MANX & JENNER
[2009] FamCA 1264
•9 DECEMBER 2009
FAMILY COURT OF AUSTRALIA
| MANX & JENNER | [2009] FamCA 1264 |
| FAMILY LAW – PROPERTY – valuation of property – where the husband has a minority interest in a family company – whether the maintainable dividend or net tangible asset valuation approach to be adopted – discussion of the valuation of minority shareholdings – determination of the appropriate discount rate on account of the husband’s minority shareholding FAMILY LAW – PROPERTY SETTLEMENT – alteration of property interests – where the husband inherited shares after the parties’ separation – whether the global or asset by asset approach is to be adopted – treatment of potential inheritance – 10% adjustment in favour of the wife on account of s 75(2) factors – net assets to be divided 55%/45% in favour of the wife – whether proposed orders are just and equitable – where the wife is to retain the former matrimonial home – where the husband has no assets from which to pay the wife the balance due to her – where the wife did not seek any additional payment to her – order just and equitable |
| Family Law Act 1975 (Cth) ss 75(2) & 79 |
| Wilde and Wilde [2007] FamCA 1044 Mallett and Mallett (1984) FLC 91-507 Harrison and Harrison (1996) FLC 92-682 Georgeson and Georgeson (1995) FLC 92-618 Reynolds and Reynolds (1985) FLC 91-362 Sapir and Sapir (No 2) FLC 92-047 Turnbull and Turnbull (1991) FLC 92-258 M and M (unreported, delivered 12 November 1992, Baker J) Ramsay and Ramsay (1997) FLC 92-742 W and W (unreported, delivered 11 March 1998, Warnick J) W and W (unreported delivered 30 November 1998, Ellis, Finn and O’Ryan JJ) T and T and T [2000] FamCA 308 T and T [2001] FamCA 230 M and M [2002] FamCA 349 Faraday and McKenzie [2007] FamCA 1626 Clarkson and Clarkson [2008] FamCA 1098 Jones v Dunkel (1959) 101 CLR 298 R and R [2006] FamCA 894 M and M [2005] FamCA 1211 H and H [2001] FamCA 374 Zyk and Zyk (1995) FLC 92-644 White and Tulloch v White (1995) FLC 92-640 De Angelis and De Angelis (2003) FLC 93-133 Milankov and Milankov (2002) FLC 93-095 |
| APPLICANT: | Mr Manx |
| RESPONDENT: | Ms Jenner |
| FILE NUMBER: | ADF | 249 | of | 2006 |
| DATE DELIVERED: | 9 DECEMBER 2009 |
| PLACE DELIVERED: | Adelaide |
| PLACE HEARD: | Adelaide |
| JUDGMENT OF: | BURR J |
| HEARING DATE: | 8 SEPTEMBER , 5-7 & 12,13 NOVEMBER 2008, 25, 26 FEBRUARY, 26 & 30 JUNE, 1 & 20 JULY 2009 |
REPRESENTATION
| COUNSEL FOR THE APPLICANT: | Mr J BOWLER |
| SOLICITOR FOR THE APPLICANT: | MELLOR OLSSON |
| COUNSEL FOR THE RESPONDENT: | MS T LEWIS |
| SOLICITOR FOR THE RESPONDENT: | MARK MUDRI & ASSOC |
Orders
That in full and final settlement of any claim that either party may have against the other by way of settlement of property or variation of settlement of property:-
(a) on or before Friday 9 April 2010 the husband do:-
(i)vacate the property situated at F in the State of South Australia (“the former matrimonial home”);
(ii)transfer to the wife at the wife’s expense in all respects all that his right, title, estate and interest both at law and in equity in the former matrimonial home being the whole of the land comprised and described in Certificate of Title Register Book Volume … Folio … to the intent that the wife shall be the sole registered proprietor thereof;
(b) pending occupation of the former matrimonial home by the wife the husband shall:-
(i)keep the former matrimonial home in a good and proper state of repair and presentation;
(ii)pay and discharge as and when they fall due to the exoneration of the wife all mortgage instalments, rates and taxes, utility accounts and other outgoings in relation to the former matrimonial home and do indemnify the wife in relation to any such payments.
(c) contemporaneously with paragraph 1(a)(ii) of these Orders, the wife do discharge to the exoneration of the husband the registered mortgage in respect of the former matrimonial home and do indemnify the husband in relation thereto;
(d) upon occupation of the former matrimonial home by the wife the wife do thereafter duly pay and discharge to the exoneration of the husband all mortgage instalments, rates, taxes, utility accounts and other outgoings in relation to the former matrimonial home and do indemnify the husband against any liability in relation to any such payments;
(e) the wife do all things necessary to transfer to the husband for his sole use and enjoyment absolutely the Daewoo motor vehicle;
(f) contemporaneously with paragraph 1(e) hereof the husband do pay and discharge the liability to the Satisfac Credit Union in respect of the Daewoo motor vehicle to the exoneration of the wife and do indemnify the wife against any liability in relation thereto;
(g) the wife’s estate and interest (if any) both at law and in equity in the following be and the same are hereby vested in the husband:-
(i)the husband’s personal effects, clothing and jewellery;
(ii)the furniture and household effects in the husband’s possession (including the furniture and household effects situate in the former matrimonial home at the date of the husband’s vacation of the property);
(iii)the aforesaid Daewoo motor vehicle;
(iv)the husband’s savings and investments;
(v)the husband’s superannuation benefits and entitlements;
(vi)the husband’s AMP shares;
(vii)the husband’s AMP life insurance;
(viii)the husband’s artistic equipment;
(ix)the husband’s entitlements in respect of J Pty Ltd.
(h) the husband’s estate and interest (if any) both at law and in equity in the following be and the same are hereby vested in the wife:-
(i)the wife’s personal effects, clothing and jewellery;
(ii)the furniture and household effects in the wife’s possession;
(iii)the Chrysler motor vehicle;
(iv)the wife’s savings and investments;
(v)the wife’s superannuation benefits and entitlements.
(i) the husband do indemnify the wife and keep her forever indemnified with respect to all debts and liabilities of the husband including personal loans, credit card and store account debts and any debts due and owing to the Australian Taxation Office in the sole name of the husband or in respect of J Pty Ltd or any other entity or severally with others;
(j) the wife do indemnify the husband and keep him forever indemnified with respect to all debts and liabilities of the wife including personal loans, credit card and store account debts in the sole name of the wife or severally with others;
(k) henceforth each party shall discharge without calling upon the other to contribute thereto the debts and liabilities contracted by them and henceforth each party is restrained and an injunction is hereby granted restraining the parties and each of them from pledging the credit of the other;
(l) each party do all such acts and things and sign all such documents as are necessary to give effect to the terms of these Orders PROVIDED THAT if the parties or either of them shall refuse or neglect to execute any transfer or other documentation pursuant to the terms of these Orders within seven [7] days after the same shall have been tendered to him or her by or on behalf of the other party for that purpose then and in such case a Registrar of the Family Court of Australia upon proof by affidavit of such refusal or neglect is hereby appointed to execute and if in his / her opinion it shall be necessary so to do to settle the same and to do all such other acts and things and to execute such other documents as shall be necessary to give full force and effect thereto and shall execute and do the same accordingly.
That all applications be otherwise dismissed and removed from the pending list.
IT IS NOTED that publication of this judgment under the pseudonym Manx & Jenner is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)
| FAMILY COURT OF AUSTRALIA AT ADELAIDE |
FILE NUMBER: ADF 249 of 2006
| MR MANX |
Applicant
And
| MS JENNER |
Respondent
REASONS FOR JUDGMENT
The Applications
I have before me for my determination disputed issues between the parties as to matters of property settlement.
At the commencement of the trial, the parties were also unable to agree on other issues pertaining to their two children, a daughter born in December 1999 (10) and a son born in January 2002 (nearly 8). However, to their credit, after the 1st Day Hearing on 8 September 2008, and Continuation Hearing days on 5, 6, 7, 12 and 13 November 2008, 25 and 26 February 2009 and 26 June 2009, the parties were able to agree upon final orders which were made by me by consent resolving all children’s issues. Final addresses regarding the property matters were heard on 1 and 20 July 2009.
Background
The parties were both born in Australia. The husband was born in 1964 and is currently aged 45 years. The wife was born in 1970 and is thus aged 39 years.
In 1965 the husband’s father incorporated a family company named J Pty Ltd (“J Company”) as a vehicle for distributing income from investments acquired by the husband’s grandfather.
In 1987 the wife’s mother set up a trust called the T Trust.
At the conclusion of his secondary education the husband completed a Bachelor’s degree in the arts. He was then employed as an artist and in a number of other more permanent and casual roles. He also taught some private students.
After completing an Education Degree from 1994 to 1998 the wife was employed by the Department of Education and Children’s Services SA on a 0.8 part time basis.
The parties commenced cohabitation on 31 January 1997 and were married in April 1998. As at the date of marriage the husband had $110,000 in savings, a parcel of 166,881 “C” class shares in J Company, a 1989 Subaru motor vehicle, superannuation of $4,000, an AMP Life Insurance policy with a surrender value of $2,083 and various items of furniture and effects. The wife owned a 1984 Holden Astra and had accumulated a small amount of superannuation.
After the parties were married the wife worked full time with the Department of Education and Children’s Services until commencing maternity leave in October 1999 prior to the birth of the parties’ first child who was born in December 1999. The husband earned an irregular income from working as an artist but received a dividend income on a quarterly basis from his shareholding in J Company.
The parties purchased the former matrimonial home at F in December 1998 for $158,000. The home was financed through the husband contributing $100,000 of his savings and $70,000 borrowed from the husband’s parents.
In 2000 the wife’s parents gave the parties $35,000.
During 2001 the wife worked with the Department of Education and Children’s Services on a 0.5 part time basis.
In 2002 the husband’s parents forgave $40,000 of the $70,000 they had earlier loaned to the parties for the purchase of the former matrimonial home.
In October 2002 the wife commenced working at a Pre-School on a 0.6 part time basis. Subsequently she was then employed on a 0.5 part time basis throughout 2003 and for all but Term 1 of 2004.
Between 2004 and 2006 the parties were the beneficiaries of gifts from the husband’s parents totalling $10,000. The husband states that these amounts were applied to the repayment of a loan for the Daewoo motor vehicle purchased for his use.
In 2004 the parties borrowed $65,000 from Satisfac Credit Union to commence renovations on the former matrimonial home. The husband states that he undertook significant renovations himself or with the help of his father.
In 2005 the husband developed chronic tinnitus and associated hearing loss. The husband ceased working as an artist and from this time received as his sole income, dividends from his J Company shares.
The wife continued to work part time at a Preschool until she took sick leave in Term 4 of 2005. From 9 November 2005 to 19 November 2005 the wife was admitted to the Adelaide Clinic, suffering depression. The wife took parental leave and did not work throughout 2006.
The parties separated on 16 January 2006 with the wife leaving the former matrimonial home with the children. They subsequently agreed a parenting arrangement whereby the children spent four nights per fortnight with the husband.
In January 2006 the wife made application for Centrelink benefits which automatically triggered a child support assessment against the husband in the sum of $245.50 per fortnight.
On 1 March 2006 the husband filed his Applications for final and interim orders with respect to property settlement and children’s issues. The wife filed her Responses on 22 March 2006.
On 28 June 2006 orders were made at a Conciliation Conference between the parties for the valuation of property and the exchange of various documents. It was also ordered that the husband make available to the wife half of the children’s toys and effects. The wife states that the husband failed to give proper compliance in that he provided mainly the children’s baby toys.
The wife sought orders that she be permitted to collect her personal effects and for the interim distribution of the parties’ furniture and effects. These orders were made on 11 December 2006. The wife attended the former matrimonial home pursuant to these orders on 14 December 2006 and while collecting those items, was videotaped by the husband.
In January 2007 the husband attended a J Company director’s meeting at which it was decided that there was no dividend to be paid to the husband by J Company for that quarter. Previously he had received dividend payments in the order of $30,000 to $40,000 per annum net.
In March 2007 the husband reported an income of $4,101 per annum to the Child Support Agency and was therefore assessed to pay nothing in child support to the wife.
In May 2007 the husband’s brother died.
In June 2007 the wife pursued an objection to the husband’s assessed child support liability. The husband filed a tax return for 2005/2006 indicating an income of approximately $45,000. The husband was then assessed as being liable for Child Support in the amount of $558.65 per month which was payable from 9 May 2007. However no arrears were assessed as payable to the wife.
A valuation report of J Company was completed by Mr N on 9 October 2007.
In August 2008 the husband received a further allocation of 147,381 “C” class shares in J Company from his brother’s estate, giving him a total of 314,262 “C” class shares.
The husband filed his Amended Application for Final Orders on 28 August 2007. The wife filed her Further Amended Response on 19 September 2008.
As of September 2008 the husband commenced paying $259.00 per month in child support.
On 24 October 2008 the single expert Mr N filed his second report on the valuation of J Pty Ltd. A third updated report was completed on 19 June 2009 (“the N reports”).
The evidence
Each party relied on affidavits they had filed and gave evidence in support of their applications. Mr N was the author of the single expert reports. He was also called for cross examination.
On issues where the evidence of the parties was in conflict, I have no difficulty in preferring the evidence of the wife. The husband’s evidence on many occasions was unsatisfactory. He was evasive, inconsistent and misleading in much of his evidence and frequently guilty of prevarication and delay.
Assets, financial resources and liabilities
The parties were able to largely agree on what constituted their assets, financial resources and liabilities, as follows:-
Assets and financial resources
35.1Former matrimonial home at F $615,000.00
35.2Daewoo motor vehicle (husband) $10,000.00
35.3Chrysler motor vehicle (wife) $5,500.00
35.4Wife’s superannuation entitlement $48,263.00
35.5Husband’s superannuation entitlement $9,628.00
35.6Husband’s AMP shares as of 11 June 2009 $1,185.00
35.7Husband’s AMP Life Insurance $4,338.00
35.8Furniture with the husband $6,675.00
35.9Furniture with the wife $6,500.00
35.10Artistic equipment (husband) $1,400.00
35.11Savings (wife) $300.00
35.12Savings (husband) $200.00
SUB TOTAL $708,989.00
Liabilities:
35.13Mortgage over former
matrimonial home $61,836.00
35.14 Loan on motor vehicle $3,334.00 $65,170.00
NET TOTAL $643,819.00
The total net pool of property and superannuation agreed between the parties is therefore $643,819.
Long service leave
The wife has an entitlement to some 80 days of long service leave. Counsel for the husband asked me to factor that entitlement into the pool of assets between the parties. However, I am satisfied it would be inappropriate to do so as I accept the wife’s evidence that she will be utilising that leave entitlement and not seeking to retrieve its cash value.
J Company shares
The parties were not able to agree on the value of the husband’s shares in J Company.
The parties did not take issue with the calculations contained in the N reports. Their dispute is as to the manner of valuation of those shares appropriate to the circumstances of this case and whether the shares inherited by the husband from his late brother ought to be treated differently from the balance of the asset pool.
The parties agreed with Mr N that there were only two valuation approaches which should legitimately be considered:-
38.1Maintainable Dividend; and
38.2Net Tangible Assets.
The latter produces a far higher valuation than does the former namely, of some $1 million, being $713,972 as against $1,680,756. Not surprisingly the husband opted for the former approach and the wife the latter.
In his third report of 19 June 2009 Mr N concludes in his Executive Summary thus:-
“3. EXECUTIVE SUMMARY
3.1In my opinion [the husband] is a minority shareholder of [J Company] and does not have control over the company.
3.2[The husband] does not have a fixed entitlement to dividends and it is at the discretion of the directors as to how dividends are paid to each class.
3.3Should [J Company] be wound up, [the husband] would be entitled to the capital pari passu with all other shareholders. Despite this, as [the husband] does not have a controlling interest in [J Company], he would not have the ability to wind up the company in his own right.
3.4My analysis has utilised the Future Maintainable Dividends Method based on a forecast of likely earnings as well as possible dividends being declared to shareholders of [J Company]. This is based on past performance that may vary particularly with the declaration of dividends.
3.5The constitution has clauses that can restrict a class of shares from being entitled to dividends, and therefore it is possible that [the husband] will not be entitled to a dividend in the future. This does not appear to have occurred when dividends have been paid in the past.
3.6Maintainable Dividend Valuation
3.7[The husband’s] shares are valued at:
Maintainable dividend 71,397
Dividend Yield 10%
Value of shares 713,972
3.8This does not take into account any income tax payable should [the husband] dispose of his shares.
3.9Net Tangible Assets
3.10[The husband’s] entitlement on a winding up of [J Company] would be $1,680,756.
3.11This does not take into account any tax [the husband] would pay on a winding up of the company.
3.12Valuation
3.13As [the husband] is not in a position to wind up the company and assuming there is no intention to wind up the company, [the husband’s] shares are valued at $713,972 based on capitalised future maintainable dividends.”
Mr N gave oral evidence that he was not aware of any circumstances in which the husband would have the capacity to wind up the company and for that reason preferred the maintainable future dividend approach. However, he conceded that if the husband could wind up the company he would prefer to value the company on the net tangible asset approach.
Discussion
CCH Australia Family Law and Practice Commentary at [36-200] notes that the “traditional methodologies” used in valuing businesses are referred to as “dividend based”, “earnings based”, “asset based”, “discounted cash flow” or “market comparison” methodologies.
In Wilde and Wilde [2007] FamCA 1044, the Full Court, Bryant CJ, Finn and Boland JJ, with reference to a text by Lonergan identified that:
154.The well recognised and commonly used valuation methods are described in Lonergan W, The Valuation of Businesses, Shares and Other Equity (Sydney: Allen & Unwin, 4th ed, 2003) at 22. The author sets out the five basic valuation methodologies namely discounted cash flow, capitalisation of future maintainable profits, notional realisation of assets, value of net tangible assets (on an ongoing concern basis) and capitalisation of future maintainable dividends.
Valuations generally
In Mallet and Mallet (1984) FLC 91-507, Gibbs CJ said at 79,115:
In determining the value of shares it is necessary to take into account both the earning power of the company and the value of its capital assets: Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358 at 362 and see Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547 at 564. In many cases the real value of the shares will depend more on the former than on the latter item. Where, however, the company is merely a convenient means of holding the assets, and the person who owns the shareholding in question is able to put the company into liquidation at will, the real value of the shares will be likely to be the amount which the holder would receive if the company were voluntarily wound up. And since the purpose for which a valuation is made may affect the court's attitude: Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd at 373-4, there is much to be said for the view that the court will be more ready to value shares on a liquidation basis in a case such as the present than in a revenue or even in a compensation case.
Mason J said with respect to valuations at 79,121:
What is the most appropriate method of estimating the value of shares in a proprietary company depends upon a variety of factors. They include the purpose for which the valuation is made, the nature of the shareholding, the character of the company's business, its capacity to earn profits and the net value of its assets. It has been said that a valuation based on earning capacity is generally most appropriate because the hypothetical purchaser of shares in a company which is a going concern is looking, not to a winding up, but to the profits which will ensue from the company continuing to trade (McCathie v. Federal Commissioner of Taxation (1944) 69 C.L.R. 1; Abrahams v. Federal Commissioner of Taxation (1944) 70 C.L.R. 23; Commissioner of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (1947) 74 C.L.R. 358, at pp. 361-362). But it has been recognised that valuation by reference to assets backing or a liquidation basis will be appropriate where earning capacity provides no real measure of the true share value (The Commissioner of Stamp Duties (N.S.W.) v. Pearse (1951) 84 C.L.R. 490) or present overwhelming difficulties (Elder's Trustee and Executor Co. Ltd. v. Federal Commissioner of Taxation (1951) 96 C.L.R. 563; Jekyll v. Commissioner of Stamp Duties (Q.) (1962) 106 C.L.R. 353) or where the shareholding is such as to enable the holder to bring about liquidation of the company (New Zealand Insurance Co. Ltd. v. Commissioner of Inland Revenue (1956) N.Z.L.R. 501). See generally the judgment of Gibbs J. in Gregory v. F.C. of T. 71 ATC 4034; (1971) 123 C.L.R. 547.
There is always the risk that in examining methods of valuation attention is diverted from the object of the exercise, namely the ascertainment of the real value of the shares, to the means by which the object is to be achieved. As a general proposition the valuation by means of capitalization of profits is appropriate to those cases in which the likely purchasers will be looking to the profits which the company will earn as a going concern. Where, however, the valuation of the shares as calculated by reference to their assets backing substantially exceeds their valuation as calculated on a capitalization of profits, the former is to be preferred, subject to a discount for the expenses of winding up and distribution, unless there is some good reason for preferring the latter, as, for example, where the shareholding to be value [sic] is a minority of shareholding and those in control of the company intend to carry on its business because that course has advantages for them. Even in such a case it will be proper to take some account of the assets backing of the shares in order to reflect the possibility that those in control of the company might be minded in the future to sell their shares or to realize the value of the assets of the company. (Emphasis added)
In Harrison and Harrison (1996) FLC 92-682 it was said by the Full Court at 83,087:
Revenue and taxation cases, as the above authorities state, have little relevance to the value which a Court, exercising jurisdiction under the Family Law Act, places upon such interests. The value to be ascribed to shares in a family company must be a realistic one, based upon the worth of the shares to the party himself or herself. (Emphasis added)
In Georgeson and Georgeson (1995) FLC 92-618, the Full Court made it clear at 82,218 (more recently affirmed by the Full Court in Wilde and Wilde (supra)) that while expert evidence may be adduced to assist the Court in determining matters with respect to valuation, the Court must come to its own conclusion as to the appropriate valuation approach. The Full Court also said in Georgeson (supra), that:
[t]here is no fixed rule as to the proper method of valuation of shares in Family Court proceedings although in some circumstances a particular methodology may be preferable; see Mallet v. Mallet (1984) FLC ¶ 91-507; (1984) 156 CLR 605 .
Valuation of minority shareholdings
Dividend based valuations are generally accepted as appropriate to value a minority interest in an entity.[1] Lonergan[2] explains (at 107) that:
A minority shareholder differs from an investor with a controlling interest in that the minority shareholder is not in a position to direct, and often not even in a position to influence, the distribution of dividends or the investment of retained profits or the strategy or tactics of the business operations. An investor in a minority shareholding in a private company is normally not entitled to any right of participation in the management of the company’s affairs. Indeed, the investor is dependent upon the relations with the majority shareholder. The duration of these relations cannot be predicted with confidence and the relations may change or deteriorate significantly. The investor may even have to rely on the abilities and goodwill of persons who are unknown to the investor. As a result, the value of such a shareholding generally ultimately lies in its right to receive dividends. Accordingly, the appropriate methodology by which to value a minority interest is normally the capitalisation of FMD [future maintainable dividends].
[1] CCH Australian Family Law and Practice Commentary at [36-205].
[2] Wayne Lonergan, The Valuation of Business, Shares and Other Equity (3rd ed, 1998), 107
Valuations based on assets generally imply control[3], however, the CCH commentary says that “it is frequently adopted in valuing minority interests.” This is done by taking the “gross” value and discounting the valuation to reflect the shareholders lack of control and the “lack of negotiability” of the interest.
[3] CCH Australian Family Law and Practice Commentary at [36-360]
Case law
Reynolds and Reynolds (1985) FLC 91-362.
The husband was a shareholder in a company of which his father held the governing director’s share and the husband’s mother held the succeeding governing director’s share. On appeal, the husband complained the trial judge erred in his treatment of the husband’s shares and the value attributed to them. The Full Court said (at 80,111):
We are doubtful, however, whether valuation methods which have been developed for commercial purposes are entirely appropriate for the purposes of family law. The present commercial or capital value of shares in a proprietary company may not reflect their value to the spouse, who either has control after divorce or who stands ultimately to benefit from them or control them after the death of generous parents, as appears to be the case here.
At 80,112:
… we are not of the view that his Honour was entitled to regard the husband's shares as a financial resource pursuant to sec. 75(2)(b) when those shares are his property alone.
Clearly, however, their potential future value to the husband must be taken into account under sec. 75(2)(o) as that is a ``fact or circumstance which... the justice of the case requires to be taken into account.''
On the facts of this case, however, this point makes little practical difference. His Honour's description of the shares as having ``an indefinable but substantial value available to him through but subject to the dynastic control of his parents while they live'' is an accurate one. It was open to his Honour on the evidence to make that finding and to view these shares as valuable property, realisable in the future by the husband, distant though that future may be.
Sapir and Sapir (No 2) FLC 92-047.
The wife held a 48% interest in family companies. Both the husband and wife’s valuers discounted the value of the wife’s shares on account of her being a minority shareholder. The husband’s valuer discounted the value by a smaller amount on the basis that the only foreseeable purchaser of the shares was the wife’s parents, who would not be concerned with purchasing a minority shareholding. It was common ground that the only real matter in dispute was the appropriate rate of discount. His Honour adopted the value of the husband’s valuer, namely the value of the shares to the wife not their commercial value or value to a hypothetical purchaser. His Honour considered that the husband’s valuer had made too many assumptions in fixing the discount rate, however, and his Honour proposed to apply a slightly higher discount rate, namely 6.5%.
Turnbull and Turnbull (1991) FLC 92-258.
One issue for determination by Baker J was the value of the husband’s shares in two family companies. After reviewing authorities, the trial judge commented at 78,737:
It is not appropriate in the context of Family Law proceedings to value shares in private family companies on the basis of what a hypothetical purchaser may pay for them. Similarly, it is quite inappropriate to adopt the approach taken in the revenue and resumption cases.
Further on at 78,738
I am satisfied therefore in the context of proceedings under the Family Law Act that when a judge is determining the value of shares held by a party in a family company, he must look at the reality of the situation and value the shares on the basis of their worth to the shareholder.
His Honour considered that a “modest” discount rate needed to be applied to the value of the husband shares in each company. With respect to the first company, the trial judge applied a discount rate of 5%, on the basis that his Honour was satisfied it was the intention of the husband’s father that the company remain in the husband’s ownership. With respect to the second company, his Honour applied a discount rate of 10% on the basis that the husband had a one fifth interest and had four sisters he would have to deal with.
M & M (unreported, delivered 12 November 1992, Baker J).
Baker J was satisfied in this case that the husband’s parents, who controlled the entity in question, intended to benefit their children. His Honour was unable to ascertain with precision what the parent’s intentions were. Given that the husband was the only family member with significant involvement in the business, there was little doubt that the husband would assume control upon his parent’s death, or when they ceased to be involved. There was a strong likelihood that the husband would step into the shoes of the father. His Honour stated that the value was based on the value to the shareholder. His Honour proposed to value the shares on the basis of net tangible assets. Due to the uncertainty surrounding when the husband’s parents would cease involvement and control, and the fact the husband had to reach agreement with his siblings as to the future of the company, his Honour determined it was appropriate to apply a discount rate of 20% to the valuation.
Harrison and Harrison (supra).
At first instance the trial judge had used the net asset valuation method and applied discount rates of 10% and 5% respectively to the husband’s shares in two companies, taking into account his minority interest. The Full Court found it was clearly open to the trial judge to value the husband’s shares on this basis.
Ramsay and Ramsay (1997) FLC 92-742.
One issue for determination before Warnick J in this case was the value of the husband’s minority shareholding in a company. His Honour provided a useful discussion of the relevant case law to date on this issue, and expressly considered the situation where there is a possibility of the minority shareholder gaining control in the future. His Honour made it clear that it is for the Court to determine the probabilities of a minority shareholder gaining control in the future, and not an expert witness providing the valuation. Although lengthy, I have set out the relevant parts of Warnick J’s judgment below:
Cases, as here, involving minority shareholding, cause greater difficulty.
Not only has it been recognised in many of the cases later cited that (as was recognised in Mallet (supra)), the purpose of valuation identified for Family Court cases differs from that in revenue and taxation cases, but it has also been recognised that the approaches developed for those cases may well be inappropriate for Family Court purposes. It may be however that, as earlier stated, there has been insufficient identification, both by the accountancy profession and by the courts, of the approaches which are appropriate for Family Court purposes.
The purpose of the valuation is to ascertain the value of the shares to the shareholding party, “.... not their commercial value or their value to a hypothetical purchaser” (Baker J, Turnbull and Turnbull [1991] FLC 92-258 at p.78,738) (see also Sapir v. Sapir (No. 2) [1989] FLC 92-047 at p.77,543 - decision of Young J, Supreme Court of New South Wales; and Harrison and Harrison [1996] FLC 92-682 at p. 83,087).
In a number of cases in which it was stated that the value to be ascertained was that to the shareholding party, it was also stated that the value must be “realistic”, as if these terms are synonymous. If the use of the term “realistic” is seen as simply “shorthand” for the expression “value to the shareholder”, then no doubt there is no inconsistency.
It seems arguable however that what is “realistic” (literally taken) may not be the same as the value to the shareholder. The latter is often not the value that can be achieved on sale and also often takes account of a number of assumptions about the receipt of benefits (often not attaching to the shareholding “per se”). Thus it has a strong “notional” aspect, in contrast to the reality of the market. It seems arguable that the concept of “realistic” value to the shareholder ought include a recognition of what can be achieved on sale. Alternatively, such recognition ought be granted some other place in the decision-making process.
It is in this area of tension, between what I suggest is realism and what might be assessed as the value to the shareholder, that the failure to identify factors pertinent to the valuation exercise being undertaken and in particular the failure to identify those factors, the import of which ought be left to the discretion of the court, causes particular difficulty.
Thus, focussing on which can be achieved on disposition, one expert pursues a particular approach, while the other, ignoring the question of what can be achieved on disposition, focuses on the value of the company’s assets or the capitalisation of benefits received or receivable by the shareholder.
Perhaps this scenario can be avoided, if the point at which a difference, between value to the shareholder (exclusive of a consideration of “market value”) and the “market value” becomes relevant, can be established.
Another point of repeated contention between expert witnesses arises where a minority shareholding party arguably has some expectation of gaining control of the company at some time in the future, for example on the death of parents who are also shareholders. In my view, it may not even be appropriate to leave to expert witnesses an assessment of the probabilities of a minority shareholding party one day gaining control of the company. A particular difficulty in expert witnesses opining about such matters is that the factual basis upon which the expert has made an assessment of probabilities must be identified and of course unless ultimately those facts match the facts as found by the Court, the expert’s assessment of probability will be of no use. Even if the facts do match, how is the Court to treat a witness’s assessment of probabilities of such events occurring? Are such “probabilities” a matter for accountancy expertise? In my view, they are not.
The same observations apply to assessments by experts of the probabilities of future receipt of benefits to the shareholding party.
As to how these various questions so far raised ought be dealt with, some guidance can be found in the reported decisions.
In Georgeson and Georgeson [1995] FLC 92-618 the Full Court (Ellis, Finn and Joske JJ) said, at 82,218-82,219:
“There is no fixed rule as to the proper method of valuation of shares in Family Court proceedings although in some circumstances a particular methodology may be preferable; see Mallet v. Mallet [1984] FLC 91-507; [1984] 156 CLR 605. Expert evidence may be adduced as to the proper method to be adopted, in the circumstances of a particular case, to assist the Court in forming an independent judgment on the issue of valuation by the application of the appropriate principles. Whilst an expert may thus suggest an approach as being appropriate in a particular case, before accepting it, the Court must come to its own conclusions as to whether that approach is appropriate in the circumstances.”
Though the Court does not appear to have been addressing the particular questions which I have raised, the observations of the Court in Georgeson’s case may indicate that factors such as the probability of a current minority shareholder gaining a controlling interest or the difference between value to the husband as assessed by accountants, and the realisable value, are matters for the Court rather than the valuers.
In Reynolds and Reynolds (supra) the Full Court (Asche and Barblett SJJ, and Murray J) said, at pp.80,111 and 80,112:
“We are doubtful, however, whether valuation methods which have been developed for commercial purposes are entirely appropriate for the purposes of family law. The present commercial or capital value of shares in a proprietary company may not reflect their value to the spouse, who either has control after divorce or who stands ultimately to benefit from them or control them after the death of generous parents, as appears to be the case here.
If there were a winding up of the company, the husband might then realise the value set on them by his Honour. The reality of the situation is, however, that a winding up is not in the least likely and the shares do not appear to have a commercial value so as to enable the husband to sell them and pay the wife the sum ordered.
That they are of value to the husband in the future is not in doubt but of how much value is impossible for his Honour to determine. It is a question, inter alia, of how his Honour regarded that factor and how much weight he gave to it.
Counsel for the appellant conceded that shares which have no value now and are of problematical value in the future might not be a financial resource under sec. 75(2)(b) but perhaps could be considered under sec. 75(2)(o). With this we agree.”
Their Honours then went on to consider the meaning of “financial resource” including a consideration of the discussion of that term in Kelly and Kelly (No. 2) [1981] FLC 91-108. Their Honours then continued:
“With respect, we adopt those dicta and we are not of the view that his Honour was entitled to regard the husband’s shares as a financial resource pursuant to sec. 75(2)(b) when those shares are his property alone.
Clearly, however, their potential future value to the husband must be taken into account under sec. 75(2)(o) as that is a ‘fact or circumstances which .... the justice of the case requires to be taken into account’”.
Again, it seems that the Court is suggesting that factors such as the prospect of the shareholding party gaining control in the future is a matter not for the valuers, but for the Court.
In Hull and Hull (supra) his Honour Justice Nygh also seemed to think that, in dealing with a valuation of shares on the basis of value to a party, there were steps for the Judge to take when considering what actual orders to make. In that case, considering the value of a party’s shareholding in a company under the control of another, his Honour said, at p.78,410:
“.... On that basis I would agree that the current value of the shares on the market would be nil.
However, it is in my view artificial to adopt such a basis of valuation in relation to interests in private companies. It cannot be said in all seriousness that Mrs Hull’s interest in the company is valueless. The test laid down in Spencer’s case can only be applied where there is a ready and available market. It is of no application in a case such as this where such a market is lacking.
This Court must approach a question of valuation on a realistic basis and as the High Court accepted in St. Helen’s Farm case, the question of valuation is essentially a matter for the trial Judge. ....
The situation is not unlike the one which prevailed in W. and W. [1980] FLC 90-872; [1980] 6 Fam L.R. 538, where the wife was the owner of a grazing property which was in the effective control of her father during his lifetime and from which she derived only very limited financial benefits. ....
.... Taking the approach I took in W. and W. (supra), I therefore find that the wife has an asset of a value of approximately $267,000. However, since that asset is not realisable by her in the foreseeable future, I will take it into account only as regard the question of her future needs. ....”
It may be that the exclusion of such a shareholding from the “asset pool” would not these days find favour. But the question of the treatment of such a asset, what allowances, discounts or adjustments must be made to reflect its non-realisable character, remains.
This dilemma is less apparent when there are realisable assets as well as the shareholding. The non-shareholder can be awarded his/her entitlement from the realisable assets.
Arguably, however, even in such circumstances, some account ought be taken of the lack of realisable value of the shareholding.
I proffer the following observations:
(a)a question to be answered in each case, and as to which expert evidence may be admissible, is whether there is a market for the shareholding;
(b)if there is a market, evidence of the market value is highly likely to be relevant, even if there is no intention to sell;
(c)it is however, unhelpful for valuations to focus on the lack of a market in establishing a value to the shareholder. Any allowance for lack of realisable value is best made by the Court, in all the circumstances of the case, particularly the presence or absence of other assets which are disposable;
(d)in cases where there are no realisable assets, the lack of market value of the shareholding will usually be critical, not only to the “division” of property, but perhaps even more so, to the orders made;
(e)if, on the facts of the case, there is any prospect of the minority shareholding party gaining control of the company, the question of the probabilities of that event is likely a question for the Court. If that is so, all that the valuers ought be concerned with is the value to the party if he/she gains control, as well of course as the value if the party remains a minority shareholder;
(f)similarly, if there is any issue about them, questions of the probabilities of particular benefits being received by a shareholding party in the future, are likely best left to the Court, but again valuers ought assess the value of the shareholding, both on the basis that the benefit is received and that that it is not.
If these observations have validity they will not remove the necessity for accountancy evidence in these cases, but they ought greatly reduce the contention, and therefore the time and costs involved in the receipt of such evidence. (Emphasis added)
In the case before his Honour, the valuer relied upon by the wife had adopted a net asset backing basis valuation, partly due to the family relationship, in particular the fact that the husband’s parents who controlled the company at the time were elderly. Warnick J said that the valuer had clearly assumed that there was a very real prospect of the husband achieving control of the entity in the future. His Honour did not consider that that assumption was borne out on the evidence. His Honour ultimately preferred the evidence of valuation relied upon by the husband, which was on the basis of capitalisation of income stream.
W & W (unreported delivered 11 March 1998, Warnick J).
Warnick J, reiterating his comments in Ramsay about the appropriateness of valuers making certain assumptions, preferred the evidence of valuation of the husband’s expert, who had discounted the share value achieved on a net asset backing approach by 60% to recognise the minority position of the husband as a shareholder. The expert for the wife had proceeded on the basis that the husband would be able to realise his shareholding upon the husband’s mother’s death in 18.8 years (statistically). His Honour found, inter alia, that the expert had ignored the fact that the husband would remain a minority shareholder even after the death of the mother. This issue was not directly addressed in the appeal in this matter (W & W (unreported delivered 30 November 1998 Ellis, Finn and O’Ryan JJ)).
T and T and T [2000] FamCA 308 (unreported) (Full Court). The husband had a minority interest in a company Advanx. The remaining shares were held by the husband’s father and his two brothers. The trial judge rejected the value placed on the husband’s shares by the wife’s expert, but his Honour did not make a finding as to the value of the shareholding. The Full Court summarised the principles applicable to issues of valuation which relevantly included with respect to the valuation of shareholdings:
24.5It is the shareholding of the party, as opposed to the assets of the company, which must be valued (Gamer and Gamer (1988) FLC 91-932 at 76,743).
24.6Whilst the primary test is that of a hypothetical prudent purchaser (Gamer and Gamer (1988) FLC 91-932 at 76,743), it is the case that for the purposes of Family Law, “...the present commercial or capital value of shares in a proprietary company may not reflect their value to the spouse, who either has control after divorce, or who stands ultimately to benefit from them, or control them after the death of generous parents” (Reynolds and Reynolds (1985) FLC 91-632 at 80,111).
24.7In proceedings under the Family Law Act, “...the value to be ascribed to shares in a family Company must be a realistic one, based upon the worth of the shares to the party himself or herself” (Harrison and Harrison (1996) FLC 92-682 at 83,087; see also Turnbull and Turnbull and Others (1991) FLC 92-258 at 78,738).
The Full Court found that despite the difficulties imposed upon the trial judge in determining the value of the shares, the Act required the judge to identify the assets and determine their value. In the absence of this, it is difficult to see how the judge could be satisfied the outcome was just and equitable. The appeal was consequently allowed.
T and T [2001] FamCA 230 (unreported) (Full Court).
This was an appeal from the retrial in the above matter. Again, the principal asset was a minority shareholding of the husband in a company Advanx. The husband’s valuer had considered the capitalisation of future maintainable earnings to be the most appropriate approach. The wife’s valuer contended that the correct methodology was to value the husband’s shares on a net asset backing basis. The trial judge accepted the evidence of the wife’s valuer. It was submitted on appeal that the trial judge erred in that his Honour should have adopted the valuation based on future maintainable earnings and then, if he regarded it as appropriate, to have some regard to the asset backing of the shares. The Full Court found the trial judge’s reasons for adopting an asset backing approach were flawed.
53.The trial Judge identified his reasons for adopting an asset backing approach as the appropriate methodology but, in our view, those reasons are flawed. We accept the submissions made on behalf of the husband that the trial Judge erred in concluding that “the asset backing approach produces greater consistency”. In that regard, we accept the submissions made on behalf of the husband. We also accept the submission on behalf of the husband set out in paragraphs 26 and 30 herein. We are conscious of the observations of Stephen J. in Gronow v Gronow (supra) at 519 but are firmly of the view that, in determining the appropriate methodology, the trial Judge failed to take into account and weigh with other relevant matters, the unsatisfactory nature of the valuation evidence relating to the relevant land and failed to attach sufficient weight to the contents of the Statement of Experts and the ability of the two experts to agree upon a valuation of the husband’s shareholding based on the future maintainable earnings of the company. In addition, whilst appreciating that his task was to value the husband’s minority interest in Advanx, we are of the view that, in determining the appropriate methodology, he attached insufficient weight to that factor. Further, he failed, in our judgment, to place sufficient weight, in reaching his conclusion, on the inability of the husband to obtain control of the company, to bring about its liquidation or otherwise to realise its assets. The evidence suggested that the husband’s father who controlled the company intended to continue to operate the business as he had done over a lengthy period of time. His Honour in paragraph 50 of his reasons was mistaken as to what the Full Court said and referred to and relied upon, not observations of the Court, but on an extract from the evidence. Moreoever, the factors referred to by Gibbs CJ. and Deane J. in Mallet v Mallet (supra) at 616 and 642 respectively are absent in the instant case.
54.The task which confronted his Honour was to value the husband’s minority interest in Advanx for the purpose of the s.79 proceedings as at the date of the hearing. In so doing, he was obliged to look at the reality of the situation and arrive at a value by reference to the notional value of that interest to the husband. In the circumstances of this case, there was a strong case for saying that an acceptable value should have reflected to a substantial extent the future maintainable earnings of the company. We are of the opinion that the trial Judge erred in his determination of the appropriate methodology to value the husband’s interest in Advanx and that accordingly we should allow the appeal.
M and M [2002] FamCA 349(unreported) - Moore J.
One issue for determination was the husband’s interest in various entities. Moore J had been referred by counsel to Mr Lonergan’s text, The Valuation of Businesses, Shares and Other Equity, Business & Professional Publishing, third edition (1998). Addressing the approach to valuation in family law context, her Honour said:
67.Plainly the approach to valuing an asset may vary according to the circumstances in which it is being considered. Undertaken for a wide variety of purposes, that purpose is a factor in the approach to be taken to it. Mr Lonergan in the introductory chapter of his text mentioned earlier discusses the concept, and a sample of the labels he mentions illustrates the diverse meanings value can have: book value, fire-sale value, replacement value, special value and market value. The last of these is outlined in the much-quoted passage from the judgment of Griffiths CJ in Spencer v. Commonwealth of Australia, 5 CLR 418 at -.432. Yet the hypothetical buyers and sellers implicit in that model are not always available or do not always represent the reality of what is to be considered.
68.When it comes to valuing shares in private companies, the approach to be taken in proceedings in this Court is now the subject of a long line of cases: for example, Dah and Hull 9FamLR 241 (Nygh J); Mallett and Mallet (1984) FLC 91-507 (High Court, in particular per Gibbs CJ, Mason J and Deane J); Bowman and Bowman (1984) FLC 91-574 (Nygh J); Reynolds and Reynolds 10 Fam LR 388 (Full Court); Sapir and Sapir (No 2) 13 Fam LR 362 (Young J, Supreme Court of NSW); Turnbull and Turnbull (1990) 15 Fam LR 81 (Baker J); Georgeson and Georgeson (1995) 19 Fam LR 302 (Full Court); Harrison and Harrison 1996) 20 Fam LR 322 (Full Court); Ramsay and Ramsay (1997) FLC 92-742 (Warnick J); and T and T (unreported, Full Court, delivered 6 April 2001). The approach is to be from the standpoint of ascertaining the value to the holder.
69.Essentially, this involves looking to the particular factual circumstances surrounding the holder and valuing the holder’s interest from a realistic appraisal of those circumstances, rather than from some contrived position based on more commercial considerations underpinned by the hypothetical model outlined in Spencer’s case. But as some of the cases have cautioned, in placing the holder in their particular context, the Court is the arbiter of the facts, not the accountants; the probabilities flowing from arguable facts are for the Court, not the accountants; and to be relevant to the valuation exercise those facts need to have a nexus to the shareholding rather than to some unrelated circumstance of the holder.
70.In this case, the task is to ascertain the current value of the husband’s shares in these two companies. That must be approached by ascertaining the value to him, as the holder, and not their value to some hypothetical buyer removed from his individual circumstances and also by having regard to his individual circumstances (and no one else’s) that have a connection to or nexus with the shares he holds.
methodology to be adopted
71.That being the approach, there comes the selection of methodology. Generally, when considering the methodology appropriate to valuing a minority shareholding, it is recognised that the holder is not in a position to direct, and often not even influence, decisions such as dividend policy or investment of profits and they may not even have any say in the management of the company’s affairs. These are the province of the majority shareholder/s with whom there may be a shifting or uncertain relationship or no relationship at all.
72.The selection of methodology has also been the subject of discussion in a number of reported cases. Suffice here to refer to the discussion in the High Court decision of Mallet v Mallet (1984) 156 CLR 605, in particular the passage from the judgment of Gibbs CJ at page 616 and the passage from the judgment of Mason J at page 627. Neither passage purports to lay down a principle of law about the methodology to be adopted, but discusses some of the factors to be taken into account by the Court in making that selection. Indeed, in Georgeson the Full Court stated that there is no fixed rule as to the proper method of valuing shares, though in some circumstances a particular methodology may be preferable. Expert evidence, it was noted, may be adduced as to the proper method to be adopted in the circumstances of a particular case to assist the Court in forming an independent judgment about it by the application of appropriate principle. But it was said that the Court must come to its own conclusions as to whether that approach is appropriate in the circumstances. (Emphasis added)
In the case before her Honour, she outlined that she was faced with two valuations, one which was too low because it was taken from a market value point of view, and one which was too high as it assumed rights and entitlements of the husband that did not yet exist. Her Honour had found that the husband would control the entities in question upon his mother’s death, which statistically would be in about a “decade or so”. Her Honour sought to resolve the problem through a combination of the valuations:
79.If value is assessed by reference to future maintainable dividends, Mr Banks’ variables and figures can be used up to the point at which he applied the compound discount, for reasons I have already discussed. Using this method, therefore, I would assess the current value of the husband’s interests at $3,655 (or $3.98 per share) for MHPL, $1,684,365 (or $353.26 per share) for the ordinary shares in Petarli, and $1,450 for the group shares in Petarli. From the total of $1,689,470 would be deducted the debt of $585,180, to arrive at a net figure of $1,104,290.
80.If value is assessed by reference to the combination of net asset backing and notional liquidation method, Mr McGrane’s figures (including the view he took about surplus assets and other disputed adjustments) require the application of a discount. In my opinion, the discount should be for present lack of control only and not for lack of marketability for reasons discussed earlier. The rate needs to be such as to allow for the fact that control is likely to be 10 years or more away. The more problematic issue is striking the appropriate rate. A flat rate of 25% to account for control being out of his reach for that period would bring the value of the holdings under this method into the same ball park as the figure achieve by FMD without any discounts. As it happens, I think that a reasonable rate when one has regard to the certainty of control by the husband in the future (from the irrevocable option) and that it will probably be 10 years or so before he gains it.
Wilde and Wilde (supra).
The Full Court (Bryant CJ, Finn and Boland JJ) said in the context of discussing valuation of the husband’s veterinary practice:
152.The question of valuation of a business or shares in a company is an issue frequently raised in proceedings in this Court. In Mallet v Mallet (supra) at 627, Mason J discussed valuation methodology appropriate to the valuation of shares in a proprietary company, and concluded:
It has been said that a valuation based on earning capacity is generally most appropriate because the hypothetical purchaser of shares in a company which is a going concern is looking, not to a winding up, but to the profits which will ensue from the company continuing to trade: McCathie v. Federal Commissioner of Taxation; Abrahams v. Federal Commissioner of Taxation; Commissioner of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd.. But it has been recognized that valuation by reference to assets backing or a liquidation basis will be appropriate where earning capacity provides no real measure of the true share value (Commissioner of Stamp Duties (N.S.W.) v. Pearse) or presents overwhelming difficulties (Elder's Trustee and Executor Co. Ltd. v. Federal Commissioner of Taxation; Jekyll v. Commissioner of Stamp Duties (Q.)) or where the shareholding is such as to enable the holder to bring about liquidation of the company (New Zealand Insurance Co. Ltd. v. Commissioner of Inland Revenue): see generally the judgment of Gibbs J. in Gregory v. Federal Commissioner of Taxation. (footnotes omitted)
153.The requirements imposed on a trial Judge in determining valuation of a business or shares are discussed in many authorities (see Commonwealth v Milledge (1953) 90 CLR 157; Georgeson and Georgeson (1995) FLC 92-618). In the latter case the Full Court summarised the trial Judge’s obligation as follows at 82,218:
Expert evidence may be adduced as to the proper method to be adopted, in the circumstances of a particular case, to assist the Court in forming an independent judgment on the issue of valuation by the application of the appropriate principles. Whilst an expert may thus suggest an approach as being appropriate in a particular case, before accepting it, the Court must come to its own conclusions as to whether that approach is appropriate in the circumstances. (emphasis added)
154.The well recognised and commonly used valuation methods are described in Lonergan W, The Valuation of Businesses, Shares and Other Equity (Sydney: Allen & Unwin, 4th ed, 2003) at 22. The author sets out the five basic valuation methodologies namely discounted cash flow, capitalisation of future maintainable profits, notional realisation of assets, value of net tangible assets (on an ongoing concern basis) and capitalisation of future maintainable dividends.
…
173.We have already noted the authorities on the role of expert evidence and valuation are clear and consistent. A trial Judge must come to his or her own conclusions about valuation evidence, and “the court must arrive at its own satisfaction by the application of established principles of valuation” (see Chick and Chick (1987) 12 FamLR 64). (Emphasis added).
Faraday and McKenzie [2007] FamCA 1626 (O’Ryan J).
The value of the husband’s shares in a company were in issue. The husband held a 14.28% minority interest. Evidence with respect to valuation was given at trial by a single expert and by an expert called by the husband. The single expert said a net assets valuation should be adopted because the value of the shares rested in the value of assets comprising of cash, a rural property and loans to directors. He considered a discount should be applied, however, on account of the husband’s minority interest and the fact he could not control decisions as to management or realisation of assets, dividend policy nor effect distribution of assets or force a liquidation. A discount of 5% was proposed. The husband’s valuer also prepared a report, in which he took into account significant discounts to reflect the deferred receipt of any capital value and lack of dividend income in the meantime and the minority nature of the investment, as well a further 25% discount for lack of negotiability. The experts then prepared a joint statement outlining their areas of agreement and disagreement. Turning to consider the issue of the quantum of discount for the husband’s minority shareholding:
219.In his report Mr L identified various cases where he said the value of a minority shareholders pro rata interest in the value of a company as a whole was reduced by a flat percentage discount rate and that the rates have “varied from 5% to 65%”. I note that in CCH, Australian Family Law and Practice at [36-370] under the heading “Family Court Discounts for Lack of Control and Negotiability” it is said that “Australian court cases have shown that the discounts to net asset backing for lack of control and negotiability range from 5% up to 65%”. A schedule is then provided of some Australian family law cases namely; Ramsay v Ramsay (1997) FLC 92-742; Sapir v Sapir (No 2) (1989) FLC 92-047; Georgeson and Georgeson (1995) FLC 92-618; Hull and Hull (1983) FLC 91-360; Turnbull and Turnbull (1991) FLC 92-258; M & M (unreported No CA1542 of 1990); M & M (unreported No S2132 of 1992); W & W (unreported No BR9107 of 1995) and Reynolds and Reynolds (1985) FLC 91-632. The commentary concludes “It is evident that discounts vary widely. It is imperative to carefully consider the facts of the particular entity and family under consideration. In particular, the articles or other such document must be examined as must the manner in which the entity has been operated”.
220.None of the cases identified were referred to in submissions however I have considered what was said in those cases and others including M & M [2005] FamCA 1211 (Cohen J); Larmar v Larmar; SL v EHL [2005] FamCA 132 (Warnick J); V & H [2005] FamCA 191 (Moore J); T & D [2004] FamCA 1160 (Strickland J); M & M (supra); T & T [2001] FamCA 230 (Ellis, Coleman and O’Ryan JJ); Harrison v Harrison (1996) FLC 92-682 (Ellis, Baker and Warnick JJ); Mopeke Pty Ltd and Ors v Airport Fine Foods Pty Ltd and Ors (supra); MMAL Rentals Pty Ltd v Bruning (supra); Orrong Strategies Pty Ltd v Village Roadshow Ltd [2007] VSC 1 (unreported, Supreme Court of Victoria) (Habersberger J); Surf Road Nominees Pty Limited and Ors v Tass James and Ors [2004] NSWSC 61 (Einstein J); Hosking v Ipex Software Services Pty Ltd [2004] VSC 299 (unreported, Supreme Court of Victoria) (Habersberger J); Dismin Investments Pty Ltd v Commissioner of Taxation [2000] FCA 1703 (Heerey J) and Holt & Anor v Cox (unreported, New South Wales Court of Appeal) (Mason P, Priestley JA and Cole JA).
221.There were no submissions made of behalf of either party in relation to the cases referred to or any matters of principle. For these and other reasons I am not going to enter into any detailed consideration of the cases and relevant principles. There are however some well established matters about which there should be no issue. Some of these matters were identified in the joint statement of experts. The market value of a minority interest in a private company is less than the pro rata share of the value of the whole company. In order to determine the value of a minority interest a discount is usually applied. The discount applied will normally have two elements which may be considered individually or collectively. The first element is the lack of control discount. The discount may be derived from empirical stock market evidence of takeovers and the average controlled premium paid in public company takeovers. The second element is the lack of marketability discount. In some cases, such as a number of those I have identified, there may be a composite discount for both elements. In other cases as suggested by Mr L in the joint statement there is a separate discount for each element.
222.As to the first element the discount is dependent upon the circumstances that prevail in each particular case. The quantum of the discount will depend on the facts and circumstances in each case although Mr L contended that the discount is generally around 25 per cent to pro rata value. This appears to be the range of discount that Mr L ordinarily applies.
223.In M & M (supra) Moore J said at pa 62, and I agree, that: “The point is more that discount is not automatically applied without regard to the facts surrounding the particular holder’s circumstances. Its application should be justified on the facts, or so it seems to me”. (Emphasis added)
In this case, his Honour preferred the approach of the single expert to the husband’s valuer as he was unable to ascertain how the husband’s valuer had considered the circumstances of this case. He was satisfied that the single expert had given consideration to the facts of this case and was therefore persuaded his opinion was to be preferred.
No additional relevant matters emerge for my consideration pursuant to these sub-sections.
(l)the need to protect a party who wishes to continue that party’s role as a parent;
Although the parties’ children are now of school age, the wife indicated a wish to continue to work part time so that she can continue to be involved in the education and development of the children. As indicated earlier, the wife anticipates working slowly to a full time position as the children grow and gain independence. The husband does not work and is therefore available to care for the children when they are with him.
(m)if either party is cohabiting with another person – the financial circumstances relating to the cohabitation;
This sub-section is not relevant to my determination.
(n)the terms of any order made or proposed to be made under section 79 in relation to the property of the parties;
I have valued the total net assets of the parties available for distribution between them at $1,401,450 (paragraph 83). If division was to be effected on a 55 / 45 basis in favour of the husband as I have determined as appropriate after consideration of the respective contributions, the husband would be entitled to receive assets to the value of $770,798 and the wife $630,652.
The husband presently owns or has access to the following:-
127.1Daewoo motor vehicle $10,000.00
127.2Superannuation entitlement $9,628.00
127.3AMP shares as of 11 June 2009 less the value of
the shares inherited from his brother of $978 $207.00
127.4AMP life insurance $4,338.00
127.5Furniture $6,675.00
127.6Artistic equipment $1,400.00
127.7Savings $200.00
127.8Interest in J Company $758,609.00
Sub-total$791,057.00
127.9Less the money due on the Daewoo motor vehicle $3,334.00
Total$787,723.00
By comparison, the wife has:-
128.1Chrysler motor vehicle $5,500.00
128.2Superannuation entitlement $48,263.00
128.3Furniture $6,500.00
128.4Savings $300.00
Total$60,563.00
In addition the parties jointly own the former matrimonial home in which there is an equity of $553,164.00.
It is more relevant to consider further issues which may arise under this sub-section when dealing with the question of whether the settlement I propose between the parties represents a just and equitable outcome between them.
(na)any child support under the Child Support (Assessment) Act 1989 that a party to the marriage has provided, is to provide, or might be liable to provide in the future, for a child of the marriage;
The husband is currently paying approximately $180 per month in Child Support to the wife.
However, due to the changes to the Child Support scheme, the increase in the time that the husband spends with the children as of 2010 and the wife’s dedication to continuing in near full time employment, the wife is likely to receive minimal Child Support from the husband and may indeed be required to make payments to the husband.
(o)any fact or circumstance which, in the opinion of the court, the justice of the case requires to be taken into account;
As identified by me in paragraph 117 hereof, the husband stands to inherit from his parents the balance of the shares in J Company which have a value of $1,252,501.
A number of authorities provide assistance in identifying the relevance and proper treatment of that potential inheritance. In White and Tulloch v White (1995) FLC 92-640 (at page 82,463) the Full Court said:-
“We do not consider there is any absolute rule. The ultimate criterion is whether the evidence is, or may be, relevant to the just and equitable process under s 79. An expectancy of inheritance will not be relevant in many s 79 proceedings. In the end, relevance must depend upon the nature of the claims being put forward and the facts of the particular case. For example, if the claims were based entirely upon contributions, it could not be suggested that an issue of expectancy could be relevant because no s 75(2) factors would be involved. Where the claim includes s 75(2) factors, the nature or degree of suggested relevance between those specific claims and the expectancy in question would need to be analysed. That is to say, there must be a worthwhile connection between a specific element of the party’s case and the suggested expectancy.”
The Full Court continued (at page 82,464):-
“It is ultimately a question of fact and degree. During the course of argument a number of obvious examples at each end of the spectrum were referred to. In a case where the testator had already made a will favourable to the party but no longer had testamentary capacity and there was evidence of his or her likely impending death in circumstances where there may be a significant estate, and where there was a connection to s 75(2) factors, it would be shutting one’s eyes to realities to treat that as irrelevant. On the other hand, the bald assertion that one of the parties has an elderly relative who has property and is or is likely to benefit that party is so speculative that it would be inappropriate to contemplate it as relevant in a s 79 determination, it being too remote to affect the justice and equity of the case in any worthwhile way.”
In De Angelis and De Angelis (2003) FLC 93-133 (decided in 1999) reference was made to White and Tulloch (supra) and the statement therein that there was no absolute rule (at page 78,246):-
“However, we think it important to remember that the Court is required in exercising the jurisdiction under s 79 of the Family Law Act 1975 to accord justice and equity to both parties. The question therefore has to be asked whether, in the present case, it would be just and equitable to the husband for the court to have ignored the probability that, in what could well be [a] very short period of time (given the ages of her aunt and mother), the wife could well be the owner of two properties having a combined value of almost the same amount as the value of the parties’ property currently available for distribution, and particularly in circumstances where the husband had been found to have done substantial improvement and maintenance work on both properties?
… We consider that it would have been unjust to the husband to ignore this matter even if it was categorised only as a possibility and not a probability.”
In Reynolds (supra), the Full Court found that the husband’s shareholding could not be taken into account as a financial resource under s 75(2)(b), but that the future potential value of the shares to the husband must be taken into account under s 75(2)(o), as this was a ''fact or circumstance which ... the justice of the case requires to be taken into account''.
The wife too has a possible expectation of an inheritance from her 75 year old mother who owns a house but which is occupied by the wife’s sister. The wife indicated she had no expectation of an inheritance given the assistance afforded to her earlier by her parents. If she does, she will likely share any entitlement with her sister.
In my view it would be unrealistic and not just and equitable to ignore the husband’s probable future inheritance and the wife’s possible inheritance, but in my view it is appropriate only to have regard to them in a general way by acknowledging their existence but not to attribute any current calculated value in any mathematical way, especially in relation to the husband’s expectations. Many factors may yet intervene. Markets could fall or rise. The husband’s parents may incur significant medical costs and need to draw upon their interests in J Company. There are other elements of unpredictability.
(p)the terms of any financial agreement that is binding on the parties;
This sub-section is not relevant to my decision in these proceedings.
Conclusion on Section 75(2) factors
In my view, on the evidence, the wife is entitled to an additional loading of 10% due to:-
140.1the wife’s current and intended future employment;
140.2the husband’s capacity to earn more than he does presently;
140.3the husband’s secure dividend stream;
140.4the shares in J Company inherited from his brother having a value of $670,034;
140.5the greater responsibility of the wife for the care of the children even after term 2 of 2010;
140.6the wife’s ultimately greater superannuation entitlement although not accessible by her for many years yet.
In my determination the wife is therefore entitled to a settlement representing 55% of the parties’ net assets identified by me earlier as having a value of $1,401,450. Her entitlement is thus to a figure of $770,798.
Just and equitable
It remains for me to consider whether or not the orders I propose in relation to the property settlement issue between the parties are just and equitable (Section 79(2) of the Act).
As I calculated earlier (paragraph 128) the wife has in her possession or an entitlement to assets totalling $60,563. There is thus a balance of payment due to her of $710,235. The only significant asset from which the balance of the wife’s entitlement could be met is the former matrimonial home which has a net value of $553,164. She ought therefore receive that property. She indicated in her evidence that she wanted to move into the former matrimonial home with the children and have that property transferred to her.
There would though still be a balance due to the wife of $157,071. The husband though has no assets from which that entitlement could be met. The only way that the husband could achieve payment of that balance would be upon the death of his parents and the receipt of his inheritance from them or if they advanced the money to him. I cannot order them to do that.
It is well established that a Court cannot make an order for the payment of a sum of money under Section 79 if there is presently no property or insufficient property from which the sum can be paid. An order can be made under Section 79 only if there is property presently in existence. In Milankov and Milankov (2002) FLC 93-095 Kay J said:-
“In my view, the law is well settled. The Court cannot make an order for the alteration of property interests that extends beyond the available assets of the parties (see Walters and Walters (1986) FLC 91-733, 10 FLR 1006; Evans and Public Trustee (1991) FLC 92-223, 14 FLR 646; and Grace v Grace (1998) FLC 92-792, 22 FLR 442. However, this restriction does not require the Court to be able to clearly identify those assets (see Briese and Briese (1986) FLC 91-713, 10 FLR 642; Weir and Weir (1993) FLC 92-338, 16 FLR 154; Giunti and Giunti (1986) FLC 91-759, 11 FLR 160; Mezzacappa and Mezzacappa (1987) FLC 91-853, 11 FLR 957; Black and Kellner (1992) FLC 92-287, 15 FLR 343; and Monte and Monte (1986) FLC 91-757.” (Emphasis added).
Here, whilst there is property, namely the husband’s J Company shares, it is not property which can be accessed or sold and hence is not available to satisfy any balance of payment due.
Significantly though, the wife has not sought any orders for an additional payment to be made to her. She has indicated in the document handed to me on 20 July 2009 entitled “Property Orders Sought by the Wife” that she seeks essentially only the transfer of the former matrimonial home property to her and that she retain what she has or that to which she is entitled in the future (superannuation).
As the parties have already divided their furniture and agreed figures to represent the value of same in each other’s possession, the husband is entitled to remove his furniture from the former matrimonial home when he vacates same.
Earlier in these reasons I indicated that the ultimate outcome, after consideration of what is a just and equitable outcome for the parties, would not be affected even if I adopted a discount rate to the valuation of the husband’s shares of 45%. By application of that discount rate the total asset pool amounts to $1,133,706 (paragraph 84). If the wife received 55% of same her entitlement would be represented by a figure of $623,538. What she is to retain (worth $60,563) and the equity in the former matrimonial home ($553,164) total $613,727.
Thus even on those figures the wife would still achieve what she seeks and justice and equity is effected between the parties.
The husband will still need accommodation to continue his significant role in the care of the children. I am satisfied that he has ready access to one of the houses owned by J Company at C Street or A Street. Again, the husband did not call his parents to rebut that inference. Prior to his death, his brother occupied the property at C Street.
Under cross-examination by the Independent Children’s Lawyer the husband said that the C Street property was not suitable for himself and the children. He acknowledged that it was suitable for a professional couple but not so for children.
A valuation of C Street is Exhibit 23. The description of the property contained therein at pages 5, 6 and 7 suggests that the husband was not being forthright in his evidence in that regard. I quote:-
“4.4 Site improvements
Colorbond front and side fencing, galvanised iron rear fencing, gravel driveway, galvanised iron rear garage, concrete and paved with attached carport, galvanised iron garden shed, attached timber framed pergola, concrete rear patio, extendaline and neat basic landscaping.”
And (at page 7):-
“The subject property has several strong marketing characteristics, being the character appointment of the dwelling and neat presentation along with the potential of the allotment, and these factors, coupled with the compact nature of accommodation have been strong influences in determining market value.”
The photographs attached to the valuation add weight to the view that the property is entirely suitable for the occupation of the husband and the children.
Exhibit 24, being a valuation of A Street, suggests that it is a property also suited to occupation by the husband and the children, although in need of an upgrade (page 5).
It was further the husband’s evidence that, while C Street was previously occupied by his brother for a nominal rental until his death in March 2007, it was not available to him as it was now commercially tenanted on a long term basis. Mr N’s third report does not bear that out. At paragraphs 6.17 and 6.18 he had this to say:-
“6.17I was provided with a valuation of both properties by [Mr S] Property Valuer dated 26 May 2009. Mr [S] does not set out the market value of rent. I have asked for but not been provided with the market value of rent for these properties.
6.18I do not purport to be a property valuer. However, for the purposes of this report I refer to ‘Your Investment property’ magazine, March 2009. The gross rental yield for properties in [those suburbs] is set out in that magazine as 4%. I have used this as an estimate for the market value of rent for both properties. I do not know if this is correct.”
Accordingly Mr N calculated (at paragraph 6.16) that the potential rental of the two properties was $36,800 per annum. The disclosed rental though (paragraph 4.17) for 2008 was $1,906. Historically, bar 2007 ($8,131), very little rental return was received by J Company for these two properties suggesting that the properties have not been let to long term tenants as indicated by the husband. Significantly too it would suggest that J Company would suffer no great loss of income if the husband and the children occupied one of the properties, particularly C Street which is only some 20 minutes from the children’s school.
Otherwise, it was the husband’s evidence that he would look for a property to rent if the wife was to occupy the former matrimonial home property.
I am satisfied that in order to effect a minimum of disruption to the children the husband should vacate the premises and the wife assume occupation of same, after Christmas and during the April 2010 school holidays.
I certify that the preceding one hundred and fifty seven (157) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Burr
Associate:
Date: 9 December 2010
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