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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Grays Timber Products Ltd v HM Revenue & Customs [2009] ScotCS CSIH_11 (13 February 2009) URL: https://www.bailii.org/scot/cases/ScotCS/2009/2009CSIH11.html Cite as: 2009 SLT 307, [2009] BTC 589, [2009] STI 585, 2009 SCLR 243, [2009] ScotCS CSIH_11, [2009] CSIH 11, 2009 GWD 8-142, [2009] STC 889 |
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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION |
|
Lord Osborne
Lord Kingarth
Lord Mackay Of Drumadoon
|
[2009] CSIH 11
OPINION OF LORD OSBORNE in Appeal under the Taxes Management Act 1970,
Section 56A by
Appellants against THE COMMISSIONERS FOR HER
MAJESTY'S REVENUE Respondents against A Decision of the Special
Commissioners dated _______ |
Act: Ghosh,
Biggart Baillie
Alt: D E L
Johnston, Q.C.; Acting Solicitor (
The
Background Circumstances
[1] On Gray
's Group Limited, for a consideration of £50,000. After that share issue, Mr G's holding
represented 5% of the issued ordinary share capital of
Gray
's Group
Limited. Mr G acquired a further
258 shares in
Gray
's Group Limited on
Gray
's Group Limited. On
Gray
's
Timber Products
Limited, the appellants, a wholly owned subsidiary
of
Gray
's Group Limited. Mr G had also
entered into a Subscription and Shareholders' Agreement, "the Subscription
Agreement", with certain other shareholders, who, including Mr G, held
84.6% of the issued ordinary shares in
Gray
's Group Limited. Clause 4 of the Subscription Agreement
provided, amongst other things, that, in the event of a change in control of
50% or more or the issued ordinary shares of
Gray
's Group Limited, the other
parties to the Subscription Agreement were to procure that Mr G's original
shareholding be purchased, either by
Gray
's Group Limited, or by the purchaser
of that portion of the issued ordinary shares of
Gray
's Group Limited. The terms upon which Mr G's shares were
to be so purchased were to depend upon the timing of the change of
control. Clause 4.2.1 was to apply
in respect of such a disposal of shares taking place on or after the second
anniversary of "the Completion Date", as defined in the Subscription
Agreement.
[2] In
order to deal with the allotment of shares in Gray
's Group Limited to Mr G
and certain other matters, on
Gray
's Group Limited
held an extraordinary general meeting at which two special resolutions and two
ordinary resolutions were passed. The
two special resolutions were in the following terms:
"1. That
the entering into by the company of the Subscription and Shareholders'
Agreement among the company, Mr G and certain shareholders of the company
in the form annexed hereto for identification purposes be and is hereby
approved.
2. That the regulations contained in the document headed 'new Articles
of Association' annexed hereto be and they are hereby adopted as the Articles
of Association of the Company to the exclusion of all existing Articles
thereof."
The Subscription Agreement itself was undated, but the
last shareholder to execute it did so on
[3] By
Clause 2.3 of the Subscription Agreement, Mr G was to enter into, and
Gray
's Group Limited was to procure that their subsidiary, the appellants,
entered into a service agreement with Mr G and that Mr G should be
appointed a director of
Gray
's Group Limited and the appellants.
[4] In
terms of Clause 4.2.1 of the Subscription Agreement, in the event of a
disposal of shares in Gray
's Group Limited of the kind previously referred to
taking place after the second anniversary of the completion date, Mr G was
entitled to receive payment for the shares allotted to him in accordance with
the formula set forth in that Clause.
The broad effect of that arrangement was that, in that event, Mr G
would become entitled to an agreed enhanced payment, in addition to the return
of his original investment, disproportionately greater than the amounts
received by other shareholders or his percentage of the equity shares of
Gray
's
Group Limited.
[5] On Gray
's Group Limited was sold to an unconnected third party, Jewson
Limited. The total consideration paid
was £5,903,219, of which a total of £1,451,172 was paid to Mr G, pursuant
to a contract between all shareholders in
Gray
's Group Limited and
Jewson Limited, the Agreement for the sale and purchase of the entire
issued share capital of
Gray
's Group Limited, "the Sale Agreement". Prior to this sale of
Gray
's Group Limited,
the existence and content of the Subscription Agreement had been disclosed to
Jewson Limited.
[6] Against
the foregoing background of fact, an issue has arisen between the appellants
and the respondents concerning the taxation consequences of the disposal by
Mr G of his shares in Gray
's Group Limited. The respondents have contended that those
shares, as employment- related securities, and sold as part of the sale of the
whole share capital of
Gray
's Group Limited, were sold for more that their
market value. Consequently, they have contended
that the sale occasioned a charge to income tax, determined under Part 2
of the Income Tax (Employment & Pensions) Act 2003, by virtue of
Chapter 3D of Part 7 of that Act.
If the disposal in question did occasion a charge under the Income Tax
(Employment & Pensions) Act 2003, the amount of the income charged by
virtue of Section 446Y of that Act was to be treated as though it had been
a payment of income to Mr G by the appellants. They would then be required to account for
tax in respect of that notional payment under the PAYE provisions, as though it
had been an actual payment. By contrast,
the appellants maintained that the shares in question were sold for their
market value, so that the whole of the consideration received by Mr G fell
to be brought into computation of his capital gain on the disposal under the
Taxation of Chargeable Gains Act 1992.
Thus the fundamental dispute between the parties is as to the market
value of the shares concerned in
Gray
's Group Limited and how that value is to
be determined.
[7] The
issue between the parties was the subject of a determination by the respondents
issued on
The
Legislative Framework
"Chapter 1
Section 417 Scope of Part 7
(1) This Part contains
special rules about cases where securities...are acquired in connection with an
employment.
(2) The rules are contained in-...
Chapter 3D (securities disposed of for more than market value),
Chapter 4 (post-acquisition benefits from securities),
(3) The following make provision for amounts to count as employment
income-
Chapters 2 to 6..."
Section 420
"Meaning of 'securities' etc
(1) Subject to subsections (5) and (6), for the purposes of this
Chapter and Chapters 2 to 5 the following are "securities"-
(a) shares in any body corporate
(wherever incorporated)..."
Section 421
"Meaning of 'market value' etc
(1) In this Chapter and Chapters 2 to 5 "market value" has the same
meaning as it has for the purposes of the Taxation of Chargeable Gains
Act 1992 by virtue of Part 8 of that Act."
Section 421A
"Meaning of 'consideration'
(1) This section applies for determining for the purposes of
Chapters 2 to 5 the amount of the consideration given for anything.
(2) If any consideration is given partly in respect of one thing
and partly in respect of another, the amount given in respect of the different
things is to determined on a just and reasonable apportionment..."
Section 421B
"Application of Chapters 2 to 4A
(1) Subject as follows (and to any provision contained in Chapters
2 to 4A) those Chapters apply to securities...acquired by a person where the
right or opportunity to acquire the securities...is available by reason of an
employment of that person or any other person.
(2) For the purposes of subsection (1)-
(a) securities are...acquired at
the time when the person acquiring the securities...becomes beneficially entitled
to those securities...(and not, if different, the time when the securities are....conveyed
or transferred), and
(b) 'employment' includes a
former or prospective employment.
(3) A right or opportunity to acquire securities...made available by
a person's employer or by a person connected with a person's employer, is to be
regarded for the purposes of subsection (1) as available by reason of an
employment of that person unless-
(a) the person by whom the right
or opportunity is made available is an individual, and
(b) the right or opportunity is
made available in the normal course of the domestic, family or personal
relationships of that person...
(8) In this Chapter and Chapters 2 to 4A-
"the acquisition", in relation to employment-related securities, means
the acquisition of the employment-related securities pursuant to the right or
opportunity available by reason of the employment,
'the employment', in relation to employment-related securities, means
the employment by reason of which the right or opportunity to acquire the
employment-related securities is available ("the employee" and "the employer"
being construed accordingly unless otherwise indicated), and
"employment-related securities" means securities...to which Chapters 2 to
4A apply...
Section 421C
"Associated persons
(1) For the purposes of this Chapter and Chapters 2 to 4 the
following are 'associated persons' in relation to employment-related
securities-
(a) the person who acquired the
employment-related securities on the acquisition,
(b) (if different) the employee,
and
(c) any relevant linked person.
(2) A person is a relevant linked person if-
(a) that person (on the one
hand), and
(b) either the person who
acquired the employment-related securities on the acquisition or the employee
(on the other),
are connected or, although not connected, are members of the same
household."
Section 421D
"Replacement and additional securities
and changes in interests
(1) Subsections (2) and (3) apply where an associated person is
entitled to employment-related securities (the 'original securities') and
either-
(a) ...,
(b) by virtue of that person
being entitled to the original securities, that person or another associated
person acquires other securities...(the "additional securities").
(2) The additional securities are to be regarded for the purposes
of section 421B(1) (securities acquired pursuant to a right or opportunity
available by reason of an employment) as acquired pursuant to the same right or
opportunity as the original securities.
(3) ...
(4) Subsections (2) and (3) apply whether or not the replacement
securities, or the additional securities, were acquired for consideration..."
Chapter 3D
"Securities
disposed of for more than market value
Section 446X Application of this
Chapter
This Chapter applies if-
(a) employment-related securities
are disposed of by an associated person so that no associated person is any
longer beneficially entitled to them, and
(b) the disposal is for a
consideration which exceeds the market value of the employment-related
securities at the time of the disposal.
Section 446Y
"Amount treated as income
(1) Where this Chapter applies the amount determined under
subsection (3) counts as employment income of the employee for the
relevant tax year.
(2) The 'relevant tax year' is the tax year in which the disposal
occurs.
(3) The amount is-
CD - MV - DA
where-
CD is the amount of the consideration given on the disposal,
MV is the market value of the employment-related securities at the time
of the disposal, and
DA is the amount of any expenses incurred in connection with the
disposal."
Section 446Z
"Definitions
(1) In this Chapter 'market value' has the meaning indicated in
section 421(1).
(2) For the purposes of this Chapter sections 421(2) and 421A
apply for determining the amount of the consideration given for anything.
(3) In this Chapter-
'the employee', and
'employment-related securities',
have the meaning indicated in section 421B(8).
(4) In this Chapter 'associated person' has the meaning indicated
in section 421C."
"Section 272
Valuation: general
(1) In this Act 'market value' in relation to any assets means the
price which those assets might reasonably be expected to fetch on a sale in the
open market.
(2) In estimating the market value of any assets no reduction shall
be made in the estimate on account of the estimate being made on the assumption
that the whole of the assets is to be placed on the market at one and the same
time."...
Section 273
"Unquoted shares and securities
(1) The provisions of subsection (3) below shall have effect in any
case where, in relation to an asset to which this section applies, there falls
to be determined by virtue of section 272(1) the price which the asset
might reasonably be expected to fetch on a sale in the open market.
(2) The assets to which this section applies are shares and
securities which are not quoted on a recognised stock exchange at the time as
at which their market value for the purposes of tax on chargeable gains falls
to be determined.
(3) For the purposes of a determination falling within
subsection (1) above, it shall be assumed that, in the open market which
is postulated for the purposes of that determination, there is available to any
prospective purchaser of the asset in question all the information which a
prudent prospective purchaser of the asset might reasonably require if he were
proposing to purchase it from a willing vendor by private treaty and at arm's
length."
(1) The Subscription Agreement (B3) and
(2) The Sale Agreement, dated
Counsel
went on to draw attention to certain features of the Subscription Agreement,
which were of importance. In
clause 2 it dealt with "Completion", which was related to Mr G taking
up employment with the appellant and becoming a Director of Gray
's Group
Limited and the appellant. On the
Completion Date certain steps were to be taken, including the subscription by
Mr G for the shares which he was to acquire. In that connection reference was made to
clause 2.2.2. A critical part of
that Agreement was clause 4, which related to disposal of shares. That was defined as a disposal of 50% or more
of the total voting rights conferred by all the shares. Clause 4.1.1 dealt with such a disposal
prior to the second anniversary of the completion date, with which the court
was not concerned. However, clause 4.2.1
did operate on the acquisition of the share capital by Jewson Limited and
contained the formula which yielded what was paid to Mr G for his
shares. It was not necessary to consider
that formula in detail; it had been
designed to confer upon Mr G a benefit in respect of the increase in value
of the shares of the company after his entry to it. The obligation created by
that clause lay upon the company,
Gray
's Group Limited, or the purchaser in
terms of the Shares' Disposal. Counsel
submitted that the critical point was that the money for the purchase came from
the purchaser. It was that which gave
Mr G's shares their value to him.
The appellants' submission was that what was provided for in
clause 4.2.1, under the relevant authorities, gave the market value to
Mr G's shares; that was the sum
which had to be paid by the purchaser to step into his shoes. There would have been no dispute if the
formula contained in clause 4.2.1 of the Subscription Agreement had been
incorporated in the Articles of Association of
Gray
's Group Limited. The concept of market value did not postulate
a deemed sale; it focused on the value
to the holder of the asset. The test was
not what the market would do, but what Mr G could expect to realise. It was not necessary to track the
consequences of an actual sale.
[11] Clause 4.4 of the Subscription Agreement
was designed to protect the arrangement established in clause 4.2.1. Likewise clauses 6.1 and 6.4 were
designed to fortify clause 4.2.1.
Clause 9 provided that the agreement and the rights and obligations
under it were not to be assignable. The
shares themselves were not assignable under the Articles of Association. Clause 11.2 of the agreement provided
that the provisions of the agreement should prevail over the Articles of
Association of Gray
's Group Limited, providing that if there was any conflict
between the provisions of the agreement, they should prevail to the exclusion
of any conflicting provisions in the Articles of Association.
(i) Sections 272(1) and 273 of the 1992 Act did not
postulate a deemed sale; there was a
valuation mechanism to measure the value of a particular asset in the hands of
Mr G. There was no deemed sale.
(ii) The sale contemplated in section 272(1) was a notional
sale to a notional purchaser in the open market.
(iii) What the Courts meant by a notional sale is the acquisition of a
right to step into the vendor's shoes.
[16] Certain propositions of application had to
be noticed;
(1) The market price of an asset was a matter of fact;
(2) Under the relevant legislation, certain factors were to be
ignored, for example, any reduction in price by the swamping of the
market.
(3) It was necessary to take account of the actual circumstances of
the taxpayer and the asset.
(4) It was necessary to impute to the prospective purchaser the
right to step into the shoes of the vendor;
all of the information which a prudent prospective purchaser of the
asset might reasonably require was to be attributed to the purchaser. Following this approach, the market value of
Mr G's shares was the sum which he received for them; £1,451,172.
[17] Counsel for the appellants
then proceeded to draw attention to authorities which he contented supported
his submissions. The first of these was product
of an arms length transaction.
Where a price emerged in that way it was to be seen as the market value. Reference was made to the observations of
Lord Fraser of Tullybelton at page 512. In the present case the shares of Mr G
had been identifiable as a separate class of shares, as they would have been if
their status had been reflected in the Articles of Association. Further, Jewson Limited knew of the
particular status of those shares; they
had been identified as different from those of other shareholders; and, in any event, under section 273(3)
of the purchaser was deemed to know a range of information which would have
included the status of those shares. It
made no difference whether shares were identified as different in Articles of
Association, or, as here in other equivalent material. It followed that there were two market values
for shares in
Gray
's Group Limited relating to the shares of Mr G and the
other shares.
[20] Counsel for the appellants went on to rely
on Inland Revenue Commissioners v Gray
(Fox's Executor) [1994] S.T.C.
360. It involved an issue of valuation
in relation to section 38 of the Finance Act 1975, which referred to
the "price which the property might reasonably be expected to fetch if sold in
the open market"...to show an omission.
Reliance was placed on the observations of Hoffmann L.J., who gave
the judgement of the Court of Appeal, at pages 371 to 374 and 378. The approach was that what was involved was
an hypothetical transaction, a notional sale but not a deemed actual sale.
[22] Lynall
v Inland Revenue Commissioners [1972] A.C.680 was another case concerned with the application of section 7(5) of
the Finance Act 1894. Counsel
relied particularly on what was said at page 693. That passage affirmed the correctness of the
"step into the shoes test". That had
been affirmed in Commissioners of Inland
Revenue v Gray
(Fox's Executor)
in that case the partnership interest could not have been sold, but it's existence
had to be taken into account.
[24] Counsel went on to discuss in detail the
issue of information presumed to be available to the hypothetical
purchaser. He referred again to the
terms of section 272(3) of the Act of 1992 and to the cases of Caton v Couch [1995] S.T.C.(S.C.D.) 34 and
Said
that it was necessary to take into account the value of what each shareholder
possessed. Possession of a controlling
interest might confer additional value on the holding of such a
shareholder.
[28] Reverting to the terms of the Special
Commissioner's decision, paragraphs 39 and 42 appeared to be the
foundation for his decision.
Paragraph 39 was irrelevant and not an answer to the appellant's
case. Paragraph 42 was wrong having
regard to the contents of schedule 1 to the Sale Agreement. The appellants' position was that all of the
shareholders in Gray
's Group Limited received market value for their
shares. The shares of Mr G were
different from those held by other shareholders and accordingly it was not surprising
to find that they possessed a different market value. What was being valued was the asset
notionally sold by the vendor. It did
not matter that the special characteristics of Mr G's shares flew off on
the sale. The valuation of Mr G's
holding had to be as it stood in the hands of the vendor.
[29] As regards the distinction drawn by the Special
Commissioner between the Articles of Association and the Subscription
Agreement, Counsel drew attention to the provisions of sections 9 and 378
of the Company's Act 1985.
Section 9 provided that, subject to the conditions there mentioned,
a company might by a special resolution alter it's Articles of Association. A majority of 75% was required to pass such a
resolution. Accordingly what the special
commissioner said in paragraph 35 of his decision was wrong. The Subscription Agreement had been
subscribed by the holders' of 83.8% of the shares of Gray
's Group Limited. The Special Commissioner appeared to have
ignored the implications of that.
Submissions For Her
Majesty's Revenue & Customs
[31] Senior Counsel for the
respondents began his submissions by considering the statutory test applicable
to this case, in association with relevant decided cases. Dealing first with Commissioners of Inland Revenue v Crossman [1937] A.C.26, he pointed out that section 7(5) of
the Finance Act 1894 was involved which spoke of the "open market". He drew attention to the speech of
Lord Hailsham at pages 38 to 44.
That made the point that there had to be disregarded any restrictions on
sale in the hands of the seller, otherwise an asset, the sale of which was
restricted would have no market value, or an artificially low market value,
which was absurd. Looking at the
observations of Lord Blanesburgh at pages 49 to 50, it was apparent
that the matter of valuation involved the realm of a hypothetical vendor; the personal characteristics of the actual
vendor were to be ignored. The
recipients in the hypothetical sale in an open market were also to be
ignored. What this case really concerned
was the significance of restrictions on sale, as appeared from the
headnote. The assumption was made that a
purchaser was entitled to be registered under the articles, but subject to the
restrictions on transfer contained therein.
The case did not suggest that it was necessary to deem that the
purchaser was identical with the vendor.
[33] At this point in the argument Senior
Counsel referred to Lynall v Inland Revenue Commissioners, in the
Court of Appeal, reported in 47 T.C. at page 389; [1970] Ch. 138. What was emphasised by Cross L.J. at
page 402 was that, in considering the hypothetical vendor, it was
necessary to endow him only with the characteristics which necessarily belonged
to all hypothetical vendors, namely that of owning the block of shares in
question. Senior Counsel also referred
to Inland Revenue Commissioners v Gray
(Fox's Executor) at pages 371
to 372. The rights which were the
subject of the notional sale in the present case should be seen only as the
rights attaching to Mr G's shares under the Articles of Association, not
under the Subscription Agreement. At
page 371 Hoffmann L.J. spoke of the "rights attached to the property
at the relevant date", not the value attached to being the vendor. The question was whether the rights of the
actual vendor should be brought into consideration. The answer was only if they affected what an
hypothetical purchaser would pay for the property in question.
[36] Turning to the issue of market value
itself, the Special Commissioner had been right to reach the conclusion that he
did in paragraph 45 of his decision.
The only evidence available was that £6m had been paid for the full
share capital of Gray
's Group Limited, under certain deductions, as appeared
from paragraph 16 of the decision of the Special Commissioner. However, there was no evidence of market
value of Mr G's shares in particular, or that Jewson Limited paid
more for them than the others. Reference
was made to paragraphs 39 and 40 of that decision. When pressed by the Court regarding the
implications of schedule 1 to the Sale Agreement and clauses 2.1 and
3.4 thereof, he contended that what they contained simply indicated what
Jewson Limited was prepared to pay for the whole company. There was a single transaction. There were no separate negotiations with each
vendor. If there had been an agreement
between the purchaser and the vendors separately, the price agreed might
require to be accepted as the market value.
However, that was not the case.
The present case was comparable to the subject matter of the decision in
Guinness Plc v Inland Revenue Commissioners [1994] S.T.C. 86.
[37] The approach to the determination of
market value of the shares of Gray
's Group Limited adopted by the Special
Commissioner in paragraph 49 of his decision was legitimately used to
identify the market value of Mr G's shares, which were identical to all
the other shares of that company for this purpose. A proportion exercise was carried out which
was correct.
[38] Commenting on certain authorities relied
upon by the appellants, senior counsel said that Stanton v Drayton Commercial
Investment Company Limited [1983] 1 A.C.501 contained certain remarks
by Lord Fraser of Tullybelton concerning market value at
page 512. Those remarks were obiter, or in any event in relation to
legislation with wording different from that involved here. As regards Short & Others v Treasury
Commissioners [1948] 1 K.B.116, the case did not assist in the present
situation. There had been two different
types of shares and two transactions.
The case was a very special one, it gives no guidance concerning any
general principals. Finally senior
counsel drew attention to Barclays
Mercantile Business Finance Limited v Mawson
76 TC 446. Reliance was placed particularly
on paragraphs 28-33 of the Judgement of the House of Lords, which outlined
the proper approach to interpretation of taxation statutes. That process should be undertaken by the
application of general principles of interpretation.
Reply by Counsel for
the Appellants
[40] As
regards the market value of the holding of Mr G, the only evidence
relating to it was to be derived from clause 2.1 and schedule 1 of
the Sale Agreement. The clause provided
that each vendor should sell his holding.
In terms of clause 3.4 each vendor was entitled to the
consideration specified against his name in schedule 1. As regards the "step into the shoes test" it
had been approved in Lynall v Inland Revenue Commissioners [1972] A.C.680 in the House of Lords in the judgment of Lord Reid at
page 693. The contention that the
rights enjoyed by Mr G to a consideration for his shares, calculated in
accordance with clause 4 of the Subscription Agreement, were personal
rights, which did not affect the market value of the shares, was unsound. The arrangements made in the Subscription
Agreement affected the company because they were enforceable against the
company. The present case was a fortiori of Inland Revenue Commissioners v Gray
(Fox's Executor). A partnership was personal, separate and non-assignable,
yet it was taken into account in that case.
Senior Counsel for the respondents had not criticised the decision in
that case in his determination here, the Special Commissioner had ignored the
Subscription Agreement, which amounted to an error of law.
The Conclusion
[41] The
issue which the Special Commissioner had to decide in this case can indeed be
simply stated. It was to identify the
market value of the shareholding of Mr G in Gray
's Group Limited, which,
along with other holdings, was sold to Jewson Limited in terms of the Sale
Agreement dated
"The Attorney-General and the defendants agree in saying that in this
case there cannot be an actual sale in open market. Therefore, argues the former, we must assume
that there is no restriction of any kind on the disposition of the shares and
estimate that (sic) would be given therefore by a purchaser who upon
registration would have complete control over them. My objection to this mode of ascertaining the
value is that the property bought in the imaginary sale would be a different
property from that which Henry Jameson held at the time of his death. The defendants, on the other hand, contend
that the only sale possible is a sale at which the highest price would be £100
per share, and that this ought to be estimated value. My objection is that this estimate is not
based on a sale in open market as required by the Act. Being unable to accept either solution, I go
back to my own, which is in strict accordance with the language of the
section. I assume that there is such a
sale of the shares as is contemplated by article 11, the effect of which
would be to place the purchaser in the same position as that occupied by
Henry Jameson."
Inland Revenue
Commissioners v Gray
(Fox's Executor) was concerned with the valuation of assets
for the purposes of capital transfer tax.
Section 38 of the Finance Act 1975 was involved. It provides:-
"Except as otherwise provided by this Part of this Act, the value at any
time of any property shall for the purposes of capital transfer tax be the
price which the property might reasonably be expected to fetch if sold in the
open market at that time..."
Thus
again the concept of open market value was involved. The facts of the case are far removed from
those of the present, involving as they did the valuation of the deceased's
interest in tenanted land and her interest in a partnership which was the
tenant of that land. However, the
observations of Hoffmann L.J. at page 371 are illuminating in
relation to the issue of open market value, where he said:
".....the only express guidance which section 38 offers on the
circumstances in which the hypothetical sale must be supposed to have taken
place is that it was 'in the open market'.
But this deficiency has been amply remedied by the courts during the century
since the provision first made its appearance for the purposes of estate duty
in the Finance Act 1894.
Certain things are necessarily entailed by the statutory hypothesis. The property must be assumed to have been
capable of sale in the open market, even if in fact it was inherently
unassignable or held subject to restrictions on sale. The question is what a purchaser in the open
market would have paid to enjoy whatever rights attached to the property at the
relevant date (see I.R.C. v Crossman [1937] A.C.26). Furthermore, the hypothesis must be applied
to the property as it actually existed and not to some other property, even if
in real life a vendor would have been likely to make some changes or
improvements before putting it on the market (see Duke of Buccleuch v I.R.C.
[1967] 1 A.C.506 at 525). To this
extent, but only to this extent, the express terms of the statute may introduce
an element of artificiality into the hypothesis."
I
consider that this passage succinctly describes the approach which requires to
be taken in relation to the matter of valuation in the present case. In the course of the arguments before us
reliance was placed on Walton v Inland Revenue Commissioners. However, I do not find anything in that case
which goes beyond the observations in the other cases to which we have
referred.
[45] In the light of the guidance derived at
from these cases, I now consider, first, the terms of the Subscription
Agreement, and, second, the Sale Agreement.
Of the former, it is to be noted that the Agreement was between Gray
's
Group Limited, Mr G and the persons listed in part 1 of the schedule
thereto holding 83.8% of the issued equity shares of the company. That percentage, in my opinion, is
significant, because it exceeds the 75% of the issued equity share capital of
the company which would require to be voted to pass a special resolution under
section 378(2) of the Companies Act 1985. Such a resolution would, of course, be
necessary in terms of section 9(1) of that Act to effect an alteration in
the Articles of Association of the company.
Having regard to those circumstances, it is no surprise to find that in
clause 11.2 of the Agreement it is provided as follows:-
"This Agreement supersedes any previous Agreements amongst the parties
in relation to the matters which it deals and represents the entire
understanding among the parties in relation to those matters. The provisions of this Agreement shall
prevail over the Articles (and any other Articles of Association of the Company
subsequently amending or replacing the same) such that if there is any conflict
between the two the provisions of this Agreement shall prevail and rule to the
exclusion of any such conflicting provisions of the Articles or such other
Articles of Association."
Plainly,
the persons listed in part 1 of the Schedule to the Agreement, holding
83.8% of the issued equity share capital, as they did, had it in their power to
make any change in the Articles of Association necessary to render them in
conformity with the provisions of the Agreement.
[48] I turn now to consider the terms of the Sale
Agreement of
"The Vendors shall be entitled to the Consideration in the amounts set
out in column (3) of schedule 1.
The part of the Consideration payable under clause 3.2.1 shall be
allocated to the vendors in accordance with column (5) of
schedule 1".
[52] Paragraph 27 of his decision itself amounts
to a narrative of the background.
Paragraph 28 is the account of a submission made on behalf of the
appellants. Paragraph 29, likewise,
is the narrative of a submission made on behalf of the respondent. In paragraph 30, the Special
Commissioner narrates that 14,465 ordinary £1 shares in the appellants were
allotted to Mr G on Grays
Group Limited arose.
[53] In paragraphs 31 and 32, the Special
Commissioner reverts to a narrative of the submissions made on behalf of the
appellants. However, in
paragraph 33, he seems to disclose some part of his reasoning. He states that the passing of the first
special resolution at the extraordinary general meeting of the appellants held
on
"That the entering into by the Company of the Subscription and
Shareholders' Agreement among the Company, [Mr G] and certain shareholders
of the Company in the form annexed hereto for identification purposes be and is
hereby approved."
It
appears to me that that resolution means exactly what is says and authorised
the entering into of the agreement referred to.
The Special Commissioner observes that the passing of the resolution did
not necessarily mean that the Subscription Agreement would ever be entered
into. Once again, no doubt that is true,
but the fact of the matter is that it was entered into. The fact that it was entered into by, among
others, the holders of 84.6% of the issued ordinary shares in the appellant
company, meant that it would inevitably be given effect. That state of affairs was reflected in the
terms of paragraph 11.2 of the Agreement itself. That aspect of the matter appears to have
been overlooked by the Special Commissioner.
".... in my judgment, Company, [Jewson Limited] could not have acquired
the benefit of the Subscription Agreement for, on completion of the sale of
company B's shares, it ceased to exist. (see paragraph 5.7 of the disclosure
letter)."
In
my opinion, that statement demonstrates a fallacious approach to the
matter. Plainly it is true that the
Subscription and Shareholders' Agreement ceased to have any significance
following the sale of the entire share capital of the appellants, but that does
not appear to me to be to the point. In
terms of such cases as Commissioners of
Inland Revenue v Crossman, Duke of Buccleuch &c v Inland Revenue Commissioners and Lionel
&c v Inland Revenue Commissioners,
the proper approach is to envisage an hypothetical notional sale of an asset,
in the exercise of reaching a conclusion as to its open market value. What is not envisaged, in this connection, is
an actual sale; accordingly it is not of
assistance to examine the consequences of such a sale. What has to be envisaged is an hypothetical
transaction in terms of which the purchaser would be placed in the same
position as that occupied by the person the market value of whose assets is
being assessed. Thus in this case, it
has to be envisaged that the hypothetical purchaser would be placed in the same
position as that occupied by Mr G, in other words "in his shoes". Plainly, upon the basis of the provisions of
the Subscription Agreement the hypothetical purchaser would have the benefit of
the additional value created in his shares by the Agreement. Finally, I have to observe that I do not find
what is being said in the last sentence of paragraph 37 of the decision
comprehensible.
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION |
|
Lord OsborneLord KingarthLord Mackay of Drumadoon |
[2009] CSIH 11OPINION OF
LORD KINGARTH In Appeal under the Taxes
Management Act 1970, Section 56A by
Appellants against THE COMMISSIONERS FOR HER
MAJESTY'S REVENUE Respondents against A Decision of the Special
Commissioners dated _______ |
Act: Ghosh,
Biggart Baillie
Alt: D E L
Johnston, Q.C.; Acting Solicitor (
"The right to receive the
price fixed by the articles in the event of a sale to existing shareholders
under sub-cl 14a is only one of the elements which went to make up the
value of the shares. In addition to that
right, the ownership of the share gave a number of other valuable rights to the
holder, including the right to receive the dividends which the Company was declaring,
the right to transmit the share in accordance with art 34, sub-cls 1,
2 and 3, and the right to have the shares of other holders who wished to
realise offered on the terms of art 34, sub-cl 14a. All these various rights and privileges go to
make up a share and form ingredients in its value. They are just as much part of the share as
the restriction upon the sale. The
construction placed upon the statute by the Court of Appeal seems to me to
ignore all these elements in the value of the share, and to treat as its value
what, in truth, is only the value of one of the factors which go to make up
that share."
"If the duty of the
Commissioners is, as I think, to estimate the price which the 'property' as at
the time of the deceased's death would fetch in the open market, were it there
to be offered for sale, it is unnecessary to inquire by whom the property would
hypothetically have to be offered"
"In the present case it is
clear that the information contained in what have been called the
"category B" documents would be highly relevant, but the question arises
whether that information would be available.
In particular, the question arises whether that information would be
available not just to some possible purchasers and vendors but whether it would
be available to hypothetical purchasers and vendors "in the open market". This must mean whether it would be openly
available to all potential purchasers and vendors in the market or markets in
which the relevant purchases and sales take place."
"The case in favour of the
published information test, which was cogently argued by Mr Bagnall,
started from the premise - which I think is correct - that one must
not envisage a vendor who is a director as well as a shareholder. Of course, the hypothetical vendor may be a
director, but he equally well may not be a director. One must, therefore, only endow him with the
characteristic which must necessarily belong to all hypothetical vendors,
namely, that of owning the block of shares in question."
[65] In Inland Revenue Commissioners v Gray
(Fox's Executor), where what was at
issue was the valuation, for capital transfer tax purposes, of a deceased's
interest as freehold owner of an estate, Hoffman LJ said at page 371
"The only express guidance
which Section 38 offers on the circumstances in which the hypothetical
sale must be supposed to have taken place is that it was 'in the open
market'. But this deficiency has been
amply remedied by the courts during the century since the provision first made
its appearance for the purposes of estate duty and the Finance
Act 1894. Certain things are
necessarily entailed by the statutory hypothesis. The property must be assumed to have been
capable of sale in the open market, even when in fact it was inherently
unassignable or held subject to restrictions on sale. The question is what a purchaser in the open
market would have paid to enjoy whatever rights attached to the property at the
relevant date (see IRC v Crossman ...). Furthermore the hypothesis must be applied to
property as it actually existed at the appropriate date and not to some other
property .... To this extent, but only to
this extent, the express terms of the statute may introduce an element of
artificiality into the hypothesis.
In all other respects, the theme which runs through the
authorities is that one assumes that the hypothetical vendor and purchaser did
whatever reasonable people buying and selling such property would be likely to
have done in real life. A hypothetical
vendor is an anonymous but reasonable vendor, who goes about the sale as a
prudent man of business, negotiating seriously without giving the impression of
being either over anxious or unduly reluctant.
The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably,
making proper enquiries about the property and not appearing too eager to buy..."
[67] In the
present case, the rights attached to the shares in the company were those
provided for in the Articles of Association adopted by special resolution on
"an agreed extra payment
in addition to the return of his initial investment and, on such a sale,
disproportionately greater than the amounts received by other shareholders or
his percentage of the equity share capital of the Company"
Although the Subscription Agreement gave Mr G
valuable and effective personal rights, enforceable against the other parties
to it, it did not bind all the shareholders.
It was only enforceable against the parties to it. It was not assignable (Clause 9). Clause 11.2, in my view, afforded no
more than protection to Mr G against any potential claim by the other
parties to the Subscription Agreement that they were not bound by it in so far
as it conflicted with the Articles.
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION |
|
Lord OsborneLord KingarthLord Mackay of Drumadoon |
[2009] CSIH 11OPINION OF
LORD MACKAY OF DRUMADOON in Appeal under the Taxes
Management Act 1970, Section 56A by
Appellants against THE COMMISSIONERS FOR HER
MAJESTY'S REVENUE Respondents against A Decision of the Special
Commissioners dated _______ |
Act: Ghosh, Biggart Baillie
Alt: D E L
Johnston, Q.C.; Acting Solicitor (
13 February 2009
[72] The
employment-related securities, to which this appeal relates, were 14, 465
shares in Gray
's Group Limited. On
Gray
's
Timber Products
Limited, a wholly
owned subsidiary of
Gray
's Group Limited, the appellants in this appeal. The
shares were allotted to Mr. G for £50,000, in accordance with the terms of a
Subscription and Shareholders Agreement ("the Subscription Agreement"), which
had been entered into by
Gray
's Group
Limited, Mr. G and three other parties. Those three other parties were
shareholders who held between them 83.8% of the issued share capital of
Gray
's Group
Limited. Those three shareholders,
Gray
's Group Limited and
Gray
's
Timber Products Limited were respectively
referred to in the Subscription Agreement as "the shareholders", "the Company"
and " the Subsidiary".
"3.1.1 Following
the termination of the Service Contract in any of the circumstances described
in clauses 3.2.1 and 3.2.2, Mr. G shall sell and the Shareholders shall procure
that the Company shall purchase Mr. G's Shares as the Buy Back Consideration.
......
3.2 The Buy Back Consideration shall be
calculated in the following manner:
3.2.1 in the event that the Service Contract is
duly terminated by the Company on any of the grounds set out in clauses 15.3.1
to 15.3.4 (inclusive) of the Service Contract, the Buy Back Consideration shall
be £50,000.
3.2.2 in the event that the Service Contract is
terminated by reason of the resignation of Mr. G prior to the third anniversary
of the Completion Date and the reason for such resignation cannot reasonably be
regarded as the conduct of the Board or any member or members of it or the
board of directors of any Group Company or any member or members of it
hindering or impeding Mr. G to a material extent in the genuine and
reasonable discharge of his duties under the Service Contract, the Buy Back
Consideration shall be a sum equivalent to the aggregate of:-
(i) a sum equivalent to:
A
B X C
X 0.74 where A equals the number of Mr G's shares,
B
equals the total number of Shares,
C
equals the Net Asset Value plus the Notional
Goodwill
all
as at the date of termination of the Service
Contract; and
(ii) a sum equivalent to
25 per centum of the amount by which the Net Asset Value plus the
Notional Goodwill exceeds the Target Net Asset Value all as determined as at
the date of termination of the Service Contract.
3.2.3 in the event that the Service Agreement is
terminated in circumstances not described in either of clauses 3.2.1 or 3.2.2,
including, without limitation, the death or incapacity of Mr. G the Buy Back
Consideration shall be a sum equivalent to the aggregate of:-
(i) A
B X
C X 0.74 as in clause 3.2.2 (i); and
(ii) a sum equivalent to
50 per centum of the amount by which the Net Asset Value plus the
Notional Goodwill exceeds the Target Net Asset Value all as determined as at
the date of termination of the Service Contract.
There is annexed by way of
Appendix to this Agreement an illustrative and non-legally binding schedule
headed 'Basis for share buy-back per clause 3.2.3' and dated 28th September
1999 setting Mr.G's entitlements on certain hypotheses referred to in this
clause 3.2.3, said illustration being designed to demonstrate the underlying
intention of the parties hereto."
Clauses 15.3.1 and 15.3.2, which are referred to in
Clause 3.2.1, provided for the immediate dismissal of Mr. G and his dismissal
at short notice.
[79] Clause
4.2.1 was in the following terms:
"4.2.1 In the event of a Shares' Disposal taking
place on or after the second anniversary of the Completion Date, Mr. G shall
sell and the Shareholders shall procure that the Company or that the purchaser
in terms of the Shares' Disposal shall purchase Mr. G's Shares at a price equal
to the aggregate of the sums calculated in accordance with (i) and (ii) below:
(i) the lower of £50,000 and the sum equivalent to:
A
B X
C X 0.74 where
A equals the number of Mr
G's
Shares,
B
equals the total number of shares,
and
C
equals the Net Asset Value plus
the
Notional Goodwill,
all
as at the date of the Shares' Disposal;
and
(ii) the
sum equivalent to:
(D - (E
+ F)) where D equals the Consideration,
3
E
equals the Target Net Asset Value
as
at the date of the Shares'
Disposal,
F
equals the sum calculated in
accordance
with sub-paragraph(i)
above."