DJM Nominees Pty Ltd v The Nutrition Bar Pty Ltd
[2016] VSC 436
•29 July 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2015 00646
IN THE MATTER of The Nutrition Bar Pty Ltd (ACN 166 123 315)
BETWEEN
| DJM NOMINEES (AUST) PTY LTD (ACN 102 549 422) & ANOR (according to the schedule) | Plaintiffs |
| v | |
| THE NUTRITION BAR PTY LTD (ACN 166 123 315) & ORS (according to the schedule) | Defendants |
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JUDGE: | Randall AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 23 & 24 July 2015, 20 October 2015 |
DATE OF JUDGMENT: | 29 July 2016 |
CASE MAY BE CITED AS: | DJM Nominees Pty Ltd v The Nutrition Bar Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2016] VSC 436 |
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CORPORATIONS – Corporations Act 2001 (Cth) – Oppression orders pursuant to s 233 – Oppression conceded – Valuation of shares for a buy-out.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J L Evans | Pryles & Co |
| For the Defendants | Mr P H Wallis | B2B Lawyers |
TABLE OF CONTENTS
Background......................................................................................................................................... 1
Valuation of shareholdings under Scenario A......................................................................... 5
Valuation of shareholdings under Scenario B.......................................................................... 6
Adjustments........................................................................................................................................ 6
Cash...................................................................................................................................................... 6
Adjustment for ‘Notional Wage’ or ‘Reward for Effort’.............................................................. 7
Depreciation........................................................................................................................................ 8
Minority shareholding discount..................................................................................................... 9
Scenario A or Scenario B................................................................................................................. 10
Costs.................................................................................................................................................... 12
Orders................................................................................................................................................. 12
HIS HONOUR:
The originating process sought ‘oppression’ orders pursuant to ss 233, 461(1)(e), 461(1)(f) and 461(1)(k) of the Corporations Act 2001 (Cth).
On the second day of the hearing, the defendants conceded that the oppression grounds had been made out and as a consequence, the following order was made:
1.Pursuant to s 233 of the Corporations Act 2001 (Cth), the plaintiffs’ shareholdings in the First Defendant (the Company) be purchased by one or more of the Second to Fourth Defendants, as the Second to Fourth Defendants may determine amongst them, at a price which will be determined by the Court subsequently.
Consequential orders were made to obtain the opinion as to the value of the shares in Nutrition Bar Pty Ltd (‘Nutrition Bar’).
Accordingly, the sole issue for determination is the value of the plaintiffs’ shareholding in the Company.
Background
Nutrition Bar was registered on 3 October 2013. The initial directors were Eloise Censor and Marianne Censor. David Milne became a director on 10 October 2014.
The initial shareholders were Eloise Censor, Marianne Censor and Censor Enterprises Pty Ltd. Subsequently the plaintiffs, DJM Nominees (Aust) Pty Ltd (‘DJM’) and JSJ Nominees Pty Ltd (‘JSJ’) also became shareholders. DJM and JSJ were each issued with 10% of the issued shares in Nutrition Bar.
DJM represents the interests of David James Milne. JSJ represents the interests of Joshua James. Each of James and Milne had experience with growing retail food chains through franchising.
In March of 2014 Nutrition Bar carried on business as a single ‘health café’ style business in Swan Street Richmond. Subsequently, after the relationship with David Milne and Joshua James commenced, two further stores were opened. A store at Windsor opened in November of 2014 and one at St Kilda Road opened on 7 January 2015.
The relationship between David Milne and Joshua James on the one part and Marianne Censor and Eloise Censor on the other part was encapsulated in an agreement dated 10 October 2014.
The October 2014 Agreement relevantly provided:
Introduction
A.The further shares in the company shall be issued to the parties in this Agreement.
B.
Operative Part
1.ISSUE OF SHARES
On the date of this Agreement the company and the parties to this Agreement shall sign all documents and do all things necessary to issue additional shares in the Company as follows:
1.1 42 shares to Marianne.
1.2 42 shares to Eloise.
1.3 12 shares to DJM.
1.4 12 shares to JSJ.
2. PAYMENT FOR SHARES
2.1 Marianne shall pay the price of $336,875 as follows:
2.1.1 $85,000 on the date of this Agreement;
2.1.2 $2,500 on 15 October 2014;
2.1.3 $60,000 on 15 November 2014;
2.1.4 $2,500 on 15 December 2014;
2.1.5 $2,500 on 15 January 2015;
2.1.6 $111,875 on 1 February 2015;
2.1.7 $2,500 on 15 February 2015;
2.1.8 $2,500 on March 2015
2.1.9 $60,000 on 1 April 2015;
2.1.10 $2,500 on 15 April 2015;
2.1.11 $2,500 on 15 May 2015;
2.1.12 $2,500 on 15 June 2015.
2.2 Eloise shall pay the price of $336,875 as follows:
[The same regime is set out as was with respect to Marianne]
David James Milne shall pay the price of $30,000 as follows:
2.1 $15,000 on 1 February 2015;
2.2 $15,000 on 1 April 2015.
Joshua Stephen James shall pay the price of $30,000 as follows:
[The same payment regime which applied to David James Milne was then set out]
2.3DJM shall pay the price of $10.00 on the date of signing this Agreement.
2.4JSJ shall pay the price of $10.00 on the date of signing this Agreement.
…
3.FAILURE TO PAY
In the event that any one instalments of the price for the shares is not paid by any party to this Agreement within the period of 28 days after which is due and payable then the Company shall have the right to issue a Notice to the defaulting party stating that it will purchase the shares of the defaulting party at a price equal to a calculation of two times previous three months profit (ebit) as at a valuation for the shares. Upon payment by the Company to the defaulting party the shares, shall be deemed to have been sold, by the defaulting party to the Company.
4. OPERATIONS AND ADMINISTRATION
4.1Marianne shall be responsible for bookkeeping, employment of staff, bookkeeping and general administration and financial matters.
4.2Eloise shall be responsible for the development of recipes and new products, the marketing, public relations matters and the selection of premises in which the business is to be conducted.
4.3For the two year period commencing on the date of signing this Agreement, DJM by its Nominee David Milne shall be responsible for the day to day operations of, establishment of business premises; the design and fitout of the business premises, the financial management, strategic decisions of the directions the business should pursue and the selection of premises upon which the business is to be conducted.
4.4For the two year period commencing on the date of signing this Agreement, JSJ by its Nominee Joshua James shall be responsible for the day to day operations of, establishment of business premises, the design of the fitout of the business premises, the financial management, strategic decisions of the directions the business should pursue and the selection of premises upon which the business is to be conducted.
5.MANAGEMENT PAYMENTS
5.1On the 15th of each month, for the 24 months from the date of signing this Agreement the Company shall pay DJM and SJS a total of $10,000 each month. Until January 2015, this will be funded 50% by Marianne and Eloise’s payments and 50% from the cashflow of the business. From February 2015, this fee will be funded out of the cashflow of the business.
There was no application before me with respect to the efficacy of the October Agreement.
The relationship effectively ceased at a meeting on 22 December 2014 during which the shareholders agreement was discussed and David Milne and Joshua James were requested not to do any further work for the business and to hand over everything that was required to keep the business going. Subsequently, the parties have agreed that a valuation of the DJM and JSJ shares be conducted as at 28 February 2015.
The parties jointly appointed Geoffrey Ronald Sincock of BDO to provide the valuation.
Mr Sincock considered various methodologies for conducting the valuation. He rejected a capitalisation of future maintainable earnings approach on the basis that there was insufficient historical trading data available and that, to date, the unaudited financial statements disclosed trading losses. Mr Sincock rejected ‘costs to create’ as he had been provided with insufficient information to determine whether this type of valuation was appropriate.
Ultimately, Mr Sincock completed his valuation on the basis of ‘value of net assets on a going concern basis’. Mr Sincock said:
This methodology simply requires an analysis of the balance sheet items and adjusting, where necessary, to take asset or liability balances from an historical cost value to a current value.
I have shown the agreed upon asset and liability values as at 28 February 2015 by reference to the submissions of the parties at Appendix B to this report. This analysis provides a list of the agreed upon balances for both assets and liabilities as at 28 February 2015.
Mr Sincock then dealt with the issue of ‘cash’, to which I will return, and continued:
For present purposes I regard the value of net assets on a going concern basis as the most appropriate valuation methodology. This should be distinguished from a methodology which uses net assets on a liquidation basis because it appears that the business conducted through the three stores remain operational and there is no need for a ‘fire sale’ of assets.
Pursuant to paragraph 5 of my order made 28 August 2015, Mr Sincock was to consider two alternative assumptions:
Scenario A - That the obligations of the parties to pay the purchase price instalments as set out in the Agreement between the first defendant, second defendant, third defendant, first plaintiff and the second plaintiff dated 10 October 2014 that fall due after 22 December 2014 or any cash paid to the company by 28 February 2015 pursuant to those obligations (‘instalment obligations’) be treated as an asset of the Company.
Scenario B - That the instalment obligations not be treated as an asset of the Company.
Based upon the direction in order 5, Mr Sincock arrived at the following valuations:
Valuation of shareholdings under Scenario A
Shareholder No. of shares Total value of shareholdings Eloise Censor 6 $37,552 Marianne Censor 48 $300,413 Censor Enterprises Pty Ltd 42 $262,862 DJM 12 $75,103 JSJ 12 $75,103 Total: $751,033 This amounts to a value of $6,258.61 per share.
Valuation of shareholdings under Scenario B
Shareholder No. of shares Total value of shareholdings Eloise Censor 6 $15,863 Marianne Censor 48 $126,905 Censor Enterprises Pty Ltd 42 $111,042 DJM 12 $31,726 JSJ 12 $31,726 Total: $317,263 This amounts to a value per share of $2,643.86.
Adjustments
A number of adjustments were considered in Mr Sincock’s report and further elaborated upon when he gave evidence to assist the Court. Other adjustment issues were raised during the course of cross examination of Mr Sincock and during the course of submissions. I will set out the adjustments in no particular order.
Cash
Mr Sincock noted a discrepancy between the sales values recorded in the MYOB financial statements and the amounts recorded in the point of sale documents. For the period of 1 February 2014 through to 28 February 2015, the total discrepancy was $100,565.51. Mr Sincock was not persuaded to attribute any particular reason for the discrepancies. However, he noted:
I note that this is a relatively new business and that there may have been teething problems and other human error when recording items on the point of sale system. However, the discrepancy is similar between the two accounting periods and is sizeable enough to warrant operational concern.
Mr Sincock did not embark upon any analysis as to whether any cash was utilised to pay creditors. He simply did not have the information to do that.
With respect to the cash discrepancy Mr Sincock said:
Any prudent purchaser of the business would want to make reference to the point of sale records. Any errors of recording would normally be adjusted for when reconciling cash takings to the daily point of sales records.
…
Therefore, in my opinion, the financial statements should be adjusted to account for the higher sales figure.
Each of the two scenarios set out by Mr Sincock are based upon the point of sale documents (the higher amount) which is entirely appropriate.
Adjustment for ‘Notional Wage’ or ‘Reward for Effort’
Mr Sincock noted that the plaintiffs had made submission for the adjustment for ‘Notional Wage’ or ‘Reward for Effort’ being excluded (save for nine weeks post 22 December 2014…) on the basis that none of these amounts were authorised to be paid by the company or its directors.
Mr Evans drew my attention to Marianne and Eloise Censor’s allowance of $97,000, which was effected by way of journal entry. Such amount was, in effect, an allowance for wages which had not been drawn by each of them. Although, the plaintiffs were willing to concede that it was reasonable for them to take a wage from 22 December 2014 until 28 February 2015 (valuation date) it was not reasonable to backdate such claims. In Mr Evans’ submission it was appropriate to add $63,000 into the valuation on either scenario which is the sum of $97,000 less $34,000, on the basis that the net amount was never authorised. Apart from that, Mr Evans did not have any issues with the valuation provided by Mr Sincock.
It is not appropriate to submit that the amount was deducted or recorded without authorisation. Mr Milne conceded that there were discussions that they (Marianne and Eloise Censor) should take ‘some sort of wage’ for their time and effort. With respect to Marianne Censor, his concession only went as far as conceding a nominal sum of $15,000 per year but in relation to Eloise it was an hourly rate which just had not been worked out.
What has been put to me is not that the quantum is too large, nor is it put to me that either or both Marianne and Eloise did not work a requisite number of hours to amount to the $97,000. Further, Mr Sincock does not offer any criticism of the amount and accepts the same for his calculations.
I accept the observation made by Mr Sincock, namely:
Any prudent purchaser would factor into their analysis a commercially realistic level of remuneration for the expected hours that they, or any other employee, would be expected to work in the business.
Mr Sincock factored in the amount as being appropriate irrespective of the argument about whether such was authorised or not. Further, he accepted information about hourly rates being paid to shop managers and area managers and the rates claimed by Marianne and Eloise Censor. He accepted that the claim was reasonable.
The adjustment will be allowed.
Depreciation
Mr Wallis submitted that values had been overstated to the extent that they did not reflect any depreciation. The difficulty for Mr Sincock was that he could only work with the figures which were provided to him. Annexure B to his Report set out the balances agreed by the parties for the period ended 28 February 2015. The entry for store fittings and improvements to property included store fittings ‘at cost’. Mr Sincock assumes that items under $1000 had been written off and that only larger items would have been capitalised in the balance sheet. He said:
… I could only go with what was actually provided to me but the value from the balance sheets that were provided to me, if that was not the value after usage, in other words depreciation, then perhaps – I would need to look at it again but perhaps the value ought to be decreased by the value of that depreciation.
The guide to depreciating assets 2014 published by the Australian Taxation Office sets out a formula of which requires the base value to be multiplied by the number of days held divided by 365 being the number of days in an ordinary year. That figure is then multiplied 200 per cent and divided by the assets’ effective life. That formula is the diminishing value method applicable to assets held on or after 10 May 2006. Assuming an asset has an effective life of 5 years, that would translate to a depreciation on a diminishing value method of 40 per cent in the assets’ first year. The method of calculation did not change in the financial year ending 30 June 2015. On the figure of $170,000 that depreciation could be significant.
However, I am faced with the following:
(a) The figure in the accounts had been agreed;
(b) There is no information derived which would enable me to attribute any part of the sum of $170,835 to any particular store. If depreciation has not been included it would only be significant in relation to the Richmond store which has operated since 2014.
Accordingly, I decline to adjust the figures in any way for depreciation.
Minority shareholding discount
Mr Sincock did not apply a discount for minority holdings. In the submission to Mr Sincock, the defendants sought to rely on Ian Allan Byrne v A J Byrne Pty Limited (‘Ian Allan Byrne’)[1] ‘on the basis that the plaintiffs were not unwilling sellers’. However, in Ian Allan Byrne, Black J found that the plaintiff had not been oppressed. There was not any unilateral exclusion of the minority by the majority. Having considered cases where the minority discount was not applied due to oppression, Black J distinguished it as follows:
…I cannot see a basis for extending the application of that policy to circumstances where a person seeks to leave the business rather than being unilaterally excluded from it.[2]
[1][2012] NSWSC 667.
[2]Ibid [70].
That is not the case here. Oppression is conceded. The plaintiffs referred me to Dynasty Pty Ltd v Coombs (‘Dynasty’)[3] and Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (‘Smith Martis’).[4] Each of Smith Martis and Byrne refer to Dynasty. The Full Court in Smith Martis referring to Dynasty said at [78]:
In Dynasty the Full Court referred with approval to a passage from the decision at first instance in Re Bird Precision Bellows Ltd…. There, Nourse J said that once a finding of oppression has been made, it would be unfair that the oppressed shareholder be bought out on the fictional basis applicable to a free election to sell the shares in accordance with the articles “or indeed on any other basis which involved a discounted price.”
[3](1995) 59 FCR 122.
[4](2004) 207 ALR 136.
Mr Sincock came to the conclusion that the substantial assets of the company:
…are cash and cash equivalents are necessary equipment items, in my opinion it is inappropriate to apply a discount for minority shareholdings.
Albeit that I concur with Mr Sincock’s observation as to why a minority discount ought not to be applied, I am satisfied that the authorities are such that it would be inappropriate in these circumstances to apply to discount in any event.
Scenario A or Scenario B
I am satisfied that Scenario B ought to apply. I have had regard to the statements in Smith Martis and, in particular, in Shirim Pty Ltd v Fesena Pty Ltd[5] where Davies JA said:
The purpose of an order that the oppressor purchase the shares at a fair price is to compensate the oppressed shareholder for the oppression which has taken place.
[5][2002] NSWSC 10.
Under the terms of the October Agreement, the Censor interests were due to pay instalments for shares amounting to $300,000 by 22 December 2015. The plaintiffs were due to pay their instalments by 1 February 2015. Further, instalments were due after the valuation date by each of the Censor interests and the plaintiffs.
Scenario A treats the obligations to pay for the shares as an asset of Nutrition Bar.
Scenario B recognises that the Censor interests have paid more than their combined obligation as at the valuation date and recognises that the plaintiffs have paid nothing at all. Mr Sincock set out that Scenario B reflects both adjustments. That is, the overpayment of $233,750 ought to be recorded in the balance sheet as a liability of Nutrition Bar as at the valuation date. Although it is difficult to distil from the terms of the October Agreement, the parties accept that the plaintiffs’ payment for the shares was calculated on the basis of $75,103 each, being the figure in Scenario A. That amount is represented by $30,010.00 in cash and the balance being recognition from the plaintiffs’ managerial input. In other words, payment in kind. In Scenario A, the full $75,103 is allowed.
In Scenario B, Mr Sincock has excised the plaintiffs’ future payment obligations but has retained an account for ‘payment in kind’ for each of the plaintiffs. The parties agree that the figure for each payment should be as recorded in Scenario B so I will not deal with the calculation further.
However, I am of the view that the lesser value per share is applicable for the following reasons:
(a) It is common ground that the plaintiffs’ involvement in the company was for the purposes of future franchising. Although it would be fair to say that the Censors wished to avail themselves of that opportunity, the experience of the plaintiffs was such that franchising was or it can be inferred that franchising was their primary aim rather than participating in the day to day management of the company;
(b) The plaintiffs did not pay any sum for the shares. Mr Sincock observed that it was doubtful even if they had of paid the $1 per share issued;
(c) The ‘in kind’ allowance for the share price contemplated at least a 24 month relationship.[6] No adjustment is noted to reflect the early cessation (nor should it be).
[6]See terms as to management fees in the October Agreement.
(d) Pursuant to the Shareholders Agreement the value of the shareholding to be issued to the plaintiffs was somewhat arbitrary. Although there was a monetary consideration to be paid, $30,000 payable by instalment of $10.00 on the signing of the agreement, $15,000 on 1 February 2015, and $15,000 on 1 April 2015, no amount was paid. The balance attributable to the shareholding of the plaintiffs, pursuant to the October Agreement was a recognition of a quid pro quo for management work rather than hands on work;
(e) But for the agreed disproportionate cash injection by or on behalf of the Censors, the company would not have been in position to establish the two further businesses which were considered in the valuation by Mr Sincock.
(f) The overpayment by the Censors might have assisted with the opening of the St Kilda Rd premises, which opened after the involvement of the plaintiffs ceased.
Accordingly, in adopting Scenario B, I determine that the amount attributable to each share is $2643.86.
Costs
In the wash up, the amounts involved are relatively minor. However, this is a matter, notwithstanding earlier discussion about a pay out, where the plaintiffs were required to issue proceedings. Oppression was initially hotly contested and it was only on the second day of the hearing that oppression was conceded. In those circumstances costs ought to follow the event except for the valuation carried out by Mr Sincock. The parties had initially agreed to obtain an independent valuation when it had been decided to part ways. In those circumstances the cost of a valuation would have been incurred in any event.
Orders
1. The 2nd to 4th defendants purchase the plaintiffs’ shares at $63, 452.
2. Notwithstanding that I have made the order against the 2nd to 4th defendants, the 2nd to 4th defendants may decide which of them or more than one of them actually purchases.
3. The 2nd to 4th defendants pay interest to the plaintiffs on the sum of $63,452 from the commencement of this proceeding until payment calculated at the rate set out in the Penalty Interest Rate Act 1983 (Vic).
4. The defendants pay the plaintiffs’ costs on a standard basis except for Mr Sincock’s costs of his valuation which will be shared equally as to one half by the plaintiffs and one half by the defendants.
5. In the event that the sale of the shares has not been effected on a date to be agreed by the parties or in the absence of agreement, within 30 days of this day, the plaintiffs be at liberty to apply.
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SCHEDULE OF PARTIES
| DJM NOMINEES (AUST) PTY LTD | First Plaintiff |
| JSJ NOMINEES (AUST) PTY LTD | Second Plaintiff |
| v | |
| THE NUTRITION BAR PTY LTD (ACN 166 123 315)) | First Defendant |
| MARIANNE CENSOR | Second Defendant |
| ELOISE CENSOR | Third Defendant |
| CENSOR ENTERTAINMENT PTY LTD | Fourth Defendant |
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