AJW and JMW

[1998] FamCA 2377

[1998] FamCA 2377

FAMILY LAW ACT 1975

IN THE FAMILY COURT
OF AUSTRALIA
AT BRISBANE  No. 9107 of 1995

BETWEEN:

AJW

Husband

AND:

JMW

Wife

BEFORE THE HONOURABLE JUSTICE WARNICK

Dates of Hearing:  15, 16, 17, 18 19 December 1997 and 16 February 1998

Date of Judgment  11 March 1998

APPEARANCES:  Mr Kirk, Senior Counsel, instructed by Barry & Nilsson,
  Solicitors of Brisbane, appeared for the HUSBAND.
  Mr Page, Senior of Counsel, instructed by Carmel Murray
  Solicitor, of Brisbane, appeared for the WIFE.

PROPERTY – Value of property – Company S PROPERTY – Value of property – Company Shares – Confusion in terminology - Whether “value to the owner” should be used to refer to a methodology employed to determine the value of particular property, or only to the objective of the valuation process.

EVIDENCE – Expert evidence – Valuations based on possibilities or assumptions unlikely to be capable of proof – whether in such circumstances, a range of values would be more helpful to the parties and to the Court.

Note: These were, primarily, property proceedings between a husband and wife.  The parties were married in 1980 and finally separated in 1995.  There were 3 children of the marriage.  The parties’ net assets were found to be $1,670,710, and were derived mainly from the initial contributions of the husband and subsequent inheritances received by him.

During the trial of the matter, the value to be attributed to the husband's minorty shareholding in the C Pty. Ltd. Group, was in issue between the parties.

Mr C, accountant, gave evidence for the husband and Mr F, accountant for the wife.

The case is reported on two aspects only:

Firstly, the difference between use of the term “value to the owner” to describe the objective of the valuation process, as opposed to the use of that term to describe a valuation methodology.

Secondly, as to the approach which accountants/valuers are advised to take when it is necessary to base assessments of value on a number of assumptions, some or all of which are unlikely to be established at the trial.

The shareholders of C Pty. Ltd, incorporated in 1972, were the husband and his two brothers, each holding 100 ordinary shares.  There were also 100 redeemable preference shares held by the husband's mother, but these did not participate in capital. 

The husband's mother was a Permanent Governing Director and the husband and his brother, S, were directors too.  The principal activity of the company was investment and it held shares in the related companies B Pty. Ltd., Co Pty. Ltd., Bl Pty. Ltd., and JKH Pty. Ltd.

These four related companies were also all investment “vehicles”, in which both the husband and his brother, S, were the directors.

Held:

1. The debate between the accountants was beset by a degree of confusion, largely due to the terminology used, and a failure to adapt definitions appropriately into the field of property division in Family Law.

2. There could be no doubt that the objective of the valuations should have been to assess the value of the shares to the husband (owner) (see Harrison and Harrison (1996) FLC 92‑682, at p.83,087).  That was so whether there were "special benefits" or not, though if there were special benefits, they must be valued in achieving the objective. However, the use of the term "value to the owner" in Family Law property cases, should not be dependent on the existence of special benefits, but rather, be as descriptive of the objective of the valuation exercise.

3. The use by Mr F of the term “value to the owner” as a methodology was confusing, particularly when used in contrast to the methodology of “fair market value”.  It was incorrect to adopt, as Mr F did, the concept of “value to the owner” (albeit as a methodology) only because of satisfaction that there was no market for the shares, and therefore no “fair market value”.  As stated above, the objective in cases such as this, would always be to assess the value to the owner.

4. On the other hand, the selection by Mr C of the hypothesis of “fair market value” as the objective, given the nature of the case, created its own confusion.  Where there is a market for shares, market value may well be the same as “value to the owner”.  Ramsay v Ramsay (1997) FLC 92-742. But where there is no market, it is something of a “non-sequitur” to seek to ascertain “market value” as the objective of the valuation.

5. The mischoice of “fair market value” as the objective of the valuation may lead the valuer to adopt a methodology which may suit the situation where there actually is a market, but which may not wholly suit a circumstance where there is no market.  So, for example, there may be an impetus to deduct realisation costs, as if shares were going to be sold, when in fact, because there is no market, they are not, and cannot, be sold.  Alternatively, a valuer who has mistated the objective to be the ascertainment of “fair market value”, may claim that the value is nil, because there is no market.  This mistake would be avoided if “value to the owner” was always the objective.

6. Mr F's approach assumed that the husband would be in a position to realise his shareholding upon the death of his mother and that assumption in turn involved a series of assumptions as to the way in which the other shareholders would act at that time. Those assumptions involved speculation which was not an appropriate field for opinion evidence by accountants.  The mere possibility of the husband realising the net asset backing value of his shareholding at the relevant time was a poor basis for a valuation which took that possibility as a certainty and then simply valued the shareholding, as if the pro rata share of the companies' assets was a vested, though deferred, realisable benefit.

7. Valuations which take a set of possibilities or even probabilities and assert a valuation based upon them as if they were certainties and therefore the only proper basis of valuation, exacerbate litigation. Ramsay v. Ramsay (1997) FLC 92-742 referred to.

8. Parties and the court would be better assisted by the recognition of a range of possibilities in the future, and a range of valuations, to match, leaving it to the court, on the facts established before it to apply the relevant value, or if the facts lead to no certainty, merely to accept the parameters in the exercise of its discretion.  Commonly, such parameters could be provided by a jointly engaged accountant, who would not be under the pressure, which currently seems to arise, upon unilaterally engaged valuers, to present the opposite of the contentions presented by the expert on the other side, in an endeavour to "balance the ledger" of arguments.

REPORTABLE

Warnick J:

1. [These were primarily property proceedings, in conjunction with an application, firstly, for lump sum spousal maintenance and, secondly, for departure from an administrative assessment of child support.  The trial Judge set out the background facts; contributions made by each party at the commencement of and throughout the marriage; both of the parties’ current circumstances and future prospects, and then listed the parties’ assets and financial resources.  The trial Judge outlined that there were issues between the parties regarding the identification of assets and liabilities, and the value or amount of assets and liabilities.  The trial Judge resolved the issue of the value of the family companies as follows.]

THE W FAMILY COMPANIES (“THE C GROUP”)

1. C Pty Ltd was incorporated in 1972. The current shareholders are the husband and his two brothers, each holding 100 ordinary shares (A, B or C respectively). There are also 100 participating redeemable preference shares held by the husband's mother, but these do not participate in capital. It is said that the family regards the ownership of C Pty. Ltd. as being between the four persons referred to, but the legal entitlements to capital are between the three brothers.

1. The husband's mother is Permanent Governing Director. S W and the husband are directors. The principal activity of the company is investment. C Pty. Ltd. holds shares in related companies B Pty. Ltd., Co Pty. Ltd., Bl Pty. Ltd., and JKH Pty. Ltd.

1. Bl is an investment company, incorporated in 1980. The husband and his brother S are directors. There are six shareholders, each of the husband and his brother holding 18 Ordinary shares and C Pty. Ltd., 29 Ordinary shares. The husband's shareholding represents an 18% interest.

1. JKH was incorporated in 1964. It also is an investment company. The husband and his brother S are directors. The husband holds 1 Ordinary share, representing a 16.67% interest in the company.

1. B Pty Ltd was incorporated in 1985. It too is an investment company, with loans to and from related entities. The husband and his brother S are directors. The only two shareholders are C Pty. Ltd. and the Estate of J M W.

1. Co Pty Ltd was incorporated in 1985. It is an investment company.  The husband and his brother are directors. The only two shareholders are C Pty. Ltd. and the Estate of J M W.

1. The value to be attributed to the husband's shareholdings in the C group has been the subject of evidence of two accountants, Mr Calabro for the husband and Mr Flynn for the wife.

(i) Overview of the dispute between the accountants.

1. The issue is presented as one between a "fair market value" adopted by Mr Calabro and "value to the owner" adopted by Mr Flynn.

1. In my view, that debate is beset by a degree of confusion, largely due to the terminology used, and a failure to adapt definitions appropriately into the field of property division in Family Law.

1. At the foot of p.9 of his first report Mr Flynn said:

“W.0 APPROACH TO VALUATION

Valuation Methodology ‑ Value to the owner.

This value known as the 'value to the owner' considers and takes into account the additional economic benefits that ownership of the shares confers to the owners which, at the same time, would not enhance the market value of the shares to the purchaser. 7hese benefits arise from special attributes or advantages which are peculiar to the owner and which may not necessarily be available to a potential third party purchaser. "

1. In my view, contrary to the heading used by Mr Flynn, this is not a statement of a "methodology", but rather, of an "objective".

1. At the most, the term "value to the owner", as used by Mr Flynn, describes both an 14 objective and one of the consequences of (or reasons for) pursuing that objective, viz. the assessment of worth of special benefits to a shareholder.

1. There can be no doubt that the objective of the valuation is to assess the value of the share to the husband (owner) (see Harrison and Harrison (1996) FLC 92‑682, at p.83,087). That is so whether there are "special benefits" or not, though if there are special benefits, they must be valued in achieving the objective. However, the use of the term "value to the owner" in Family Law property cases, should not be dependent on the existence of special benefits, but rather, as descriptive of the objective of the valuation exercise.

1. To add to the confusion in Mr Flynn's report, notwithstanding the expressions indicating that the methodology he was employing was something called "value to the owner other parts of Mr Flynn's evidence make it quite apparent that the methodology used by him was not so described, but was a "discounted cash flow method".

1. Mr Flynn considered "value to the owner" conceptually, as opposed to the concept of "fair market value".

1. However, his discussion proceeded as if one came to choose the concept of "value to the owner" after satisfying oneself that there was no market for the shares, and therefore no "fair market value". Again, 1 do not think that position is so. The objective, in cases such as this, is always, as I said above, to assess the value to the owner. Nor is Mr Flynn's basis (namely, the absence of market value), for choosing "value to the owner" consistent with the definition of "value to the owner", propounded by Mr Flynn. As noted, that definition contains within it the reason for its selection, namely, the existence of special benefits.

1. Mr Calabro seems to have been led into the confusion. On his part, Mr Calabro, having rejected the assertion that the husband received economic benefits which would not enhance the value of the shares to a purchaser, consequently rejected the concept of "value to the owner" as having any significance at all.

1. While that was a logical step if Mr Flynn's definition was exhaustive and was solely a definition of a methodology, it was a step further along the erroneous path created, given that "value to the owner" remains the objective of the exercise, whether there are special benefits or not.

1. The compounded error led Mr Calabro to maintain that, as the "value to owner" concept was not applicable, one looked at the "fair market value" of the various holdings.

1. Insofar as Mr Calabro stated his objective as being to ascertain "fair market value" he was, in my view, further down a wrong path.

1. Moreover, the selection of "fair market value" as the objective in a case of this nature, creates its own confusion.

1. As 1 indicated in Ramsay v. Ramsay (1997) FLC 92‑742 where there is a market for shares, evidence of market value may well be one and the same as "value to the owner".

1. But where there is no market, it is something of a "non‑sequitur" to seek to ascertain "market value".

1. That is not to say, however, that, though Mr Calabro misstated his aim, the methodology he used could not in fact produce a result which represents the "value to the owner", nor that that result could not also equate market value, if there was a market.

1. But the mischoice of "fair market value" as the objective of the valuation may lead the valuer to adopt a methodology which may suit the situation where there actually is a market, but which may not wholly suit that circumstance where there is no market. So, for example, there may be an impetus to deduct realisation costs, as if shares were going to be sold, when in fact, because there is no market, they are not, and can not.

1. Mr Calabro defined a "fair market value" as that at which a willing seller and a willing buyer, both informed of the relevant facts about the various entities, could reasonably conduct a transaction with neither person acting under compulsion to do so or anxious to buy or sell. Elsewhere in his report, however, Mr Calabro referred to the fact that there was really no market for these shares. Mr Calabro endeavoured to explain this apparent contradiction by saying that the absence of market was not of particular significance, because the concept of "fair market valuation" usually dealt with a hypothetical vendor and hypothetical purchaser, rather than an actual purchaser.

1. While that observation is correct, it is one thing to have a hypothetical vendor (though the "hypothesis" is really only that the known owner may sell, not as to the identity of the owner) and a hypothetical purchaser, where there is in fact a market (for it is assumed an actual purchaser can be found); but it is quite another thing to speak of a hypothetical purchaser where there is no market.

1. In fact, I question the relevance (and admissibility) of such evidence, when a hypothesis cannot be connected to the reality in the case.

1. Under these confusions, the debate was really about nothing.

1. Notwithstanding the way in which Mr Calabro mis‑described his valuation as one of "fair market value", in my view, since there is no market, Mr Calabro was really himself recognising that the objective of his valuation was to find a value to the owner.

1. As has been seen, Mr Flynn also tried to achieve "value to the owner", (as I have used the term) though he misdescribed the objective as a methodology, and used a definition not particularly suited to the use of the term in Family Law property cases.

1. Thus, the apparent conflict between Mr Calabro and Mr Flynn which was really a dispute about objectives, not methodologies, and upon which considerable time was spent, was an illusion.

1. Turning from the debate about "concepts" or "objectives" then, to methodologies, we find that both valuers used methodologies which had at their core the assessment of net tangible assets. The subsequent divergence between the accountants lay between Mr Flynn's "discounted cash flow" approach, which proceeded from the fundamental assumption that upon the death of the husband's mother in the statistically anticipated 18.8 years time, the husband would be able to realise his shareholding or the underlying asset value of the shareholding, as opposed to Mr Calabro's approach, which was to discount the share value achieved on a net asset backing approach, to recognise the minority position of the husband as shareholder both now and even after the mother's death.

1. 1 have a number of difficulties with the approach of Mr Flynn.

1. While, as a debate about concepts, the differences between Mr Calabro and Mr Flynn are of no impact on the valuation, it may be that Mr Flynn's confusion about whether "value to the owner" was an objective or a methodology affected his choice of actual methodology, namely "discounted cash flow".

1. Bearing in mind Mr Flynn's definition of when the concept of "value to the owner" was appropriate, it seemed necessary for its adoption by Mr Flynn that the husband enjoy additional economic benefits as a result of his shareholding, which benefits a purchaser might not expect to enjoy.

1. In his report, Mr Flynn noted that funds had been advanced from the W Family Group to family members, including the husband, and that property acquired by the group had been available for the use of members.

1. It is noted that Mr Flynn in no way sought to give a value to these specific benefits, for example, by calculating the rental value of any use of property enjoyed by the husband, but rather he used the asserted existence of such benefits to adopt a particular methodology. 1 did not discern a cogent connection between the choice of methodology and the existence of any "extra" benefits to the husband, and more particularly the valuation of those benefits.

1. In Mr Flynn's evidence‑in‑chief he suggested that there were other "extra" benefits enjoyed by the husband. These seemed to involve the suggestion that the husband would be more favourably regarded by financiers because he was part of a group, which as a group, had considerable wealth. I am unconvinced that this is a real advantage which has anything to do with the husband's position as shareholder as distinct simply from having acquaintances of some wealth, who may come to his assistance from time to time by pledging property of theirs as security for money lent to him. Alternatively, if it is a "benefit" attached to the shareholding, it is not demonstrated that a purchaser would not also enjoy the benefits.

1. The issue is perhaps simply resolved because, in cross‑examination, Mr Flynn conceded that there are no economic benefits received by the husband as a result of his shareholding which do not derive from the shareholding per se and could not therefore, be passed to at least a hypothetical purchaser.

1. Therefore, the basis upon which Mr Flynn said he selected his methodology, is (concededly) absent. However, since Mr Flynn in fact used a methodology which was not dependent on that basis, his ultimate result might still be valid.

1. The most fundamental difficulty with Mr Flynn's approach, however, is that he assumes that the husband will be in a position to realise his shareholding upon the death of his mother. This assumption in turn involves a series of assumptions as to the way in which the other shareholders will act at that time. These assumptions are the very sort of speculation to which I made reference in Ramsay v. Ramsay as not being an appropriate field for opinion evidence by accountants. The mere possibility of the husband realising the net asset backed value of his shareholding at the relevant time is a poor basis for a valuation which takes that possibility as a certainty and then simply values the shareholding, as if the pro rata share of the companies' assets is a vested, though deferred, realisable benefit.

1. As 1 also observed in Ramsay's case, valuations which take a set of possibilities or probabilities and assert a valuation based upon them as if they were certainties and therefore the only proper basis of valuation, exacerbate litigation. The first of such valuations usually invokes one in response in which the opposite conclusions are propounded. Clients must be confused by the gulf presented to them.

1. Frequently the valuations are undermined, because the facts established in court differ from those assumed by either accountant.

1. Parties and the court would be better assisted by the recognition of a range of possibilities in the future, and a range of valuations, to match, leaving it to the court, on the facts established before it to apply the relevant value, or if the facts lead to no certainty, merely to accept the parameters in the exercise of its discretion.

1. Commonly such parameters could be provided by a jointly engaged accountant, who would not be under the pressure, which currently seems to arise, to present the opposite of the contentions presented by the expert on the other side, in an endeavour to "balance the ledger" of arguments.

1. Returning to the position in this case, it is my view that:

   (a)         Mr Flynn may have chosen the methodology of "discounted cash flow", affected by confusion about the concept of "value to the owner";

   (b)       Mr Flynn may have chosen his methodology because of the incorrect view that special benefits to the husband as shareholder existed;

   (c)       Mr Flynn's approach ignores the position that, on present shareholdings and corporate structure, after the death of the husband's mother, the husband will remain a minority shareholder, and his shares will still lack marketability.

1. For these reasons, 1 prefer the methodology of Mr Calabro.

1. Strangely enough, though again considerable time was spent in the hearing dealing with the difference in methodologies just discussed, the difference proves to be of academic rather than practical significance. Mr Calabro applied a discount of 60% to the value, on a net asset backing basis, of the husband's shareholding in C Pty. Ltd. The discount used by Mr Calabro in relation to the husband's shareholding in  Bl and JKH was 55 %.

1. The conversion of Mr Flynn's calculation discounting the capital value of the husband's shareholding over 18.8 years at 5 % to a present discount, shows that it is 60 %, matching the present discount rate applied by Mr Calabro to the husband's interest in C Pty. Ltd..

1. In the end, the significant difference between the accountants lies, not in the difference in "objectives", nor in "methodologies", but in the assessment of values of the assets of the companies in the C group.

1. [The trial Judge then resolved other issues regarding the identification and valuation of the parties’ assets and liabilities; assessed the parties’ contributions; made adjustments for s75(2) factors and divided the property 60:40 in favour of the husband.]

I certify that the preceding 53 paragraphs are a true copy of the extract from the reasons for judgment delivered by this
Honourable Court.
Sgnd:  P. Zellner
Associate