TMI Blog1969 (1) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... and, after he ceased to be chairman, to the other members of the company, at the fair value, which at all material times was fixed at par. At the very lowest estimate the shares were worth double that figure, but in effect a would-be transferor had nothing to sell but the par value. In these circumstances a familiar difficulty arose of valuing the shares for estate duty purpose under section 7(5) of the Finance Act, 1894, which is in these terms : The principal value of any properly 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. It has been the law since Attorney-General v. Jameson, the decision of a very strong Court of Appeal in Ireland, which was followed and confirmed in the House of Lords in Inland Revenue Commissioners v. Crossman, that the meaning to be given to this section is that for the purpose of estimating the price of such shares, price being under the section the criterion of value, it must be assumed that a purchaser would be entitled notwithstanding the restrictions to be transfer imposed by the articles of association. This view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what I call published documents, of all such further information (if any) as on the evidence in this case a member of the board applied to would have afforded. This evidence was given by one of the two sons of the family, who alleged that the board if asked would have been extremely uncommunicative. The judge himself did not favour this result but he felt constrained to it by a decision of Danckwerts J. in In re Holt, decd. The second view, which the judge would have preferred had he felt himself free, is the published information footing, namely, that the purchaser would have had only such information as had before the date of the death been communicated by the board to the shareholders and no confidential information such as was within the knowledge of the board. The third possibility, which was, at any rate in this court, supported by the Crown, was that the purchaser must be supposed to have in addition to the published information such further information as would in practice, on a sale of an important block of shares such as these, have been confided by the board either to the purchaser or perhaps more probably in confidence to his financial advisers. As a matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded a pound to the value of each share. Before us, therefore, only one point was argued, namely, whether Plowman J.s. valuation of pounds 3 10s. should stand or whether it should have a pound added to it, as, on the evidence, would happen if the further information were disclosed. There is an extraordinary dearth of authority on this point. In Jamesons case no question of valuation arose because the commissioners had not arrived at a valuation : the only thing settled was the basis of the valuation. That case, therefore, is of no help. Attorney-General v. Jameson was followed in Scotland by Lord Fleming in Salvesens Trustees v. Inland Revenue Commissioners in the Outer House of the Court of Session. The shares in question were shares in a private company with a restricted right of transfer and the judge made a valuation following Jameson. He said, at page 46 : The problem can only be dealt with by considering all the relevant facts so far as known at the date of the testators death and by determining what a prudent investor, who knew these facts, might be expected to be willing to pay for the shares. Counsel for both the petitioners and respondents accordingly assumed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have obtained them. The third cases is that already mentioned, In re Holt, decd. There, the information in the hands of the directors was a deprecatory character, and evidence was given by one of them of the adverse factors, and he said that he would if inquiry had been made have disclosed all these facts to the prospective purchaser. Danckwerts J. said, at page 1495 : One question of some importance dealt with by Mr. Holt was how for a prospective purchaser would have been able to obtain information as to the company's position and prospects by inquiry from the directors. Mr. Holt said that all the information which he had given in evidence would not have been given directly to a buyer of a small quantity of shares, but that it would have been made available, in confidence, to a reputable firm of accountants, acting on behalf of a buyer and approved by the board of directors, with the result, as I understood the position, that the information so revealed would not be passed on to the buyer, but his accountant would be in a position to advise him as the prudence of the purchase and the price which could reasonably be offered for the shares. The judge in the end base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to admit that it was legitimate to take into account the financial results of the company for the nine months after the last published balance sheet. The reason given was that this information would eventually come into the hands of shareholders but that cannot be made to accord with the principle that the knowledge of the shareholders therefore, that the taxpayers contention breaks down at this point and it is legitimate that the hypothetical purchaser should know matter which at the date of death were only known to the board. The more important information is, of course, facts which tend to show the likelihood of a public issue. Now the B documents show that this had been in fact under consideration by the board since 1959, that Messrs. Thomson McLintock Co. had been called in to report and advise on this very subject and had advised an immediate issue to the public. They show, moreover, that the board had sanctioned the taking of advice from Messrs. Gazenove Co., well-known stockbrokers, who had at the beginning of 1962 reported in favour of a public issue and discussed ways and means. This leaves the Crowns contention. Very strong evidence was produced form two le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to say that directors as such are to be ignored. All likely purchasers are deemed to be in the market. What the Act says in that the sale is to be treated as an open market sale, that is to say, the restrictions on transfer are to be ignored for the purposes of the hypothetical sale which is to fix the price, but I cannot see why the hypothetical sellers are not to be treated as being what they are, namely, directors in possession of the information which a purchaser would reasonably require and which on the evidence he would have obtained if he were to be a willing purchaser. It is agreed here, as I have said, that if information such as is contained in the D documents were available to the hypothetical purchaser a pound must be added to the value of the shares and I am, accordingly, of opinion that the Crowns appeal succeeds and that the proper price for these shares for the purpose of estate duty ought to be set at pounds 4 10s. I would allows the appeal accordingly. Widgery v. L. J. - The facts of this case are fully set out in the judgment in the court below and I find it unnecessary to respect them in full. When Mrs. Lynal died on May 21, 1962, she was the regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vendor and purchaser concerned in the hypothetical sale should be deemed to be in possession of no information as to the financial position and prospects of the company beyond that contained in the company's accounts prepared prior to the relevant date, and any other information which had then been made available to shareholders or was available to the public at large. The judge referred to this by the convenient Label of the published information. Mr. Bagnall contended that the published information should also include that to be derived from the company's accounts for the financial year in which the death occurred even though these were not available until a later date. The second alternative contended for was that in addition to the published information the vendor and purchaser should be deemed to have any information which the board of directors of this company would in fact have provided to a prospective purchaser or inquiry made on relevant date. This has been referred to as the subjective test since it involves an investigation of the state of mind of the board and of its probable response to such an inquiry. Thirdly, that in addition to the published inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive at the value in the open market. It is also clear that quite drastic departures from the so-called reality of the situation must be made when this is necessary to give effect to the intention of the statute. In the Crossman case itself a majority of the House of Lords held that, when shares in a private company are to be valued, it must be assumed that the hypothetical purchaser will have a right to be entered on the share register notwithstanding restrictions on transfer, or rights or pre-emption, contained in the articles, which would have precluded an open market sale in practice. A further example of such departure from reality is to be seen in Buccleuch (Duke) v. Inland Revenue Commissioners where Lord Reid said, at page 525 : But here what must be envisaged is a sale in the open market on a particular day. So there is no room for supposing that the owner would do as many prudent owners do - withdraw the property if he does not get a sufficient offer and wait until a time when he can get a better offer. It is desirable, in my opinion, that when the court is constructing the conditions under which the hypothetical sale is deemed to take place it should build upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise if the hypothetical purchaser is assumed to have confidential information in the possession of the directors. He says (and with the support of the judge below) that this would involve protracted inquiries which would make the commissioners task impossible, but the commissioners do not take this view. He asks, rhetorically, what is to happen if the directors decline to provide the information to the commissioners, and concluded that the result would be to force the parties to litigate, so that the information could be obtained on subpoena, and points out that even then the result would depend on whether the person in possession of the information was amenable to the jurisdiction of the court. I think that these difficulties are exaggerated. If, as a result of our decision, it is accepted that evidence is admissible of facts in the directors knowledge which a prudent purchaser would wish to discover, the likely consequence is that such information will be made available. I would not expect a marked increase in litigation. Nor am I unduly disturbed by the fact that in a minority of cases the parties may be unable to discover confidential information which was in the directors po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble sources, which a prudent purchaser of that property would wish to make, and it must further be assumed that he would receive true and factual answers to such inquiries. In the present case a prudent purchaser would have made inquiries of the directors which, if truthfully answered, would have disclosed the confidential reports of McLintocks and Gazenoves. Accordingly, I would allow this appeal and declare that the value of shares is pounds 4 10s each. Gross, L. J. - The question at issue in this appeal is : What degree of knowledge of matter affecting the value of the shares to be imputed to the parties to the hypothetical sale postulated by section 7(5) of the Finance Act. 1894 ? Three different possibilities were suggested in argument both in the court below and before us, which I will call, for short, the published information standard, the Holt standard and the Crowns standard. 1. The published information standard imputes to the parties to the hypothetical sale knowledge of what is shown in the company's accounts and of any other information which has in fact been made available to the shareholders or was available to the public at large. 2. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been may be many years after the death when the composition of the board may have changed. In this connection it is not irrelevant to observe that the criterion of value prescribed for estate duty purpose by section 7(5) of the Finance Act, 1894, has been adopted by the Finance Act, 1965, section 44(1), for the purposes of capital gains tax, where the chargeable disposition may be made many years after the basic date in April, 1965. Thirdly, it would be very unsatisfactory if the amount of estate duty payable in cases such as this were to depend on evidence, which in the nature of the case cannot easily be challenged, given by persons who may be personally interested in the result. I do not suggest for a moment that the directors in question would give evidence which they knew to be false, but in this sort of situation the wish may easily be father to the thought and one cannot help observing that in the Holt case the information which Mr. Holt said that he would have disclosed was depreciatory of the value of the shares, whereas the information which Mr. Lynall said that he would not have disclosed tended to enhance the value. If one rejects the Holt test, one is left to ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holder, one cannot predicate of him that he will be in possession of the company's accounts over a reasonable number of years before the sale. In this case the witness who gave evidence had before them the accounts back to 1951-52. Secondly, although the accounts for the year July, 1960, to July, 1961, had been audited and approved by the directors before Mrs. Lynall died on May 21, 1962, they had not yet been sent to her. These two points may, of course, be said - and fairly said - to be comparatively trivial, for it would be a very unreasonable board of directors which refused to supply a shareholder with copies of the accounts for a few years back or with information as to the contents of accounts a copy of which was due to be sent to him. But the third difficulty in Mr. Bagnalls way - namely, the fact that the accounts for the year 1961-1962 (ten months of which had expired at the date of Mrs. Lynalls death) were not available for the shareholders until long after death - is far more formidable. Obviously no one would give a proper price, or anything like a proper price, for the shares if he was refused all information as to the company's fortunes between the date to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly his advisers in confidence, with information possibly affecting the value of the shares which is not to be found in the accounts - as, for example, the trading result from the date to which the last accounts were made up and information, such as is contained in the category B documents in this case, bearing on the likelihood of a capital appreciation and the time at which one might hope to realise it. Further, the evidence showed that such information is in practice always given to enable the sale to go through. It is, of course, true - as Mr. Bagnall pointed out - that the sales of which Sir Henry Benson and Mr. Andrews were speaking were sales sponsored, or at least approved, by the board of the company in question. This is necessarily so, for if the board did not wish the shareholder in question to dispose of his holding they would make it clear that they would refuse to register the purchaser. It is in fact a condition of the market for the sale of minority holdings in private companies that the directors co-operate with the vendor. But that is the very condition which the Crossman decision obliges one to impose on the hypothetical sale envisaged by section 7(5) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , of course, obtain the evidence by discovery of subpoena. There may, of course, be exceptional cases in which the executors could not obtain the information, however hard they tried to do so. To take an example pressed on us by Mr. Bagnall, the deceased holder of a substantial number of shares might have been a member of the family who had quarrelled with the others and had been expelled from the board. Again one might have the case of a small holding - such as the 200 shares held by Mr. Ellis in this case - which had passed into the hands of someone who was completely out of touch with the board. But I think that in such cases the commissioners can be trusted to act reasonably and not to draw unfavourable inferences from a failure of the executors to produce information which they are not in a position to produce. At all events, the disadvantages -such as they are - of the Crowns test as compared with the published information test appear to me to weigh very lightly in the balance against the considerations telling in favour of the Crowns test which I have tried to set out. In the event, therefore, I agree with my Lords that this appeal should be allowed and the figure pou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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