George - civil claim following misrepresentation - share valuation
George was talking to his friend Peter in the pub one day. George had known Peter for a couple of years on a fairly casual basis and understood Peter to be a successful local businessman and entrepreneur.
Peter was talking about his plant hire business, Huntersglen Plant Hire Ltd. As it happened, plant hire was a subject George knew something about as he had worked in that field himself and still had a number of relevant business contacts.
As a result of their common interest in plant hire, Peter invited George to purchase a one third shareholding in Huntersglen Plant Hire Ltd for £15,000. Peter told George that the company "had assets of £70,000". Peter also told George that George's investment of £15,000 would provide additional working capital for the company to enable it to expand and that George's contacts could prove invaluable to the company's future business.
George did not ask to see the accounts of the company, nor did he make any further enquiries. George did not seek professional advice of any kind. He agreed to buy the shareholding and paid Peter £15,000.
Unfortunately the company did not prosper and ceased trading just over a year after George had purchased his shareholding. George lost all the money he had invested in the company. George then sought professional advice. As a result George discovered that statutory accounts for the company showed that, a short while before his share purchase, the company had assets of £71,000 but liabilities of £61,000, leaving net assets of only £10,000.
In the light of this George sued Peter for misrepresentation and claimed damages of £15,000, the money he had lost.
We were instructed to value a one third shareholding of Huntersglen Plant Hire Ltd, at the date George purchased it, on the alternative bases that (i) the company had net assets of £70,000, and (ii) the company was in the financial position shown in the statutory accounts.
George's solicitor planned to quantify George's loss as the difference between these two valuations, if this proved to be less than £15,000.
In accordance with our instructions, we calculated the value of the one-third shareholding on these two alternative bases.
Since the company had been incorporated only two years previously, we assumed, for the purpose of the first valuation, that the company had made profits of £70,000 over that two year period (an average profit of £35,000 per year). On this basis we valued a one-third shareholding at £36,300.
On the basis of the statutory accounts of the company we valued a one-third shareholding at £7,400.
When the matter came to court the Judge held that, when purchasing the shareholding, George had not relied upon Peter's statement that the company "had assets of £70,000". The Judge considered that George had purchased the shares based upon his own estimation of Peter's business talents and entrepreneurial flair and of the future prospects of the company once George and Peter combined their knowledge and efforts.
The Judge's view was that if George had been placing reliance upon the value of the company's net assets at the time he purchased the shares he would have taken steps, at the very least, to obtain a copy of the statutory accounts of the company, and in all probability would have sought professional advice at that time.
As a result George's claim for damages was dismissed.