided that as the information contained in these documents was not published information it would not have been available to a purchaser : he further decided, in view of the evidence given by a director (Mr. Alan Lynall), that had an inquiry been made of the board by a prospective purchaser the information contained in the documents would not in fact have been made available by the board. On the evidence which he heard the learned judge decided that the valuation should be £ 3 10s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact existed at the relevant time ? Should it include such information additional to the published information which would have been supplied by the directors if they had reasonably been asked for information by a shareholder wishing to sell or by a member of the public wishing to buy Should the test be what a reasonable board of directors would communicate ? At the date of her death (May 21, 1962), Mrs. Lynall was the registered holder of 67,886 ordinary shares in the company : her holding was about 28 per cent. of the issued share capital. Accepting the Crossman decision ([1937] A. C. 26 ; 2 E. D. C. 537 (H. L.)) the hypothetical purchaser would purchase on the basis that he would become a holder but would be subject to the restrictions on transfer imposed by the articles. If, however, the company became a public company and these restrictions were removed it is clear that the value of the shares would greatly increase. Any information relating to the prospects of the company becoming a public company and in particular of the timing of such a change would therefore be calculated to have very considerable effect upon the price of the shares. The sum required to purchase the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll potential purchasers have an equal opportunity to make an offer as a result of its being openly known what it is that is being offered for sale. Mere private deals on a confidential basis are not the equivalent of open market transactions. The somewhat limited issue as between the two figures of £ 3 10s. or £ 4 10s. mainly depends upon the question whether knowledge of the category B documents and of the information which they contain would be " open market " knowledge. The conclusion of the learned judge was that as such information was not published information and as (on Mr. Alan Lynall's evidence which the learned judge accepted) it would not in fact have been elicited on inquiry it ought not to enter into the calculation of price and value. The differing view of the Court of Appeal was based on the evidence, above referred to, of the practice of boards of directors to answer reasonable questions in confidence to the advisers of an interested potential purchaser. If this is the practice and even if the sought-for information may be given " in confidence " to an interested potential purchaser himself, I cannot think that this equates with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of shares in Linread Ltd., a private company, would have had knowledge at the time of the hypothetical sale of reports by Messrs. Thomson McLintock and by Messrs. Cazenoves as to the advisability of making a public issue of shares and converting the company into a public company. Section 7(5) of the Finance Act, 1894, is in the following terms : " (5) The principal value of any property 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. " Mrs. Lynall died on May 21, 1962. She then held 67,886 £ 1 shares in the company of which the issued share capital was £ 241,700 divided into 241,700 £ 1 shares. The price which the shares she held would have fetched if sold in the open market has therefore to be determined. Article 8 of the company's articles of association contains restrictions on transfers of shares in the company. It gives the directors power in their absolute and unfettered discretion to refuse to register any proposed transfer of shares. That article also provided that no shares in the company should be transferable u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial purchaser, and then if the directors approve of him they will authorise their accountants to furnish confidential information to an accountant acting for the purchaser who will in the light of his advice make an offer for the shares. On such a sale, no doubt all or nearly all the relevant information, whether confidential or otherwise, will be disclosed to the purchaser's accountant and a higher price will be obtainable than would be the case in the absence of such information. If the shares in Linread were sold in this way, presumably McLintocks' reports and that of Cazenoves would have been disclosed to the purchaser's accountant. The revenue contend that as this is the normal way of selling such shares in a private company, it constitutes a sale in the open market. In my opinion, it is the antithesis of a sale in the open market. Only a person or persons selected by the vendor will be able to make an offer. It is, I think, an essential feature of a sale in the open market that persons interested should have an opportunity to purchase, not just those selected by the vendor. This method of selling shares in a private company is not a sale in the open market but o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on alienation has been made for estate duty purposes on the basis laid down in the latter case. It would, therefore, need to be clearly demonstrated that that basis was erroneous if it were now to be supplanted. So far from being shown to be wrong, I think the two decisions quoted have emerged from the further examination to which they have been subjected with enhanced authority. I concur in the view that confidential information ought not to be regarded as available to a hypothetical purchaser under section 7(5) of the Finance Act, 1894, though I would think it right not to treat as confidential information for this purpose accounts of the company already prepared and awaiting presentation to the shareholders. I have in mind the accounts of the present company for the year to July 31, 1961. I have been a little perturbed about the procedure adopted in this case, apparently as an innovation, that discovery should be applied for as a means of prising out of the appellants the secrets of the board room. The corresponding procedure, had not the appellants been directors of the company as well as executors, would presumably have been the service of a subpoena duces tecum upon an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odified accordingly and no preference or ordinary share in the company shall be transferable until it shall (by letter addressed and delivered to the secretary of the company) have been first offered to Ezra Herbert Lynall so long as he shall remain a director of the company and after he shall have ceased to be a director of the company to the members of the company at its fair value. The fair value of such share shall be fixed by the company in general meeting from time to time and where not so fixed shall be deemed to be the par value. The directors may from time to time direct in what manner any such option to purchase shares shall be dealt with by the secretary when communicated to him. " The company in general meeting had never fixed the fair value of its shares for the purposes of article 8, and accordingly a shareholder wishing to sell his shares would have been obliged to offer the shares to Ezra Herbert Lynall at the par value of £ 1 per share. The question, therefore, arises whether in a case such as this the hypothetical sale in the open market under section 7(5) is in itself subject to or free from the restrictions imposed by the articles of association. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of that subsection do not require or authorise the commissioners to disregard such restrictions in considering the nature and value of the subject which the hypothetical buyer acquires at the assumed sale. Though he is deemed to buy in an open and unrestricted market, he buys a share which, after it is transferred to him, is subject to all the conditions in the articles of association, including the restrictions on the right of transfer, and this circumstance may affect the price which he would be willing to offer. " To my mind, that is a clear and convincing statement. In Crossman's case ([1937] A. C. 26 ; 2 E. D. C. 537 (H. L.), Finlay J. followed the decisions in the Jameson case ([1905] 2 I. R. 218) and the Salveson case ([1930] S. L. T. 387) ; then the majority of the Court of Appeal ([1935] 1 K. B. 26) took the other view ; and then this House by a majority restored Finlay J.'s order. I find the reasoning of the majority in this House, especially that of Lord Roche, preferable to that of the minority, and I think their decision should be followed in the present case-not only because it is an authoritative decision which has stood intact and been frequentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantially advance the time at which a public issue of shares in the company could be expected and, therefore, would enhance the price of the shares to an extent agreed to be £ 1 per share, making a price of £ 4 10s. per share. The crucial question, therefore, is whether this information should be deemed to be available to participants in the hyphothetical market. I should agree with what was said by Lord Fleming in the Salvesen case ([1930] S. L. T. 387), and by Danckwerts J. in In re Holt, decd. ([1953] 1 W. L. R. 1488) to the effect that a purchaser of shares in a private company subject to restrictions on transfer would be diligent in his inquiries. Danckwerts J. siad, at page 1501 : " I think that the kind of investor who would purchase shares in a private company of this kind, in circumstances which must preclude him from disposing of his shares freely whenever he should wish (because he will, when registered as a shareholder, be subject to the provisions of the articles restricting transfer) would be different from any common kind of purchaser of shares on the Stock Exchange, and would be rather the exceptional kind of investor who had some special reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X
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