Giacci v Giacci
[2006] WASC 239
GIACCI -v- GIACCI & ANOR [2006] WASC 239
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2006] WASC 239 | |
| Case No: | COR:298/2005 | 3 AUGUST 2006 | |
| Coram: | MARTIN CJ | 3/08/06 | |
| 28 | Judgment Part: | 1 of 1 | |
| Result: | Adjourned for further submissions | ||
| B | |||
| PDF Version |
| Parties: | ANTONIO CARMINO GIACCI MARIO MICHELE GIACCI PETER LOUIS GIACCI |
Catchwords: | Corporations law Section 232 and s 233 quasi partnership broken down Appropriate relief Practical issue of whether defendants able to buy out plaintiff Evidence led of misconduct Then directions for parties to adduce evidence on market value Objective test of willing but not anxious seller and willing but not anxious buyer applied Agreed valuer Range of values Whether various costs should be deducted from range Whether adjustment for good will, tax losses, interest, appreciation over time, and valuer being conservative Whether plaintiff should retain particular subsidiary |
Legislation: | Corporations Act 2001 (Cth), s 232, s 233 |
Case References: | Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 Spencer v The Commonwealth of Australia (1907) 5 CLR 418 Nil |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
MARIO MICHELE GIACCI
First Defendant
PETER LOUIS GIACCI
Second Defendant
Catchwords:
Corporations law - Section 232 and s 233 quasi partnership broken down - Appropriate relief - Practical issue of whether defendants able to buy out plaintiff - Evidence led of misconduct - Then directions for parties to adduce evidence on market value - Objective test of willing but not anxious seller and willing but not anxious buyer applied - Agreed valuer - Range of values - Whether various costs should be deducted from range - Whether adjustment for good will, tax losses, interest, appreciation over time, and valuer being conservative - Whether plaintiff should retain particular subsidiary
Legislation:
Corporations Act 2001 (Cth), s 232, s 233
(Page 2)
Result:
Adjourned for further submissions
Category: B
Representation:
Counsel:
Plaintiff : Mr M L Bennett
First Defendant : Mr R E Keen
Second Defendant : Mr R E Keen
Solicitors:
Plaintiff : Lavan Legal
First Defendant : Taylor Smart
Second Defendant : Taylor Smart
Case(s) referred to in judgment(s):
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Spencer v The Commonwealth of Australia (1907) 5 CLR 418
Case(s) also cited:
Nil
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1 MARTIN CJ: This is an edited version of reasons for decision delivered ex tempore on 3 August 2006.
2 The background to these proceedings is a tragic falling out between three brothers who have between them built up a very successful and substantial business over the last 40 years or so. The nature of the business has varied from time to time but its essential components include trucking and the quarrying and sale of stone.
3 Although it is not presently necessary for me to form or express any views as to the reasons for the breakdown of the relationship between the three brothers, sadly the evidence before me left me in no doubt that at least in relation to business matters that breakdown is irreconcilable. I do however express the sincere hope that when the business issues that have given rise to these proceedings are resolved and an interval has elapsed during which tensions might subside some attempt might be made to resume a normal family relationship, if not for the sake of the parties to these proceedings themselves then for the sake of the wider family group, who have no doubt been very distressed by this family disharmony.
4 Turning now to the proceedings, these proceedings have had a chequered history which it is not presently necessary to relate in full. Their primary thrust has been transmogrified between the time when they were commenced and the time at which they came on for trial.
5 When the trial first came on before me in late May the only substantive remaining claim was for relief pursuant to s 232 and s 233 of the Corporations Act 2001 (Cth), which I will hereafter refer to as "the Act". At that time it was clear that all parties wanted the Court to grant substantively the same form of relief; namely, an order that the defendants purchase the plaintiff's shares in Giacci Holdings Pty Ltd, which is the holding company through which the business, which had commenced as a partnership, was ultimately conducted.
6 However, a valuation of the plaintiff's shares in that company, which had been commissioned by the company, was not then complete so the evidence necessary for the Court to fix a price for those shares was not available. There were also disputes between the parties as to whether any order for sale should be made subject to finance, as the defendants wished, or on the basis that default in settlement would result in an automatic liquidation of the company, as the plaintiff wished. There was also a dispute as to whether the plaintiff should be permitted to purchase from the holding company all the shares in a wholly owned subsidiary
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- which carried on business under the name Lido Limestone and, if so, on what terms.
7 In order to accommodate the limited agreement as to remedy and to enable the question of price and the other outstanding issues to be resolved the first hearing concluded on the basis that the defendants conceded that conduct within the meaning of s 232 of the Act had occurred but without conceding any particular degree of fault or culpability. That course was taken as it then appeared that findings as to the precise culpability of the parties in the breakdown of their relationship would not be necessary in order to fashion the particular relief to be granted.
8 I then expressed the view, to which I continue to adhere, that if pressed to make a finding as to the basis of jurisdiction, the failure of the substratum of the company in the form of an irreconcilable breakdown in the relationship between the parties to what was in substance a quasi partnership would seem to provide a fairly obvious source of jurisdiction along the lines of the well-known case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. The procedure followed was adopted in the hope that findings as to the precise culpability of the parties could be avoided. That remains the hope although that objective has necessarily undergone a modification to which I will shortly refer.
9 In any event, at the conclusion of the first hearing the defendants' admission was noted and directions were made for an urgent mediation. No agreement was reached at that mediation so directions were made for the exchange of evidence in relation to the remaining issues and the matter was relisted for hearing on 12 and 13 July, by which time it was expected that the valuation to which I have referred would be available.
10 When the matter came back on for hearing it was plain that, contrary to the expectations of all at the previous hearing, the plaintiff wished to press for findings of particular misconduct against the defendants in order to support a claim for an order that in the event of liquidation he receive a specified minimum dollar value from the realisation of the company's assets.
11 Such findings would only be necessary in the event of a liquidation. That is an outcome which all parties seek to avoid for reasons which will become obvious. In order to avoid a further substantive hearing I directed that the evidence which the parties wished to lead on the misconduct issue should then be led, and that occurred.
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12 At the conclusion of all the evidence I expressed the provisional view that the most practical way of proceeding was to invite the parties to put all submissions they wished on the subject of price, for me to then announce my conclusions on those issues (and therefore the price at which a sale would be ordered), but defer the making of any orders for sale for two to three weeks to enable the defendants to ascertain unequivocally whether they would be able to finance a purchase at that price.
13 If after the adjournment the defendants advised the Court that they were in a position to complete, an unconditional order for sale and purchase would be made and it would be unnecessary to make findings as to the particular allegations of misconduct save insofar as they may be relevant to costs. But if the defendants advise that they are not in a position to complete at the specified price directions would be made for the exchange of further submissions as to the most appropriate form of alternative relief.
14 I turn then to identify and endeavour to resolve the issues that arose from the evidence given in relation to price. The starting point for the ascertainment of the price at which the shares should be transferred is the market value of those shares. Although not explicit in the plaintiff's stance, that is I think implicit in the stance adopted by both parties, and certainly explicit in the only valuation evidence before the Court.
15 The plaintiff submitted that certain adjustments should be made to ascertain market value having regard to the particular circumstances of the valuation, but expressly relies upon the evidence given as to market value as the starting point for those adjustments. The defendants similarly rely upon the evidence of market value.
16 It seems to me that this is of some considerable significance because it means that the fundamental principle of valuation identified in the leading case of Spencer v The Commonwealth of Australia (1907) 5 CLR 418 applies, so that market value is to be determined by reference to a hypothetical market transaction between a willing but not anxious seller and a willing but not anxious buyer. The critical point for this case is that both the transaction and the parties to it are hypothetical so that the subjective views or intentions of the actual parties before the Court are simply irrelevant.
17 I will explain the significance of that proposition, which I take to be trite to the particular issues in this case, in due course. Before doing so,
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- however, I will endeavour to list in no particular order what I take to be the controversial issues between the parties on the subject of price.
18 Firstly, there is a question as to whether the appropriate starting point is the low point, the midpoint or the high point in the range identified in the evidence of Mr Calder.
19 Secondly, there is the question of whether the price should be adjusted to add back adjustments which the plaintiff says should not have been made to the value of the total shareholding of the company and which the plaintiff asserts are costs associated with the orderly realisation of the company's assets being, firstly, the tax payable as a consequence of the realisation of those assets; secondly, the costs of realisation; thirdly, accrued employee entitlements and, fourthly, redundancy payments to employees in the event of cessation of business.
20 The third issue is whether the price should be adjusted upwards to allow for the value of carried forward tax losses.
21 The fourth issue is whether the price should be adjusted upwards to allow for the value of goodwill.
22 The fifth issue is whether price should be adjusted to allow for interest since 30 November 2005, being the date of valuation.
23 The sixth issue is whether the value of the plaintiff's shares should be adjusted upwards to reflect the difference between the value of assets shown in the management accounts at as 30 November 2005 when compared to earlier accounts as at 30 June 2005, and the seventh issue is whether an adjustment upwards should be made to reflect the various respects in which the plaintiff asserts that the assessed price has been diminished by reason of an inherently conservative approach to valuation taken by Mr Calder, being in particular the matters identified in par 21 of the plaintiff's most recent written submissions.
24 In addition to the issues directly related to price there is the question of whether the plaintiff should be permitted to buy the wholly owned subsidiary which carries on the Lido Limestone business. Before addressing those issues in turn, I will turn to the evidence on these issues which essentially came from Mr Duncan Calder, at least in relation to the issues concerning price.
25 Mr Calder's expertise in valuations of this kind was accepted by both parties. Although Mr Calder's report is not written in terms which show
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- his views with pellucid clarity, by the end of his oral evidence those views were quite clear. They are not contradicted. They seem to me to be rational and logical.
26 In the course of his oral evidence I formed the view that Mr Calder was answering questions impartially and to the best of his ability without prevarication or any apparent bias. For these various reasons I have no hesitation in accepting his evidence to which I will now turn, starting with his written report dated July 2006 and apparently delivered to the company on 7 July 2006.
27 The first point to note about that report is that the cover page describes it as an independent indicative valuation. On the first page of the report under the heading "Limitations", Mr Calder identifies qualifications to the views expressed in the report. He identifies under that heading the information upon which he has relied. In particular he reports that virtually all of the accounts upon which he relied had not been audited.
28 At the first dot point at the bottom of page 1 of his report he points out that he has relied on the unaudited management accounts as at 30 November 2005 as being an indication of the assets and liability balances as at 21 December 2005. On the next page he notes:
"[T]he auditor is yet to finalise his review of the Unaudited Financial Statements for the year ended 30 June 2005 and it is not expected that the financial statements will be amended."
29 And he notes that similar circumstances exist with unaudited financial statements for the year ended 30 June 2004. He then notes that as shown in Appendix D of his report:
"The financial statements detailed in the Management Accounts as at 30 June 2005 do not reconcile to the Unaudited Financial Statements for the year ended 30 June 2005."
30 He then observes:
"Given the discussion it appears prudent to assume that the Unaudited Financial Statements for the year ended 30 June 2005 provide a more reliable presentation of Giacci's profit and balance sheet and, it is arguable, that the Management Accounts contain 'errors'."
(Page 8)
31 He then observes that despite several requests he had not been able to determine whether the errors contained in the unaudited management accounts as at 30 June 2005, and to which he had just referred, were rectified and corrected by the time the unaudited management accounts as at 30 November 2005 were prepared. Mr Calder went on to say that whilst for the purposes of the valuation he had been instructed by the directors of the company to rely on the unaudited management accounts as at 30 November 2005 he was unable to comment on their reliability or integrity. Consequently, he caveated his report.
32 On page 2 under the heading Plant And Equipment Valuation he observed that the most recent valuation of plant and equipment was performed in November 2004 and that he had been instructed by the directors of the company to rely on that information in preparing his report. He expressed the opinion that an updated valuation would provide a more robust valuation assessment and he explained in his oral evidence that by the word "robust" he there meant to convey the notion of "reliable".
33 These are important qualifications upon the evidence given by Mr Calder and they lead to the conclusion that it would be a mistake to view his report as providing a mathematically precise single correct figure. Rather, it is preferable to regard his report as providing a range of indicative values.
34 At page 2 of his report he summarised in his report and recorded that he had been instructed to value the equity in Giacci Holdings as at 21 December 2005 based upon a number of scenarios. The first was as a going concern. The second was the whole of the business being sold based on what a liquidator might get for a quick sale, and a third was what each separate item might be worth at market value, which was described as asset value. He then observed on page 3:
"The … assessments have allowed for a high level estimate of any income tax payable on capital gains that would be realised in the asset realisation process."
35 He later describes how he has approached the tax issue. Then, on the question of discount for minority interest or premium for the gaining of control, he observed that neither had been applied. Although a discount for a minority interest had not been applied, it was thought to be offset against the failure to apply a premium for the obtaining of control by reason of the acquisition of a one-third share. So Mr Calder was not of
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- the view that any adjustment either for discount for minority or premium for control should be made.
36 On page 3 of his report Mr Calder sets out in tabular form the conclusions of his review under the headings: Going Concern Value, Liquidation Value and Asset Value. He refers to a range of values in each case, namely low, mid point and high. The going concern value of the company was assessed at a low point of 21,481,000, a mid point of 23,682,000 and a high point of 25,255,000. Mr Calder included the value of a one-third share on the basis of each of those figures.
37 In relation to liquidation value the equivalent values identified by Mr Calder were a low value of $12,195,000, a mid point value of $15,348,000 and a high value of $17,795,000. It will immediately be observed that each of those figures is well below the going concern value, which is why I earlier made reference to the understandable desirability of the parties to avoid liquidation if possible.
38 The figures given by Mr Calder in the box for Asset Value are identical to his Going Concern Value and I will in due course explain how that has come about. I think it has unfortunately been the source of some confusion.
39 Mr Calder then observed under the table that as a result of those figures the indicative value of the Giacci equity under the going concern and asset value scenarios lay in the range of 21.6 million to 25.4 million. As a result, a departing shareholder's one-third interest in the company on a pro rata basis lay in the range between 7.2 million and 8.5 million with a midpoint of 7.9 million. The total liquidation value of the equity lay in the range of 12.3 million to 17.9 million and a departing shareholder's one-third interest in the company valued on a pro rata basis would lie in the range between 4.1 million and 6 million, with a midpoint of 5.2 million.
40 Mr Calder then described the principal assets of the group: its interest in property and plant and equipment. He indicated that for the value of those items he had been instructed by the directors of the company to rely on valuations of property prepared by Southern Independent Property Valuations in October 2005, and in relation to plant and equipment he had relied upon valuations prepared by Smith Broughton and Sons in November 2004.
41 Mr Calder then refers at that point of the report to the use of a cross-check method of valuation, namely applying a multiple to the EBIT
(Page 10)
- assessed by reference to the company's accounts, although that was not the primary method of valuation adopted. He expresses the view at the top of page 4 that the calculated implied multiples are greater than those which could be achieved in current market conditions and therefore an approach based on the market value for each item is the preferred method of valuation. He explained that view both a little later in the report and in oral evidence. But he made the point also on page 4 that such an approach did not imply that he was of the view, or that Giacci Holdings management was of the view, that the business operations of the company were likely to cease in the foreseeable future.
42 On page 4 of his report he also dealt with the question of tax and made the observation that due to investigative action by the ATO there was a prospect that the carried forward tax losses of Giacci Holdings could potentially be reduced by $2.1 million.
43 In subsequent pages of Mr Calder's report he sets out the profile of the Giacci group which I need not refer to in detail save to refer to Lido Limestone Pty Ltd. On page 9 of his report Mr Calder observes that in 1998 Ace Range Nominees Pty Ltd, which was a wholly owned subsidiary of Giacci Holdings, acquired 51 per cent of the Statewest Limestone Products partnership. The following year that partnership was dissolved and the Giacci group acquired full control of its operations which it renamed Lido Limestone. Ace Range subsequently also changed its name to Lido Limestone.
44 Mr Calder then describes the nature of the business. On page 10 he observes in the second paragraph that management advice was to the effect that brother and sister Michael and Judy Giacci trading as MGM Limestone Products had commenced trading recently in direct competition with Lido Limestone; and since MGM commenced operations, they have persuaded what were previously two major Lido Limestone clients to transfer their business to MGM. Mr Calder observes that despite the new competition the directors of the company advised him that they believed Lido was performing well.
45 A table is then set out showing the revenue derived by Lido Limestone over a series of years. In 2004 revenue from sale of goods was $3.2 million and revenue from services $274,000. In the year ended 30 June 2004 the equivalent figures were $2.8 million and $256,000. In relation to the unaudited financial statements for the year ended 30 June 2005, the equivalent figures were $3.96 million and $233,000. Management accounts as at 30 November 2005 suggested that Lido
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- Limestone had derived revenue from sale of goods in an amount of $1,897,000.
46 Mr Calder then makes reference to the share capital of the company, the consolidated net assets and previous forecasts. On page 13 he identifies the current situation facing the company. He refers to the dispute among the shareholders which has resulted in these proceedings. There is reference to a taxation dispute which threatens carried forward tax losses by up to $2.1 million. There is reference to the company's reliance on its financiers to be able to continue to operate as a going concern, as was suggested by the unaudited financial statements for the year ended 30 June 2005. He also identified the fact that the audit of the draft financial reports for each of the years ended 30 June 2005 and 2004 remained incomplete.
47 Mr Calder expresses the view in the middle of page 13 of his report that while the Giacci group operates at marginal level with respect to profitability and cash flow, it retains a number of properties and a fleet of plant and equipment independently valued at over $14 million and $17 million respectively. This compares favourably to just over $8 million of interest bearing liabilities as per the management accounts, so in other words he was expressing the observation that the company was favourably geared. He explains how that came about by reason of a substantial reduction in debt by asset sales over the last three to four years. He then observes:
"The profits and margins derived by Giacci Bros for contract work is under pressure due to the poor condition of the mobile plant and equipment."
48 With respect to the mobile plant and equipment, he noted:
"[D]ue to the dispute amongst the directors, to the draft 2006 budget which allocated capital expenditure of $17.3 million for the upgrade of mobile plant and equipment remains unapproved and as a result has not been incurred. … We note that according to the Management Accounts as at 30 November 2005 Giacci Bros has recorded a loss of $0.7 million for the five months."
49 In the next section of his report commencing at page 14 Mr Calder refers to the possible valuation methodologies which might be adopted, drawing from ASIC practice note 43. The first method which he considered was the discounted cash flow method of valuation. In his
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- view, that method could not be adopted because the company had not prepared detailed long-term cash flow forecasts for its future operations and therefore that method was not available.
50 He then referred to the method of capitalisation of maintainable earnings. He thought that method had not been used as the primary methodology due to the group's significant variations in earnings from year to year, in particular variations in the yearly earnings of Giacci Bros, the main operating entity. However, in a later section of the report he used the capitalisation of earnings approach as a cross-check to calculate an implied earnings multiple based upon the assessed net asset values and the EBITs for the financial years ended 30 June 2004 and 30 June 2005.
51 Under the heading Orderly Realisation of Assets he states the following:
"The value achievable in an orderly realisation of assets is estimated by determining the net realisable value of the assets of business segments on the basis of an assumed orderly sale. Consequently, this method may ignore the ability of the asset base of the Company to generate ongoing earnings at a level sufficient to justify a value in excess of the value of its assets in an orderly realisation.
Costs associated with the sale of assets or business segments are deducted as part of the assessment, including costs of contract cancellation and other associated expenses and any tax payable on realised capital gains or resulting from the sale of depreciated plant and equipment. A derivation of this methodology commonly used in valuing exploration companies is an Asset Value. Such a valuation assumes that the value of the company is the sum of the realisation value of its assets, without incorporating costs associated with termination of business operations."
52 It seems clear to me, from the terms of that paragraph and from the oral evidence subsequently given by Mr Calder, that this paragraph sets out two methodologies. One of them was a derivation of the former, being a derivation commonly used in valuing exploration companies. Plainly, Giacci Holdings is not an exploration company. The essential difference between the two methods to which he referred is that in the former method costs associated and arising from the orderly realisation of assets are deducted whereas in the latter method they are not.
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53 It is clear from the terms of Mr Calder's report and from the terms of his evidence that in the case of Giacci Holdings he was advocating the former method and not the latter. I think there has been a tendency in the plaintiff's submissions to conflate the two methods. Mr Calder went on to express this view:
"We consider that an orderly realisation of assets approach gives the highest valuation of the equity in Giacci Holdings at the present time. As discussed we have considered as a crosscheck a calculation of an implied earnings multiple based on the assessed net asset values and the EBIT's for the financial years ended 30 June 2004 and 30 June 2005. Our approach does not imply that KPMG Corporate Finance or Giacci management is of the opinion that the business operations of the Company are likely to cease in the foreseeable future."
54 He then refers to the specialist reports upon which reliance had been placed, namely the valuations prepared by Southern Independent of the land-holdings of the group and the report prepared by Smith Broughton in November 2004 on the value of the group's plant and equipment. Next he referred to the final possible alternative method of valuation which was that addressed under the heading: "Alternative Acquirer".
55 As Mr Calder observed, this valuation method considers the premium that an alternative acquirer who, as a result of potential economies of scale, reductions in competition, synergy with existing operations or other factors is prepared to pay for a business. Mr Calder rejected that method in this case because his information was to the effect that there were no firm offers for all or part of the business operations of the group. He also gave consideration to the possibility of an alternative offer but concluded that there was no probability of such an offer.
56 At page 19, there is Mr Calder's indicative Going Concern or Asset Value of the Giacci group. The reason for the same figures being used for both values is I think clear enough from both the terms of the report and from Mr Calder's evidence. That is, his conclusion that a hypothetical buyer or seller's maximum value of the company was to be derived from the orderly realisation of assets. He has therefore used that value both for the Asset Value and the Going Concern methodologies.
57 The view I formed after hearing his evidence was that he placed the value derived using this method under the heading Going Concern because he considered that the business would need to be maintained for
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- so long as it took to achieve an orderly realisation of the assets and that is why he felt it appropriate to use that valuation methodology under the heading. I think that terminology has perhaps been conducive of misapprehension, at least in the submissions from the plaintiff.
58 Returning then to the figures which Mr Calder has used in the table – I refer only to the mid point figures – he has identified the components of assets being cash in the form of $152,000, debtors in the form of $6.8 million, property plant and equipment being made up of $32.62 million and other assets being made up of $1.6 million, a total of some $41.2 million.
59 In relation to liabilities the components of liabilities are payables which are $5.8 million, interest-bearing liabilities of $6.07 million, liabilities under legal action of $70,000, provisions and other liabilities of $1.957 million, giving total liabilities of $13.956 million and therefore net assets of $27.274 million.
60 From that figure for net assets further amounts have been deducted: estimated costs of realisation at $1.449 million and estimated tax payable of $2.143 million. The report explains and I will also explain where each of these figures came from, at least where they are contentious.
61 In relation to property, plant and equipment, particularly the figure of $32.62 million, page 20 of Mr Calder's report provides a breakdown of the components of that sum. As foreshadowed earlier in his report, they are substantially property in an amount of $14.4 million and mobile plant and equipment in an amount of $17.2 million. But because it is an issue raised by the plaintiff I also draw attention to the fact that within the $32.62 million, there is a reference to "Fixed plant not in property valuation" in an amount of $600,000. That item is explained on page 21 of Mr Calder's report as being a reference to a number of fixed plant items not valued by Southern Independent and located on the property where Lido Limestone operates, being lot 56 Sutherland Way. They are therefore added over and above Southern Independent's valuations.
62 At page 23 Mr Calder provides a breakdown of payables, in each case being $5.8 million on any range of value. Interest-bearing liabilities are identified and again broken down on the same page at $6.07 million. Further, reference is made to liabilities under legal actions in which he observes that allowance has been made for a claim by a dismissed employee. But the litigation with Road West Transport Equipment and Sales has not been included on either side of the ledger.
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63 On page 24 Mr Calder deals with the items comprising provisions and other liabilities. The amount of $1.957 million is made up essentially of employee entitlements of $929,000, an amount owing to a director of $197,000 (but that is no longer an issue in the case), and provision for redundancy in an amount of $846,000. I will come back to those items in due course.
64 On page 25 Mr Calder deals with the components of the item Cost of Realisation. He said the figure of $1.449 million was advised by Smith Broughton and Southern Independent. In the case of real estate he allowed an average cost of realisation of 5 per cent. For mobile plant and equipment, he allowed an average cost of realisation of 4 per cent plus marketing costs of $30,000 to $50,000. Thus, total costs of realisation were estimated at $1.449 million.
65 On page 26 Mr Calder sets out the components of the calculation of the item of Tax Payable to which I have previously referred. Again referring to figures in the mid point range the commencing entry in that table is a balancing charge on disposal of plant and equipment of $10.1 million. As Mr Calder explained in his evidence, that is a balancing charge which effectively brings to account profit on the sale of plant and equipment having regard to cost of the initial acquisition of that plant and depreciation since then.
66 To that is added a capital gain on the disposal of property of $1.98 million, giving a total taxable profit on the sale of property of some $12.1 million. From that, Mr Calder has deducted taxable losses carried forward as at 30 June 2005 in an amount of $3.9 million. After some other adjustments, including payment of redundancies, a taxable gain or loss of $7.1 million emerges. He therefore estimated, at a 30 per cent rate of tax applicable to corporate entities, a tax liability of $2.143 million.
67 On page 27 of his report Mr Calder has set out the basis for his liquidation value of the group. Other than to observe that in each case the liquidation values are significantly lower than either of the other valuation methodologies adopted by Mr Calder it is unnecessary for me to refer to the details.
68 On page 32 of his report Mr Calder set out the valuation cross-check to which he had referred earlier in his report. On this page he took the assessed value of net assets of $3.8 million arrived at in the way I have earlier described, added back net debt of $6.07 million and then deducted from that combined figure the amount of surplus assets of $3.4 million. In
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- this context, surplus means assets not required for the derivation of the income of the business. Those calculations produced an implied enterprise value of $26.49 million.
69 Mr Calder has then assessed that implied enterprise value against the EBIT identified in the unaudited financial statements for the year ended 30 June 2004 of some $2.8 million and the EBIT identified in the unaudited financial statements for the year ended 30 June 2005 in some $1.2 million.
70 In the former case he has concluded that the EBIT suggests that the capital, more correctly the enterprise value, is a multiple of nine times earnings before interest and tax. In the latter case capital, or more correctly implied enterprise value, is a multiple of 22 times the earnings before interest and tax.
71 Mr Calder expresses the view in his report and reiterated it in the oral evidence to which I will shortly refer that those multiples were significantly above any multiple that he would expect to be paid in the marketplace for a business such as this, and that in a nutshell is why he arrived at the conclusion that the maximum value attributable to this company by a hypothetical seller and a hypothetical buyer in the course of their negotiations would be a value derived from the capital unlocked by an orderly realisation of the assets of the company rather than the maintenance of the company as an income-producing entity.
72 Mr Calder gave oral evidence to which I will refer briefly. But in relation to an appropriate multiple in his report, he was asked this question in chief:
"Can you just tell his Honour, because it appears to come out of what's here, how you view those figures, whether they are high, acceptable or low in relation to the implied EBIT multiple? …"
- The answer given by Mr Calder was in these terms:
"For a small business that's generating EBIT of around 1.2 million, that's privately owned, in my experience it would be unusual to have a purchaser pay a value implying a multiple of more than six times, possibly seven."
"Pay that as a going concern?---It could be as low as four."
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74 The next question was:
"Yes?---The implied range of nine to 22 indicates that the earnings that has been generated from the assets aren't generating sufficient profit to justify a valuation based on earnings rather than asset values."
75 After a question from me Mr Calder observed:
"It's not getting the rate of return that an investor in the industry would expect …"
- where "it" plainly refers to the company. He was asked about the values at which he had arrived in cross examination and the answer he gave was in these terms:
"…
[T]he highest value from the business as a going concern is obtained by selling the assets, realising the cash and having a pool of funds available."
77 Then in relation to tax Mr Calder made clear that the calculation of tax had brought to account carried forward losses. He did that in the following passage. He was asked:
"For the purpose of the company, would you assess the value of the carried-forward losses as being at the marginal tax rate applicable to companies?"
78 The answer he gave was:
"It would depend. So in this approach we have assumed that there will be tax payable on the sale of the land and we've offset it. So effectively in this case we have assumed that deduction, yes."
79 In relation to the question of mobile plant and equipment I had earlier asked Mr Calder whether account had been taken in his valuation of transactions in relation to mobile plant and equipment since the Smith and Broughton valuation at the end of 2004. He was asked some more
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- questions about that in cross examination and the questions were in these terms:
"Just to deal with the point his Honour made, the $1.294 million worth of plant that has been picked up, been acquired, hasn't to the extent that it was acquired after November 2004 been reflected in your valuation, has it?---No.
But the disposals have?---So it's about 3 per cent of the opening balance which it's not unreasonable to assume that that would probably be cancelled out by depreciation.
It's 5 per cent of the total value of the plant and equipment at the end of the period, isn't it? It's 1.2 million over 20?---The depreciated amount as opposed to?
Yes?---But that itself would be depreciated by the total cost value. The cost value is just over 3 per cent."
"The non-mobile plant and equipment fixtures and fittings, were included in the valuations attributable by land value. It's standard valuation practice."
81 Then in relation to redundancy items he was asked these questions:
"The provision for redundancy you explain as being costs that will be incurred should Giacci Holdings sell its assets, cease operating, and these have been assessed at the estimated [sic] provided to us by management. Is that Mr Webb again?---Yes.
No-one suggested there was any contemplation of sacking all the employees and paying out $846,000 redundancy, did they?---No, but I valued this on the orderly realisation basis which assumes the cost of selling - the cost of realisation are a part of that deduction determinate - - -
If his Honour was of the mind to view as a going concern that it's not appropriate to make adjustments for notional sale costs you would add back, would you, that 929,000 - "
- which I interpose to observe is the amount for employee entitlements –
- "and $846,000 as being notional provisions?---No. The employees entitlements are statutory entitlements for long service leave and annual leave et cetera but the provision for redundancy, if you took the view that you stated, then yes, that would be an adjustment."
82 Then he was asked about the cost of realisation and he explained how he had arrived at those figures. He observed that the costs associated with the sale of assets or business segments had been deducted as part of the assessment, including costs of contract consolidation and other associated expenses and any tax payable on realised capital gains.
83 Then he was asked whether that was on the basis that shares were being valued upon a presumption of an orderly realisation of assets. He answered, "Yes". The next question was:
"You are also assuming it on a going concern basis, aren't you?---Yes. As a going concern the best value you can achieve is through an orderly realisation because if you continue to trade the asset value is allowed to deplete."
84 Again, I think it is clear Mr Calder was saying that his view of going concern was limited to going only for so long as was required to achieve an orderly realisation of the assets and he conducted his valuation on that basis. He was asked this question:
"So in relation to the asset realisation and the orderly realisation of the assets is there any validity in the assessment of these tax losses by reference to those tax rates?---No, because the tax losses have already been taken into account."
85 Then further questions were asked in cross-examination:
"Can you explain to his Honour why goodwill doesn't figure in your valuation of the going concern entity?---Because [if] the rate of return that this business is achieving is below that which you would normally expect then there is no goodwill. So goodwill is the [premium] someone is prepared to pay to buy into a business that generates an accruing rate of return. This business does not generate an acceptable rate of return and therefore there is no goodwill.
So the connection that the company has with its clients, Iluka and the like that you refer to, you assess no value for that
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- because it is not manifested by a profit, a super profit?---The relationship does not generate profits, therefore it hasn't demonstrated that relationship can yield value."
86 I then asked Mr Calder some questions and he confirmed to me that he had not used the discounted cash flow method because there were no long term forecast cash flows. In answer to the next question he gave this answer:
"… [R]egardless of whether or not you use the November numbers or the June numbers, whichever set of numbers you use, and that has been consistent across all the valuations that we've done for this group over the last four years. It has never got to the point where it generated a sufficient rate of return."
87 I then asked him if he was able to give any order of magnitude as to the difference between a valuation that might have been produced on a capitalisation of maintainable earnings basis as compared to the asset realisation method – and his answer was:
"If you assume a multiple of five to six times earnings … if you assume 1 million earnings it's five to six. If you assume 2 million earnings, it's 10 to 12, which was still quite a long way below the 21."
88 In other words, Mr Calder was saying that if you took what he would take to be an industry multiple and applied that to EBIT it would produce a capital value which was substantially below the capital value which he had assessed on the basis of an orderly realisation of assets. I then endeavoured to put that succinctly when I asked him this question:
"Am I right in thinking that because you have applied the orderly realisation of assets methodology to arrive at a going concern value, for that reason you have deducted redundancies marketing costs and tax upon realisation of assets on the basis that they would be costs incurred in achieving the realisation? … Because that's a higher value than you would get if you assessed it on a going concern on earnings or other basis."
89 Then I asked him if I was right in thinking he took that approach because those amounts are properly deducted because the value is unlocked only if in fact you proceeded to sell the assets, and he agreed with that proposition.
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90 That I think is a sufficient reference to the evidence of Mr Calder which, as I have said, I accept for the purposes of dealing with the issues as to price, to which I now return.
91 The first of those issues was the question of whether the starting point for the assessment of price should be the low point, the mid point or the high point identified by Mr Calder. Predictably enough the defendants say that I should start from the low point of Mr Calder's range or at the most go to the mid point, whereas equally predictably the plaintiff says that I should go to the high point of the range.
92 It seems to me that both submissions imply a degree of mathematical precision in the figures and a degree of precise accuracy, which is belied by the many significant qualifications with which Mr Calder's report is attended. As is I think clear, the highest use to which his report could properly be put is to provide the Court with an indicative range of values within which range the Court can select a point having regard to the various considerations identified in the evidence.
93 That being said, however, absent a specific reason for departing from the mid point within the range, that area within the range seems to me to be the most likely area in which the not anxious but willing buyer and the not anxious but willing seller would have arrived at a price. One must assume a hypothetical process of negotiation which would have resulted in a price which was fair without unreasonably favouring either party.
94 The second issue concerns the costs of realisation and, as I have already suggested, some confusion was introduced by Mr Calder's use of a value reflecting an orderly realisation of assets by a prospective purchaser to provide a price that he described as a going concern value. Plainly, for the reasons I have given, he comprehended "Going Concern" in that context to mean a buyer and a seller assessing the value of the company on the basis that its maximum worth or the highest and best use to which it could be put (to borrow from the lexicon of land valuation) was to unlock the value of its various assets by their orderly realisation. Of course, that necessarily connotes the closure of the business ultimately. Thus, in this context "going concern" could properly be taken to mean "going for so long as is required to achieve an orderly sale without the diminution in proceeds of sale which would flow from a forced or rushed sale of assets of the kind associated with a liquidation."
95 Applying the Spencer test, the hypothetical parties would, in my view, assess their price by reference to net return from the sale of assets
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- after due allowance for the costs and fiscal imposts flowing from the sale of assets necessary to unlock that maximum value. Any buyer who did not allow for those costs would make a loss on the purchase, which would be irrational, and any seller who demanded a price which did not allow for those costs would never find a buyer willing to pay that price and there would be no hypothetical transaction.
96 The plaintiff submits that the costs of realisation of the company's assets should not be deducted because the evidence establishes that the defendants intend to continue the business of the company as a going concern. I do not accept that submission for several reasons. The first is that it seems to me to beg the question as to just what is meant by "Going Concern" in the terms which I have already identified. The second is that in my view the evidence does not in fact establish that the defendants do not intend an orderly realisation of assets and I make no finding of fact to that effect. But the third and perhaps most important reason is that even if I were to make such a finding it would, in my view, be irrelevant because the subjective intention of these parties is irrelevant to the ascertainment of market value, which is at the heart of the process that I am undertaking.
97 Put another way, if the hypothesis is that market value is to be ascertained on the basis that the assets of the company are to be retained and operated, the appropriate valuation method would be either a discounted cash flow or the application of an appropriate multiple to earnings in the form of an assessment of earnings before interest and tax. But it is clear from Mr Calder's evidence the first of those methods was not available and the second method would result in a much lower capital value than that assessed on the basis of an orderly realisation of assets.
98 In my opinion the plaintiff cannot have it both ways. He cannot demand the maximum price assessed by reference to a hypothetical sale of all the assets of the company but then deny that the price should be adjusted to reflect the costs and fiscal consequences of such a sale.
99 Turning to the specific items dealt with under this head and dealing firstly with tax, it is of course inevitable and will flow from the sales of the assets necessary to unlock the value by reference to which price is being assessed. The tax will give rise to a real liability and in Mr Calder's assessment the amount calculated has been assessed after bringing to account in full the entire amount of carried-forward tax losses, even though those losses might be reduced as a result of the ATO investigation to which he has referred. In my opinion the hypothetical buyer and seller would allow for the net tax liabilities calculated in this way.
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100 So also in my opinion would they allow for the costs of realisation. Assets do not sell themselves. The value could only be unlocked if they were sold. It is inevitable that agents and consultants would be used to achieve that objective and costs would be incurred. Again, I think a hypothetical buyer and seller would certainly make allowance for those costs when arriving at a price.
101 In relation to employee entitlements there is, in my view, another reason why these items should not be subject of any adjustment. That is because they are provisions for liabilities to long service leave, sick leave, annual leave etcetera which have accrued and will have to be met whether assets are sold or not.
102 Finally, in relation to employee redundancies, there will be no business, if all the assets are to be sold so as to unlock the value in the company. Staff will have to be retrenched and redundancies will have to be paid. For these reasons, in my opinion, there should be no adjustment to the assessed price for any of these items.
103 The third issue concerns carried forward tax losses. The short answer to this contention will be apparent from what I have already said: the value of these tax losses has in fact been included in full by reason of Mr Calder's assumption that those losses will be available in full to offset the tax arising from the sale of assets. Any further allowance for those tax losses would be double counting.
104 In relation to goodwill, books have been written about the proper definition of goodwill, but, in essence, as Mr Calder made clear, it is the amount that a purchaser would pay over and above the value of tangible assets to reflect the fact that a business generates profits over and above the level of profit that would be expected as a result of those tangible assets. Mr Calder's evidence, which I accept, was clear and unequivocally to the effect that viewed in this way the company had no goodwill because profits were in fact less than those that might have been expected from capital assets of the magnitude held by the company.
105 I turn then to the question of interest. Although the price has been assessed by reference to the accounts as at 30 November 2005 and also by reference to a balance date of 21 December 2005, the plaintiff remains the owner of the shares in Giacci Holdings to this day. He will remain the owner of those shares until settlement with all the rights and obligations of ownership. It seems to me, therefore, that there is no basis in logic to
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- assess the price as if there had been a transfer in November or December of last year.
106 In addition, no evidence has been led as to what rights and obligations have accrued since November or December of last year. For example, no evidence has been led in relation to dividends, payment of salaries or other drawings from the company and so forth. Nor is there any evidence which would enable me to infer that the value of the company is higher today than as would have been assessed as at either November or December 2005.
107 To the contrary, the evidence was that at that date the company was trading at a loss which, if continuing, as to which I have no way of knowing, would have reduced the company's capital base between then and now. So for those reasons I do not think it is appropriate to make any allowance for interest.
108 The next item concerns the adjustment to reflect differences in the accounts between figures as at 30 June 2005 and as at 30 November 2005. The plaintiff's submission on this topic receives substantial support from Mr Calder's report and from his oral evidence. I think it is soundly based. The plaintiff submits that I should adjust price upwards by a figure of $127,000 to reflect this item.
109 That submission again seems to me to have a degree of mathematical precision which cannot be justified, given the various qualifications and uncertainties expressed by Mr Calder and the fact that neither set of accounts has been audited. Rather, I think the proper approach is to bring this matter to mind when I am selecting the point within the area of the mid-range at which the hypothetical buyer and hypothetical seller would have agreed a price.
110 The seventh issue concerns a miscellany of items identified by the plaintiff under the general heading of the conservative approach taken by Mr Calder to the valuation. The best way to address those items is to go to par 21 of the plaintiff's most recent written submissions and to address them in the order in which they are addressed in that paragraph.
111 The first of the items, item 21.1, is the allegation that for the purpose of assessing capital gains tax on the property at lot 31 Goulds Road, it has been assumed that this property has a cost base of zero. The effect would be to increase the estimated capital gains tax payable by Giacci Holdings. The evidence on this subject left me entirely unclear as to what if any was the explanation for that cost base but one open explanation provided by
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- one of the defendants was that the zero cost base may in fact be due to the absorption of the prior cost base by its application towards capital receipts generated by reason of the sale of sheds.
112 At all events, the evidence does not rise to the point of satisfying me that there is some error in the approach to valuation taken by Mr Calder in relation to this item.
113 The next item concerns the proposition that because property valuations were taken as at October 2005, it could have been expected by December 2005 that there would be an increase in the value of the real estate. Mr Calder disavowed any expertise in the area of real estate valuation and in my opinion any proposition to that effect would be sheer speculation.
114 The next item concerned the complaint about the age of the valuation in relation to mobile plant and equipment and the failure to take account of transactions since November 2004. There is undoubtedly an element of uncertainty created here. However, on the evidence it is not I think possible to say whether that is a plus or a minus from the perspective of either party because, of course, there is the factor of depreciation since that time and the failure to replace aging equipment since that time which Mr Calder has referred to. So it is not possible, I think, for me to conclude that that is a factor which has adjusted the valuation inappropriately one way or the other.
115 Next, there is reference to the Smith Broughton valuation utilising rent from a number of properties held by Giacci Holdings as being at a value less than that which the properties were actually achieving. I assume that must be an erroneous reference to Smith Broughton. It should, I think, be a reference to the land valuers. In any event, it is sufficient for me to note that neither valuation was impugned by any direct evidence. In the circumstances, reference to that matter does not persuade me that there is any basis for not accepting the land valuations upon which Mr Calder has relied.
116 Next, in item 21.5 there is an allegation that the valuation does not include a number of fixed plant items located on the property where Lido Limestone operations are conducted. It is said that there should be an adjustment back upwards by reason of that omission in an amount of $803,599. As I identified when going through Mr Calder's report, in fact the fixed plant items located on that property have been brought to account by Mr Calder, albeit in a different amount; namely, $600,000.
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117 That I think is clear from the text at page 21 of Mr Calder's report, where he identifies the amount of $600,000 and its inclusion on page 20 in the components of the item that lead to the calculation of total assets of $32.62 million - the mid-point of his valuations of property, plant and equipment. So I think those items have in fact been brought to account. The evidence does not provide sufficient detail for me to determine whether the value of those items is either $600,000 or $803,599. I am of the view that I should adopt the figure used by Mr Calder in the absence of evidence to the contrary.
118 Then at item 21.6 complaint is made of the failure to assign value to immovable plant and equipment. I think Mr Calder has the answer. That is, those items have been included in the land valuations.
119 Item 21.7 concerns goodwill, with which I have already dealt.
120 Item 21.8 concerns the failure to assign a value to the counterclaim being pursued in the litigation. The evidence on this topic is extremely sparse. I am unpersuaded that there is a sufficient evidentiary basis for me to conclude that the valuation is inappropriate because of that item. It would be complete speculation on my part to try and put a value on the value of that counterclaim.
121 The final issue is a complaint that no allowance has been made for the unfair dismissal claim brought by Mr Michael Giacci. Again, it seems likely on such evidence as I have heard that that claim may well be soundly based. But I express no firm view on that. In any event, Mr Calder was advised to bring an amount to account for that. He has done so, and it is a small amount. In the overall scheme of this valuation, it is not a significant item.
122 So in summary, in relation to all of the items identified in par 21, I am not persuaded that any particular adjustment needs to be made to the range of figures identified by Mr Calder by reason of any of those items. However, I do take them to account in a general way when I come to consider the choice of figures within the range provided by Mr Calder.
123 Before I come to that question I will deal with the issue concerning Lido Limestone. Assuming without accepting that there is power to order the company which is not a party to these proceedings to sell the shares in the subsidiary which runs the Lido Limestone business, this not a case in which I would give serious consideration to exercising that power. There are various reasons for that.
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124 The first is that in my opinion no substantive reason for that course has been advanced by the plaintiff, other than the proposition that he wants the subsidiary company. In written submissions it is said to be appropriate to reflect the plaintiff's role as founder of the business. The problem I have with that submission is that, as I have already observed, the Lido Limestone business was not acquired until 1998, by which time the brothers were unfortunately already in dispute. Therefore, on the evidence, no nexus between this business and the plaintiff's role as founder of the enterprise.
125 The second reason I would be disinclined to make such an order is the various potential problems with severance of these assets from the company as identified in evidence. The first is that the business is conducted on company land and so, in addition to the business, there would need to be an acquisition of the land to avoid further disputation.
126 The second is that the business is amongst the assets secured to the bank and covered by cross guarantees. No evidence was put before me as to the effect which removal of those assets from the bundle of assets secured to the bank would have upon the bank's position, or indeed to the effect that the bank would consent to the removal of those assets from its parcel of securities.
127 The third problem is the tensions that exist between Lido's business and the MGM Limestone business conducted on adjoining land, a business associated with the first defendant. Severance of the Lido Limestone business would, I think, create a real risk of further dispute between these parties.
128 I return then to the fundamental question which I must address which is the price which the defendants should pay for the plaintiff's shares. The midpoint in Mr Calder's range of values was the figure of $7,894,000, although my reference to that figure should not be taken to suggest a mathematical precision which is in fact justified.
129 I bring to mind the increased asset balance in the 30 June 2005 accounts and the plaintiff's submissions on that topic and the various uncertainties to which the plaintiff has pointed. On the other side of the ledger I bring to mind the risks associated with the process of asset realisation, the costs of that process, the effort that would be involved in that process, the risk of delay in its completion and the defendants' risk that trading losses might be incurred during that period of delay if they choose to unlock the value of the assets in the company (the basis upon
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- which the price is being assessed by reference to the evidence of Mr Calder).
130 As against those various risks, the plaintiff will receive in a very short time a large capital sum free of risk. Doing the best I can on the imprecise evidence I have before me and balancing the various considerations to which I have referred, I have concluded that $8 million is the fair and reasonable price at which the parties to a hypothetical transaction for the sale of a one-third interest in Giacci Holdings Pty Ltd would arrive today.
131 If on 23 August the defendants tell me that they have the financial capacity to buy the plaintiff's shares at that price, I will make an unconditional order to that effect and hear the parties on the question of costs. If the defendants do not tell me that, I will make directions for the exchange of submissions as to alternative remedies.
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