MMAL Rentals Pty Ltd v Bruning

[2004] NSWCA 451

Reported Decision: 63 NSWLR 167

Court of Appeal

CITATION:	MMAL Rentals Pty Limited (ACN 008 293 490) & Ors v Bernard John BRUNING [2004] NSWCA 451
HEARING DATE(S):	27 & 28 September 2004
JUDGMENT DATE:	9 December 2004
JUDGMENT OF:	Spigelman CJ at 1; Mason P at 226; Hodgson JA at 227
DECISION:	Appeal dismissed; cross appeal allowed.
CATCHWORDS:	CONTRACT - Meaning of "fair market value" - Share valuation - Use that may be made of evidence of an offer in a valuation exercise - Whether special potentiality or special value to one purchaser may be taken into account - Whether minority discount should apply - Whether minority shares have a 'greenmail' value - INDUSTRIAL LAW - Unfair contract - Jurisdiction under s106 - Relationship between s106 and oppression - Remuneration of managing director linked to share agreement - Disparity between expected financial benefit and benefit actually received
LEGISLATION CITED:	Trade Practices Act 1974 Corporations Act 2000 Industrial Relations Act 1996 Jurisdiction of Courts (Cross Vesting) Act 1987
CASES CITED:	Blefari v The Minister (1962) 8 LGRA 1 Boland v Yates Property Corporation Pty Ltd [1999] HCA 64, (1999) 74 ALJR 209 Brett Lees Norager v Charles Norager & Son Ltd (1999) NZCA 255 Bruning v Kingmill (Australia) Pty Limited (1988) 44 NSWLR 180 Caldwell v Minister of Transportation and Communications (1982) 23 LCR 286 Capricorn Diamonds Investments Pty Ltd v Catto [2002] VSC 105, (2002) 5 VR 61 Cattanach v Water Conservation and Irrigation Commission [1963] NSWR 304 Chen v Karandonis [2002] NSWCA 412 Commonwealth v Reeve (1949) 78 CLR 410 Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48 E S Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 Freestone v Parramatta City Council (1974) 34 LGERA 35 Gambotto v WCP Ltd [1995] HCA 12, (1995) 182 CLR 432 Geita Sebea v Territory of Papua (1941) 67 CLR 544 Goold & Rootsey v The Commonwealth (1993) 42 FCR 51 Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547 Harris v Municipal Council of Sydney (1910) 10 SR (NSW) 860 Henderson v Armadio Pty Ltd (No 1) (1995) 62 FCR 1 Holt v Cox (1994) 15 ACSR 313 Hustlers Pty Ltd & Robert Reid Pty Ltd v Valuer General [1967] 2 NSWR 760, [1967] 4 LGRA 269 In the Marriage of Dah and J E Hull (1983) 9 FamLR 241 In the Marriage of K D and P A Reynolds (1984) 10 FamLR 388 Inland Revenue Commission v Clay [1914] 1 KB 339 Inland Revenue Commission v Clay [1914] 3 KB 466 James Patrick & Co Pty Ltd v Minister of State for the Navy (1944) Argus Law Reports 254 Marcus Clark and Co Ltd v Commissioner for Railways (1949) 29 LVR 98 Marks v GIO Australia Holdings Ltd [1998] HCA 69, (1998) 196 CLR 494 McDonald v Deputy Federal Commissioner of Land Tax for New South Wales (1915) 20 CLR 231 Melcann Ltd v Super John Pty Ltd (1994) 13 ACLC 92 Michon v National Capital Commission (1974) 6 LCR 152 Minister for Public Works v Thistlethwayte [1954] AC 475 Mordecai v Mordecai (1988) 12 NSWLR 58 Nelungaloo Pty Ltd v The Commonwealth (1948) 78 CLR 495 O'Neill v Phillips [1999] 1 WLR 1092 Old UGC Inc v Industrial Relations Commission of New South Wales [2004] NSWCA 197 Pastoral Finance Association Ltd v The Minister [1914] AC 1083 Pauls Ltd v Dwyer [2002] QCA 545, (2002) 43 ACSR 413 Percival Peterborough Corporation (1921) 1 KB 414 Phillipou v Housing Commission of Victoria (1969) 18 LGRA 254 Poirier-White v Regional Municipality of Ottowa-Carleton (1979) 16 LCR 210 QSR Limited v Industrial Relations Commission of New South Wales [2004] NSWCA 199, (2004) 208 ALR 368 Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer [1939] AC 302 Re An Arbitration Fletcher Humphreys & Co Limited v Middleton [1944] NZLR 502 Re Bird Precision Bellows Limited [1986] 1 CH 658 Re ESC Publishing Ltd [1990] BCC 335 Sapir v Sapir (No 2) (1989) 13 FamLR 362 Scottish Cooperative Wholesale Society Limited v Meyer [1959] AC 324 Solution 6 Holdings Limited v Industrial Relations Commission of New South Wales [2004] NSWCA 200, (2004) 208 ALR 328 Spencer v The Commonwealth of Australia (1907) 5 CLR 418 Stockl v Rigura Pty Ltd [2004] NSWCA 73, [2004] ANZ ConvR 265 Teh v Ramsay Centauri Pty Ltd [2002] NSWSC 456, (2002) 42 ACSR 354 United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910, (2003) 47 ACSR 514 Waters v Thorn (1856) 22 Beav 547
PARTIES :	MMAL Rentals Pty Ltd (ACN 008 293 490) (First Appellant) Mitsubishi Motors Australia Limited (ACN 007 870 395) (Second Appellant) Thrifty (Australia) Pty Ltd (Formerly Kingmill (Australia) Pty Ltd (ACN 003 966 649)) t/as Thrifty Car Rental (Third Appellant) Bernard John Bruning (Respondent)
FILE NUMBER(S):	CA 40271/2004
COUNSEL:	Mr RJ Whitington QC / Mr A G Grant (Appellants) Mr G Lindsay SC / Mr S Phillips (Respondent)
SOLICITORS:	Thomas Playford Lawyers (Appellants) Horton Rhodes Solicitors (Respondent)

LOWER COURTJURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	SC 3142/98; 4049/98
LOWER COURT JUDICIAL OFFICER :	Young CJ in Eq

- 69 -

40271 of 2004

SPIGELMAN CJ
MASON P
HODGSON JA

Thursday 9 December 2004

MMAL RENTALS PTY LIMITED (ACN 008 293 490) & Ors v Bernard John BRUNING

FACTS

The Appellant, a car manufacturer, decided to acquire a car rental business. The Respondent became managing director of the business and acquired an 18.75 per cent interest, with the Appellant holding the balance of 81.25 per cent, in a holding company, which held 80 per cent of the shares in the company conducting the business. Pursuant to a contract, the Appellant held an option to acquire the Respondent’s shares, upon termination of the management agreement, for a “fair market value”. The Appellant exercised its option to purchase the Respondent’s shares. A dispute arose as to the value of the minority shareholding. The Appellant claimed that the “fair market value” of the shares was $58,911. The Respondent claimed that the “fair market value” of the shares was about $6 million. Both parties disputed the trial judge’s valuation of the shares at $675,000 plus interest. The Respondent also asserted that the contract was unfair within the meaning of s106 of the Industrial Relations Act 1996 and sought relief under that section, or alternatively, by way of an oppression suit under the Corporations Act 2001 (Cth), in each case seeking that the Court determine a fair value of the shares.

HELD
(per Spigelman CJ, Mason P and Hodgson JA agreeing)

A
The trial judge’s valuation of the shares was correct. [124], [226], [227]

1. The phrase “fair market value” requires an objective valuation test not a test of what is fair and equitable between the parties. [59], [60], [226], [227]

Scottish Co-operative Wholesale Society Limited v Meyer [1959] AC 324; Re Bird Precision Bellows Limited [1986] 1 Ch 658; Coombs v DynastyPty Ltd (1994) 14 ACSR 60; United Rural Enterprises Pty Ltd v LopmandPty Ltd [2003] NSWSC 910, (2003) 47 ACSR 514 at [36]; Re AnArbitration Fletcher Humphreys & Co Limited v Middleton [1944] NZLR 502; Holt v Cox (1994) 15 ACSR 313; E S Gordon Pty Ltd v Idameneo(No 123) Pty Ltd (1994) 15 ACSR 536 referred to. Spencer vCommonwealth (1907) 5 CLR 418 applied.

2. The “realistic basis” is not an alternative form of valuation methodology and the trial judge did not employ it as such. [64], [65], [68], [226], [227]

In the Marriage of K D and P A Reynolds (1984) 10 FamLR 388; In theMarriage of Dah and J E Hull (1983) 9 FamLR 241; Sapir v Sapir (No 2) (1989) 13 FamLR 362 considered.

3. The trial judge was entitled to take into account the value of good will of the business on a hypothetical liquidation, notwithstanding the fact that on an actual liquidation the rights in the ‘Thrifty’ name would be surrendered. [67], [69]

4. The trial judge was entitled to take into account the “special potentiality” to Mitsubishi of acquiring 100 per cent of Rentals. In a majority controlled business that requires mutual trust and co-operation, the majority shareholder has an interest in ensuring that the minority shareholding is not acquired by someone who has no relationship with the majority holder and a valuation of the minority shareholding may take into account that the majority holder will be prepared to pay more for the minority than another person. [71], [72], [73], [75], [78], [226], [227]

A minority discount is not appropriate in such circumstances. [106]–[107], [226], [227]

Spencer v Commonwealth (1907) 5 CLR 418; Inland RevenueCommission v Clay [1914] 1 KB 339; Inland Revenue Commission v Clay [1914] 3 KB 466; Raja Vyricherla Narayana Gajapatiraju v RevenueDivisional Officer [1939] AC 302; Geita Sebea v Territory of Papua (1941) 67 CLR 544 applied. Mordecai v Mordecai (1988) 12 NSWLR 58; Melcann Ltd v Super John Pty Ltd (1994) 13 ACLC 92; Pauls Ltd v Dwyer (2002) 43 ACSR 413 considered.

5. The trial judge was entitled to take into account Mitsubishi’s offer as evidence of value. Where a valuation involves the special potentiality of particular property for a specific purchaser, an offer by that purchaser to purchase that property is admissible. [84]–[100], [226], [227]

McDonald v Deputy Federal Commission of Land Tax for New SouthWales (1915) 20 CLR 231; James Patrick & Co Pty Ltd v Minister of Statefor the Navy (1944) ALR 254; Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547; Nelungaloo Pty Ltd v The Commonwealth (1948) 78 CLR 495 distinguished. Goold & Rootsey v The Commonwealth (1993) 42 FCR 51; Henderson v Armadio Pty Ltd (No 1) (1995) 62 FCR 1; Stockl vRigura Pty Ltd [2004] NSWCA 73 ; Inland Revenue Commission v Clay [1914] 1 KB 339; Inland Revenue Commission v Clay [1914] 3 KB 466; Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer [1939] AC 302; Chen v Karandonis [2002] NSWCA 412 applied.

6. The trial judge was correct to reject expert valuation evidence based on unsubstantiated assumptions and inappropriate industry comparisons. [110]–[114], [226], [227].

B
It was not unfair that the Respondent did not earn a profit bonus under the contract or that the respondent was forced to comply with a restraint of trade provision. [167], [176] – [177], [185], [190], [192], [226], [227]

C
The was no evidence to establish that Mitsubishi diverted profits to itself or that Kingmill should have made profits by way of profit on resale of vehicles or by way of concessional leasing rates. However, the share allotment agreement became an unfair contract within the meaning of s106(2) of the Industrial Relations Act because of the disparity between the significant commercial advantages received by Mitsubishi and the minimal financial benefit received by Mr Bruning, in circumstances where original projections anticipated profit to both parties. [207], [226], [227]

D
In order to be fair, the Share Allotment agreement should be varied to allow the shares to be valued according to their “fair value” instead of their “fair market value”. 207], [226], [227]

E
A “fair value” required recognition of the value of the business, not merely an interest rate type rate of return on investment.

ORDERS
1. Set aside orders 1 and 2 made on 3 March 2004

2. Clause 11.2.3 of the Agreement for the Allotment of Shares dated 30 October 1990 by amended by substituting “fair value” for “fair market value” wherever appearing.

3. Subject to order 3 made on 31 March 2004, and noting that the period of 28 days therein referred to commences on the date of these orders the Second Defendant pay the Plaintiff the sum of $2,000,000 within 28 days of the date of these orders.

4. Amend order 4 made on 31 March 2004 by inserting “$2,000,000” in place of “$1,059,75” and noting that the reference to “order 2” is a reference to order 3 hereof.

5. The Appellants/Cross-Respondents pay 90 percent of the Respondent/Cross-Appellant’s costs of the appeal and cross appeal.

40271 of 2004

SPIGELMAN CJ
MASON P
HODGSON JA

Thursday 9 December 2004

MMAL RENTALS PTY LIMITED (ACN 008 293 490) & Ors v Bernard John BRUNING

Judgment

1 SPIGELMAN CJ: Between 1990 and 1997 Bernard John Bruning acted as a managing director of a company conducting a car rental business under the trade name Thrifty Car Rentals (“Thrifty”). The operating company of the business was Kingmill (Australia) Pty Limited (“Kingmill”). The shares in Kingmill were owned as to 20 percent by Thrifty Inc of the USA (“Thrifty US”) which had rights to the name “Thrifty” with respect to a car rental business. The remaining 80 percent was owned by MMAL Rentals Pty Limited (“Rentals”), the shareholding of which was held by Mr Bruning as to 18.75 percent and, as to the balance of 81.25 percent, by Mitsubishi Motors Australia Limited (“Mitsubishi”).

2 Mitsubishi is one of the major car manufacturers in Australia. In 1990 Kingmill acquired the pre-existing rental car business which operated under the Thrifty name in Australia (“Old Thrifty”) which Mr Bruning had part owned and managed until 1984, when he sold it. By reason of his experience in the rental car business, Mitsubishi wished to obtain his services as manager director of the business of Thrifty. Mr Bruning sought equity participation in the venture. He acquired his shareholding in Rentals for an investment of $354,656.25 of his own funds.

3 The commercial motivation for Mitsubishi to participate in the rental car business is of significance for the valuation issues that arise in the present case. Achieving sales volumes was then of considerable importance to each Australian car manufacturer under the then Government Car Plan. The two major rental car companies, Hertz and Avis, were dominated in their fleets by GMH and Ford, Mitsubishi’s major competitors. Shortly before the relevant agreements were entered into another rental car company, Budget, had gone into liquidation and Old Thrifty was close to liquidation. Mitsubishi could be left with no outlet in a significant market for sale of cars. The importance to Mitsubishi of the volume of sales available from involvement in a car rental company was emphasised in its internal documentation. Such volume was only available from a rental company with rights to operate at airports. Furthermore, a major car rental company with such rights provides exposure to potential purchasers of a kind which is not otherwise available to a car manufacturer.

4 The terms of the arrangement upon which this business venture was to be conducted were set out in four written contracts, all of which bear the date 3 October 1990, as follows:

(i) A Share Allotment Agreement in relation to shares in Rentals between Mitsubishi and Mr Bruning

(ii) A Management Agreement between Kingmill and Mr Bruning

(iii) A Shareholders Agreement between Rentals, Kingmill and Thrifty US

(iv) A License Agreement in relation to the name “Thrifty” between Thrifty US and Kingmill.

5 The agreements operated for five years and in March 1995 were extended for a further two years until 3 October 1997. Mr Bruning continued to act as managing director until July 1997 when the Management Agreement was terminated by Kingmill.

6 The issues that arise in these proceedings primarily concern the Share Allotment Agreement and the Management Agreement.

7 Mr Bruning brought two sets of proceedings. The first was instituted in the Federal Court of Australia and, relevantly, sought relief under the Trade Practices Act 1974, with respect to conduct that was alleged to be false and misleading, and also relief under what is now s233 of the Corporations Act 2000, in the form of an oppression suit. Mr Bruning also instituted proceedings in the Industrial Relations Commission of New South Wales under s106 of the Industrial Relations Act 1996 seeking relief, relevantly, directed to the price at which his shares in Rentals were to be acquired by Mitsubishi under the Share Allotment Agreement and also as to his entitlements to certain bonuses under the Management Agreement and the consequences for him of the enforcement of a covenant in restraint of trade, also under the Management Agreement.

8 By means of a cross claim, Mitsubishi asserted that it had validly exercised an option to purchase Mr Bruning’s shares in Rentals, pursuant to the Share Allotment Agreement.

9 By reason of the overlap between the two proceedings, the proceedings in the Industrial Relations Commission were transferred to this court pursuant to the Jurisdiction of Courts (Cross Vesting) Act 1987. (See Bruning v Kingmill (Australia) Pty Limited (1998) 44 NSWLR 180.) The Federal Court proceedings were transferred by order of that Court on 30 June 1998.

10 Both of the proceedings were heard by Young CJ in Eq. His Honour granted Mr Bruning a measure of relief pursuant to s106 of the Industrial Relations Act and also with respect to the computation of the purchase price upon exercise of the option by Mitsubishi under the Share Allotment Agreement. Significant parts of the relief sought by Mr Bruning were rejected.

11 His Honour, exercising the s106 power, varied the provision for exercise of the option to purchase Mr Bruning’s shares by inserting a clause providing for a minimum price. However, in the event, this clause had no operative effect, other than in the alternative, because his Honour proceeded to calculate the fair market value and ordered the Appellants to pay the amount so computed. This amount was equivalent to that which resulted under the contract as ordered to be amended under s106, namely $1,059,750 (including interest to 31 March 2004).

12 The Court has before it an appeal by Mitsubishi, Rentals and Kingmill and also a cross appeal by Mr Bruning.

13 The appropriate starting point is Mitsubishi’s case that it had validly exercised its option to purchase Mr Bruning’s shares and the determination of the price that it is obliged to pay pursuant to the contractual option. Until that is determined it is not possible to say whether the contract was, or became unfair, within s106.

The Acquisition of Mr Bruning’s Shares

14 Mitsubishi exercised its option to acquire the 18.75 percent held by Mr Bruning in Rentals upon the termination of the Management Agreement between Kingmill and Mr Bruning. In the Share Allotment Agreement the “Sale Shares” are identified as the shares in Rentals owned by Mr Bruning. The relevant clause is 11.2 which provides:

“11.2 If for any reason the Management Agreement is terminated or terminates by effluxion of time Mitsubishi shall have an option to purchase the Sale Shares upon the following terms and conditions:
11.2.1 the option shall be exercised with respect to all (and not part) of the Sale Shares;
11.2.2 the option shall be exercised by notice in writing by Mitsubishi to Bruning;
11.2.3 The purchase price of the Sales Shares shall be the fair market value thereof as agreed between Bruning and Mitsubishi. In default of Agreement the fair market value shall be agreed between the Auditor for the time being of the Company and a chartered accountant nominated by Bruning provided that in the event that Bruning fails to nominated a chartered accountant the determination of fair market value shall be by the Auditor. If the Auditor and the chartered accountant nominated by Bruning cannot agree on the fair market value then either party may request the President for the time being of the Institute of Chartered Accountants in South Australia to appoint a chartered accountant to determine the fair market value. The costs of the Auditor shall be borne by Mitsubishi, of the chartered accountant nominated by Bruning by Bruning and of the chartered accountant nominated by the President of the Institute, by Bruning and Mitsubishi equally;
11.2.4 The purchase price for the Sale Shares shall be payable to Bruning within twenty-eight (28) days of the ascertainment of the purchase price whereupon Bruning shall deliver to Mitsubishi duly executed transfers and share certificates of all the Sale Shares. Bruning warrants that Mitsubishi will obtain title to all the Sale Shares free of Encumbrances;

11.3 In the event that the option referred to in Clause 11.2 becomes exercisable and Mitsubishi does not exercise it Bruning shall have the option to require Mitsubishi to purchase the Sale Shares upon the following conditions:
11.3.1 the option shall be exercised with respect to all (and not part) of the Sale Shares;
11.3.2 The option shall be exercised by notice in writing by Bruning to Mitsubishi;
11.3.3 Clause 11.2.3 and 11.2.4 shall apply to this option as if herein set out;
11.4 In the event that Mitsubishi wishes to transfer any shares owned by it in the capital of the Company, then on receipt by Bruning of the transfer notice in accordance with Article 51 of the Articles (such transfer notice includes details of the proposed transferee (if any) and the consideration agreed to be paid by that proposed transferee) then Bruning may by notice in writing to Mitsubishi within 14 days of receipt of the transfer notice require Mitsubishi to acquire the Sale Shares. If after receipt of that notice Mitsubishi proceeds with the transfer of its shares in the Company to a 3rd party, Mitsubishi shall purchase or procure the purchase of the Sale Shares for a consideration equal to the greater of the consideration payable to Mitsubishi by the 3rd party and the amount determined in accordance with Clause 11.2.3 payable in accordance with Cluse 11.2.4.
11.5 Bruning and Mitsubishi agree that Articles 47 and 55 inclusive of the Articles shall not apply to the Sale Shares.”

15 The clauses in the Articles referred to in cl 11.5, which are said not to apply to the Sale Shares, are, however, relevant to determining the proper construction of cl 11.2.3. Those Articles contained a pre-emptive rights provision in a common form.

16 The relevant Articles provide:

“51… The transfer notice shall identify the share which it is proposed to transfer and specify the sum the proposing transferor fixes as the fair value thereof and shall constitute the Company’s agent for the sale of the share at the price so fixed or at the option of the Member or person willing to purchase at the fair value to be fixed by the Auditor or an Accountant in accordance with Article 53.
…
53. In case any difference arrises between the proposing transferor and the person willing to purchase as the fair value of a share then the Auditor (of failing him the Accountant) of the Company of failing him a duly qualified Accountant nominated by the President at the time being of the South Australian Branch or Division of the Institute of Chartered Accountants of Australia shall on the application of either party certify in writing the sum which in his opinion is the fair value and such sum shall be deemed to be the fair value and in so certifying the Auditor or Accountant (as the case may be) shall be deemed to be acting as an expert and not as an arbitrator and accordingly the Arbitration Act shall not apply.”

17 I note that these pre-emptive rights provisions in the Articles refer to “fair value”, not the formulation “fair market value” found in the Share Allotment Agreement.

18 By a Notice of 2 April 1998 Mitsubishi exercised the option to purchase Mr Bruning’s shares pursuant to cl 11.2. There was no agreement. The parties could not agree as to what the “fair market value of the Sales Shares” was. Mitsubishi asserted, and maintained the position in its cross claim in these proceedings, that the fair market value of the Sale Shares was minimal.

The Determination of Fair Market Value by Young CJ in Eq

19 The Appellants did not seek to enforce the arbitral mechanism for determining fair market value in cl 11.2.3. Before Young CJ in Eq, and in this Court, the parties proceeded on the basis that the Court should determine that value. The relevant date for valuation was 24 April 1998, being the date on which Mitsubishi exercised the option.

20 During the course of the proceedings expert valuation evidence was given on behalf of the Mitsubishi interests by Mr Wayne Lonergan and on behalf of Mr Bruning by Mr Norman Hilton. Mr Lonergan’s evidence was to the effect that the fair value of the shares was $58,911 and it was for that valuation that Mitsubishi contended in the proceedings. Mr Lonergan valued the shares in Kingmill as nil. The positive value of the shares in Rentals comprised a discounted interest in real estate which was Rentals’ only other asset.

21 The degree of difficulty involved in determining the fair market value of the shares is manifest in the widely different valuations. Mr Hilton valued Mr Bruning’s indirect interest in Kingmill at about $6 million. Plainly the two experts were not engaged in the same discourse.

22 The two expert valuers accepted that, in the normal case of a well established business, the most appropriate method of valuation was to capitalise future maintainable earnings.

23 Mr Lonergan said that that approach was only appropriate for a business which had been, or was likely to be profitable. That methodology would lead to a nil valuation of Kingmill. Mr Lonergan adopted a net assets based valuation methodology.

24 Mr Hilton computed earnings on the basis of what, on his approach, Kingmill’s profits ought to be, in view of Mr Bruning’s assertions which he accepted, that past profits had been distorted. He adopted a formula of taking Thrifty’s gross revenue and applying what he described as the “average industry net return percentage” which, presumably, would remove the alleged distorting effect of Mitsubishi’s exercise of control.

25 Young CJ in Eq rejected the evidence of both Mr Lonergan and Mr Hilton. His Honour proceeded to determine the fair value on the basis of the materials before him, in the manner I will hereinafter describe.

26 In view of his Honour’s rejection of the expert evidence, the scope of available information for determining “fair market value” was limited. Nevertheless, his Honour proceeded upon the basis that the Court must do the best it can with the evidence before it. This Court will find itself in the same position if it decides to interfere with Mr Justice Young’s determination of fair market value.

27 Young CJ in Eq rejected Mr Hilton’s approach. He said:

“[194] I do not consider that Mr Hilton’s valuation is of assistance as it is based on unverified assumptions put to him by Mr Bruning, most of which I have determined are without foundation.”

28 The “assumptions” to which his Honour was referring focused on a list of allegedly lost opportunities to improve profit, many of which were said to have been diverted from Kingmill to Mitsubishi. I will return below to his Honour’s comprehensive rejection of this aspect of the Respondent’s case.

29 With respect of Mr Lonergan, his Honour noted that he valued the Rental shares in Kingmill at nil. Accordingly the value of Mr Bruning’s shares in Rentals was simply an adjusted value of the real estate, being the only other asset.

30 Mr Lonergan used a “net assets base valuation” methodology, to which he applied a deduction of 25 percent by reason of the fact that the holding of Mr Bruning was a minority holding.

31 His Honour said:

“[199] With respect this was as useful as valuing the Sydney Harbour Bridge on the basis of its scrap metal value. The bridge may have little value to its owners as it may make little profit, but its value to the community is considerable.”

32 The equivalent person to “the community” in his Honour’s analogy, in the present proceedings was and is Mitsubishi. As I will outline below, I agree with his Honour’s implicit approach that Mr Bruning’s shares had to be valued after taking into account what Mitsubishi would be prepared to pay.

33 Young CJ in Eq rejected Mr Lonergan’s approach to valuation. His Honour said, inter alia:

“[201] Mr Lonergan also made the assumption that all the figures which MMAL provided to him were correct. This was a handy way of avoiding difficulties in that there was a considerable amount of material which, if accepted, might lead to the conclusion that the Company may well have made profits if the accounting had been done differently so that profits were made in the Company and not in some other part of MMAL’s empire. This in turn might have led to the conclusion that net maintainable profits was the preferred method of valuation of the shares.”

34 His Honour went on to note that it was inappropriate to apply a minority discount in the case of a valuation done on a net assets backing basis. His Honour said that, if there was sufficient material to show a prima facie case for a winding up then a minority holder would get his share of the assets. His Honour referred to O’Neill v Phillips [1999] 1 WLR 1092 at 1107 per Lord Hoffman.

35 Having rejected the evidence of the expert valuers, and being urged by both parties to determine what the “fair market value” was, his Honour was left with a limited range of material on which to draw.

36 In the course of his rejection of Mr Lonergan’s report, his Honour had drawn attention to the fact that Mitsubishi was prepared to pay a substantial amount of money for the Old Thrifty business, which his Honour described as “virtually bankrupt with low staff morale and unhappy creditors”. The amount Mitsubishi paid for that business was $2 million.

37 His Honour also referred to evidence that in 1996, when Mr Bruning was told his shares were worthless, he offered to take over the Mitsubishi shares on that basis, but the offer was not even entertained. Mitsubishi then offered Mr Bruning $535,000 for his shares. His Honour said:

“[203] Whilst an unaccepted offer is usually no evidence of value, the circumstances that the only likely buyer is prepared to pay $535,000 for the shares which have little assets backing rather than lose them goes a long way to making one think that a value of $58,911 is sorely suspect.”

38 His Honour identified the offer as a signpost. His Honour said:

“[216] Although an unaccepted offer is no real evidence of valuation, it is significant that MMAL was prepared to make such an offer.”

39 His Honour identified a number of other signposts, which he said “may help one find one’s way to the true value of the shares” [211].

40 The first matter to which his Honour referred as a signpost was a computation derived from an internal Mitsubishi document in which an estimate was made of the financial advantage that Mitsubishi had actually received over the course of the period from 1990 to 1997 from the operation of Kingmill. That computation indicated that that advantage was in the amount of $7,886,000. On the basis that Mr Bruning’s diluted interest in Kingmill was 15 percent, it had been submitted to Young CJ in Eq that 15 percent of this computation was about $1.2 million. His Honour did not accept this submission, but treated the amount so calculated as a “signpost”.

41 His Honour then expressed a conclusion that he was satisfied that the operations of the Thrifty Company did have a goodwill value which included the right to have a desk at the major airports and that this value was “considerable”. His Honour proceeded on the assumption that Mr Lonergan had made, which in effect involved a liquidation, to say that a theoretical liquidator would auction the goodwill of the airport desk and of the Thrifty licence to use its name and other ancillary rights.

42 Although, as is usually the case in arrangements of this character, liquidation would create, in Thrifty US, an option to terminate the licence and acquire rights, such as the right to occupy the airport desk, I do not understand his Honour to be considering an actual rather than a theoretical liquidation for purposes of computation. His Honour was well aware of the effect of the Thrifty US licence agreement in this regard. A few paragraphs later in his judgment, when his Honour explained the figure that he had come to, he referred to the figure as an amount that would be paid for Mr Bruning’s shares by Mitsubishi “rather than lose them or be forced to wind up Kingmill and suffer the possibility of losing the Thrifty business”. His Honour assumed, reasonably, that Mitsubishi would avoid an actual winding up, but that the valuation task could assume a theoretical winding up.

43 His Honour went on to say that he had no “reliable information on which to assess the likely value of these rights”. However, he rejected Mr Hilton’s figure of $29 million. He noted that Mitsubishi was prepared to pay the previous liquidator about $2 million in 1990 but his Honour was not prepared to assume that the conditions were the same then as now. However, as a “signpost”, his Honour noted that if the liquidator received $2,388,000, Mr Bruning’s share would be $447,750 and if he got $3,388,000, then Mr Bruning’s share would be $635,250. These were amounts his Honour would use ([217]) when determining the appropriate range. In the absence of any figures or relevant expert evidence, this was the range which his Honour adopted, on the basis of all the material before him, as constituting a reasonable range.

44 On the basis of these signposts his Honour concluded that a “realistic value of the shares as at 24 April” was $600,000 plus interest. (Subsequently adjusted to $675,000 plus interest.)

45 His Honour concluded:

“[218] This $600,000 is the figure that an arms length MMAL would pay for Mr Bruning’s shares rather than lose them or be forced to wind up Kingmill and suffer the possibility of losing the Thrifty business.
…
[220] I am conscious that the figure of $600,000 is rather artificial in that there is no clear set of factors which establish it. It may well be that MMAL would prefer to have the company wound up rather than pay that sum, though the Quinn 1996 offer tends in the other direction.”

46 This was the manner in which his Honour determined, as best he could on the materials before the Court, what the “fair market value” of Mr Bruning’s shares was for the purposes of cl 11.2.3 of the Share Allotment Agreement.

The Meaning of “fair market value”

47 It is convenient at the outset to determine the proper construction of the words “fair market value”. All the words in the contractual formula in cl 11.2.3 must be taken into account in its construction. The term employed is neither “fair value” nor “market value” but “fair market value”.

48 Under the contract there are three situations in which the determination of a “fair market value” may arise. The first, under cl 11.2.3 is Mitsubishi’s exercise of its call option after the termination of the Management Agreement. The second is Mr Bruning’s exercise of his put option under cl 11.3, if Mitsubishi does not exercise its call. The third, pursuant to cl 11.4, arises if Mitsubishi wishes to transfer any shares to a third party, in which case Mr Bruning has a put option for the greater of the consideration payable by Mitsubishi to the third party or the amount determined to be “fair market value”.

49 The second feature of the contractual scheme is that the Mitsubishi call option under cl 11.2, and Mr Bruning’s put option under cl 11.3 or cl 11.4, relate to the whole of Mr Bruning’s share holding. No provision is made for a transfer of part of Mr Bruning’s holding. Mr Bruning is either a participant in the venture or he is not. Clause 11.4 envisages that Mitsubishi may sell down. Mr Bruning cannot.

50 The third feature of the scheme is that both Mitsubishi under cl 11.2 and Mr Bruning under cl 11.3 or cl 11.4, will call or put, the Sale Shares without knowing what the price will be.

51 Finally, it is pertinent to note that cl 11.4 contemplates the possibility that Mitsubishi may sell to a third party at more than “fair market value” whereupon the higher price would have to be offered to Mr Bruning.

52 There are a number of contractual, statutory and accounting standards contexts in which the administration of justice must determine the “fair value” of property. The meaning of that formulation will vary with the context. In some contexts the formulation refers to what is just or equitable in all the circumstances. In such a case the scope of the relevant considerations which may be taken into account by the requisite decision-maker, whether an arbitrator or a judge, is wide. (See, e.g. with respect to oppression suits in corporations law: Scottish Co-operative Wholesale Society Limited v Meyer [1959] AC 324 at 369; Re Bird Precision Bellows Limited [1986] 1 Ch 658 at 669; Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 at 102; United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910, (2003) 47 ACSR 514 at [36]; Re An Arbitration Fletcher Humphreys & Co Limited v Middleton [1944] NZLR 502 esp at 507-508. In another statutory context see, e.g. Holt v Cox (1994) 15 ACSR 313 esp at 334 and 336-337; E S Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 esp at 539-541; cf Capricorn Diamonds Investments Pty Ltd v Catto [2002] VSC 105, (2002) 5 VR 61 pp71-77.) Where the relevant test is “fair value”, a market value is often not decisive. (See, e.g. Gambotto v WCP Ltd [1995] HCA 12, (1995) 182 CLR 432 at 457-458.)

53 A number of authorities suggest a distinction between a “market value” test and a “fair value” or “fair market value” test. (See, e.g. Fletcher Humphries & Company Ltd v Middleton supra at 507; Holt v Cox supra at 334; cf Cattanach v Water Conservation and Irrigation Commission [1963] NSWR 304 at 308-309.) The overall context will be determinative.

54 In my opinion, the Respondent’s contention that the wide ranging approach applicable to the determination of a “fair value” can be applied to the contractual test of “fair market value”, should be rejected.

55 A test of a “market value”, whether in a statutory or contractual context, usually invokes the test long established and frequently applied in Spencer v The Commonwealth of Australia (1907) 5 CLR 418 esp at 432 and 440-441 of a willing but not anxious purchaser and vendor, bargaining with each other. This approach was most recently expressed in a joint judgment of three judges of the High Court in Marks v GIO Australia Holdings Ltd [1998] HCA 69, (1998) 196 CLR 494 at 514:

“ … The value … is to be identified according to what price freely contracting, fully informed parties would have offered and accepted for it.”

56 It is convenient to refer to the Spencer’s case formulation as the exchange value test (Spencer supra at 431.5 per Griffith CJ, as did Gleeson CJ in Boland v Yates Property Corporation Pty Ltd [1999] HCA 64, (1999) 74 ALJR 209 at [79].)

57 Where the focus of the valuation process is on a “market value”, even in a context, as so often occurs, where there is no or little trading history in the relevant property, the approach will usually be quite different to that which arises where a “fair value” is required to be determined. The range of relevant circumstances to be taken into account is not as wide and regard is not had to the particular history of the commercial or personal relationships between the prospective vendor and purchaser of the property to be valued.

58 Where, as here, the formulation is “fair market value”, the valuation test requires a similarly limited focus on the range of circumstances relevant to a process of determining exchange value. A “fair market value” may diverge from a “market value” for numerous reasons, e.g. where property is thinly traded, or the parcel is small, or there exist market distortions.

59 In the present contractual context, the intrusion of the word “market” between “fair” and “value” points away from a process of determining what is just or equitable between the parties, towards an objective standard. That that is so in the present case is strongly suggested by the decision-maker nominated in cl 11.2.3. The decision is to be made jointly by the company’s auditor and a chartered accounted nominated by the vendor and, failing agreement, by a nominee of the President of the Institute of Chartered Accountants. Persons with such a background are not generally suited to determining what is just or equitable in all the circumstances. Their expertise is appropriate for determining exchange value.

60 Nevertheless, the word “fair” has, in my opinion, work to do. In a contractual context, this additional word suggests that the valuation should proceed on the assumption, which may be contrary to the facts of a particular contractual relationship, that there is no impediment to the process of bargaining, whether in terms of availability of information or restraints arising from the characteristics of a particular vendor or purchaser or otherwise. Issues will arise, however, when determining what aspects of the particular relationship are of a character which inhere in the item of property itself, as distinct from those which should be treated as excluded by the concept of a “fair market value”.

61 It is not possible to set out in abstract terms how a fair market value should be computed. It is necessary to focus on the particular issues which arise in order to determine what the formulation requires in a particular case.

The Methodology of Valuation

62 The first criticism that the Appellants advanced of his Honour’s determination of fair market value was that his Honour failed to accept Mr Lonergan’s methodology. Both the experts indicated that, normally, the appropriate method of valuation of a company in the situation of Rentals was the capitalization of future maintainable earnings. However, the Appellant submitted Mr Lonergan was correct to conclude that, in the absence of any likely dividend stream, the appropriate method in this case was to value Rentals on a net assets basis. It was submitted that his Honour erred in determining that there was some other methodology of valuation called the “realistic basis” or the “realistic value rule”.

63 This terminology was derived by his Honour from cases in which the valuation of property had been carried out for family law purposes: In the Marriage of K D and P A Reynolds (1984) 10 FamLR 388; In the Marriage of Dah and J E Hull (1983) 9 FamLR 241 and Sapir v Sapir (No 2) (1989) 13 FamLR 362. In Reynolds the Full Court of the Family Court of Australia doubted whether valuation methods appropriate for commercial purposes were also appropriate for the purposes of family law. In Hull the issue arose in a context in which shares in a family company had to be valued where restrictions in the Articles could result in the shares of the family member not having any effective control over the company. A commercial approach would lead to a nil valuation. It was in such a context that Nygh J said in Hull supra at 246 that the Court had to approach valuation “on a realistic basis”. It is sometimes unrealistic to assume that formal restrictions should be regarded as binding in situations where parties have a broader relationship.

64 However, it could not be said that this “realistic basis” constituted an alternative form of valuation methodology. If, by adopting this terminology Young CJ at Eq intended to suggest that it did, then in my opinion his Honour erred.

65 A close reading of his Honour’s reasons does not suggest that his Honour was putting forward an alternative methodology. Indeed his Honour said:

“[213] Normally, the result of applying the realistic value rule is that one applies the net assets backing rule with an allowance for the notional cost of a winding-up rather than the hypothetical purchaser rule. However, that will not always be the case.”

66 It was at this point that his Honour went on to compute, on a theoretical basis, the possible value that could accrue to a liquidator who was selling the goodwill associated with the Thrifty business. His Honour noted that he had no reliable information on which to assess the value of the rights associated with that business particularly the right to access to airports and the value of the Thrifty licence. Nevertheless, after such a process his Honour identified a figure which could constitute Mr Bruning’s indirect interest so computed.

67 The Appellant submitted that any such computation was inappropriate because if there were a liquidation then, pursuant to the terms of the Licence Agreement between Thrifty US and Kingmill, all such rights would be surrendered to Thrifty US. Nevertheless what his Honour was undertaking at this stage of his reasons was an entirely theoretical computation, setting aside the strict provisions of the legal arrangements in the same manner as the particular restrictions in the Memorandum and Articles of the companies involved in the family law cases had been set aside. Where, as here, the party with legal rights can be seen to be unlikely to enforce them, a liquidation being against its apparent interests, it is appropriate to set such rights aside in a valuation based on a hypothetical scenario.

68 In this regard, it appears to me that his Honour in fact applied a net assets value methodology with respect to the calculation of one of the “signposts” his Honour adopted. This, of course, was the methodology that Mr Lonergan adopted, with the difference that Young CJ in Eq thought it appropriate to take into account the value of goodwill of the business on a hypothetical liquidation, setting aside the fact that an actual liquidation could trigger certain rights in Thrifty US. His Honour’s reference to a “realistic basis” was no more than the adoption of an approach, for the limited purpose that his Honour adopted it, i.e. as one of a number of “signposts”, on analogous grounds to that found in the family law cases to which he referred.

69 It is easy to see why in a close relationship, such as that involved in a co-operative business venture and even more so in a family context, it may be appropriate, when determining what a “fair value” is between two co-venturers, to set aside as immaterial the restrictions that arise from particular provisions of the Memorandum and Articles of Association or, specific rights of third parties such as financiers or licensees of intellectual property that may arise on an actual liquidation. Where a “fair market value” is the test, it may be more unusual to do so. However, a net assets value approach to valuation is appropriate for an actual liquidation. When that methodology is adopted for purposes of a hypothetical liquidation, it may be appropriate to set aside as immaterial the legal consequences of an actual liquidation.

70 If the valuation exercise required the determination of the value of the business as a whole, then inherent in the market value would be the price which rival car manufacturers would be prepared to pay to acquire the full range of commercial advantages, including those which can accrue only to a car manufacturer. However, cl 11.2.3 is concerned with the valuation of the Sale Shares which extends only to Mr Bruning’s minority shareholding. The property to be valued is a 18.5 percent Holding in Rentals.

71 The minority interest which must be valued in the present case was held by a person with direct involvement in a majority controlled business requiring mutual co-operation and a level of trust. (I avoid the often misleading terminology of quasi partnership.) The sale is triggered, and triggered only, by the termination of that involvement. The majority shareholder has an interest in ensuring that the minority holding is not acquired by someone who has no relationship with the majority holder of mutual co-operation or trust. The ability of the majority holder to get the full advantage from its controlling interest can be considerably attenuated by activities sometimes derogatively referred to as greenmail. In order to avoid the nuisance of such an investor, the majority holder will be prepared to pay more for the minority than another person.

72 The Appellants submitted that the formulation “fair market value” does not permit consideration of any special value to Mitsubishi. They submitted that in any market sale, the nature of the property had to be the focus of attention. This was a minority parcel of shares in a holding company with restrictive articles. Furthermore, the major asset, being a partly owned subsidiary, had substantial accumulated losses and substantial debt owed to the controlling shareholder so that, even if the business were to become profitable, dividends were a very remote prospect. All of that can be accepted without detracting from the proposition that a majority shareholder who has no intention of winding up the business and, therefore, for whom it has real commercial value, will be willing to pay more than net asset value to ensure 100 percent ownership.

73 In such a situation, valuation is not done on the basis of an estimate of what a third party would pay and then allowing the majority holder one more bid. This is because a vendor in a market, including a “fair market”, would know that the majority holder was prepared to pay more and is well placed to bargain for a higher price by refusing to sell. The minority holder would not part with the property unless the majority holder offered a price that was substantially closer to the price the latter would be willing to go up to. The “one more bid” approach does not describe a situation of a “willing but not anxious vendor” in the exchange bargain test. (See Inland Revenue Commission v Clay [1914] 1 KB 339 esp at 349; Inland Revenue Commission v Clay [1914] 3 KB 466 at 472; Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer [1939] AC 302 at 314-317; Geita Sebea v Territory of Papua (1941) 67 CLR 544 at 557; Mordecai v Mordecai (1988) 12 NSWLR 58 at 69-70; Melcann Ltd v Super John Pty Ltd (1994) 13 ACLC 92 at [94]; Pauls Ltd v Dwyer [2002] QCA 545, (2002) 43 ACSR 413 at [30].)

74 As Cozens-Hardy MR said in Clay supra (1914) 3 KB at 472:

“To say that a small farm in the middle of a wealthy landowner’s estate is to be valued without reference to the fact that he will probably be willing to pay a large price, but solely with reference to its ordinary agricultural value, seems to me absurd. If the landowner does not at the moment buy, landbrokers or speculators will give more than its price agricultural value with a view to reselling at a profit to the landowner.”

75 This represents the operation of a market and does so even if called greenmail. This is not an exception to the exchange bargain test established by Spencer’s case. It is an application of the test involving the determination of how a willing vendor of a minority interest would behave.

76 A similar approach was adopted in Mordecai v Mordecai supra. The issue was whether or not any value at all should be placed on the goodwill of the business in circumstances where the persons who conducted the business were not restrained by contract from departing with all the customers. The proposition that the goodwill was therefore valueless was dismissed by Hope JA, with whom Samuels and Priestley JJA agreed. His Honour said at 68: “This appears to me to be so unjust a result as to make it unlikely that it is a correct way to approach the question”. Referring to the defaulting directors/trustees, his Honour concluded:

“It does not lie in their mouths to say that they did not want to acquire the business, for that is precisely what they did. If, as the appellants assert, the goodwill would have been unsaleable to anyone else, it was certainly saleable, at its proper value to them, and as the position stood when they took the business …, the business had the potentiality, valuable only to them when it was in their hands, to free them from the restraints which the law otherwise would impose on them.
It is well-established that if property has some special potentiality which only one person would buy, it is to be valued on the basis of a notional sale to that person. The property is not valueless or diminished in value because there would be no other buyers: Vyricheria Narayana Gajapatiraju Bahadur Garut (Sri Raja) v Revenue Divisional Officer, Vixagapatam [1939] AC 302 at 316, 317 and Geita Sebea v Territory of Papua (1941) 67 CLR 544 at 557. On this basis, the value of [the] goodwill is to be determined upon the basis of a hypothetical sale to the only person to whom, on the appellants’ submissions, it could be sold, and to whom the matters which they submit would render the goodwill valueless in any other purchaser’s hand would be irrelevant.”

77 A similar approach was also adopted by McLelland CJ in Eq in Melcann Limited v Super John Pty Limited (1995) 13 ACLC 92. The Court was concerned with the fair value of shares in a context of an application for court approval for reduction of capital pursuant to ss191 and 195 of the Corporations Law. His Honour dismissed the application on the basis that the proposed reduction of capital would not be fair to minority shareholders because the valuation had not taken into account the value to the majority shareholder of the benefits it would receive from merging elements of the company’s activities with its own activities. If the reduction of capital were to proceed, that shareholder would attain 100 percent ownership of the company. These special benefits to the majority shareholder should have been taken into account when computing the value of the minority shares.

78 In the present case a “fair market value” must take into account the “special potentiality” or “special value” to Mitsubishi of acquiring 100 percent of Rentals, thereby ensuring that it does not have to deal with a third party investor, with whom it has no relationship relating to the conduct of the business affairs of its partly owned subsidiary Kingmill. This element is not taken into account if Kingmill is valued only on net asset value basis or on a future maintainable earnings basis.

79 Although Young CJ in Eq did not approach the matter in precisely the same manner as I have done, his conclusion was expressed in analogous terms. Substituting the figure which his Honour ultimately determined to be appropriate, he concluded:

“[218] This $675,000 is the figure that an arm’s length MMAL would pay for Mr Bruning’s shares rather than lose them or be forced to wind up Kingmill and suffer the possibility of losing the Thrifty business.
[219] Thus, if an order for specific performance were to be made, it would be for $675,000 plus interest.
[220] I am conscious that the figure of $675,000 is rather artificial in that there is no clear set of factors which establish it. It may well be that MMAL would prefer to have the company wound up rather than pay that sum, though the Quinn 1996 offer tends in the other direction.”

80 There was no suggestion on the appeal that Mitsubishi was prepared to contemplate an actual winding up of Rentals and Kingmill. His Honour’s test of what Mitsubishi would pay for the Sale Shares “rather than lose them or be forced to wind up business” is sufficiently close to the approach I have set out above for this Court to accept his Honour’s judgment of what the value should be.

Mitsubishi’s Offer as Evidence of Value

81 The second criticism by the Appellants was the use made by Young CJ in Eq of the offer by Mitsubishi in 1996 to purchase Mr Bruning’s shares for $535,000. His Honour referred to this as a “signpost” to which he had regard. His Honour said:

“[203] Whilst an unaccepted offer is usually no evidence of value, the circumstance that the only likely buyer is prepared to pay $535,000 for the shares which have little assets backing rather than use them goes a long way to making one think that a value of $58,911 is sorely suspect.”

82 At this stage of his judgment his Honour was dealing with the expert evidence of Mr Lonergan. His Honour returned to the subject and said:

“[216] Our third signpost is the offer that was made by Mr Quinn in 1996 of $545,000 (sic). Although an unaccepted offer is no real evidence of valuation, it is significant that MMAL was prepared to make such an offer. Mr Bruning’s reaction was that the interest rate was to mean (MMAL had offered 90 day bank bill interest).”

83 His Honour went on to adopt a different interest rate to apply to Mr Bruning’s original investment for purposes of computing a reasonable rate of return. After correction in his second judgment (cf Bruning v MMAL Rentals Pty Ltd; Bruning v Kingmill (Australia) Pty Ltd [2004] NSWSC 60 pars [216] and [217] and Bruning v Kingmill (Australia) Pty Ltd; Bruning v MMAL Rentals Pty Ltd [2004] NSWSC 256 par [21]), his Honour used the Mitsubishi offer plus interest at the rate his Honour determined as, in effect, the floor in the small range which his Honour considered to be a reasonable estimate of fair market value. Within the range his Honour chose the approximate midpoint, i.e. a value of 675,000 as at 24 April 1998 plus interest to the date of judgment at 9.5 percent. This led to his Honour’s order that the Respondent be paid $1,059,750. In substance his Honour awarded an amount somewhat above the Mitsubishi offer of 1996. It seems that this offer played a more significant role in his Honour’s judgment than any of the other “signposts” to which his Honour referred. Indeed, subject to a small upward adjustment, perhaps allowing for the proposition that this was not a “best offer”, although his Honour does not express the matter in that way, the Mitsubishi offer can probably be seen as the element which determined his Honour’s assessment of fair market value to a very substantial degree. In my opinion, his Honour was right to do so.

84 The Appellants contend that his Honour erred in taking into account this offer and noted his Honour’s own observations that unaccepted offers are not usually evidence of valuation. There is a line of case law that is often quoted as supporting the proposition that evidence of an offer is not evidence of value. I refer particularly to the High Court judgment in McDonald v Deputy Federal Commission of Land Tax for New South Wales (1915) 20 CLR 231 approving the prior decision in Harris v Municipal Council of Sydney (1910) 10 SR (NSW) 860 and subsequently applied by single judges of the High Court in James Patrick & Co Pty Ltd v Minister of State for the Navy (1944) Argus Law Reports 254; Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547 and Nelungaloo Pty Ltd v The Commonwealth (1948) 78 CLR 495 at 507.

85 As was acknowledged in James Patrick & Co supra at 258 and Nelungaloo supra at 507, evidence of an offer has long been admitted in England as evidence of value. See, e.g. Waters v Thorn (1856) 22 Beav 547 at 557, 52 ER 1219; Percival Peterborough Corporation (1921) 1 KB 414 at 421; Re ESC Publishing Ltd [1990] BCC 335 at 339-340; Cripps on Compulsory Acquisition of Land London, Stevens & Sons, (1962) at 4-193. The same appears to be the case in New Zealand: Brett Lees Norager v Charles Norager & Son Ltd (1999) NZCA 255 at [3], [24]-[25] and in Canada: Michon v National Capital Commission (1974) 6 LCR 152 at 157-159; Poirier-White v Regional Municipality of Ottowa-Carleton (1979) 16 LCR 210 at 211; Caldwell v Minister of Transportation and Communications (1982) 23 LCR 286 at 287; The Canadian Abridgement (2nd ed) Carswell Toronto (1990) pp274-278.

86 More recent case law has rejected the proposition that McDonald and the subsequent cases authoritatively establish the proposition that evidence of an offer is never admissible in a valuation case. (See especially the careful analysis of Wilcox J in Goold & Rootsey v The Commonwealth (1993) 42 FCR 51 esp at 59-60 referred to with approval in Henderson v Armadio Pty Ltd (No 1) (1995) 62 FCR 1 at 122 and in this Court in Stockl v Rigura Pty Ltd [2004] NSWCA 73, [2004] ANZ ConvR 265 at [37]-[38].)

87 I agree with the observations of Wilcox J in Goold and would add a further factor which narrows the scope of McDonald as a precedent. In McDonald Isaacs J said at 237:

“… it is plain that the mere fact of a statement by an owner to a stranger that he would be willing to sell at a given figure, and that the offer was not accepted, for some reason undisclosed, is no evidence of what the Statute requires , namely, the price which a willing buyer would give, supposing the seller announced reasonable conditions.” [Emphasis added]

196 The particular computations contained in this Study projected profits within the rental car company, ie what became Kingmill, of $3.3 million and profits in Mitsubishi over and above the operations of the rental car company of $4.2 million. The total of about $7.5 million was put forward as the possible purchase price of Old Thrifty, although it was contemplated that Mitsubishi would negotiate for a lower price. It recommended a purchase price between $5 and $6 million.

197 The original projections in the Study were based on a break up of 60 percent of the corporate fleet and 40 percent of the franchisee fleet as being Mitsubishi vehicles. The fact that the percentage proved to be much higher, in excess of 70 percent and sometimes as high as 80 percent, was the principal reason why the benefit to Mitsubishi proved to be so much higher than was projected in the original Study. Nevertheless, in the Study it was stated that this portion was a “conservative” assumption and that the objective would be to achieve a higher share for Mitsubishi vehicles.

198 There was in evidence two computations of the net financial advantage that had actually accrued to Mitsubishi over the course of the operation of the Thrifty rental car business. These calculations established that the advantage was considerably greater than that which had been projected in the document of April 1990 known as the Study.

199 In June 1996 Mr M T Quinn, the managing director of Mitsubishi, put forward a submission to his head office in Japan recommending that an offer be made to acquire Mr Bruning’s shares for an amount in excess of that which was required under the contract. That letter said:

“As Kingmill Pty Limited has accumulated losses greater than its share capital from the financial point of view Mr Bruning’s shares have not value – see attached Price Waterhouse letter. However, in view of the overall profit of the rent a car business to MMAL it is recommended that we buy back Mr Bruning’s shares at original value plus interest based on 90 day bank bill rate – see attached calculation.”

200 Mr Quinn also said:

“Although Mr Bruning works hard to expand the business of Thrifty he is not in a position to enjoy a profit like the other two shareholders. (See P&L Account attached which confirms his understanding.)”

201 The reference in parentheses “which confirms his understanding”, indicates Mr Quinn’s agreement with the view expressed by Mr Bruning, as recorded in the first sentence.

202 Mr Quinn supported his recommendation with figures of what returns were originally expected, which were not precisely identical to the Study, but were of a similar order of magnitude. The figures were put forward as the projections at the time the venture was initiated. They indicated that the profit within the rental company over the period of the first five years had been projected to be in excess of $3.5 million, whereas what had actually happened was a loss of $4 million, a deficiency of $7.5 million. The document also stated that the projection of profit before tax for Mitsubishi, over and above its interest in the rental company, had been $6.825 million, whereas what had actually happened was a return of in excess of $19.871 million, a surplus of $13 million. Considered overall, the venture, had proven to be about $5.5 million more profitable to Mitsubishi than had been originally projected over the first five years, i.e. something less than double. However, the rental company had suffered considerable losses.

203 The document of June 1996 also projected the likely results in 1996 which showed a smaller loss of $175,000 in the rental company but a continued additional profit for that year for Mitsubishi in its own right of $4.9 million. On this basis, over the six years 1990-1996, the Mitsubishi advantage would be about $25 million, before tax.

204 Further computations were done in this regard in May 1997 which made adjustments for a number of factors, including tax, and brought the position up to 1997. The Appellant’s submissions to this Court referred to the statement in the May document that the original estimate of the benefit to Mitsubishi was $6.875 million. It extended the calculation to 1997 by adding an average of the five year projections for two additional years of about $2.7 million. This would give a hypothetical original seven year projection of about $9.6 million. This should be compared with what actually occurred over the seven year period of a net contribution to Mitsubishi of about $18 million, i.e. almost double.

205 The Appellants’ computation was directed to establishing the proposition that the actual benefit to Mitsubishi was not such as to justify a conclusion of unfairness. It drew particular attention to the fact that the original projection was based on an assumption that only 50 percent of the Kingmill fleet would be Mitsubishi cars. Mr Bruning had always said that it would be higher. Recalculation of the original projection on the basis of 80 percent of the fleet would increase the Mitsubishi benefit over the nine years from about $9.6 million to $15.4 million, only $2.6 million below the actual amount of $18 million. The Appellants also noted that at the end of the seven years, the unpaid lease obligations owed by Kingmill to Mitsubishi amounted to $10.8 million.

206 In his s106 case and, alternatively, in his oppression suit, the Respondent asked this Court to fix a fair value for his shares in Rentals. Under s106 that would require the Court to vary the Share Allotment Agreement by substituting “fair value” for “fair market value” in cl 11.2.3. After such an amendment, as I have noted above, the Court could take into account the full range of relevant circumstances, including the significant divergence between the original expectations and the ultimate result with respect to the commercial advantages accruing to the parties.

207 In my opinion, the Respondent has established that the Share Allotment Agreement had become an unfair contract within the meaning of s106(2) of the Industrial Relations Act 1996, because of this disparity. I reiterate my acceptance of the finding by Young CJ in Eq that the original expectations played a part in determining the remuneration of Mr Bruning under the Management Agreement.

208 The commercial advantage to Mitsubishi was not an accounting profit, but its own internal assessments treat the advantage as real. It has received benefits of about $18 million over the first seven years of the venture. This required an expenditure of $1,536,843.75 for its original acquisition of a 81.25 percent interest and additional funding to finance Kingmill’s losses. When assessing the fairness of the arrangement in the events that have happened, it is necessary to bear in mind that Mitsubishi provided additional funds, but Mr Bruning was not called upon to do so.

209 The additional funding advanced by Mitsubishi to Kingmill had two components. There was a substantial amount of accrued arrears of lease payments. (As at 31 December 1997 this amount was $10.78 million.) However, these amounts were taken into account in computing the net loss within Kingmill in both the June 1996 and May 1997 documents, to which I have referred above. Indeed the May 1997 document allowed for interest on outstanding receivables. Mitsubishi did, however, advance $3.3 million by way of loan to Kingmill.

210 As at 24 April 1998, when it exercised its option to acquire the Sale Shares and when the valuation must be performed, Mitsubishi had an asset which could be valued for itself on a future maintainable earnings basis. This valuation was not carried out, but if the full range of commercial advantages were taken into account, the value would clearly be substantial.

211 Mr Bruning had invested $354,656.25 of his own funds and, on his Honour’s findings, had received lower remuneration because of the prospect of returns by way of profit and capital gain on his investment. He received no commercial return of any kind over the seven years and was left with an asset which, on a “fair market value” test, was worth $675,000 computed on, in effect, a nuisance value basis, with no allowance for future maintainable earnings.

212 There can be no doubt that Mr Bruning’s contribution to building the business to the advantage of Mitsubishi was substantial. When compared with the respective benefits each of the parties expected to receive when their original investments were made, the operation of the fair market value test for valuation leads to a valuation that is, in my opinion, unfair.

213 This Court should order that the Share Allotment Agreement be varied by deleting the word “market” in the formulation “fair market value” in cl 11.2.3, wherever appearing.

Determination of Fair Value

214 I have set out at various stages of this judgment the nature of the relationship between the parties in the context of the operations of the car rental business in which Mr Bruning was both a managing director and, indirectly, an investor. Against this full range of circumstances, I have identified only one matter as rendering unfair the formula for determining the price on which his shares can be acquired by Mitsubishi. The application of the “fair market value” test provided to him a comparatively small return on his original investment whereas Mitsubishi had not only received a substantial return on its investment but would be left with an asset of considerable value which, subject to the interest of Thrifty US, it would completely control.

215 There are few available quantitative guidelines for determining what “fair value” is in this case. However, I am satisfied that the fair market valuation to which his Honour came and which I have confirmed, on a slightly different basis, of $675,000 as at the date of the exercise of the option was not fair value.

216 His Honour’s computation, like Mr Quinn’s recommendation that an offer be made to purchase the shares, involved applying an interest rate type rate of return to the original investment. This is, in my opinion, an unfair approach to rewarding a person who has assisted significantly in building a business of, it appears, substantial capital value. Some recognition of the value of the business is required on a “fair value” test.

217 The submissions of the Respondent identified three separate elements cumulatively required to restore fairness. The three elements were: first, the return of the capital he originally invested; secondly, a computation based on a 15 percent share of the profits which Mitsubishi had actually received over the seven years 1990-1997; and, thirdly, an estimate on what profit ought to have been made on the sale of ex-rental vehicles.

218 In my opinion, neither the first nor third are appropriate to be considered in the quantification. The return of capital is not a separate item in the relevant equation. The issue is what is fair value, as at the date of the exercise of the option, of the Sale Shares. The third element, the profit on sale of vehicles is, for the reasons already outlined, not a matter that was ever of any relevance in the Kingmill business as it was capitalised and structured.

219 The second element identified does, however, provide assistance for quantifying the fair value of the Sales Shares. The Respondent’s submissions focused on the computation in the May 1997 document to which I have referred that the cumulative total commercial advantage obtained by Mitsubishi over the seven years from 1990-1997 was $7,886,000. Mr Bruning’s 15 percent of that amount would be $1,182,900. It is appropriate to round this item upwards because the computation was made as at 31 December 1997, whereas the determination of fair value must be done almost five months later as at 24 April 1998.

220 What is involved here is a matter of broad judgment rather than any form of mathematical precision. I would round up the figure as at 24 April 1998 to an amount of $1,250,000 as the fair value at that date of the Sale Shares. I note that this constitutes almost double the fair market value of the shares as originally computed by Young CJ in Eq and which I have affirmed above. There is some justice in this ratio in view of the fact that, on the basis of the May 1997 document, Mitsubishi’s actual net commercial advantage proved to be about double the commercial advantage it was expected to receive on the adjusted seven year projection set out in the May 1997 document which I have outlined above.

221 To this amount of $1,250,000 as at late April 1998 must be added an interest component. There was no substantive criticism of the approach of Young CJ in Eq in this regard or of the rate he chose. This requires the addition of 9.5 percent for approximately six years and six months being $118,750 per annum or an addition of $771,875 which, in view of the broad brush approach that the calculation in fact involves, should be rounded down to $750,000 for an ultimate value of $2 million.

Costs

222 The Appellants contend that even if their appeal is dismissed, his Honour erred in making the order for costs that he did make: that the Appellants pay 90 percent of the Respondent’s costs, but no costs be allowed for the Respondent’s expert valuer.

223 The figure of 90 percent was an allowance for the issues pursued in this hard fought case upon which the Respondent failed. The Appellants submit that this was an inadequate allowance. This was a discretionary matter for this Honour. I would not intervene, particularly in view of the additional success that the Respondent has had in this Court.

224 The Respondent asserts, by way of cross appeal, that his Honour erred in excluding an award for the costs of his valuation expert, Mr Hilton. I have indicated in my agreement with the conclusion of Young CJ in Eq that this report was of no value. I would not disturb the costs order at first instance.

Orders

225 The orders I propose are as follows:

1 Set aside orders 1 and 2 made on 31 March 2004.

2 Clause 11.2.3 of the Agreement for the Allotment of Shares dated 30 October 1990 be amended by substituting “fair value” for “fair market value” wherever appearing.

3 Subject to order 3 made on 31 March 2004, and noting that the period of 28 days therein referred to commences on the date of these orders, the Second Defendant pay the Plaintiff the sum of $2,000,000 within 28 days of the date of these orders.

4 Amend order 4 made on 31 March 2004 by inserting “$2,000,000” in place of “$1,059,750” and noting that the reference to “order 2” is a reference to order 3 hereof.

5 The Appellants/Cross-Respondents pay 90 percent of the Respondent/Cross-Appellant’s costs of the appeal and cross appeal.

226 MASON P: I agree with Spigelman CJ.

227 HODGSON JA: I agree with Spigelman CJ.

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Last Modified: 12/21/2004