Hypothetical open market valuation of private shares includes material facts a prudent purchaser would reasonably obtain on inquiry.

For valuation of restricted shares in a private company under section 7(5) of the Finance Act, 1894, the hypothetical open market sale is assessed on the basis of what a willing purchaser would reasonably need to know, not merely on published information. The Court rejected a valuation approach tied to what a particular board would disclose, because that would make tax consequences depend on the board's choice. It also rejected limiting the exercise to public accounts alone, since a prudent purchaser would seek other material facts, including later trading results and confidential matters affecting prospects. The purchaser is therefore attributed with information reasonably obtainable by inquiry, and the valuation was increased accordingly.

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Issues: What information is to be imputed to the parties to the hypothetical open market sale postulated by section 7(5) of the Finance Act, 1894 when valuing restricted shares in a private company for estate duty purposes.

Analysis: The governing valuation exercise requires a hypothetical sale between a willing vendor and a willing purchaser in an open market, but the sale must still reflect the reality of what a prudent purchaser would reasonably seek before buying. The Court rejected a valuation method that turned on what a particular board of directors would, in fact, choose to disclose, because that makes the tax consequence depend on the whim or personality of the board. It also rejected limiting the valuation to published information alone, since that would exclude material matters a prudent purchaser would necessarily want to know, including trading results for the period after the last published accounts and confidential facts bearing on the likelihood of a public issue. The better approach is to assume that the purchaser would make all reasonable inquiries from available sources and would receive truthful answers to those inquiries.

Conclusion: The hypothetical purchaser is to be attributed with material confidential information reasonably obtainable by inquiry, not merely published information. The share value was therefore to be fixed at 4 10s. per share, in favour of the Revenue.

Final Conclusion: The appeal succeeded and the estate duty valuation was increased by taking account of information that a prudent purchaser would reasonably obtain before buying the shares.

Ratio Decidendi: For valuation under section 7(5) of the Finance Act, 1894, the hypothetical open market purchaser of restricted private company shares is deemed to make all reasonable inquiries and to receive truthful answers to those inquiries, so valuation is not confined to published information alone.

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