Coronation Street: A Forensic Accountant’s Perspective
Inspired by recent events at Corrie’s famous Underworld factory, in this article, we will take a brief look at shareholder disputes, share transfers and business valuations and their connection to the cobbles.
Drama on the Cobbles!
For those who don’t know (although you really should), Underworld is the lingerie factory at 14 Coronation Street. Since opening its doors some 20 years ago, it has been a continuous source of amusement, drama, and employment for the residents of Weatherfield and a headache for its many owners.
Over the years, deaths, murders, affairs, and disputes have rocked Underworld, often resulting in shares changing hands and new ‘partnerships’ forged. The most recent drama occurred in Autumn 2018 when Peter Barlow sold his 50% shareholding to Nick Tilsley behind the back of the other 50% shareholder, Carla Connor.
The unanswered questions
While the layperson may have been captivated by this unfolding drama, something else caught our attention: the financial and legal aspects of the share transfer.
We sat eagerly awaiting the one-hour special that would address our mounting questions, the episode that would see Peter and Nick sit down with their respective lawyers and accountants to discuss everything from discount rates to pre-emption rights.
Alas, no such episode materialised! And that’s why we’ve stepped in to examine some of the things that may (or should) have happened behind the scenes as part of this share sale.
Who can Peter sell his shares to?
A company’s Shareholders’ Agreement (if it has one) and Articles of Association govern how shares can be transferred between parties and are therefore key to establishing the options available.
For private companies such as Underworld, the Articles of Association can (and often will) impose certain restrictions on share transfers, such as:
- Pre-exemption rights which give existing shareholders the right to buy the shares at an agreed price before they can be offered to a third party; and
- Directors’ right to refuse to register a transfer of shares.
A Shareholders’ Agreement can be as lengthy and prescriptive as the contracting parties desire and can include the likes of:
- Drag along / tag along rights meaning that in the event that one shareholder agrees to sell their shareholding the other shareholder can (i) be forced to sell their shares as well (drag along) or (ii) demand that their shareholding is also purchased (tag along); and
- Specific rules on how exactly a shareholding must be valued in the event of a dispute, including the appointment of the valuer and the valuation method and inputs.
In the case of Underworld, we are left in the dark as to the existence of these rights. However, Carla’s reaction to the news of the agreed share transfer between Peter and Nick indicates that either (i) none of these rights exist (which would be unusual); or (ii) she was simply not aware of them and her potential ability to block the transfer because she failed to obtain adequate legal advice.
In any event, should Carla and Nick not want history to repeat itself, now might be the time to tighten up the Shareholders’ Agreement and Articles.
Establishing a market value for Peter’s shares
Appointing an expert business valuer
Even for someone with Peter’s unquestionable business acumen – after all, he once owned the bookies and held the coveted position of landlord of the Rovers’ Return – we would expect him to have left the valuation to an expert. Likewise, we can only hope that savvy entrepreneur and bistro owner Nick had the sense to do the same to ensure he didn’t overpay.
Business valuations can be complicated and are ultimately more of an art than a science (an overused yet accurate saying) which requires both skill and experience. As such, a DIY valuation is a dangerous and ill-advised path to take that could cost either Peter or Nick more than they hoped they would save.
Valuing Underworld
So, what might an expert, independent valuation of Peter’s 50% shareholding entail?
At a high level, we would expect the valuation to have been based on an assessment of Underworld’s expected future performance (not it’s past!) and for any debt, excess cash and surplus (non-operating) assets held in the company to have been identified and taken into account.
Some of the factors likely to have been considered as part of this are Underworld’s:
- Current and projected financial performance by examination of its management accounts, budgets and forecasts;
- Dependence on Carla who has been at its helm (albeit on and off) for many years; and
- Reliance on any key customers/suppliers, the strength of these relationships and the potential impact on the business if they were lost.
Valuing Peter’s 50% shareholding
Lastly, to arrive at a value for Peter’s 50% shareholding, we expect the valuer would have considered whether a simple pro-rating of the total equity value of business was appropriate or if an additional minority discount was required on top of this.
In our experience, such a minority discount (which could be in the region of 30%) would typically be applied in order to reflect the lack of influence a 50% shareholding has in a business. For instance, whilst Peter has the ability to block changes to the Board and dividend policy, his influence is reduced by his inability to control Board composition, dividend policy or carry a special resolution without approval from the other shareholder, Carla.
How we can help in a similar situation!
At DSW Bridge Houghton Forensic we offer advice on the drafting of Shareholders’ Agreements and Company Articles (from a financial perspective) to help ensure that, in the unlikely event of a dispute, there are pre-agreed procedures in place that the parties can work from.
We also regularly undertake business and individual shareholding valuations for a variety of contentious and non-contentious matters, including in connection with:
- Shareholder disputes (both pre and post-commencement of litigation);
- Matrimonial proceedings;
- Tax and probate;
- Statutory audits; and
- Debt/equity funding rounds.
Therefore, whether you are thinking of buying or selling a shareholding in either a contentious or non-contentious setting and need sound financial advice to help ensure you don’t undersell or overpay, or have just embarked upon a new business relationship but think it sensible to plan for all future eventualities, please contact us today and we would be happy to discuss how we are able to help.
David Houghton (senior partner) – [email protected] – 01928 378 055
Kate Beckett (partner) – [email protected] – 01133 970 901
Aaron Pegg (senior associate) – [email protected] – 01928 378 019