Share valuation – Unlawful distribution of capital Progress Property Co Ltd v Moorgarth Group Ltd: Sup Ct (Lords Phillips (President), Walker, Mance, Collins, Clarke): 8 December 2010 Matthew Collings QC, Gabrielle Higgins (instructed by Seddons) for the appellant; John McGhee QC, Richard Fowler (instructed by Eversheds) for the respondent. The appellant company (P) appealed against a decision ((2009) EWCA Civ 629, (2009) Bus LR 1535) that there had not been an unlawful distribution of capital when the whole issued share capital of its subsidiary company (Y) was sold to the respondent company (M). All three companies were indirectly controlled by the same holding company. The sale price was calculated on the basis of Y’s open market value, subtracting liabilities for creditors and a further sum in respect of an indemnity believed to have been given by P for a repairing liability. It transpired that P had no such indemnity liability to be released from and that there was no justification for the reduction in Y’s value. P alleged that the transaction had been at a gross undervalue, relying on what the Court of Appeal referred to as ‘the common law rule’ devised for the protection of creditors, that a distribution of a company’s assets other than in accordance with specific statutory procedures constituted a return of capital which was unlawful and ultra vires. The Court of Appeal upheld the High Court’s decision that the transaction had been genuine and not ultra vires despite being at an undervalue. P contended that an objective approach was required and that any such transaction which resulted in a transfer of value not covered by distributable profits, regardless of its purpose, constituted an unlawful return of capital. Held: Whether a transaction infringed the common law rule against unlawful distributions was a matter of substance, not form. The label attached to the transaction by the parties was not decisive, Ridge Securities Ltd v Inland Revenue Commissioners  1 WLR 479 ChD, Aveling Barford Ltd v Perion Ltd  5 BCC 677 ChD, and Halt Garage (1964) Ltd, Re  3 All ER 1016 ChD applied (see paragraph 16 of judgment). The essential issue therefore was how the sale of Y was to be characterised. A relentlessly objective rule would be oppressive and unworkable and would cast doubt on any transaction between a company and a shareholder, even if negotiated at arm’s length and in good faith, where the company proved with hindsight to have got significantly the worst of the transaction (paragraph 24). If it was a stark choice between a subjective and an objective approach, the least unsatisfactory option would be the latter but the court’s real task was to inquire into the true purpose and substance of the impugned transaction. That approach called for an investigation of all the relevant facts, which could include the state of mind of the persons orchestrating the transaction. That state of mind could be totally irrelevant. A distribution described as a dividend but actually paid out of capital would be unlawful, however technical the error and well-meaning the intention. However, the participants’ subjective intentions would sometimes be relevant, and a distribution disguised as an arm’s length commercial transaction was the paradigm example. If a company sold to a shareholder at a low value assets which were difficult to value precisely but were potentially very valuable, the transaction might call for close scrutiny. The company’s financial position and the motives and intentions of its directors would be highly relevant. If the conclusion was that it was a genuine arm’s length transaction, then it would stand even if it appeared with hindsight to have been a bad bargain. If it was an improper attempt to extract value by the pretence of an arm’s length sale, it would be held unlawful. It would depend on a realistic assessment of all the relevant facts, not simply an isolated retrospective valuation exercise, Clydebank Football Club Ltd v Steedman (2002) SLT 109 OH applied. In the present case, there had been concurrent findings that the sale of Y was a genuine commercial sale (paragraphs 27-29, 31-33). Appeal dismissed.
The number of partners at UK law firms rose significantly this year as the rate of ‘firing and retiring’ fell, according to a survey by an accountancy firm.Figures show an overall net increase of 2,795 partnership posts this year, reversing the net loss of 153 partner roles seen in 2011/12, a report by Wilkins Kennedy says. A key factor behind the rise in partner numbers was that 44% fewer partnership posts terminated than in the previous year. In 2012-13, 3,077 partnership posts were closed, down from 5,487 the year before that.The figures also show a 10% increase in new partnership roles being created, with 5,872 posts started this year, up from 5,334 in 2011/12. In total 38,740 partners were practising at UK law firms in 2012. Wilkins Kennedy suggests the findings show that the worst of the downturn may be over for many firms, although problems may still remain at the smaller end of the market. Tommy White, partner at Wilkins Kennedy, said: ‘Although many firms are still adapting to the more challenging market conditions, this marked fall in apparent firing and retiring of partners at UK law firms is perhaps an indicator that the stop-start restructuring and cost-cutting of the legal sector is now past its worst.’ Explaining the reasons for the change, he suggested: ‘On the one hand, after the unprecedented partner redundancies and forced retirements which have taken place recently, most firms have by now already taken the opportunity to offer early retirement to those partners that perhaps were not performing and contributing to profitability. ‘At the same time, more partners who near retirement age, but are still generating income for the firm, are deciding to delay their retirement – where their existing partnership structure permits.’ But White notes that the attitude to partnership of many associates is changing with many no longer seeing it as the pinnacle of their career. ‘Associates are starting to question whether partnership is really the be-all and end-all for their careers. Some are seeing a salary and bonus arrangement based on their own personal performance as preferable to what can be the much more volatile earnings of a profit sharing partner,’ he said.