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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> ESO Capital Luxembourg Holdings II SARL v GSA Invest Management SA & Anor [2018] EWHC 2656 (Ch) (12 October 2018) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2018/2656.html Cite as: [2018] EWHC 2656 (Ch)

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IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST

		Royal Courts of Justice Rolls Building, Fetter Lane, London, EC4A 1NL
		12 October 2018

MR JUSTICE SNOWDEN:

1. I gave a lengthy judgment in this action on 12 June 2017: see [2017] EWHC 1351 (Ch) (the "Judgment"). I shall use the same abbreviations herein as in that earlier Judgment.

Background

2. In the Judgment I was required to value the Claimant's 30% shareholding in Promoroche as at 10 October 2012 as the basis for an award of damages for an admitted breach of contract by the Defendants. That value was based upon the value of the Hotel at the same date.
3. After hearing factual and expert evidence, I decided to adopt a discounted cash flow approach to the valuation of the Hotel and made a number of findings as to some of the relevant parameters of that DCF calculation. In my Judgment, I summarised the result of my analysis as follows,

"185. The result of my analysis is that I consider that the DCF valuation of the Hotel should be arrived at by adopting Mr. Cottle's approach to the cashflow figures, including some adjustment for PPE expenses, but with a reduced CAPEX provision as suggested by Mr. Mack. I would then apply a (post-tax) discount rate of 6% to arrive at the present value of the primary cash flows, and use a (post-tax) capitalisation rate of 5% to calculate the terminal value of the Hotel.

186. It is my understanding from agreed computations provided to me whilst preparing this judgment that this would give a result for the market value of the Hotel in October 2012 of between CHF 25.3 million and CHF 33.1 million, depending upon the extent to which the CHF 400,000 per annum PPE expenses are deducted from the cashflows. Having regard to the conclusion that I have reached that I should not simply incorporate the whole of that CHF 400,000 figure into the cashflows, I think that it is appropriate to arrive at a final valuation that lies in the lower half of that range. I therefore conclude that the true market value of the Hotel at the valuation date in October 2012 (excluding transaction costs) was CHF 27.5 million."

4. I then adopted the approach advocated by both sets of experts of "sense-checking" that value of CHF 27.5 million by standing back and assessing whether it made sense and was consistent with other relevant and reliable evidence in the case.
5. In that regard I noted that the value that I had arrived at was (significantly) lower than a number of the figures derived from other sources. However, I explained why most of those other figures were unreliable. In the end, I concluded that my value was not radically different from the most significant contemporary valuation by THED in March 2012 which was CHF 31.197 million at its mid-range, or from the figure resulting from an application of the hospitality industry's rule of thumb for valuing three and four-star hotels, of which Mr. Mack had given evidence, which would have given a value of CHF 24.437 million.
6. After deducting an agreed 4% for costs of sales from the value of CHF 27.5 million, incorporating the resultant net value into the Company's balance sheet as at 31 November 2012 and making adjustments for the other items that I considered in the judgment, I then arrived at a net asset value for the Company of CHF 6,266,110, of which 30% was CHF 1,879,833. I concluded that this was the amount of damages to which the Claimant was entitled.

The errors and omissions in the Judgment

7. In the usual way, my Judgment had been provided in draft to the parties for them to provide me with a list of any typing corrections and other obvious errors. I received lists of typographical corrections from the parties and handed my Judgment down on 12 June 2017, adjourning all consequential questions to a date to be fixed.
8. Before that consequentials hearing had taken place or any order had been drawn up, on 21 June 2017 the Defendants wrote to the Claimant raising two matters which they contended were errors or omissions in my Judgment, which they claimed significantly affected the end result – indeed so much so that they contended that the result was that the Claimant's shares in the Company at the relevant date were actually worthless and so the Claimant was not entitled to any damages.
9. The first point concerned the cashflow figures used for the DCF calculation. In my request for agreed computations to which I had referred in paragraph 186 of my Judgment, I had requested that the experts should adopt Mr. Cottle's figures for revenue and expenses down to his EBITDA figures, with some stated exceptions and variations for PPE expenses, and then that they should apply a number of alternative post-tax discount and capitalisation rates.
10. It transpired that because of the reference to EBITDA, the experts had misinterpreted my request as a request to apply the post-tax discount and capitalization rates to pre-tax cashflows. This meant that the figure for the terminal value to which the relevant rates were applied did not include the impact of tax at 18%. I did not appreciate that this was so on my reading of the figures supplied to me.
11. As is apparent from paragraphs 165-172 of my Judgment, I had in fact intended to adopt Mr. Cottle's approach of applying the relevant discount and capitalisation rates to the post-tax cashflows. The parties are now agreed that if a discount rate of 6% and a capitalisation rate of 5% had been applied to post-tax cashflows, the result would have been values for the Hotel (excluding transaction costs) of between CHF 20 million and CHF 26.8 million (depending on the extent to which PPE expenses were deducted from the cashflows) rather than the range of between CHF 25.3 million and CHF 33.1 million which I had arrived at.
12. The parties have also calculated that if the same proportion of PPE expenses as I deducted from the cashflows in the Judgment to arrive at my figure of CHF 27.5 million were to be deducted from the lower range of figures, the result would have been a final value for the Hotel of CHF 22 million (excluding transaction costs).
13. The second issue concerned the adjustments to the Company's balance sheet position as at 30 November 2012. Although I resolved a number of issues concerning disputed items in that balance sheet, I inadvertently left out of account the opening balance sheet liabilities of CHF 3.279 million which should have been deducted to arrive at a net asset value for the Company.
14. It is unfortunate that I used the reference to EBITDA in my request to the parties for agreed figures, and it is also regrettable that these matters were not drawn to my attention when I circulated the draft Judgment, when I could have taken steps to reconsider and amend the draft before the Judgment was handed down. However, now that these matters have been raised, and given that no order has been drawn up and perfected by being sealed, it is clear to me both that I have the power to consider whether to modify my decision, and that I ought to take advantage of that opportunity: see Re L and Another (Children) [2013] 1 WLR 634 (SC).
15. If I were minded to modify my decision, however, I do not think that I should do so by attempting to amend the terms of the Judgment itself, because it has now been handed down and has gone into the public domain. I think that it would be undesirable for there to be two versions of what would ostensibly be the same judgment in existence. The appropriate course is for me to deal with the matter by way of this supplemental judgment and to ensure that my final decision is accurately reflected in the order that is made.

The value of the Hotel

16. In relation to the first issue, Ms. Bingham QC for the Defendants submitted that I had adopted a principled approach to the determination of the issues that had arisen under the DCF, and that the result of CHF 22 million which would be arrived at using the correct post-tax cashflows and rates was not materially "out of kilter" with the reliable evidence in the case. She submitted that given the findings that I had made in relation to each aspect of the DCF calculation, there was no principled basis upon which I could depart from any part of it, and that I was logically bound to revise my Judgment to arrive at a value for the Hotel of CHF 22 million (excluding transaction costs).
17. For the Claimant, Mr. Anderson QC submitted that the value of CHF 27.5 million at which I had arrived was one that I had "sense-checked" against other evidence and been satisfied with, whereas a result of CHF 22 million for the value of the Hotel would be an unreasonable result that would be significantly out of line with the contemporaneous valuation and other evidence. He suggested that if I had arrived at such a low figure, I would have questioned the inputs and assumptions of the DCF computation and revised them or the result of the computation upwards. He accordingly urged me not to depart from the figure of CHF 27.5 million. He accepted, however, that, I was not limited to a stark choice between CHF 22 million and CHF 27.5 million.
18. In addressing this issue, I have firmly in mind the evidence of the experts which I recounted in paragraphs 128-132 of the Judgment to the effect that valuation is not a precise science, and that when employing a DCF calculation it is important to bear in mind that the selection of some of the variables or inputs will require subjective judgment, that the approach to selection of one variable or input can have an effect upon the selection of another, and also that it is important to stand back and review the overall result against other evidence to ensure it makes sense.
19. By way of illustration of the lack of scientific precision, I note that in relation to two of the inputs of (i) the discount and capitalisation rates, and (ii) the extent to which PPE expenses should be deducted from cashflows, there was a margin requiring the exercise of subjective judgment.
20. As is apparent from paragraphs 173-184 of the Judgment, my selection of a post-tax discount rate of 6% was not a precise computation, but was arrived at as a whole number falling between Mr. Cottle's suggested post-tax discount rate of 7.5% and Mr. Mack's pre-tax discount rate of 5.3% (which equated to a post-tax rate of 4.1%). I explained this as follows,

"183. Taking all these factors into account, it seems to me that the appropriate discount rate which a reasonable buyer would apply to post-tax cashflows would be between the rate suggested by Mr. Cottle and that suggested by Mr. Mack. As I have explained above, the selection of a particular figure within that range is necessarily a matter of judgment, influenced by the nature of the other assumptions which go into the formulation of the cashflow figures.

184. Taking into account the various inputs to which I have referred to above, and especially that I think that Mr. Cottle's cashflows were, if anything, on the conservative side, I consider that the appropriate discount rate to apply to post-tax cashflows is 6%. Using the convention adopted by Mr. Cottle this would also have the result that the appropriate capitalisation rate to apply to post-tax cashflows is 5%."

21. As I also observed in my Judgment, relatively small changes in this discount rate would have produced significant variations in the final value.
22. Likewise, for the reasons that I explored in paragraphs 148-156 of the Judgment, I thought it was appropriate to make a deduction from the cashflows on the basis that the Company was obliged to bear some proportion of the PPE expenses, but I took the view that the figure of approximately CHF 400,000 included in the Company's 2012 accounts might well have been overstated. However, when it came to determining the amount of such expenses that ought to be deducted, I was hampered by the lack of any really granular investigation at trial of the individual items (which would not have been practical). The result was that in the end, in paragraph 186 of my Judgment, I simply selected a final value for the Hotel which reflected a view that most, but not all, of the PPE expenses shown in the accounts were properly borne by the Company.
23. Against that background, I do not accept Ms. Bingham's submission that the DCF based valuation that I had conducted was so precise in its method that I had in effect put myself into a straightjacket in the Judgment and that there could be no principled basis for me to depart in any way from a final figure of CHF 22 million (excluding transaction costs). In my judgment, the evidence of the experts made it quite clear that it is in accordance with valuation principle to sense-check the final figure against other relevant and reliable evidence in the case, and, if necessary, to make some adjustments to the valuation accordingly. In the ordinary course, such adjustments will doubtless be carried out on an iterative basis by a valuer exercising judgment in making minor changes to the subjective elements of the DCF, such as the discount rate, until the resultant valuation makes sense overall when viewed against the other evidence.
24. Approached in this way, on the facts, I do not consider that a final figure for the value of the Hotel of CHF 22 million (excluding transaction costs) is reasonable or makes sense in light of the other evidence in the case. It is simply too low. I had already observed at the start of my sense-check in paragraph 217 of the Judgment that the figures derived from the majority of other sources in the evidence seemed to be in a range that was higher than the value of CHF 27.5 million that I had arrived at. As I have indicated, in my Judgment I then went on to analyse the context and assess the reliability of those other pieces of evidence. I found much of the other evidence was not entirely reliable, but I obtained some reassurance in particular from the fact that the figure of CHF 27.5 million was somewhere between the most contemporaneous and generally reliable mid-range THED valuation from March 2012 (CHF 31.197 million) and the industry rule-of-thumb figure of CHF 24.437 million for three and four-star hotels (the Hotel being a five-star hotel).
25. In contrast, the figure of CHF 22 million lies even further below the values in the other pieces of evidence to which I referred. It is, for example, less than half the figure in the Settlement Agreement and in the various statements made from time to time by the Defendants as to their view of the Hotel's value which I considered in paragraphs 205-216 of the Judgment. It is, more significantly, below even the lowest alternative THED valuation from March 2012 of CHF 23.385 million. That figure had been arrived at on the basis of a wholly pessimistic scenario (not shared by any of the expert witnesses) that the Hotel had reached its maturity in terms of revenue, that it would underperform the norm for hotels of its type and that its maximum occupancy rate would only be 60%. The figure of CHF 22 million is also below the figure of CHF 24.437 million arrived at by applying the industry rule of thumb for three and four-star hotels.
26. For completeness, I also note that a figure of CHF 22 million is less than the value at which the Hotel was carried in the audited accounts of the Company as at 30 November 2012 (CHF 25.347 million). Although it is clear from the evidence that the figure in the accounts (which were prepared in July 2013) was simply based upon cost less depreciation and hence should not be taken as a statement of its market value, there is also no indication in the accounts that this figure was believed by the directors to represent significantly more than the realizable value of the Hotel at the time.
27. In these circumstances, I consider that I must adjust my valuation to arrive at a figure that is reasonable and makes sense. In doing so, I do not think that I should depart from my decision on the point of principle that it is appropriate to use post-tax residual cashflows for the reasons which I explained in paragraphs 165-172 of the Judgment. However, there is a greater degree of subjectivity in the selection of the post-tax discount and capitalization rates and in the treatment of PPE Expenses, and a relatively modest adjustment of those factors could in my judgment produce a reasonable and sensible result.
28. Rather than require the parties and the experts to go through a further process of calculation in an iterative fashion, it seems to me that I should simply short-circuit matters and say that I do not see that I could sensibly arrive at a value for the Hotel which was lower than CHF 25.5 million. That figure still lies well below the figures in much of the evidence and the mid-range THED valuation, but it at least exceeds the lowest THED valuation and the industry rule of thumb figure for three and four-star hotels.
29. In argument, Ms. Bingham warned me against adopting such an approach, suggesting that this would be "unprincipled reverse-engineering". Whilst I accept that there is a limited element of determining an end result rather than going through an iterative process of adjusting the subjective inputs at the last two stages of my DCF computation, I do not think it is unprincipled for the reasons that I have explained. It is a result informed by the remainder of the DCF computation and the other evidence in the case. Moreover, the amendments required to the two subjective elements of the DCF to achieve the result would obviously still be within the ranges that I considered appropriate for those elements.
30. Adopting a gross value for the Hotel of CHF 25.5 million results in a net value, after deducting 4% transaction costs, of CHF 24.48 million. That is the value that I consider should be inserted into the balance sheet to arrive at the net asset value of the Company as at the valuation date.

The opening liabilities on the balance sheet

31. There is, as I understand it, no real argument between the parties that I should ensure that the liabilities of the Company of CHF 3.279 million, as shown in its balance sheet as at 30 November 2012, should be reflected in my decision. It was common ground between the experts that they should be deducted in arriving at an adjusted net asset value. I had not intended otherwise, and my omission of these liabilities was inadvertent.

The result

32. Putting the relevant figures and adjustments into the balance sheet of the Company as at 31 November 2012 to arrive at a net asset value of the Company as at the valuation date of 10 October 2012 produces a value of CHF 1.067 million, of which 30%, representing the value of the Claimant's shares in the Company, is CHF 320,100. That is the amount of damages to which I conclude that the Claimant is entitled.