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Technology Valuations

Client: DAC Beachcroft

Brief

On Friday 18 May 2012 The High Court handed down Judgment in the Innovator One trial, rejecting all claims against Collyer Bristow and two former partners. The dispute was about tax efficient investment schemes relating to information and communications technology – known as the Innovator Schemes. This trial concerned 6 test schemes of 19 which were invested in between 2002 and 2004. There were very many claims in the case, involving allegations of conspiracy, dishonest assistance, and negligence and these were rejected by the Court. Some of the claims centred on the acquisition costs, and valuations, of the ICT at the time of the Innovator Schemes, in 2002 to 2004.

Approach

Expert valuation evidence

Expert valuation evidence on behalf of the Claimants was put forward by Dr David Sharp, of Charteris plc, that the valuations were at least an order of magnitude higher than they should have been by reference to their cost and due diligence which should have been done on the forecast cash flows underlying the valuations.

Expert valuation evidence for Collyer Bristow and the two former partners was put forward by Mr Thayne Forbes of Intangible Business Limited. Thayne Forbes’ evidence was that the income approach or discounted cash flow approach was almost invariably used (rather than cost), that due diligence is difficult and may support a wide range of income projections. In addition the valuations were in the range he would expect, although that was a very substantial range.

Mr Justice Hamblen agreed with Thayne Forbes that the income approach is the usual and most appropriate method to value start-up technology. He noted that Mr Forbes had more experience of start-up technology valuations than Dr Sharp. He accepted Thayne Forbes’ evidence that due diligence is a very difficult exercise which may support a wide range of income projections, but concluded that this did not mean that no meaningful due diligence can ever be done. He found that the failure to carry out due diligence on the business plans and projected income figures was a shortcoming of the valuations which were produced at the time of the Innovator Schemes. However he went on to find that that did not, however, mean that the technologies had no or no real value, nor did it mean that they had only minimal value. The likely outcome of any such due diligence would have been to support a wide range of income projections, and the projections actually produced are unlikely to have been outside that range. Mr Justice Hamblen found that the technology rights were of real value, that that value was more than minimal and did bear relation to the acquisition costs.

Result

Therefore the claims made in respect of over valuation of ICT by orders of magnitude were rejected by the Court, this rejection being consistent with the expert valuation evidence of Thayne Forbes. 

Points for the future

This therefore represents acceptance by the Court of the income approach and the valuation figures produced at the time. It also signals that the valuations done at the time of the Innovator Schemes should have carried out more due diligence done at the time.

Comments by instructing solicitors

Thayne Forbes was instructed by DAC Beachcroft LLP partner Julian Miller, who commented:

"Our client, Collyer Bristow, and their insurers are delighted that this major and complex claim has been comprehensively dismissed. We worked closely with an able team at Intangible Business, who made a significant contribution in relation to valuations.  Thayne Forbes was one of the last witnesses to testify at the trial lasting nearly five months, thus ending the case on a positive note.  His views were largely accepted and endorsed by the trial judge."

Julian Miller, partner DAC Beachcroft LLP

 

The paragraphs of the Judgment relating to the expert valuation evidence are attached.