Donegal Investment Group Plc v Danbywiske and Others

• Jurisdiction: Ireland
• Judge: Mr. Justice Brian J. McGovern
• Judgment Date: 05 December 2014
• Neutral Citation: [2014] IEHC 615
• Docket Number: 591 COS/2013
• Court: High Court
• Date: 05 December 2014

[2014] IEHC 615

THE HIGH COURT

591 COS/2013

[No. 3 COM/2014]

Donegal Investment Group PLC v Danbywiske & Ors

COMMERICIAL

IN THE MATTER OF ELST LIMITED AND

IN THE MATTER OF SECTION 205 OF THE COMPANIES ACT 1963 AND

IN THE MATTER OF SECTION 213(F) OF THE COMPANIES ACT 1963

AND IN THE MATTER OF THE COMPANIES ACTS 1963 TO 2012

BETWEEN

DONEGAL INVESTMENT GROUP PLC.

PETITIONER

AND

DANBYWISKE, RONALD WILSON, THE GENERAL PARTNERS OF THE WILSON LIMITED PARTNERSHIP 1, MONAGHAN MUSHROOMS IRELAND AND ELST

RESPONDENTS

Company – Minority Shareholder – Relief - Companies Act 1963 – Valuation of Shares – Shareholders Agreement – Oppression – Discount – Price – Practice and Procedures

Facts: In this case the petitioner who was a minority shareholder in ELST claimed various forms of relief under the Companies Acts arising out of alleged oppression of it by the majority shareholders including an order that the first, second, third and fourth named respondents purchased the petitioner”s shares at their true value and without any discount to reflect the minority interest and valued on the basis that the alleged acts of oppression had not occurred. By order made on 11th April 2014, the Court directed the trial of a discrete issue to determine the price at which the respondents might purchase the petitioner”s shares. The principle issue was whether or not a discount should be applied to the petitioner”s shareholding to reflect the fact that its holding was a minority interest. Consequently, the overriding objective for the Court was to determine a fair price in all the circumstances.

Held by Justice McGovern in light of the evidence given to the Court and the expert reports furnished by the valuers, that he was satisfied that the relationship between the petitioner and the respondents was one involving a joint venture and a quasi-partnership. Acknowledging that relations had become poor, it was accepted there was a shareholders agreement which did not envisage shares being bought out on the basis of a minority discount, and when the relevant businesses merged to form the Company, it was based on a relationship involving equality, mutuality, trust and confidence. Therefore, as a matter of law, it was stated that the shares should be valued without applying a minority discount. Consequently on the discrete issue fixed for determination by the Order of 11 April, 2014, Justice McGovern fixed the price at which the Respondents should purchase the Petitioner”s shares at €30.6m. That figure was based on an assumed 35% stake in the Company and would be subject to adjustment depending on whether the interest of the petitioner was ultimately found to be 35% or 30%.

Mr. Justice Brian J. McGovern

1 The petitioner is a minority shareholder in ELST ("the Company") and claims various forms of relief under the Companies Acts arising out of alleged oppression of it by the majority shareholders including an order that the first, second, third and fourth named respondents purchase the petitioner's shares at their true value and without any discount to reflect the minority interest and valued on the basis that the alleged acts of oppression had not occurred. By order made on 11^th April 2014, the Court directed the trial of a discrete issue to determine the price at which the respondents might purchase the petitioner's shares and it is on that matter that this judgment is handed down.

2 For the purpose of the discrete issue, the first, second, third and fourth named respondents (hereinafter referred to as "the Wilson shareholders") admitted a non- specified ground of oppression so as to give the Court jurisdiction to make an order that the Wilson shareholders purchase the petitioner's shares at a valuation to be determined by the Court.

3 The petitioner is a plc. registered in the State and is a minority shareholder in the fifth named respondent ("the Company"). There is a dispute as to whether it holds 30% or 35% of the issued shares and that is a matter to be decided at a later date. However, it is agreed for the purpose of determining this issue, the Court may proceed on the basis of the petitioner holding a 35% shareholding and any necessary adjustment can be made in due course, depending on the outcome of any further hearings. In the course of this judgment the fourth and fifth named respondents may, from time to time, be referred to as "Monaghan" as witnesses used that term interchangeably with "the Company" in evidence.

4 The first named respondent ("Danbywiske") is an unlimited company owned and controlled by Mr. Ronald Wilson and the remaining Wilson shareholders are either owned by or associated with Ronald Wilson and/or Danbywiske.

5 Prior to 2004, the petitioner and Connacht Gold were the sole shareholders in a company called Carbury Mushrooms. The Wilson shareholders owned the majority of shares in Monaghan Middlebrook Mushrooms Ltd. ("MMM") a competitor of Carbury. In 2004, it was agreed that the two companies would merge and that the Carbury shareholders would be entitled to 40% and Danbywiske to 60% of the merged business. A Share Exchange and Shareholder's Agreement ("SESA") was entered into on 1^st June 2004, which affected both the allotment of shares in MMM and set out a Shareholder's Agreement with regard to the future governance and management of MMM. In 2010, as part of a group reorganisation, the Company was incorporated, effectively in place of MMM, as the top level corporate vehicle of the merged business with shares being issued and allotted in the Company in accordance with the party's previous shareholding in MMM.

6 Clause 10 of the SESA provides:

"The Company and each of the Shareholders and the Management Team hereby covenant with and undertake to each of the Major Shareholders to use their reasonable endeavours to promote, enhance and improve the business of the Group with a view to obtaining a realisation within six years following Completion, including without limitation, the bona fide consideration of any proposal to appoint a corporate finance adviser to procure a purchaser for the entire share capital of the Company."

7 The petitioner claims that this should inform any decision as to how its shares are to be valued.

8 7. A number of issues arise in valuing the shares. The principal area of disagreement between the valuers is whether a minority discount should be applied to the shares. There are also variations in the methods used to value the shares by the three experts who gave evidence before the Court. Those experts were Mr. Tom Lindsay of Spayne Lindsay for the petitioner and Mr. David Tynan of PricewaterhouseCoopers ("PwC") and David O'Flanagan of Deloitte & Touche ("Deloitte") on behalf of the respondents.

9 8. These experts approached the valuation of the Company in two ways, namely:

(a) Group valuation (Spayne Lindsay and PwC) and

10 (b) Sum of the Parts (Deloitte).

11 9. The methodologies adopted by the experts in approaching the valuation of the Company can be summarised as:

(a) Market Approach (Spayne Lindsay);

12 (b) Hybrid Approach - 60% Market Approach, 40% Discounted Cash Flow ("DCF") (PwC) and

13 (c) Hybrid Approach - 50% Market Approach, 50% DCF (Deloitte).

14 10. As between the experts, there was general consensus that Mr. Lindsay had the most particular expertise in mergers and acquisitions relating to businesses in the food sector. However, both Mr. Tynan and Mr. O'Flanagan were partners in their respective offices with extensive valuation experience which cannot be lightly overlooked.

15 11. In considering the correct approach to valuation of the petitioner's shareholding, there are a number of legal issues which arise. The first is whether or not, as a matter of law, a minority discount should be applied to the value of the petitioner's shareholding in the Company. The second issue is whether the use of the DCF as a method of valuation is an appropriate method. A third legal issue arises from the shareholders agreement between Monaghan and its minority partner, Walkro, and the fourth concerns the issue of marketability discount and whether, as a matter of law, it is appropriate to apply such a discount to the value of the petitioner's shares.

16 12. The valuation put on petitioner's shares by Spayne Lindsay is dramatically different from the value postulated by PwC and Deloitte. Mr. Tom Lindsay values the petitioner's shares on the basis of a 35% interest in the Company with no minority interest applied at €63.5m. The PwC valuation, based on a 30% interest in Monaghan and a 17% discount for minority interest is €18.8m which should be rounded up to €26.4m based on a 35% shareholding with no minority discount. The Deloitte figure, based on a 30% shareholding and applying a 35% minority discount is €14.5m to be rounded up to €26m in respect of a 35% shareholding with no minority discount. In summary, therefore, by applying the same criteria, the Spayne Lindsay valuation is €63.5m, the PwC valuation is €26.4m and the Deloitte valuation is €26m.

17 13. From the evidence given to the Court and the expert reports furnished by the valuers, it is possible to establish the following matters as relevant:

18 (a) The comparables chosen and the selection of the appropriate multiple;

(b) Capital expenditure;

(c) Net debt and debt-like items;

(d) EBITDA adjustments and

19 (e) Acts of oppression affecting valuation.

20 14. On the issue of transaction comparables, Mr. Lindsay was criticised for not including Walkro as a comparable. Walkro was acquired by Monaghan and a private equity partner known as GIMV in January 2012 for a price of €82m. The multiple used to value Walkro for the purposes of that transaction was 4.75. The private equity partner has an option to exit and sell its interest in Walkro in 2017, and the price for its equity...