RUSSELL L. J. - This is an appeal concerning the valuation for capital gains tax on April 6, 1965, of 98,604 ordinary stock units in R. W. Crabtree & Sons Ltd. owned by the taxpayer, Peter Neville Crabtree. The taxpayer also owned some preference and preferred ordinary stock in the company; but having mentioned that, I need not further consider it. The facts of this case are fully set out in the stated case and the judgment of Pennycuick J.  Ch. 626, and in those circumstances I do not propose to burden this judgment with repetition on them.
The method of valuation with which we are concerned is set out in section 44 of the Finance Act, 1965, and the prima facie valuation is by sub-section (1) stated thus : 'Subject to the following subsections, in this Part of 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. But when we come to securities that are quoted on the London Stock Exchange, subsection (3) supplies a measuring rod, and, so far as now material, the terms of sub-section (3) 0 and I read in the extended definition of 'market value' which is found in subsection (1) - are these. In effect it says that in the cases of shares of securities quoted on the London Stock Exchange, the price which they might reasonably be expected to fetch on a sale in the open market shall, except where in consequence of special circumstances prices so quoted are by themselves not a proper measure of the price which the shares of securities might reasonably be expected to fetch on a sale in the open market, be as follows - and then it sets out references, with which I need not concern myself, to quotations in the London Stock Exchange Official Daily List and bargains recorded therein.
The first question in this case is : Is it correct as a mater of law to say that there existed on April 6, 1965, in this case, special circumstances in consequence of which the Stock Exchange prices were not by themselves a proper measure of the price that I have just mentioned The circumstances relied upon by the taxpayer were that, first of all, the board of R. W. Crabtree & Sons Ltd. had not, prior to April 6, 1965, made public the fact that there had been discussions with Vickers of a possible cash take-over bid by Vickers, discussions which in fact had for the time being been halted in February, 1965; secondly, that the evidence showed that such an announcement would have resulted in the Stock Exchange price on April 6, 1965, being of the order of 51s. rather than 42s. 6d.; and, thirdly, that the evidence of Mr. Gillum of Kleinwort Benson Ltd. was that in his considered opinion the Stock Exchange, and therefore the public, should have been informed of the existence of these discussions or negotiations before April 6.
The special commissioners formed the view that there were relevant special circumstances, and then turned to examine the situation under subsection (1). I would observe that a finding that there were relevant special circumstances requires an implicit finding that subsection (1) must throw up an answer other than one based on the Stock Exchange prices, because the special circumstances are only such as have the consequence that the latter - the Stock Exchange prices - are not a proper measuring rod for that to which subsection (1) will lead. On arriving, then, at sub-section (1), the special commissioners considered that the Stock Exchange was 'working in blinkers' (to user their phrase) and was (to use their phrase again) 'shut off from information vital to a realistic assessment of the true value of the stock,' and the Stock Exchange was not therefore to be considered the open market for the purposes of sub-section (1). They then decided on a valuation, which was based on that evidence, to which I have already referred, of what the Stock Exchange price would probably have been had the negotiations been announced before April 6. Here I would stress that we are concerned, as the special commissioners and Pennycuick J. were concerned, not with a conception of the intrinsic value of these shares, but with what price they might reasonably be expected to fetch on a sale in the open market.
Pennycuick J. agreed with the view of the special commissioners that a failure to announce the negotiations was a relevant special circumstances, and he held that, in considering the open market under subsection (1), the special commissioners were right to treat the possible purchasers as people having information as to the take-over negotiations. In this connection he referred to In re Lynall, decd. while at the same time he had, and expressed, reservations as to how far the analogy should be taken. He did, however, rely on it to some extent as indicating that the price to be reasonably expected on a sale in the open market was in a market in which all prospective purchasers had all such information as is normally available to purchasers in that market. In re Lynall, decd. was a case of an unquoted private company. It was a case of valuation for estate duty purpose -though it is not suggested that the principles of estate duty valuation are any different from the principles and the law applicable to capital gains tax valuation. The evidence was that in such cases a proposing purchaser of a substantial block of shares in such a company as that would approach the board of the company before buying the shares and ask all reasonable questions of the board, and that the board as an invariable practice would answer those questions, one of the questions - and the relevant one in that particular case - being whether a public issue was in mind or contemplated.
In this court the Crown submitted that there was not any justification for the view that the failure to publicise the negotiations before April 6, 1965, was a special circumstances. For my part, I would accept that the failure to publicise the negotiations was not a special circumstances. It is perfectly true that Mr. Gillum expressed the expert view that the board of Crabtree ought to have publicise the negotiations, and it is true that this view was accepted by the special commissioners, there being no evidence to the contrary. But subsection (3), in providing a measuring rod, is an extremely useful subsection. It is, I think, designed to reflect the accepted practice in estate duty cases; and, of course, cases may occur of a control holding where mere multiplication of the quoted price for a single stock until will not represent the price obtainable on a sale of the holding; or there may be cases where the Stock Exchange quotations, many factors - ignorance, optimism, pressmism, false rumour, inside information - that contribute to a Stock Exchange quotation, and it would obviously be wholly disruption of the value of subsection (3) if those matters were to be subject of analysis on valuation, whether for capital gains tax or for estate duty.
It is right to say that that approach is disclaimed by Mr. Graham, who appears for the taxpayer. He relies exclusively on the evidence of Mr. Gillum that the public should have been told by the Crabtree board, presumably with the assent of the Vickers board, of the tentative negotiations that had taken place. But the one thing that Mr. Gillum did not say was that either universally or even normally boards would, in the given circumstances, publicise the fact of discussions or negotiations. In my judgment, the evidence was insufficient to justify the conclusion that there were here special circumstances, as that phrase is used in sub-section (3), so as to enables the taxpayer to escape from the measuring rod of subsection (3).
But the questions is, in my view, also to be answered in another matter and in the same sense. What grounds are there for saying that the consequence of the non-event of non-publication of the negotiations was that the Stock Exchange quotation would produce less than the price on a sale in the open market It was argued that a block of stock of this importance in this sort of company would more likely be offered on expert advice to financial institutions and not through the Stock Exchange. Well, there was not evidence of this, but I am prepared to accept for the purpose of this judgment that the open market would thus be wider than those who buy only through the London Stock Exchange. Mr. Graham said that the owner of such a block would go for advice to somebody like Mr. Gillum, and that the institutions approaches by Mr. Gillum, or the proposed vendor, would ask question. It was then suggested that those questions would lead not to a private disclosure to a few of the negotiations, but to publication.
But, of course, we must forget that this block of shares happened to be owned by the taxpayer, who was a director and knew all about the negotiations. We must assume a shareholder with the same block who knew nothing about them. I cannot for myself see how it can be realistically said that the open market must be assumed to know of the negotiations when it is quite plain that the open market would not have known. Nowhere in the evidence was it suggested for a moment that in the event of a holder of such a block of quoted shares in this company offering them to institutions either that the latter would approach the board of the company with an inquiry as to whether any take-over approaches had been made, or that the board in answer to such inquiry would have said other than : 'We always says No comment when we are asked that kind of question', or that the board would have felt obliged because of the questions to publish the fact that there had been negotiations. It seems to me that there is no possible analogy here with a case such as In re Lynall, decd.
I have already adverted to the facts in In re Lynall decd. : that court in that case had clear evidence as to what would go on in the market as a matter of course, and indeed as an invariable practice, and were concerned only to say : 'We will look objectively at what goes on in the market with this type of share, and we do not look subjectively at the evidence of the particular board that it would not answer this question'. That was what that case was concerned about. But the court there had full information as to invariable practice. I only wish to drawn attention to that in particular because of the complete lack of evidence in the present case suggesting that say steps would be taken by virtue of which, on a hypothetical sale, it would be thought that purchasers in the open market would in fact have become aware of the negotiations. This, in my view, is an additional ground for holding that there was no relevant special circumstances.
It is, I think, wrong in law, besides being wholly unrealistic, to suppose, to infer, or to assume that in the open market under subsection (1) the possible purchasers would, in making their offers, be aware of the negotiations. I, for my part, would accordingly allow the appeal.
SACHS L. J. - The manifest intent of the legislature when enacting section 44(3) of the Finance Act, 1965, was to provide for shares quoted on the London Stock Exchange a simple and easily accessible basis upon which to found the many thousands of calculations which have to be made every month for computing liability to capital gains tax. To that end, subsection (3) provided that as regards securities thus quoted the price which they 'might reasonably be expected to fetch on a sale in the open market,' to recite the words of subsection (1), must in general be assessed by reference to the quotations to be found in the Stock Exchange Official Daily List of the relevant date or to the recorded prices for bargains done on that date. It is to be observed that the quotations on no other stock exchange were given a parallel ranking by the statute.
The provisions of subsection (3) plainly stem from the experience gained over many years of the practice that has matured in regard to calculations made for the purposes of assessing estate duties. Thus this obligatory method of measurement imposed by this subsection must be taken to have been selected in full knowledge of both the advantages and disadvantages inherent in the bargaining processes that prevail on the London Stock Exchange. In essence the legislature took that market at it found it.
Apart from certain specific provisos, the only exception to this obligatory method is 'where in consequence of special circumstances prices so quoted are by themselves not a proper measure of the market value' - that is to say, of the price referred to in subsection (1). The onus of establishing such special circumstances lies, of course, upon whoever alleges their existence.
It must not be overlooked that such circumstances must be special in relation to the nature or conditions of the Stock Exchange market or its lists or to the particular holding under consideration, as opposed to special in relation to the personal position of the owner of that holding. It has thus been properly conceded for the taxpayer that his special knowledge of Crabtrees affairs, derived from his being a director, cannot be taken into account. That is nonetheless something that needs to be emphasised so that there may be avoided any inadvertent tendency to bring in that special knowledge as a factor by some back door or to apply tests other than those applicable to sharesholders who have no such knowledge.
The sole point on which reliance was placed by the taxpayer in this court was a special circumstances affecting all shareholders in the company that was alleged to exit on April 6, 1965, viz. : that the then 'unofficial negotiations' (to use the descriptive words of Sir Charles Dunphile in his letter of July 30) between Vickers and Crabtree ought to have been the subject of some public announcement which would have become known to the members of the London Stock Exchange, and thus to those who deal there.
I am by no means convinced that there was any evidence before the special commissioners on which they were entitled to hold that in 1965 such an announcement would by April 6 have been normal in the circumstances - far less that it was something that was invariably (to use the phraseology adopted in In re Lynall decd.) to be expected. Nor does it seem to me that the special commissioners so held. Mr. Gillum of Kleinwort Benson Ltd. said that in his view (and I strees those words) a public announcement would have been appropriate, and that in his opinion it should have been made. But even that evidence taken at its highest needs to be read in the light of the fact that months later, in the first days of August when official negotiations had substantially been concluded, neither Messrs. Morgan Grenfell nor Kleinwort Benson Ltd., the eminent merchant bankers then concerned respectively for Vickers and Crabtree, caused an announcement to be made in advance of the formers offer of August 17. To my mind, there was no material before the special commissioners on which it could be held that on or before April 6 either the Stock Exchange or those dealing there were entitled as of right to be told of the negotiations, such as they were then.
Be that as it may, the fact remains that day in and day out there occur on the London Stock Exchange situations in which it may well be said that an announcement should have been made by some company which if made would affect the price of the quoted shares. This can and does happen in relation to many various events. For instance, it happens in relation to news of the success or failure of bore holes affecting the prospects of mining companies; to the publication of a companys accounts being deferred beyond the proper time; to the effects of important matters which may only later become public when published accounts appear; or to the imminence of the successful completion of some negotiations relating to a highly valuable contract. Sometimes the absence of that information may results in the quoted prices on the Stock Exchange being higher than if it had been available, sometimes lower. That all forms part of the pattern of the general circumstances in which the market operates and under which prices and fixed having regard to supply and demand.
The Stock Exchange, like other bodies concerned with the goods name and best interests of the City, may be taken to do its best to see that as much informations as practicable is available to those who deal in the market. It does not, and cannot, guarantee the availability of that information, and having regard to the general circumstances in which it operates, it cannot be said to be a special circumstances merely that in some particular instance information has not become available. It would make a most serious inroad on and to an extent nullify, the manifest intention of section 44(3) if a companys failure to provide information of the type under consideration were to open the way to an inquiry as to what was the correct price under subsection (1). To take only one instances, it could in future produce most untoward complications as regards the holding of any shareholder in a company when that shareholder dies between the date an announcement should have been made and the date on which the news broke.
Thus I respectfully take a different view from that of Pennycuick J. as to whether the matters found to exist in the stated case form a special circumstances. Moreover, I agree with what Russell L. J. has said as to the results of any inquiry into what, on the particular facts of the present case, would have been the result of an investigation to ascertain the open market price under subsection (1).
I need only add that in the instant case it is obvious that all concerned in the negotiations acted with patent honesty. Indeed, one glance at the course of the quoted prices between February, 1965, and August 17, 1965, shows that there was no leak of any kind, and that everybody preserved a well-intended discretion that many might regard as commendable. Accordingly, nothing in this judgment is intended to relate to some occasions when a false market is created through being fraudulently rigged by the aid of false information or by dishonest concealment of facts. On that type of circumstances, at the instances of counsel for the Crown, I make no observation.
I agree that the appeal in agree and but for the fact that we are differing from Pennycuick J. I should not think it necessary to add anything. However, what I am going to say can be stated quite briefly. Pennycuick J. in the course of his judgment said :
'It seems to me that the market value of any assets, i.e., the price which that asset might reasonably be expected to fetch on a sale in the open market, must be the price in a market where the prospective purchasers have all such information as to any relevant factors as is normally available to purchasers in that market, having regard to the nature of the market..... having regard to the evidence of Mr. Gillum which the commissioners accepted, the commissioners were, it seems to me, clearly justified in finding that prospective purchasers on the Stock Exchange were entitled to have information as to the take-over negotiations. Once they reached this conclusion, it necessarily follows that the absence of this information represents a special circumstance which renders the quoted value something other than a proper measure of market value.'
It is necessary, in the light of those observations by Pennycuick J., to look with great care at precisely what was the evidence before the special commissioners and what their findings on that evidence were. Mr. Gillums evidence is set out in paragraph 7 of the stated case, where it is noted that at April 6, 1965, the negotiations for a take-over had been in a state of suspended animation since the previous February. It appears from paragraph 6 (9) of the stated case that in February the course that the negotiations had taken was that it was the second time that the parties had met to discuss a possible take-over. They came to the conclusion on that occasion that the take-over should take the form of a cash offer, and the discussions proceeded on this footing and on the basis that the figure would be about Pounds 7 million. The negotiations at that stage were in a quite inchoate state. Mr. Gillums evidence goes on, as reported in the case, to state that :
'He considered that it would have been appropriate for the shareholders of R. W. Crabtree & Sons Ltd. to have been advised by or before the beginning of April 1965, of the position generally as regards the approach made by Vickers,' and that 'If he had then been advising the directors of the company, he would have favoured a statement being made to the effect that they announced that discussions were in progress which might lead to a cash offer being made for the whole of the issued capital, but that the discussions were expected to be of some duration and that no further announcement should therefore be expected at an early date.'
It is true that later on in his evidence as recorded by the special commissioners in the case stated Mr. Gillum expressed the view that the Stock Exchange had no in his view been given at that time - that is, at April 6, 1965 -information as to the negotiations which should have been supplied to them; and he thought that because of this current quotations did not bear any true measure of the value of the stock units in question.
In the light of that evidence the special commissioners found that at April 6, 1965, the meetings of January 15 and February 24, 1965, between the two boards had taken place - and I quote from the case stated :
'They had not carried matters to the point of finality, but they had carried them to a stage at which in Mr. Gillums view it would have been appropriate for the directors of R. W. Crabtree & Sons Ltd. to have made a public announcement to the effect that discussions were in progress which might lead to a cash offer being made for the whole of the issued capital'
with a caveat attached to such a statement. The commissioner go on to say :
'Where there in those circumstances special circumstances in consequence of which the quote prices were not a proper measure of market value as defined in section 44(1) ?'
Analysing their findings precisely, the only fact relevant to the present consideration that they seem to take into consideration at that stage is Mr. Gillums view that it would have been appropriate that the directors should have made an announcement, and in the light of that they come to the conclusion that there were special circumstances. They go on to say :
'..... on the evidence before us we were satisfied that the London Stock Exchange prices on April 6, 1965, were substantially less than they would have been if an announcement of the kind which Mr. Gillum considered should have been made had been made before that date.'
When one comes to look closely at the findings of the special commissioners, it seems to me, as Russell L. J. has said, impossible to reach the conclusion that they found that a public announcement of the state of the negotiations as they existed at April 6, 1965, was a matter which would have normally, much less invariably, been made available to persons dealing on the Stock Exchange.
The point at which, for himself, I part company with Pennycuick J. is that passage in the judgment, where he says that the evidence as accepted by the commissioners established that prospective purchasers on the Stock Exchange were entitled to that information as to the negotiations. I do not think that the evidence establishes nay such entitlement; and I do not think, with respect to Pennycuick J., that the special commissioners so held. They were very careful, as I read their case stated, in limiting their findings. I for myself, entirely accept the reasoning which has persuaded Russell L. J. to his conclusion, had I agree with it. On those grounds I agree that the appeal should be allowed.
Appeal allowed with costs in the Court of Appeal and below.
Leave to appeal refused.