In an extreme illustration of how difficult it is to put an accurate value on companies that operate in countries affected by political and economic turmoil, the Court of Appeal has ruled that a mining business that was claimed to be worth almost $24 million was, in the real world, almost worthless.
The company held supposedly valuable rights to bitumen deposits in the Democratic Republic of Congo (DRC). By an escrow deed, a debtor had agreed to transfer his 26% shareholding in the company as security for repayment of an $81 million investment. There was no dispute that, in failing to complete the shares transfer, the debtor was in breach of contract.
Employing a discounted cash flow valuation method, the High Court had calculated that the company was worth just under $24 million. On that basis, the debtor’s 26% shareholding, after appropriate discounts, was valued at over $5.6 million and that was the sum that he was ordered to pay in damages.
Upholding the debtor’s challenge to that decision, the Court observed that the value put upon the company bore no relation to the shortcomings in its management and the enormous risks involved in the venture. In reality, no prudent investor would have ‘touched these shares with a barge pole’ and, on that basis, the debtor was obliged to pay only ‘nominal’ damages.
The ‘incompetently managed’ company’s exploitation of the bitumen reserves was subject to numerous risks and uncertainties which had been made worse by the deteriorating political and economic environment in the DRC. Attempts to fund mining operations had come to nothing and the company’s hopes of obtaining large government contracts had in all probability evaporated. In those circumstances, it was almost unimaginable that any sensible investor would have paid anything at all for the company’s shares.
The Court acknowledged that the result of the case ‘might appear to fall some way short of doing subjective justice’ to the creditor. However, it noted that 'where a creditor takes as security a minority shareholding in a private company, the value of its security is inevitably exposed to the quality or otherwise of the company’s management, over which the secured creditor has no control'.