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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> Pender v GGH (Jersey) Limited (Royal Court : Hearing (Civil)) [2025] JRC 094 (2 April 2025) URL: https://www.bailii.org/je/cases/UR/2025/2025_094.html Cite as: [2025] JRC 94, [2025] JRC 094 |
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Companies - decisions and reasons for valuation
Before : |
A. R. Binnington, Esq., Commissioner, and Jurats Ronge and Christensen, MBE. |
Between |
Daniel John Pender |
Plaintiff |
And |
GGH (Jersey) Limited |
First Defendant |
|
Punter Southall Group Limited |
Second Defendant |
|
Simon Anthony John Davis |
Third Defendant |
Advocate R. S. Christie for the Plaintiff.
Advocates M. St. J. O'Connell and W. A. F. Redgrave for the second Defendant.
judgment
the COMMISSIONER:
1. On 19 July 2023, we gave judgment in favour of the Plaintiff, following a five week hearing, in respect of his claim brought pursuant to Article 141(1) of the Companies (Jersey) Law 1991 ("the Law") that the affairs of the First Defendant ("the Company") had been conducted in a manner which was unfairly prejudicial to his interests in it (Pender v GGH (Jersey) Limited and Ors [2023] JRC 124).
2. During the course of that hearing we heard evidence from, inter alios, two expert witnesses, namely Mr Amit Arora for the Plaintiff and Mr Paul Cliff for the Second Defendant (together "the Experts").
3. We ordered that:
(i) The Plaintiff's 100,000 A Preference shares shall be transferred to the Second Defendant in return for the withdrawal of the counterclaim.
(ii) The Plaintiff's 1 Waterfall Protection Payment Share shall be purchased from him by PSG and that PSG pay to him the sum equal to the fair value of his former holding of 1,800,000 Ordinary Shares in the capital of the Company which is to be valued on the basis that it represents 18% of the issued Ordinary Shares, at a price to be determined following further advice from Mr Arora and Mr Cliff, making allowance for the reversal of the effects of the acts of unfair prejudice committed by the Defendants in accordance with the guidelines set out in the judgment.
(iii) Mr Arora and Mr Cliff should seek to agree the valuation of the Plaintiff's shares using the valuation methodology set out in the judgment and that they should provide their agreed valuation to the Court within 12 weeks, failing which they should submit to the Court their respective conclusions identifying those points upon which they agree and disagree.
(iv) Upon the Court ruling as to the appropriate purchase price, the purchase of the Plaintiff's shares shall be completed within four weeks of the Court's order.
4. The valuation approach which we directed the Experts to follow in that judgment was that adopted by Mr Arora, which he described as a "venture capital" approach, being a hybrid Income and Market approach. He said that it was broadly based on a modified Discounted Cash Flow, the methodology being described in the following terms:
(i) estimated expected earnings or revenues over a short (maybe 2 or 3 years) to mid-term period (approximately 5 years), often matching the point at which a venture capitalist might be assumed to exit the investment;
(ii) the terminal value is calculated by using an exit multiple applied to earnings, the multiple being assessed using the Market Approach;
(iii) discount the cash flows using a "venture capital" rate of return that is sufficiently high to capture the risk in the business, the possibility that the business will not survive and the illiquidity in these types of business; and
(iv) the resultant valuation is a "post-money" valuation in that it is based on forecasts that may assume an investment is made. The "pre-money" valuation is calculated by deducting the assumed investment.
5. Pursuant to the order that we made in August 2023, we heard further evidence at a four-day hearing which commenced on 4 December 2023 ("the Second Hearing"), which included evidence from the Experts. The Experts had filed further reports, pursuant to our earlier Order, being Mr Arora's Third Report and Mr Cliff's Second Supplemental Report. In addition, the Experts had filed a joint statement, being their Second Joint Statement, which identified those areas upon which they agreed and disagreed.
6. It had not proved possible for the Experts to agree on a valuation of the Plaintiff's interest in the Company, Mr Arora valuing it at between £44.6 million and £59.6 million and Mr Cliff valuing it at between £0 and £4.1 million.
7. Although both Experts had prepared their valuations according to the methodology that we had ordered, the substantial difference between them in terms of their valuations arose as a result of different inputs that they had made in key areas of their calculations.
8. In our judgment of 17 May 2024 ("the May Judgment") reported at Pender v GGH (Jersey) Limited and Ors [2024] JRC 117, we reached, in summary, the following conclusions for the reasons set out in that judgment:
(i) Choice of model - The Experts were to use the Company's latest approved forecasting model, being FM Lite v2.8, subject to a modelling error in relation to the EBITDA and value of the in-force book that had been identified by Mr Arora being addressed, if it had not already been, before any reliance was placed upon it.
(ii) Sales APE profile - The valuation was to be concluded on the basis of Mr Arora's Scenario 2 (which was indirectly based on the Company's forecasts from September 2022, adjusted by a 12.7% increase to reflect the outperformance in sales in 2023); in other words, with Sales APE in 2027 of £111 million.
(iii) Expenses profile: A saving in relation to the Board Plan expenses of 4% was to be applied to 2023 and all future years. In relation to the Central Business Unit ("CBU") expenses re-charge, we ordered that the two Experts review this and seek to agree what level of adjustment should be made to it. Failing agreement, they were to state their respective positions and refer the matter to us for a decision.
(iv) Adjustment to IFRS/BE ratio - The exit multiple was to be applied to the non-IFRS-adjusted EBITDA of the Company.
(v) Exit multiple: The exit multiple to be applied was to be that calculated by reference to the non-IFRS-adjusted EBITDA of PruProtect / PruHealth, namely 15x (after adjustment for the passage of time).
(vi) Exit year - The exit year was to be taken as 2028, but this would require further adjustments to the key assumptions identified by Mr Arora under item 22 in the Second Joint Statement.
(vii) Discount rate -“ Cost of equity - We concluded that the appropriate cost of equity to apply was 21% (subject to any further adjustment for a 2028 exit year).
(viii) SFA advance commission - The relevant cash flows were to be modelled out in the manner that Mr Arora had suggested in his evidence, rather than simply deducted from the exit value as suggested by Mr Cliff.
(ix) Debt - We took the agreed figure of £187,009,433 net of the mezzanine counterfactual, plus £13.4 million for the counterfactual relating to the money PSG put into the Company in January 2018.
(x) Yield curve: Both Experts had used the 30 June 2023 yield curve which was up to date as at the Valuation Date.
9. In the May Judgment, we expressed our regret that we found ourselves unable to make a final decision due to the significant differences that remained between the Experts, together with a number of unresolved issues which were likely to impact the valuation. We requested that the Experts complete and file their respective valuations within 7 weeks of the handing down of our judgment and ordered the parties to file closing submissions within 1 week thereafter.
10. In his Fourth Report, filed in response to the directions given in the May Judgment, Mr Arora prepared a calculation of the value of the Plaintiff's shareholding in which he adopted:
(i) the methodology set out in the 2023 Judgments; and
(ii) the inputs set out in the May Judgment.
11. Mr Arora noted that in the May Judgment the Court had requested that the Experts give further consideration to four principal issues. The issues, and his conclusions in respect of them, were as follows -
(i) Model Error. In his view, there was no significant model error that he could identify based on the testing of short-term actual results compared to the forecast for those months. He noted that he and Mr Cliff agreed that no adjustment was required for the model error issue.
(ii) CBU Costs. In his view, it was reasonable to adopt the analysis within the CSC Expense Review for non-HR based CBU costs and combine this with an estimate of £250k for HR. He said that this totalled £466k, which was adopted for 2023 and 2024. The amount was increased by inflation in later years. He noted that he and Mr Cliff agreed on the values to be used.
(iii) 2028 adjustments. In respect of the change of the exit year of 2028, he considered it appropriate to adjust the cost of equity by one percentage point from 21% to 20%. This term adjustment was, in his view, required given that the estimate for the cost of equity had now to be applied in respect of cash flows arising over a longer period of time. Further, he had adjusted expenses down by £2.16 million on the basis of the lower forecast growth in sales in 2028.
(iv) SFA advance commission. He noted that, whilst the Company had adapted the model, there were inherent shortcomings associated with extending the short-term focussed model into a long-term model. This limited the accuracy of the analysis, such that any conclusions had to be treated with caution. Notwithstanding these concerns, he adopted the model and made adjustments that he felt were appropriate to address specific concerns.
12. Mr Arora calculated the value of the Plaintiff's holding to be £49.3 million.
13. In Mr Cliff's Third Supplemental Report, he calculated an Enterprise Value for Guardian of £384.0 million at the Valuation Date of 19 July 2023. He stated that the Plaintiff's 18% shareholding therefore amounted to £33.1 million, after deducting the Experts' agreed estimate of Guardian's net debt (£187.0 million), and the counterfactual debt that he had been instructed to assume (£13.4 million).
14. However, Mr Cliff pointed out that it remained his opinion that the assumptions that he adopted in his previous report and during the Second Hearing were reasonable, and by using those assumptions (in particular his cost of equity, exit multiple and IFRS/BE Ratios) he calculated a significantly lower value for Guardian's Enterprise Value and the Plaintiff's shareholding, which he said was consistent with the contemporaneous valuations of Guardian prepared by Nash and Evercore.
15. In Section C of their Additional Closing Submissions, the Second Defendant suggested that the Court "may have been misled into serious error in concluding that the Court is entitled to inflate the valuation to reflect what it would like PSG to have to pay Mr Pender".
16. The Second Defendant appears to have drawn this conclusion by reference to two passages in the May Judgment that cited extracts from the judgments in Re Tobian Properties and Financial Technology Ventures v ETFS (Tuckwell) respectively.
17. In Re Tobian Properties [2013] 2 BCLC 567, Arden LJ said -
18. In Financial Technology Ventures II (Q) LP and Ors v ETFS Capital Limited and Tuckwell [2021] JCA 176, the Court of Appeal summarised the Court's approach to valuation in the following terms when considering the application of minority discounts:
19. For the avoidance of doubt, the Court did not draw from these passages the conclusion (as the Second Defendant sought to suggest) that "the Court has a general discretion to arrive at a number that reflects the level of its disapproval of the unfairly prejudicial conduct".
20. As the Second Defendant itself points out, and we agree, the passages simply recognise that the award must reflect the financial loss caused by the unfair prejudice. This does of course mean that a valuation may be adjusted to allow for the effect on the Company of any wrongs the Court has found that the Second Defendant has committed and, as the Second Defendant has accepted, this has already happened in this case - it was the basis for the counterfactuals imposed by the Trial Judgment, namely that (a) the additional investment made by PSG in January 2018 was made by £12m of counterfactual debt; (b) Mr Pender's percentage shareholding is to be assumed to be 18%; (c) adjustments are made for more recent forecasts and actual performance and expenses; and (d) both the Hannover and PSG Mezzanine debts would have been refinanced by June 2020 to ordinary debt at an interest rate of 12%.
21. Whilst the application of the counterfactuals will inevitably reflect the actions of the Second Defendant, thereafter the Court simply has to arrive at a valuation with the assistance of the Experts.
22. We should at this point make some comment about the assistance provided by the Experts.
23. During the Second hearing the Second Defendant put to Mr Arora in cross-examination certain criticisms that were made of his expert evidence by the High Court of England and Wales in a separate valuation case, in which his approach was described as "methodologically precarious", including "double-counting", and as an "outlier".
24. In its Additional Closing Submissions, the Second Defendant has suggested that the Court, by not referring to those criticisms in the May Judgment, may not have taken those criticisms into account. Whilst it is correct that the Court did not refer to this criticism in its judgment it was of course aware of it, but without a detailed examination of the basis of the criticism within the context of the relevant case, which the Court did not regard as a worthwhile exercise, we nevertheless took into account the criticism but did not regard it as highly persuasive.
25. Regrettably we did not regard either expert as having been particularly helpful to the Court. Despite the Experts owing duties to assist the Court, we found them to be somewhat partisan and more ready to criticise their counterpart than to help the Court to navigate its way through a complex valuation exercise.
26. Some areas that had been in contention when we delivered the May Judgment have been capable of agreement by the Experts, notably the alleged model error and the CBU re-charge.
27. In relation to the alleged model error, Mr Arora noted in his Fourth Report that the Company had produced a document entitled "Investigation and Report into the Modelling Issue", which was signed by Ms MacLean and dated 7 June 2024. He understood from this document that the Company had recreated the "model error" that he had identified in his Third Report which the Company attributed largely to the variance in the IFRS value. The conclusion that he drew from that report was that there were issues with the FM Lite v2.3 and v2.5 models in that they did not reflect actual performance, but he noted that the Company had stated that adjustments had now been made that are reflected in FM Lite v2.8.
28. Accordingly, he was satisfied that there was no significant model error that he could identify based on the testing of short-term actual results compared to the forecast for those months.
29. In his Third Supplemental Report, Mr Cliff referred to Mr Arora's previously identified concerns about a Modelling Error in FM Lite v2.3, amongst other models. However, Mr Cliff had performed his own analysis on FM Lite v2.3 for the full year 2023 and had reached the opposite conclusion, namely that there had been overstated performance.
30. Given that the Court had instructed the Experts to use FM Lite v2.8 in the Valuation Exercise, Mr Cliff was able to confirm that, following analysis, the Experts had now agreed that there was no suggested Modelling Error in FM Lite v2.8 and therefore made no adjustment.
31. As already noted, Mr Arora's view on the CBU recharge figure was that it was reasonable to adopt the analysis within the CSC Expense Review for non-HR based CBU costs and to combine this with an estimate of £250k for HR. This totalled £466k, which was adopted for 2023 and 2024. The amount was increased by inflation in later years. Mr Cliff confirmed his agreement with the values to be used.
32. In his closing submissions, Advocate Christie suggested that given the agreement between the Experts on the suggested model error and the CBU recharge, the only issues that remained to be determined were the adjustments for the 2028 Exit Year and the modelling of the SFA Drawdown Cashflows. That was not agreed by Advocates O'Connell and Redgrave. In our conclusions we have taken their submissions into account in relation to a number of the relevant factors, for example the cost of equity and the differences in modelling the SFA facility. However, some of their closing submissions sought to re-open issues that had already been determined. In particular, they criticised what they sought to argue were efforts by the Plaintiff to include additional impact upon the company resulting from the litigation; however, in our first judgment we limited the -˜counterfactual issues' to those described in that judgment and the calculation of the value of Mr Pender's shares reflects only the impact of those counterfactual issues. We have therefore not taken into account any other impact of the litigation. If we do not refer to specific submissions in this judgment, we do not mean any disrespect to the party advancing them and have taken all submissions fully into account.
33. In the May Judgment, we concluded (at paragraph 150) that "the appropriate cost of equity to apply is 21% (subject to any further adjustment for a 2028 exit year as set out in paragraphs 120-121)".
34. Paragraphs 120-121 referred to Mr Arora's evidence regarding adjustments which were required to the exit year in 2028 as "consideration of sales growth opportunities, or at least removal of certain expenses and lowering the discount rate". We stated in our judgment that "We find that 2028 is the appropriate exit year for the Experts to adopt but note that we would expect that the further adjustments to the key assumptions identified by Mr Arora should be made".
35. At paragraph 6.1.3 of his Fourth Report, Mr Arora stated that he considered that the main issues to consider when adopting a 2028 exit year were -
(a) How much should the cost of equity be reduced by to allow for the fact that it must now be applied to a different time period?
(b) What are the options for adjusting sales, expenses and/or cost of equity further for normalising the performance in 2028?
36. Mr Arora explained that given that the May Judgment had determined that the explicit cash flows be extended by a year and that 2028 be adopted as the exit year, the cost of equity selected now needed to apply an explicit period of cash flows from July 2023 to December 2028. In his view, the change in term to which the discount rate was applied in the valuation might result in a change to the appropriate discount rate. He referred to this as the -˜term adjusted' cost of equity. He estimated the term adjusted cost of equity by calculating a weighted average of the 21% cost of equity that was previously identified for the 4.5-year period (previously used when exiting in 2027) with the cost of equity for the additional one-year period. He explained that if the cost of equity for the additional one-year period was lower, then the term adjusted cost of equity would also be lower.
37. Mr Arora noted that the forecast for Guardian in 2028 indicated that, by that time, the business would be more mature than earlier years with APE sales of over £100m. The business was also forecast to be highly profitable at the EBITDA level (estimated to be in excess of £60 million prior to certain adjustments). He said that in his view, the business would be considered highly mature from a venture capital investor's perspective, and he would expect a low cost of equity to apply in that year. He referred to a report entitled "2023 Private Capital Markets Report" by Pepperdine Graziadio Business School, which suggested that the 1st quartile cost of equity (i.e. cost of equity for the "25th centile" company in Pepperdine's sample) for later stage VC investments was 18%. He considered that a reasonable cost of equity for Guardian would be lower than this.
38. Mr Arora concluded that if one were to assume a cost of equity of 15% to 17% for Guardian in 2028, then the weighted average cost of equity would be around 20%. Accordingly, Mr Arora considered it appropriate to adjust the cost of equity adopted to discount the cash flows by one percentage point for this term adjustment. He therefore adopted a cost of equity for Guardian of 20%, prior to considering potential further adjustments to the cost of equity.
39. In the Second Defendant's Additional Closing Submissions, Advocates O'Connell and Redgrave were critical of Mr Arora's assertion that by 2028 Guardian would be "highly profitable" and "highly mature" and therefore that the cost of equity should be 20%, not 21% as previously ordered by the Court. They noted that reducing the cost of equity by this one percentage point had the effect of increasing the value of Mr Pender's shareholding at the Valuation Date by £2.5m. They pointed out that Mr Arora had supported his conclusion by reference to the 1st quartile cost of equity for later stage VC investments in the 2023 Pepperdine Report, which was 18%, but Mr Arora did not state Pepperdine's cost of equity for the median, or the 3rd quartile, which would instead be 28%, or 33%. They noted that both the median and 3rd quartile rates were significantly higher than both the cost of equity which Mr Arora used, and the rate ordered by the Court to date.
40. Advocates O'Connell and Redgrave explained that Mr Cliff's position on cost of equity in his Second Supplemental Report, and at the Second Hearing, of 30% was between the median and the 3rd quartile. In other words, Mr Cliff considered that Guardian was slightly riskier than the median later stage VC investment. Mr Arora, on the other hand, considered Guardian to be less risky than even the 1st quartile of later stage VC investments. They suggested that Mr Arora did not point to any or sufficient reasons as to why the Court should further reduce the cost of equity to 20% because the Exit Year has been ordered to be 2028 and not 2027, as Mr Arora had proposed.
41. On this point we agree with the Second Defendant that there is insufficient justification to change the rate from 21% to 20%.
42. In relation to the second issue to consider when adopting a 2028 exit year, namely the options for adjusting sales, expenses and/or cost of equity further for "normalising" the performance in 2028 Mr Arora identified three main approaches to consider how to normalise the 2028 year:
(i) To assume that the Guardian platform continued to develop. In this case the investment expenditure and growth would continue at above market rates through, for example, new initiatives to gather market share and enter new markets. However, he suggested that costs would need to be reviewed to see what could be optimised for the existing more mature product portfolio and the benefit of any future negotiated agreements (for example, continuing the pattern of improvements to FinRe) would be taken into account. Mr Arora's conclusion was that there were too many permutations to consider with the level of information available regarding what Guardian might reasonably seek to achieve post 2027. Given this, he did not adopt this approach.
(ii) The second was to assume, for the purposes of this analysis, that Guardian was in a more stable growth phase and so there was a reduced need for the investment expenditure required in previous years. There might also be benefits of scale and improvements to operational agreements and the potential to access cheaper financing. Mr Arora concluded that there was a degree of information available regarding costs, which enabled this scenario to be considered to a greater level of depth than the continued development scenario.
(iii) The third was to adopt a high-level view as to whether the forecasts were conservative and, if so, reduce the cost of equity (or vice versa). He said that this was often part of what constituted a -˜company-specific adjustment' to the cost of equity. To distinguish it from the term-adjusted cost of equity, he referred to this as the -˜performance adjusted' cost of equity. He noted that the overall growth profile in the latest forecasts was broadly aligned with that of earlier forecasts and so it appeared that there continued to be a longer-term imbalance in growth rates. A compensatory adjustment to cost of equity would assist in balancing this (i.e. over and above the term adjustment to cost of equity). He regarded this as a subjective adjustment and one that he did not generally prefer. However, he stated that if this approach was considered appropriate, based on his experience, he would adopt a revised cost of equity that was 1 or 2 percentage points lower (i.e. a cost or equity of 18% or 19%) rather than one without any adjustment.
43. In considering the second option in greater detail, Mr Arora considered the review carried out by Craven Street Capital ("the CSC Expense Review") and noted that the Court had determined that a 4% reduction to costs would be possible from Financial Year 2023 onwards taking the CSC Expense Review into account. However, he considered that a higher level of reduction, of the order of 8.7% (i.e. c. 4% to 5% higher) of costs might provide a reasonable high-level approach for Financial Year 2028 onwards in a scenario in which Guardian was not modelling new products and market growth as it was between Financial Years 2023 and 2027.
44. Mr Arora further considered "Change Costs", which were identified by CSC as costs in relation to "Change projects" to establish and launch new insurance products and enhance their technological capabilities. These had been considered in the CSC Expense Report and were also the subject of questions posed by Mr Cliff to the Company, the responses to which were considered by Mr Arora.
45. Mr Arora's conclusion in relation to Change Costs was that given that (i) Change costs appeared to be primarily linked to new product development in the near-term and that (ii) no new products were currently modelled after 2027, there was scope to reduce costs over the investment phase. He estimated that a net reduction of £2.161 million was possible.
46. In summary, Mr Arora stated that:
(i) He adopted a term adjusted cost of equity of 20% and sought to reduce expenses to normalise expense to the lower sales growth profile.
(ii) CSC's analysis for no material impact whilst still pursuing investment growth indicated a reduction in non-CBU costs of approximately 8.7% was possible. The overall cost reduction potential was 13% to 16%.
(iii) His analysis suggested that a £2.1 million reduction to Change was possible which would still retain some of the original Change budget as well as retaining amounts in other parts that were already allocated to maintenance or to one-off projects, but which were modelled in a way that the cost had not been removed and it recurred.
(iv) An adjustment of £2.1 million, in addition to the base 4% reduction would result in an overall reduction of 9% from the base level of expenses (excluding CBU), which he considered reasonable relative to the CSC Expense Review analysis.
(v) Further, he considered there might also be scope for an additional reduction to other costs such as marketing, sales, recruitment and training. However, he did not make a further adjustment for those categories of costs.
47. Mr Cliff noted that there were three categories relevant to modelling the 2028 exit year adjustments, namely Sales APE, expenses and Discount Rate.
48. In relation to Sales APE, Mr Cliff considered it reasonable to assume that by 2028 Guardian would be growing in line with market growth, which he regarded as being consistent with the Board Plan Forecast. As such, he did not consider it appropriate to apply an adjustment to the Sales APE in the Exit Year of 2028.
49. In relation to expenses, Mr Cliff considered possible expense adjustments in addition to the 4% expense adjustment that he was required by the Court to apply to the 2028 Exit Year. He considered first Change costs as these were identified in the Second Joint Statement, and then went on to consider the overall picture for expenses.
50. Mr Cliff noted that in the Second Joint Statement, Mr Arora had raised a concern that "if it was believed that only market growth in sales would be achieved beyond 2027, there is an inconsistency in that the 2028 forecasts include significant change costs". Mr Cliff therefore went on to consider whether there was such an inconsistency.
51. Mr Cliff noted that in the Second Joint Statement, he had explained that he would expect Change costs to stabilise as a percentage of Sales APE over the longer term. He regarded this as being consistent with Mr Gibson's previous explanation that ""Change" is our cost of IT development and investment, and this grows for a few years as we update our systems and then goes down as we move to maintaining them".
52. Mr Cliff analysed the projected Change costs as a percentage of Sales APE between 2023 and 2032. This was based on the Sales APE in the Board Plan Forecast uplifted by 12.7% between 2024 and 2026, and Change costs reduced by 4% in all years, in line with the Court's instructions. Total Change costs were 20.8% of Sales APE in 2023 and reduced as the Company approached maturity. Total Change costs then stabilised at circa 2.7% of Sales APE from 2027 onwards as the Company matured. He regarded this as being consistent with the expectations that he had expressed in the Second Joint Statement.
53. In order to ascertain whether there existed an inconsistency between the market growth in Sales APE beyond 2028 and the Change Costs, he asked the Company whether, in 2028, the Change costs or any other expenses contained any spend relating to new product development.
54. In their response dated 5 July 2024, the Company confirmed that - "The Changes [sic] Costs does [sic] not contain any spend relating to new product development. The Change Costs are associated with maintenance of a full product set that has been assumed to be launched in previous years. The maintenance includes systems maintenance; distributor-driven change; regulatory updates on both new and in force business; and minor product changes to maintain market share against competitor actions".
55. Mr Cliff's conclusion was therefore that as the Change costs in 2028 did not relate to new product development and were instead related to ongoing maintenance of existing products in order to maintain market share, he did not consider there to be an inconsistency between the market growth in Sales APE beyond 2028 and the Change Costs, which he found to be reasonable.
56. Advocate Christie, in his Closing Statement, was critical of Mr Cliff's approach, suggesting that he had taken the same approach to all of the issues which had arisen from the Company's forecasts/models in this case, which was to ask a question of the Company and accept the answer as correct, without undertaking any probative analysis as to the validity of the Company's answers in certain instances. He suggested that in relation to Change costs, Mr Cliff addressed the issue by simply quoting answers to his questions to the Company and stating that he finds the Change costs to be "reasonable" without providing any analysis as to how he derived his opinion that these costs were "reasonable", aside from accepting the Company's statements and relying upon Ms MacLean and Mr Gibson's answers in cross examination.
57. Mr Cliff then considered the Change costs and the corresponding staff costs for the Change team in the Board Plan Forecast (reduced by 4% in line with the Court's instructions) between 2023 and 2028.
58. He noted that there was a significant decrease in Change costs (of 38.2%) and the corresponding staff costs for the Change team (of 29.0%) between 2024 and 2025. It appeared to him that this significant decrease was linked to Guardian ceasing new product development, given that there would be a time lag between the costs of developing new products and the Sales APE generated from releasing them, which was in line with expectations. As such, he did not consider it appropriate to apply an adjustment to Change costs in the instructed Exit Year of 2028.
59. In relation to overall expenses, Mr Cliff noted that the Court had instructed the Experts that a "saving in relation to the Board Plan expenses of 4% should be applied to 2023 and all future years". He then considered the medium to long-term growth in expenses in the Board Plan Forecast in order to determine whether the overall level of expenses was reasonable in 2028. For the purposes of determining whether the long-term growth assumptions for expenses were appropriate, he explained that two forecasts were available, namely i) the Board Plan Forecast; and ii) FM Lite v2.8.1.
60. He noted that in 2028, the Board Plan Forecast assumed that Sales APE grew at 0.7 percentage points faster than expenses. However, medium-term and long-term, the Board Plan Forecast assumed that Sales APE grew at 0.7 percentage points and 1.7 percentage points respectively slower than expenses, i.e. that margins decreased, and Guardian became less profitable over time. He pointed out that the Company had not explained why it considered this might be the particular case for Guardian, and he did not consider this assumption to be reasonable, as generally he would expect a company to become more profitable in the long-term as it reached a steady state.
61. Mr Cliff identified that for 2028, FM Lite v2.8.1 assumed that Sales APE would grow at 2.4 percentage points faster than expenses. Medium-term, FM Lite v2.8.1 assumed that Sales APE would grow at 1.9 percentage points faster than expenses, before they eventually grow at the same rate as one another in the long-term. He considered these assumptions to be more reasonable than those in the Board Plan Forecast as they meant that Guardian would continue to become more profitable as it approached maturity. As he did not consider an adjustment to Sales APE in 2028 to be appropriate as discussed, as previously noted, he instead considered an overall reduction to the Board Plan Forecast expenses in 2028.
62. Mr Cliff went on to discuss his analysis regarding the level of reduction to be made to the Board Plan Forecast expenses in 2028.
63. Mr Cliff noted that in relation to the CSC Expense Review dated June 2023 the CSC presentation contained tables of Guardian's financials but there appeared to have been two versions of the Excel file which had been used as the source of these tables. Mr Arora had used one of those versions, filtered for "no material impact" (as opposed to the alternatives of "efficiency impact (non-sales)" and "sales impact"). Mr Arora had calculated a total cost saving (excluding CBU cost savings) of GBP 1.7 million for 2023, and GBP 2.9 million for 2024. Mr Arora had further calculated these total cost savings to be a circa 5% reduction to the Board Plan Forecast expenses for 2023, and a circa 8% reduction to the Board Plan Forecast expenses for 2024, concluding that his former adjustment of 2.2% in the Second Joint Statement may have been too low.
64. Mr Cliff had repeated Mr Arora's calculations from the relevant Excel spreadsheet and agreed them to be mechanically correct if adopting all potential "no material impact" savings. However, he noted that Ms MacLean, in her comments at trial, expected some, but not all, of these savings to be achievable. As such, Mr Cliff had adjusted the "no material impact" values in the CSC Expense Review to include - i) 100% of the "no material impact" savings for facilities management, technology (excluding Change costs), legal fees, professional fees and medical fees; ii) 50% of the "no material impact" savings for personnel costs, stating that this was an assumption based on Ms Maclean's comments that some savings to personnel costs could be made, but unlikely to be to the extent considered by CSC; and iii) 0% of the "no material impact" savings for marketing and Change costs. This resulted in revised potential cost savings (excluding CBU cost savings which he considered separately) of GBP 1.5 million for 2023, and GBP 1.7 million for 2024.
65. These potential cost savings corresponded to a reduction of 5.2% to the Board Plan Forecast expenses for 2023, and a reduction of 5.0% to the Board Plan Forecast expenses for 2024. He noted that this was at the lower end of the range of circa 5% to 8% calculated by Mr Arora in his letter.
66. Mr Cliff concluded that a reduction of 5.2% to the Board Plan Forecast expenses in 2028 would be an appropriate proxy for cost savings that Guardian might be able to make in the Exit Year. In line with the Court's instructions in paragraph 146 of the May Judgment, he had already reduced the Board Plan Forecast expenses by 4%. He therefore applied a further 1.2% reduction in his Exit Year of 2028 (giving a total reduction of 5.2% to the Board Plan Forecast expenses in 2028).
67. Mr Cliff went on to consider the other Excel file used as the basis for the CSC figures and his analysis suggested that it would suggest a lower expense reduction than 4%. However, as the Court had not previously seen it, he made no adjustment for the potential discrepancy.
68. Mr Cliff considered the inflation assumptions in the Board Plan Forecast but noted that there were practical difficulties that limited further consideration and, accordingly, Mr Cliff did not consider it appropriate to apply an adjustment to expenses in 2028 in relation to inflation and instead applied an overall reduction of 5.2% to the Board Plan Forecast expenses in 2028. This adjustment resulted in an overall expense growth of 3.8% in 2028, which he considered reasonable.
69. In relation to expenses, Mr Cliff adopted the Board Plan Forecast expenses reduced by 4.0% each year from 2023 to 2027 and reduced by 5.2% in 2028.
70. On this point, we agree with Mr Cliff that the reduction in 2028 should be 5.2%. We regard Mr Arora's figure of 9% as being over-ambitious.
71. Mr Cliff further considered whether any adjustment needed to be made to the Discount Rate. He noted that, in line with the Court's instructions, the Experts had agreed to adopt - i) a leverage ratio of 18.85%; ii) a cost of debt of 12.0%; and iii) a cost of equity of 21.0%, subject to adjustments in the Exit Year. This resulted in a Discount Rate, or WACC, of 18.7%. In the May Judgment, the Court had instructed the use of a 2028 Exit Year which was consistent with the Exit Year that Mr Cliff had used in his Second Supplemental Report.
72. In his Third Supplemental Report, Mr Cliff had noted that in his Second Supplemental Report, he had calculated a WACC of 25.9% based on a cost of equity of 30.0%. He explained that he had used this WACC consistently in each year of his Discounted Cash Flow model, with no adjustments made to his calculated WACC in his Exit Year of 2028. He said that he did not consider there to be a significant change in the risk profile of Guardian between 2027 and 2028 as, when adopting the Court's instructed inputs, Guardian were forecast to generate positive EBITDA and EBITDA (cash) from 2025 onwards. Accordingly, he did not consider it appropriate to apply an adjustment to the WACC in the instructed Exit Year of 2028.
73. Mr Cliff further noted that the WACC ordered by the Court (18.7%, based on a cost of equity of 21%) was already well below the WACC that he had recommended for an exit date of 2028 in his Third Supplemental Report (namely, 25.9%, based on a cost of equity of 30%). During Mr Cliff's oral evidence at the Second Hearing, he had said - "it is clear to me that this is a very risky company, for reasons I have explained before about other market competitors, and it would be reasonable to have a very high [discount] rate..."
74. In his closing submissions, Advocate Christie suggested that Mr Cliff's statement that 2028 had the same risk as 2027 (even if strictly true) would be to miss the point. The comparison, he suggested, was not between the exit year 2028 as against the exit year 2027. The comparison was between the right blended rate for 2023-2027, and the right blended rate for 2023-2028 -“ and the impact on the blended rate for 2023-2027 of adding 2028. Accordingly, even if there were to be no difference between 2027 and 2028, the effect of adding another year at the lower end of the range would affect the blended rate across the whole period.
75. Mr Cliff's conclusion in relation to adjustments in respect of the Exit Year 2028 was that he would not apply an adjustment for:
(i) Sales APE, as he considered it reasonable to assume that by 2028 Guardian would be growing in line with market growth, which was consistent with the Board Plan Forecast.
(ii) Change Costs, as they did not relate to new product development in 2028 and were instead related to ongoing maintenance of existing products in order to maintain market share.
(iii) Discount rate, as he did not consider there to be a significant change in the risk profile of Guardian between 2027 and 2028.
(iv) Inflation, due to significant limitations in calculating and applying such an adjustment.
76. Based on cost savings described by CSC as having "no material impact" and the savings thought to be achievable by Ms MacLean, Mr Cliff applied a further 1.2% reduction to expenses in his Exit Year of 2028 (giving a total reduction of 5.2% to the Board Plan Forecast expenses in 2028). However, he expressed concerns that there were multiple versions of the CSC Excel spreadsheet, which might suggest a smaller reduction than the 4.0% reduction instructed by the Court in the May Judgment.
77. The SFA Facility is a facility which we understand is typically used by insurance companies, in this case provided by Scottish Friendly Assurance ("SFA"), secured against the "in force book", that allows the Company to receive from SFA advance payments of the commission that the Company is entitled to receive from SFA pursuant to the distribution agreement between the two entities. In the Trial Judgment, we stated that in relation to forecast cash flow, "we would wish the experts to adopt the approach used in [Mr Arora's] scenario 2 set out at paragraph 2.1.6 of the Second Report".
78. Mr Arora's Scenario 2 included the operational cashflows during the valuation period up until the terminal valuation year, which at that time was 2027 and is now 2028. There was no terminal value deduction in Mr Arora's scenario 2 during the Liability Trial. Mr Arora maintained this approach for the Valuation Trial.
79. Mr Cliff explained in his Second Supplemental Report, at paragraph 2.18, that he had done as follows - "In keeping with Mr Arora's Scenario 2 valuation approach, in PC3 I now also include the SFA cash flows in the period to 2028 (being my assumed exit year). I then recognise the resulting liability in my exit year while Mr Arora does not".
80. Accordingly, Mr Cliff considered in his Second Supplemental Report, in mid-2023, that the Court's finding in the Trial Judgment in favour of Mr Arora's Scenario 2 required him to include the SFA Facility cash flows in his discrete period (i.e. between valuation date and exit year). However, the difference between the Experts at the Valuation Trial was that Mr Cliff deducted the entire outstanding SFA Facility drawdowns at the point of exit, as if it were debt that would be repaid at that point, whereas Mr Arora considered the SFA drawdowns to be operational cashflow which did not require any adjustment as the facility (or similar) would in his view continue to be used by the new owners of the company.
81. In the Valuation Trial, Mr Arora explained how this terminal value in respect of the SFA Facility would lead to "a small positive or small negative" and in doing so explained that even if it were right to include it, "it's not actually going to impact the overall value by a significant amount just because of that discounting effect". Mr Arora also pointed out that "There's a nuance to that, which is you do need to model the discount rate going forward, which is a challenge". The Court concluded, in paragraph 140 of the May Judgment, that "the relevant cash flows should be modelled out in the manner that Mr Arora suggested, rather than simply deducted from the exit value as suggested by Mr Cliff".
82. In his Fourth Report Mr Arora explained the approach that had been suggested to the court as follows -
"The approach that I suggested arose after I was asked a question by the Court during the second trial regarding SFA advance commission. I explained an approach that, in principle, could be used to examine the issue in more detail. The key points of my suggested approach to model SFA advance commission were - (a) set out the explicit drawdown and repayment cash flows on the assumption that the SFA advance commission continues; (b) to model the discount rate going forward; and (c) to discount those cash flows back to today."
83. In order to assist the Experts with their analysis, the Company supplied an updated version of FM Lite v2.8 which modelled the SFA cash flows to 2060.
84. Mr Arora found that there were limitations in the mechanics of the underlying FM Lite v2.8 model that made it relatively unsuitable for presenting a reasonable set of ongoing SFA cash flows, namely -
(i) he considered that the interest rate modelled was overstated beyond the initial period of 2023, and potentially some of 2024;
(ii) the longer-term forecasting of sales was not considered to the same extent by Guardian as shorter-term forecasts; and
(iii) the model forced the facility to be paid off by 2060.
85. Mr Arora suggested that the model would require extensive adjustment to deal with those factors. Making such adjustments would be an extremely time-intensive process and would also be limited given that the Extended SFA FM Lite v2.8 was a very large sized Excel file, slow to process updates and prone to frequent freezing or crashing.
86. In the circumstances, although he had adopted the model as provided, he pointed out that any conclusions should be treated with caution. In his view, the model could not be relied upon to provide an exact quantitative conclusion to the issues raised in the May Judgment. However, he included in his report illustrative analysis that he suggested provided guidance to the overall approximate level of the adjustment that was necessary.
87. Whilst recognising that there were significant inherent difficulties with calculating the net present value of the SFA advance commission, based on his analysis of the latest Company-“extended version of FM Lite v2.8, he found that present-valuing the post-2028 cash flows arising from the continuing SFA advance commission could result in something of the order of a negative £11 million to positive £4 million impact on the Enterprise Value of Guardian (if a 5 or 10 year "repayment delay" is assumed, and interest rate assumptions are made), before considering the issue of the ending of forced repayment in, or around, 2060.
88. In Mr Arora's opinion, theoretically, there was no reason that SFA advance commissions would be discontinued from 2060 and thus there should also be a further present value benefit associated with the cash flows that arise (provided that the applicable interest rate was below the discount rate employed). This additional benefit would make the values that he had suggested more positive. Further, his interest income adjustment might also be understated if there was compounding of high interest rates in the model; an appropriate adjustment would also make the values more positive.
89. In the absence of being able to model the impact more precisely and given the high-level outcomes to which he had referred, Mr Arora made no further adjustment to the value of Guardian for this operating cash flow, other than the cashflows he had already recognised to 2028.
90. Advocates O'Connell and Redgrave, in their closing submissions, were highly critical of Mr Arora's approach, which they described as "cursory".
91. They suggested that "the proposition that a company can increase its value by taking on debt is absurd as a matter of basic common-sense", to which Advocate Christie responded that the facility was not "debt" but "operational cashflow". Advocate Christie suggested that it was not surprising that an efficient use of operational cashflows, which increases the present value of those future cashflows, can increase the value of the Company, when the valuation methodology is (at least in part) a function of the net present value of those cashflows.
92. In his Third Supplemental Report, Mr Cliff contrasted the approaches of the two Experts in modelling the SFA Facility cash-flows, noting that in their respective third reports, both Experts had, in their valuation models, modelled the SFA Cash Flows as a discrete item, outside of their EBITDA calculations.
93. Mr Arora modelled the SFA Cash Flows up to his Exit Year of 2027, but made no adjustment to recognise the outstanding liability at exit. Mr Cliff modelled the SFA Cash Flows up to his Exit Year of 2028 and in that Exit Year recognised a liability to reflect his view that the outstanding drawdowns would need to be repaid at some point in the future. The Experts then discounted their SFA Cash Flows using their respective WACCs for each year, back to the July 2023 Valuation Date.
94. According to Mr Cliff, putting the differences in the choice of Exit Year and WACC to one side, the only difference in approach between the Experts was whether the modelling in the valuation models reflected the assumption that the SFA cash flows would be repaid in the future or not, and how that repayment should be modelled. He suggested that the impact of Mr Arora's approach was to increase the Enterprise Value of the Company by GBP 54.5 million. He said that the impact of his approach was to increase the Enterprise Value of the Company by GBP 16.9 million.
95. Mr Cliff pointed out that in his November 2022 Valuation, he considered the funding provided by SFA to be a debt item. In his Second Supplemental Report, he included the SFA cash flows in his discrete period, but also recognised the resulting liability in his Exit Year. In the Second Hearing, he said that either approach (i.e. accounting for the liability in the Exit Year or deducting the outstanding value at the Valuation Date) would be appropriate. However, in his Third Supplemental Report, he considered it important to take a step back from his analysis and reflect on whether it led to a reasonable conclusion. He did not consider that it made sense to recognise the SFA as a positive value. This was because any debt (whether labelled as debt or operational funding) represented a liability. Had he followed his original approach of recognising the funding provided by SFA as a debt item, the impact of this would have been to deduct the outstanding balance from Guardian's Enterprise Value at the Valuation Date, reducing Guardian's value.
96. Mr Cliff's approach to modelling the SFA Cash Flows was to prepare a counterfactual analysis, assuming that the SFA Cash Flows would continue beyond when he understood the Company currently intended to cease drawing on the SFA Facility (2026), and beyond the current cut-off date in the agreement with SFA (the "Ohio Agreement"). He said that he understood from the Court's instruction at paragraphs 137 to 140 of the May Judgment that he should explicitly model out all the SFA cash flows for each year up to and beyond the 2028 Exit Year and then discount these cash flows back to the July 2023 Valuation Date. He considered that he would have to address the following questions in his analysis of the SFA Cash Flows -
(i) What counterfactual Sales APE profile should be used when modelling the SFA cash flows beyond 2028, given that the amount of SFA advance commission drawn was directly linked to the policies incepted.
(ii) At what counterfactual date after the 2028 Exit Year would the Company cease drawing down on the SFA Facility.
(iii) To what extent are the drawdowns repaid following this cessation; and
(iv) At what discount rate should these cash flows be discounted back to the July 2023 Valuation Date.
97. Mr Cliff's analysis suggested that the growth profile from FM Lite v2.8.1 and the Board Plan Forecast were sufficiently similar, as both adopted long-term growth rates of around 3%. He therefore adopted the growth profile from FM Lite v2.8.1 when modelling out the SFA Cash Flows in his analysis after 2027. To model the Sales APE figures from 2028 to 2060 in his analysis, he had extended the Court's instructed Sales APE profile in line with the growth profile of the Company's Sales APE in FM Lite v2.8.1. In the period from 2023 until 2034 the Company's cash profit was lower than its accounting profit. This difference was due to movements in the in-force book value, which were non-cash in nature. This was the change in the value of Guardian's book of business and was calculated by following a specific actuarial valuation method.
98. Mr Cliff concluded that 2035 was the first year where the cash profits would no longer be lower than the accounting profits. As such, he considered that 2035 was a reasonable year to assume that the Company would cease drawing down on the SFA Facility, as its purpose would then have been achieved. He said that he would expect that, hypothetically, if the SFA Facility were to continue to be renewed SFA would monitor the level of repayments it had been able to achieve from Guardian's policy profits, and if those repayments were not acceptable it would terminate or renegotiate the arrangement. Any outstanding repayments due would be payable upon termination.
99. Mr Cliff considered the interest rate set out in the Ohio Agreement to be the best indicator of the return required on the SFA Cash Flows. The amount outstanding for the SFA Facility as at July 2023 was GBP 10.9 million. He considered that using a discount rate of the SFA interest rate led to a reasonable reduction to Guardian's Enterprise Value being GBP 12.4 million and accordingly a reasonable reduction to the Plaintiff's 18% shareholding was GBP 2.2 million.
100. In his Closing Statement, Advocate Christie was critical of the modelling methodology that Mr Cliff had applied in relation to the SFA drawdown. Advocate Christie pointed out that in their reports for the Valuation Trial, both Experts had modelled the SFA cashflows up to the exit year which he accepted was appropriate given that they were included in the FM Lite models. They then differed in their treatment in the exit year - Mr Arora felt that no adjustment was appropriate, whilst Mr Cliff deducted the drawdown as debt in the exit year. This treatment in the exit year was the subject of scrutiny in the trial. Advocate Christie submitted that this time, Mr Cliff had stripped the SFA cashflows entirely out of the valuation model, so that the figures between valuation date and the 2028 exit year did not feature those cashflows, and that he had modelled them separately, as at the valuation date of 19 July 2023. Advocate Christie suggested that this had a number of very significant effects on the way in which the modelling of the SFA drawdowns played out which effects had not been explained by Mr Cliff in his report.
101. Advocate Christie noted that for the Valuation Trial, the Experts had been asked by the Court to follow the approach of Mr Arora in his scenario 2. In respect of SFA, he said that this included the operational cashflows during the valuation period up until the terminal valuation year which at that time was 2027 and which was now 2028. There was no terminal value deduction in Mr Arora's scenario 2 during the Liability Trial. Mr Arora remained consistent with this approach for the Valuation Trial. Mr Cliff also remained consistent with it and explained in his Second Supplemental Report ("PC3") (at paragraph 2.18) that he had done as follows - "In keeping with Mr Arora's Scenario 2 valuation approach, in PC3 (his Second Supplemental Expert Report) I now also include the SFA cash flows in the period to 2028 (being my assumed exit year). I then recognise the resulting liability in my exit year while Mr Arora does not". Accordingly, Mr Cliff considered in PC3, in mid-2023, that the Court's finding in the Trial Judgment in favour of Mr Arora's Scenario 2 required him to include the SFA cash flows in his discrete period (i.e. between valuation date and exit year). The difference between the Experts at the Valuation Trial was that Mr Cliff deducted the entire of the outstanding SFA drawdowns at the point of exit, as if it were debt that would be repaid at that point, whereas Mr Arora considered the SFA drawdowns to be operational cashflow which did not require any adjustment as the facility (or similar) would continue to be used by the new owners of the company.
102. Advocate Christie reminded us of the genesis of our order in relation to the SFA modelling in the May Judgment. During the Valuation Trial the Court had put to Mr Arora that "So linking that to the SFA funding, if the SFA funding arrangements result in future cash flows being reduced by the amount needed to refund the SFA, or perhaps looking at it another way, to take into account the advances made by the SFA towards future cash flows, doesn't it logically follow that the current value of the amount advanced by the SFA, but discounted for the fact it won't be paid to them immediately, ought to be deducted from the terminal value? That's the concept we're having difficulty grappling with". Mr Arora had responded "it's not actually going to impact the overall value by a significant amount just because of that discounting effect". Mr Arora also pointed out that "There's a nuance to that, which is you do need to model the discount rate going forward, which is a challenge".
103. This exchange led to the Court concluding, in its May Judgment (at para.140), that "the relevant cash flows should be modelled out in the manner that Mr Arora suggested, rather than simply deducted from the exit value as suggested by Mr Cliff".
104. Advocate Christie suggested that whilst Mr Arora had followed this request, Mr Cliff had done something different. Inconsistently with the Court's direction and with his own acknowledgement in PC3 of the requirements of consistency with Scenario 2, he had removed the SFA operational cashflows between 2023 and 2028 from the valuation model and modelled the entire SFA cashflows separately. This, he said, made it very difficult to compare the modelling and inputs of the two Experts and to analyse the drivers behind the differences, to the extent that it was difficult to analyse even the outcome of Mr Cliff's modelling of the SFA cashflows.
105. Advocate Christie argued that when Mr Cliff stated that he had modelled the SFA cashflows with a negative £12.38m effect on net present value at the valuation date, or negative £2.2m on Mr Pender's share, that was net of the positive SFA cashflows between 2023 and 2028. This was not comparable to previous adjustments made by either expert. Conversely, Mr Arora's adjustment (which ranged from negative £11m (assuming a 5 year payment delay, and slower interest rate decline) to positive £4m (assuming a 10 year payment delay, and faster interest rate decline) impact to 100% of the Enterprise Value in AA4, paragraph 7.4.3 reflected the impact of the SFA cashflows from 2028 onwards only.
106. He argued that what this meant was that the 2023 impact of Mr Cliff's PC3 methodology (deducting the SFA drawdowns outstanding) was either negative £37.44m or negative £39.392m. The 2023 impact of Mr Cliff's Third Supplemental Report methodology and inputs (isolating his modelling of the post-exit cashflows only) was negative £64.5m as compared with the starting point from which Mr Arora's calculations were made. In other words, he said that the negative impact on value of the way in which Mr Cliff had modelled the post-exit SFA cashflows was twice as large as his Second Supplemental Report methodology. Not only was this not at all clear in his Third Supplemental Report but it appeared to give the opposite impression where, at paragraph 5.168, he stated "I consider that a reasonable reduction to the Plaintiff's 18% shareholding is GBP 2.2 million".
107. This issue is one where we have not found the Experts to be particularly helpful. It may be that the task that we set was more difficult than we or the Experts expected. In Mr Arora's case he appears to have regarded the FM Lite v.2.8 model as being inadequate to carry out the necessary modelling and his approach was described as "cursory" by the Second Defendant, whilst Mr Cliff is alleged by the Plaintiff to have carried out an exercise which differed from that ordered by the Court.
108. Mr Arora's assessment was that a negative £11,000,000 to positive £4,000,000 impact on the Enterprise Value of Guardian was appropriate, whilst Mr Cliff's assessment was a reduction to Guardian's Enterprise Value of between £11,000,000 and £13,600,000. However, as we noted in paragraph 100, Mr Cliff had removed the SFA operational cashflows between 2023 and 2028 from the valuation model and modelled the entirety of the SFA cashflows separately. As the Plaintiff pointed out in his closing submissions this makes it very difficult to compare the modelling and inputs of the two Experts and to analyse the reasons for any differences. We do not regard the methodology applied by Mr Cliff as being that requested by the Court, further noting that it does not appear to be consistent with what he had done previously. However, in our view the Court was clear as to the exercise required, and we consider that we are entitled to take the expert evidence at face value as to the size of Mr Cliff's proposed adjustment, albeit that he may have calculated it in a different way. We therefore take the figure of negative £11,000,000, being the figure that is at the top of Mr Cliff's stated range in his conclusion and at the bottom of that of Mr Arora. We have endeavoured to achieve a just result in a complicated exercise, taking into account all of the submissions by the parties on the two respective SFA Drawdown calculation methodologies.
109. We noted a submission made by Advocates Redgrave and O'Connell at paragraph 168 of their Additional Closing Submissions, which illustrates the difficulty that the Court has faced in the valuation phase of the proceedings.
110. Advocate Redgrave said this:
"PSG appreciates that it cannot relitigate those decisions before this Court. However, it invites the Court to acknowledge these basic propositions when considering the appropriate level of award in this case:
(a) No one has a crystal ball, and no methodology is perfect; the valuation process is nothing more than an attempt to estimate a value, using information and experience, but it may well arrive at a number that will be proved to be very wrong.
(b) Whatever methodology is used, valuing a young company means estimating its likely performance many years into the future, which is an inherently uncertain exercise.
(c) There are specific problems in valuing a life insurance business by applying an EBITDA multiple. As Mr Cliff explained, this approach treats the movements in the IFV as "profit". However, this movement is not itself cash, but is a figure obtained through the business's accounting and actuarial policies. These highly technical calculations are essentially actuarial issues. (PC4, paragraphs 2.26 to 2.34) {P2/1/23-25}.
(d) There are many inputs to which the overall valuation is highly sensitive - a small percentage change to the choice of discount rate, or multiplier, or EBITDA, for example, can have a major impact, measured in millions of pounds.
(e) This effect is magnified if more than one of the inputs are wrong, and the effect in each case pushes the valuation in the same direction.
(f) The Court should therefore acknowledge that if the result of applying its chosen inputs to the chosen methodology is a value that common sense and other evidence shows must be too high, then it must accept that something is wrong, and make an adjustment to correct for that (a "sense check").
(g) This adjustment could mean revising some of the inputs, or it could be achieved by an overall reduction to bring the figure in line with a reasonable range of outcomes."
111. Whilst this approach may be superficially attractive, we do not regard it as appropriate. The suggestion that the Court should make an adjustment by way of a "sense-check" is to invite the Court to disregard the evidence of the Experts and to come up with a final value, not based on expert evidence but on "common sense", a concept which is easily said but wholly undefined.
112. We were invited by the Second Defendants in their closing statement to have a further oral hearing to "avoid injustice and reduce the issues on any appeal". We made clear in our judgment of 17 May 2024 that it was a matter of some regret that we found ourselves unable to make a final decision at the Second Hearing due to the significant differences between the Experts and a number of unresolved issues which were likely to impact the valuation. We therefore gave directions both to the First Defendant in relation to the alleged modelling error and to the Experts with a view to their completing and filing their respective valuations. The parties were then to file closing submissions which they have done.
113. In our view a further oral hearing would have served little purpose save for presenting an opportunity to re-litigate matters that have already been determined by the Court, a course which was adverted to in the Second Defendant's closing submissions where it was said that "In order to avoid a grave error, and an injustice, we invite the Court, finally, to accept that the inputs it has ordered in this valuation exercise are wrong".
114. We found the table at paragraph 11 of the Plaintiff's Further Submissions to be a helpful starting point. That table was prepared by Mr Arora to demonstrate the principal differences between his and Mr Cliff's calculations.
115. We start with Mr Arora's Enterprise Value of £474,082,000.
116. We deduct £85,000 in respect of the different methodology for applying uplift to APE in the FM Lite v2.8 model.
117. We deduct £11,226,000 in respect of Mr Cliff's reduction in expenses by 5.2% in the exit year 2028 as compared with Mr Arora's reduction by c.9%.
118. We deduct £11,000,000 in respect of the Differences in modelling of the SFA facility.
119. We deduct £13,979,000 in respect of Mr Arora's use of 20% as the cost of equity compared with Mr Cliff's use of 21%.
120. We deduct £200,409,433 being the agreed figure of £187,009,433 net of the mezzanine counterfactual, plus £13.4 million for the counterfactual relating to the money PSG put into the Company in January 2018 as stated in paragraph 152 of the May Judgment.
121. Those deductions result in a total of £237,382,567, 18% of which is £42,728,862.
122. Accordingly, we order the Second Defendant to pay the sum of £42,728,862 to the Plaintiff being the sum equal to the fair value of his former 18% shareholding in the Company as at 19 July 2023. We further order the transfer to the Second Defendant of the Plaintiff's 1 Waterfall Protection Payment Share for no additional consideration.
123. We shall hear arguments on the matters of interest on the judgment sum and costs on a date to be fixed.