Re National Protective Services Pty Ltd
[2025] VSC 486
•15 August 2025
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2023 00755
IN THE MATTER OF NATIONAL PROTECTIVE SERVICES PTY LTD (ACN 007 009 261)
BETWEEN:
| HOLMES PROPERTIES (AUST) PTY LTD (ACN 095 076 485) | Plaintiff |
| - and - | |
| RACHAELL SAUNDERS | First Defendant |
| - and - | |
| NATIONAL PROTECTIVE SERVICES PTY LTD (ACN 007 009 261) | Second Defendant |
| - and - | |
| LAMBERT PROPERTIES (AUST) PTY LTD (ACN 095 076 458) | Third Defendant |
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JUDGE: | Matthews J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 12–14 May 2025, 23 May 2025 |
DATE OF JUDGMENT: | 15 August 2025 |
CASE MAY BE CITED AS: | Re National Protective Services Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2025] VSC 486 |
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CORPORATIONS – Oppression proceeding – Whether payment of remuneration to key executives associated with majority shareholder was excessive – Whether excessive remuneration was oppressive to minority shareholder – Whether non-payment of dividends was oppressive – Payment of bonuses was so high as to be oppressive – Non-payment of dividends oppressive to minority shareholder in context of excessive remuneration paid to key executives associated with majority shareholder – Corporations Act 2001 (Cth), ss 232, 233 – Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd [2001] WASC 8 applied – Slea Pty Ltd v Connective Services Pty Ltd (No 9) [2022] VSC 136 applied.
CORPORATIONS – Oppression proceeding – Valuation of shares – Whether provisions of shareholder agreement regarding transfer of shares apply – Discount for minority shareholding not applicable where oppression is found – Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136 applied – Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 applied - Joint v Program IT Pty Ltd [2020] VSC 867 followed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A Ford | Northcote Lawyers |
| For the First and Third Defendants | Mr D McAloon | B2B Lawyers |
Contents
A.. Introduction and overview
B.. Factual background
B.1 The origins of NPS
B.2 COVID-19 and its effect on NPS
B.3 Payments at issue in this proceeding
B.4 Commencement of this proceeding
B.5 Key clauses of the shareholder agreement and Constitution of NPS
C.. Pleadings
D.. Lay evidence
D.1 High level observations regarding the lay witnesses
D.2 Evidence of Ms Lowson
D.2.1 Ms Lowson’s relationship with Mr Holmes
D.2.2 Ms Lowson’s understanding of Mr Holmes’ work at NPS
D.2.3 Events following Mr Holmes’ death and leading up to the commencement of this proceeding
D.3 Evidence of Ms Saunders
D.3.1 Ms Saunders’ role at NPS
D.3.2 Relationship with Mr Holmes
D.3.3 Ms Saunders gifting a share in NPS to Mr Holmes
D.3.4 Purchase of the York Street Property
D.3.5 NPS’ payment of dividends
D.3.6 The passing of the Resolution
D.3.7 Workload during COVID
D.3.8 Obtaining expert opinion in 2020 and the recording of the accrued charges in 2023
D.4 Evidence of Mr Saunders
D.4.1 Working on-call for NPS between 2005 to 2014
D.4.2 Mr Saunders’ remuneration at NPS
D.4.3 Increased workload during COVID
D.4.4 Change in role after COVID
D.4.5 Mr Holmes’ role at NPS
E... Expert evidence
E.1 Expert remuneration evidence
E.1.1 Mr Hare
E.1.2 Mr Ritchie
E.1.3 Mr Sigston
E.2 Expert valuation evidence
E.2.1 High level observations regarding Mr Sojka and Ms Murone
E.2.2 The methodology employed by Ms Murone and Mr Sojka
F... Applicable law regarding shareholder oppression
F.1 Legislative provisions
F.2 Key principles
G.. Summary of how each party puts its case regarding the allegations of oppression
H.. Key issues for determination
I.... Plaintiff’s submissions regarding the alleged acts of oppression
I.1 The passing of the Resolution
I.2 Remuneration paid to the Saunders’ interests
I.3 The accrued charges
I.4 Non-payment of dividends
J.... Defendants’ submissions regarding the alleged acts of oppression
J.1 Conduct of the plaintiff is part of the context
J.2 The passing of the Resolution
J.3 Remuneration paid to the Saunders
J.4 The accrued charges
J.5 Non-payment of dividends
K.. Consideration - the alleged acts of oppression
K.1 Consideration of defendants’ submissions regarding the plaintiff’s conduct
K.2 The Passing of the Resolution
K.2.1 Whether the passing of the Resolution itself is part of this case
K.2.2 Whether the passing of the Resolution was oppressive conduct
K.2.3 Whether the passing of the Resolution was a breach of Ms Saunders’ duties as a director
K.3 Remuneration payments
K.3.1 Were the remuneration payments paid in FY2021 to FY2023 to Ms and Mr Saunders (or for their benefit) excessive?
K.3.2 If the remuneration payments to the Saunders’ interests were excessive, does that constitute oppressive conduct?
K.3.3 What is the quantum of the excessive remuneration for the Relevant Period?
K.4 The accrued charges
K.5 Non-payment of dividends
L... Valuation of NPS
L.1 Plaintiff’s submissions on value of NPS
L.1.1 Principles
L.1.2 Valuation date
L.1.3 Treatment of Remuneration payments
L.1.4 Fair value
L.2 Defendants’ submissions regarding value of NPS
L.2.1 Principles
L.2.2 Valuation date
L.2.3 Treatment of Remuneration payments
L.2.4 Fair value
L.3 Consideration regarding value of NPS
L.3.1 Summary of the parties’ positions
L.3.2 Principles in respect of valuations for shareholder oppression cases
L.3.3 Valuation date
L.3.4 Maintainable EBITDA
L.3.5 Treatment of Remuneration payments
L.3.6 Whether to apply a discount for minority interest and/or marketability and/or the plaintiff’s alleged conduct
L.3.7 The fair value to be paid for the plaintiff’s share in NPS in the circumstances of this case
L.4 Appropriate remedy
M. Conclusion
HER HONOUR:
A Introduction and overview
National Protective Services Pty Ltd (NPS) carries on a security business from premises in York Street, South Melbourne. The company provides protective security services — such as security guards, security patrols, secured transport, and consulting — as well as electronic security services — such as alarm systems, CCTV, and access control systems. NPS provides these services to government and commercial clients, as well as a limited number of domestic clients. The company employs between 260 to 360 staff depending on demand, most of whom are employed on a part-time, casual or ‘full-time casual’ basis. NPS is the second defendant in this proceeding.[1]
[1]As is common in cases of this type, the company is a party to the proceeding but has not played an active role in it. Where I refer to ‘defendants’ in this judgment, I am referring only to the first and third defendants.
The first defendant, Rachaell Saunders, is the founder and Chief Executive Officer (CEO) of NPS. Ms Saunders is the sole director and the secretary of NPS, and owns two of three shares in the company through Lambert Properties (Aust) Pty Ltd (Lambert Properties), the third defendant in this proceeding. Lambert Properties is the trustee of the Lambert Family Trust, and Ms Saunders is its sole director and shareholder.
Jessica Lowson is the director, secretary and shareholder of the plaintiff, Holmes Properties (Aust) Pty Ltd (Holmes Properties), which own the remaining share of NPS. Holmes Properties is the trustee of the Holmes Family Trust.
The plaintiff alleges that the defendants have engaged in oppressive conduct by failing or refusing to respond to requests by the plaintiff for copies of the financial records of NPS. The plaintiff also alleges that during the period FY2021 to FY2023, Ms Saunders paid herself and her husband, Glenn Saunders, remuneration that exceeded market rates, and that NPS failed to pay dividends to its shareholders. Both of these are alleged to constitute oppressive conduct. The plaintiff seeks a purchase of its shares by the defendants, or alternatively, that NPS be wound up.
The defendants deny the plaintiff’s claims.
B Factual background
B.1 The origins of NPS
NPS was founded by Ms Saunders in 1988, originally doing patrol and alarm response work.
In 1994, Christopher Holmes became involved in NPS when his brother, Gary ‘Rob’ Holmes (who had previously worked at and been a director of NPS), departed the company.[2] Mr Holmes initially performed patrol officer duties, but eventually started working in secure transport, such as collecting coins from parking machines. Mr Holmes became a director and shareholder of NPS in March 1994. According to Ms Saunders, as a director he signed contracts and banking documents on behalf of the company when required, but apart from this he did not perform other director duties.
[2]In this judgment, I will refer to Christopher Holmes as Mr Holmes and to his brother as Rob Holmes.
In or around 2000, Mr Holmes moved into a staff supervisory role at the company. Around this time, Mr Holmes later transferred his share in NPS to his company, Holmes Properties.
In 2002, NPS acquired new business premises in York Street, South Melbourne (York Street Property). At that time, Ms Saunders and Mr Holmes both put up security for the purchase (in the form of separate mortgages over their personal real estate) and the property was and remains owned in equal parts by Lambert Properties and Holmes Properties. The company moved into the premises in 2003 and began paying rent in equal parts to Lambert Properties and Holmes Properties.
Around this time, Mr Holmes began to experience periods of ill health and worked at NPS less and less as his health deteriorated.
Also, in or around 2002, Glenn Saunders began working at NPS in a part-time support role. At that time, Mr Saunders was also a member of Victoria Police, where he had been working since 1976. From 2003 to 2005, Mr Saunders performed the role of operations coordinator. His role included rostering, maintenance of security equipment, maintenance of office infrastructure, coin counting, infrastructure purchase and negotiation, recruitment, staff onboarding and human resources related matters (such as staff welfare, discipline and management).
In 2005, Mr Saunders resigned from Victoria Police, having achieved the rank of detective sergeant, and started working full-time at NPS as the company’s new operations manager.
Also in 2005, Mr Holmes ceased being involved in day-to-day operations of NPS due to his ailing health. Subsequently, the company made ad hoc payments from its cash reserves to Mr Holmes when he was experiencing financial difficulties. These payments were treated as a ‘loan account’ by the company’s accountant, and were subsequently rationalised as a dividend paid to Holmes Properties at the end of the financial year. An equivalent dividend was then paid to Lambert Properties for each of its two shares in NPS. In 2006, although Mr Holmes remained a director, he lodged a total and permanent disability claim with WorkCover and ceased working at NPS.
B.2 COVID-19 and its effect on NPS
In 2020, the COVID-19 pandemic began to have an impact on the business of NPS. The company lost several major security guard contracts as a result of event cancellations, as well as much of its electronic maintenance and installation work. This led the company to stand down most of its guard staff, including the electronics division. Some clients stopped paying their NPS invoices, while others were forced to close shop entirely. Eventually, NPS retrenched all of its office staff while the company’s accountants had to rely on JobKeeper payments from the Australian Tax Office.
On 9 June 2020, Mr Holmes passed away. The circumstances of his death were not in evidence, as they are not relevant, but it was clear that his death was sudden and unexpected, and had a significant effect on those close to him.
Although he had not worked at NPS for 15 years prior to his death, he had remained a director and continued to hold a one-third interest in the company through Holmes Properties. He also held the company’s firearms licence, and was the nominee for the company’s firearms licence.
In the days following Mr Holmes’ passing, Ms Saunders helped take care of Mr Holmes’ personal and financial affairs. While helping to clean out Mr Holmes’ residence, Ms Saunders discovered a will in the back of a gun safe. The will, which had been executed on 3 December 2013:
(a)revoked all former wills and testamentary dispositions;
(b)appointed Sue Jamieson [Mr Holmes’ cousin] as executor and trustee under the will;
(c)gifted $500 each to Rob Holmes, Richard Charles Holmes, Jennifer Louise Williams and Ms Saunders; and
(d)named Ms Lowson as the recipient of Mr Holmes’ residuary estate (which included the share in Holmes Properties).
On 6 July 2020, Ms Saunders removed Mr Holmes as a director of NPS and lodged the change of officeholder form with the Australian Securities and Investments Commission (ASIC).
On 7 July 2020, Ms Saunders, as director of NPS, signed and passed a resolution (the Resolution) which states:
Agreed Items:
(1) Glenn and Rachaell commit to the next 12 months at NPS
(2) Any profit will be paid to Glenn and Rachaell
(3) Reviewed quarterly
The circumstances around the passing of this resolution will be discussed later in this judgment.
In late July 2020, NPS began working with the Department of Health and Human Services (DHHS) to provide guard services at high-rise housing commission properties throughout Melbourne. This work quickly expanded to the provision of ‘special response’ guard services for COVID outbreaks in special government accommodations. From August 2020 to September/October 2022, NPS enjoyed ‘its best years ever’ according to Ms Saunders; employing upwards of 1500 staff, cementing its working relationships with government clients, and gaining a high degree of credibility and respect as a reliable provider of security services. This period of renewed business activity eventually tapered off as the COVID-19 pandemic began to wind down. However, NPS continued to enjoy the fruits of its new client relationships and reputational gain.
On 22 February 2022, Ms Lowson was appointed director and secretary of the plaintiff.
B.3 Payments at issue in this proceeding
The plaintiff received dividends from NPS for FY2019 and FY2020 of $236,000 and $201,000, respectively. The third defendant also received dividends for those years.
On 10 November 2021, Ms Saunders advised Ms Jamieson’s solicitor that no dividends to shareholders would be paid. No dividends have been paid to shareholders since.
For the period of FY2021 to FY2023, Ms Saunders, Mr Saunders, and the Lambert Family Trust received the following amounts from NPS:
Ms Saunders’ remuneration
Mr Saunders’ remuneration
Lambert Family Trust management fee
FY2021
$2,495,763
$2,345,327
$420,000
FY2022
$1,197,810
$1,046,331
$420,000
FY2023
$1,273,857[3]
$45,740
$420,000
[3]This included a bonus of $1,075,000 referable to FY2022.
B.4 Commencement of this proceeding
On 28 February 2023, the plaintiff commenced this proceeding.
B.5 Key clauses of the shareholder agreement and Constitution of NPS
Clause 4 of the NPS shareholder agreement (SHA) provides that:
Notwithstanding the provisions of the Constitution of the Company:
(a)the Board shall at all times comprise of at least 2 Directors, one nominated by each Participant;
…
Under clause 1, ‘Participants’ is defined as:
…the shareholders of the Company from time to time, and which at the date of this Agreement are Lambert Properties (Aust) Pty Ltd (ACN 095 076 458) as trustee for the Lambert Family Trust and Holmes Properties (Aust) Pty Ltd (ACN 095 076 485) as trustee for the Holmes Family Trust.
Clause 13 of the Constitution of NPS provides that:
The Directors may continue to act if there is a vacancy even if the number of Directors falls below the minimum number of Directors as resolved by the Members at general meeting. In that case, the Directors may only act to fill the vacancy.
Under clause 151, ‘Member’ is defined as:
…the registered holder of shares in the Company.
C Pleadings
By its Amended Points of Claim filed on 15 November 2024, the plaintiff alleges that Ms Saunders caused:
(a)herself and Mr Saunders to be paid remuneration that was excessive in FY2021, FY2022 and FY2023, as compared to industry benchmarks;
(b)NPS to pay all profits of the company from 7 July 2020 to herself and Mr Saunders; and
(c)NPS to incur $2,954,855 in accrued charges in circumstances where no accrued charges have been listed in the company's balance sheets previously, and no accrued charges were listed in the company records on 30 June 2023.
The plaintiff alleges that NPS failed to pay dividends to its members in FY2021, FY2022 and FY2023 notwithstanding the excessive remuneration paid to the Saunders.
The plaintiff alleges that Ms Saunders has conducted and continues to conduct the affairs of NPS for the benefit of herself and her husband, contrary to the interests of the company and its members as a whole.
The plaintiff alleges that Ms Saunders has failed to exercise her powers and discharge her duties as a director of NPS in good faith in the best interests of the company and for a proper purpose. In addition, the affairs of NPS are being conducted in a manner that is either contrary to the interests of the company's members as a whole and/or oppressive to, unfairly prejudicial to, or unfairly discriminatory against the plaintiff in its capacity as a member of the company or in any other capacity.
The defendants deny that the remuneration paid to the Saunders in FY2021, FY2022 and FY2023 was excessive. They say that:
(a)NPS was, for significant portions of these financial years, operating during the COVID-19 pandemic, which materially increased the workloads of Ms Saunders and Mr Saunders;
(b)the Saunders worked many hours in excess of their usual commitment in the company and performed a role that required them to be ‘on call’ 24 hours per day, seven days per week;
(c)NPS did not employ a separate executive team (performing such roles as Human Resources Director, Finance Manager and Marketing Manager), with the consequence that Ms Saunders performed those roles in addition to her existing responsibilities;
(d)NPS generated a significant increase in revenue and gross profit (particularly in the years ending 30 June 2021 and 30 June 2022), referable to the role performed by the Saunders in the company. This included securing additional contracts (including in relation to the provision of COVID-related services) and the delivery of services to clients;
(e)the remuneration paid to the Saunders was designed to reflect their respective personal contributions to the company, which resulted in NPS generating material profits, enhancing its market reputation, and increasing its market share; and
(f)the payment of bonuses was a market-recognized means of remunerating senior staff that had directly contributed to increased profitability. The payment of executive bonuses calculated as 5-10% of revenue generated was relatively commonplace.
The defendants deny that Ms Saunders caused NPS to pay all company profits from 7 July 2020 to herself and Mr Saunders.
The defendants accept that NPS did not pay dividends in FY2021, FY2022 and FY2023, but deny that this was oppressive.
In terms of the $2,954,855 in accrued charges, the defendants say that prior to July 2020 the Saunders had been paid remuneration that did not reflect market benchmarks and was not commensurate with the relative benefits derived by NPS from the services provided by the Saunders. They say that the accrued charges were recorded in the company’s financial records as a provision for the company’s liability to the Saunders referable to this historical underpayment. However, NPS has to date made no payment to Ms Saunders or Mr Saunders referable to the accrued charges or the historical underpayment.
Ms Saunders denies the allegations at paragraphs 33 and 34 above.
D Lay evidence
The plaintiff called Ms Lowson as a lay witnesses in support of its case.
The defendants called Ms Saunders and Mr Saunders as lay witnesses in support of their case.
All three lay witnesses gave oral evidence at trial.
D.1 High level observations regarding the lay witnesses
I will have more to say in the course of this judgment about my assessment of the evidence. At this point, I make some high-level observations about the witnesses.
Ms Lowson was, both by her own admission and to my observation, a nervous witness. She often seemed unsure of herself or her answers. She struggled to follow some of the more complex questions put to her by counsel, and struggled to recall key dates or even the years in which certain events took place.
Ms Lowson seemed reluctant to answer questions about her relationship with Mr Holmes, such as when and how often he would visit her, or how long they would spend together. For example, during cross-examination, the following interaction took place:
Mr McAloon: All right. So 2010 to 2013, you were seeing him on a weekly basis. You go to Canada and he comes and visits you there, and you sometimes meet in other countries?
Ms Lowson: Mmm.
Mr McAloon: And in a given year, you might have caught up with once, twice, how many times? Again, it’s not a test, just do the best you can?
Ms Lowson: I’m not sure.
Mr McAloon: All right?
Ms Lowson: I didn’t count.
Mr McAloon: No. But it might have been only once a year?
Mr Lowson: I don’t know. I didn’t count.
I found these answers somewhat incredulous, given how much time Ms Lowson spent with Mr Holmes over the years and the closeness of their relationship.
I formed the impression that Ms Lowson remained troubled and upset by Mr Holmes’ death, which is understandable, and that this may have affected some of her evidence.
When asked what she understood of the work Mr Holmes performed at NPS, she was unable to recall any details.
At times, Ms Lowson became visibly frustrated by questions put to her during cross-examination. She appeared unwilling to answer questions which she did not consider relevant or important or that she assumed counsel would already know the answer to. However, I do not believe these factors undermine Ms Lowson’s credit as a witness. Firstly, the details of her relationship with Mr Holmes are largely inconsequential to the matters at issue in this proceeding. Secondly, her defensiveness was likely a symptom of her nervousness and discomfort when unable to answer certain questions. Thirdly, I accept that her evidence was honestly given.
Ms Saunders was an honest and intelligent witness. She was knowledgeable about NPS’ business and demonstrated strong business acumen. This was to be expected given she was the founder and CEO of the company. Ms Saunders displayed genuine emotion at the passing of Mr Holmes, as well as the difficult choices she was forced to make in laying off her staff during the early days of the COVID-19 pandemic.
I make many of the same observations about Mr Saunders as I do with Ms Saunders. Mr Saunders was honest, reliable and knowledgeable. He had a good memory for dates, taking time to consider most questions before answering. Mr Saunders seemed genuinely interested in providing accurate testimony and I consider this works to his credit. His evidence largely corroborated the evidence of Ms Saunders.
D.2 Evidence of Ms Lowson
D.2.1 Ms Lowson’s relationship with Mr Holmes
Ms Lowson had known Mr Holmes for 10 years before his passing. He was her best friend. When Ms Lowson studied abroad, Mr Holmes would visit her and they would often travel together. When Ms Lowson returned to Melbourne in 2017, she stayed with Mr Holmes for a few months before finding a place of her own. In the years that followed, Ms Lowson continued to see Mr Holmes every week.
D.2.2 Ms Lowson’s understanding of Mr Holmes’ work at NPS
Although Mr Holmes would sometimes tell Ms Lowson about the nature of his work at NPS, Ms Lowson stated during cross-examination that he did not go into much depth or detail about his work at NPS. According to Ms Lowson, they would usually talk about non-work-related matters. However, in or around 2019 Mr Holmes had spoken of his business relationship with Ms Saunders, and had told Ms Lowson that Ms Saunders wanted him out of the business and that she was offering a low price for his share buyback.
D.2.3 Events following Mr Holmes’ death and leading up to the commencement of this proceeding
Following Mr Holmes’ death on 9 June 2020, Ms Lowson was in a ‘lot of shock’ after learning that she was named as a beneficiary under his will. Mr Holmes had appointed Ms Jamieson as executor of his will, with Prior Law acting for Ms Jamieson as she undertook those duties. Although Ms Lowson had approached Prior Law requesting information about the assets that constituted Mr Holmes’ estate, Prior Law refused to communicate with Ms Lowson directly and instead advised that she obtain her own legal representation. Ms Lowson soon engaged Northcote Lawyers.
Ms Lowson was questioned on her appointment as an appointor of the Holmes Family Trust and who were the beneficiaries of the Trust. Ms Lowson was evidently confused by counsel’s line of questioning. I attribute this to her lack of exposure to the legal concepts and principles governing commercial trust structures; however, I do not believe this undermines Ms Lowson’s credibility or weight of her evidence in any way. To help understand the mechanics and relevant appointments under the Holmes Family Trust, I raised the possibility of providing the Court – and Ms Lowson – with a copy of the relevant trust deed to assist in this line of questioning. No trust deed was provided to the Court overnight during the trial and I assume that neither party wanted to press any issues relating to the trust or trust deed.
On 29 March 2022, Ms Saunders contacted Northcote Lawyers – then acting for Ms Lowson as appointor of the Holmes Family Trust – requesting contact details and bank account details for the trust. Ms Saunders referred to the fact she had also requested those details at the end of February directly through Northcote Lawyers’ website.
Later that same day, Mr Peter Lynch, Director and Principal Lawyer of Northcote Lawyers, confirmed that they acted for Ms Lowson and provided the relevant bank details. Mr Lynch also enquired as to whether Ms Saunders could make herself available for a teleconference or video conference that same week with himself and a senior associate at Northcote Lawyers, Ms Miriam Ungureanu. Ms Saunders stated in oral evidence that Mr Lynch had advised her via telephone that Ms Lowson wanted to sell her share of the business, and that a meeting to discuss that was necessary.
On 30 March 2022, Mr Lynch and Ms Ungureanu sent an email that they could not attend a meeting at 11:30am on that day and that they would propose a new time in the coming weeks, and settle an agenda for same. Ms Saunders later gave evidence during the trial that no subsequent meeting time was arranged between herself and Northcote Lawyers.
On 30 May 2022, Mr Lynch emailed Ms Saunders advising that Northcote Lawyers had engaged chartered accountants, Romanis Cant, to complete a forensic analysis of the business and its activities for the purposes of a formal valuation of the business. To complete the valuation, Mr Lynch requested key financial material from Ms Saunders such as NPS’ financial statements, income tax returns and financial forecasts.
On 6 June 2022, Mr Reid Bettridge, Partner at B2B Lawyers, replied to Mr Lynch’s email advising that B2B Lawyers were acting on behalf of the director of NPS, and its majority shareholder. Mr Bettridge rejected the information requested by Ms Lowson on the basis that it extended well beyond the entitlements of a shareholder to company information. Rather, Mr Bettridge advised that Ms Saunders would be willing to provide information that is reasonably necessary to prepare a valuation to Romanis Cant on a strictly confidential basis. This was on the condition that Romanis Cant entered into a non-disclosure agreement and a copy of the report was provided to B2B Lawyers once it was finalised. These terms were not agreed to and nothing further eventuated.
On 20 February 2023, Ms Saunders wrote directly to Ms Lowson stating that she would like to conclude the partnership regarding the York Street Property and buy out the plaintiff’s 50% share. Ms Saunders proposed that valuations should be obtained for the property.
On 23 February 2023, Mr Lynch replied to Ms Saunders’ email to Ms Lowson, confirming that Northcote Lawyers continued to act for Ms Lowson, and for Ms Saunders to ‘refrain from contacting our client directly and ensure all communication is sent to this office’.
On 28 February 2023, Ms Lowson filed an affidavit (Lowson Affidavit). This was also the day that the proceeding was commenced. Ms Saunders gave oral evidence that she received no advance notice that the proceeding would be commenced, despite being informed by her accountant that Ms Lowson’s accountant was requesting further financial information. Ms Saunders’ evidence was that she gave permission for her accountant to give Ms Lowson full and complete information.
During cross-examination, the defendant’s counsel challenged Ms Lowson’s adherence to her obligations under the Civil Procedure Act 2010 (Vic) (Civil Procedure Act). Here, counsel suggested that from May 2022 to February 2023, despite being approached by Ms Saunders, Ms Lowson did not engage to see whether the dispute could be resolved, or whether the issues could be narrowed. Ms Lowson agreed with that proposition, and said that she did not have the information to know how to resolve it. Ms Lowson also justified her actions by referring to the nature of COVID lockdowns and the grief of losing her best friend. Counsel did not point to a specific provision under the Civil Procedure Act, and in my view, there is no evidence that Ms Lowson contravened any of her overarching obligations under the Civil Procedure Act. The tenor of Ms Lowson’s evidence on this issue was that she felt unable to meaningfully engage in discussions about Ms Saunders buying out the plaintiff’s interests in the York Street Property and NPS as she felt that she did not have sufficient information to do so. She had had her lawyers request it, but to her it had not been forthcoming.
D.3 Evidence of Ms Saunders
D.3.1 Ms Saunders’ role at NPS
As CEO, Ms Saunders is responsible for implementing strategy, maintaining compliance, and ensuring that the company is operating correctly and efficiently. I will come back to aspects of her role.
D.3.2 Relationship with Mr Holmes
Ms Saunders regarded herself as ‘extremely close’ with Mr Holmes, and treated him as family. According to her, it was this relationship that spurred later business decisions at NPS such as the business’ financial support of Mr Holmes from late 2005 when he went on sick leave, to Ms Saunders’ decision to ‘gift’ Rob Holmes’ share in NPS to Mr Holmes for no consideration.
D.3.3 Ms Saunders gifting a share in NPS to Mr Holmes
Rob Holmes was an employee, a director and a shareholder of NPS. Following Rob Holmes’ departure from NPS, he ‘released’ his share in NPS. Instead of releasing his share back to NPS or to Ms Saunders – and as Mr Holmes was already working in the business - , Ms Saunders decided to transfer Rob Holmes’ share to Mr Holmes for no consideration. It was Ms Saunders’ understanding that at some point later in time, Mr Holmes transferred his share to Holmes Properties. Ms Saunders gave oral evidence that she had received advice from accountants to re-set her and Mr Holmes’ structures to include family trusts for risk management. At this time, the Lambert Family Trust was also set up. The transfer of the share in NPS from Mr Holmes to Holmes Properties likely occurred around this time.
D.3.4 Purchase of the York Street Property
In 2002, Lambert Properties and Holmes Properties purchased the York Street Property for NPS to use. NPS moved into the premises in January 2003, and traded from there from that time. The sourcing of the Property, its purchase and its finance were all organized by Ms and Mr Saunders. The York Street Property was jointly owned by the two respective corporate trustees. Rental paid by NPS was applied first to pay down the finance used to purchase the York Street Property and then, after it was paid off, remitted to Lambert Properties and Holmes Properties in equal shares (less expenses).
D.3.5 NPS’ payment of dividends
Ms Saunders’ evidence was that following Mr Holmes’ becoming ill in 2005, NPS began the practice of paying dividends to shareholders. Ms Saunders asserted that the practice was that when Mr Holmes became short of money, he would come into NPS with various requests. NPS would pay Mr Holmes out of its cash reserves and the payments would be recorded in Mr Holmes’ loan account. At the end of the year, NPS’ accountant would ‘clean out’ his loan account and treat the total payments as a dividend. Lambert Properties would be paid an appropriate percentage dividend for whatever sum Mr Holmes had taken during the year.
I note that no evidence was called by the defendants to corroborate this: for example, NPS’ accountant did not give evidence. Effectively a stranger to NPS, Ms Lowson was not really in a position to challenge it. This was the case for quite a lot of the matters about which Ms and Mr Saunders gave evidence.
After Mr Holmes died in June 2020, NPS ceased paying dividends to Holmes Properties. Ms Saunders conceded that NPS did not pay dividends despite it achieving unprecedented profits. Ms Saunders gave oral evidence that at the time of Mr Holmes’ passing, there was no option of dividends. Ms Saunders did not think it was appropriate to pay dividends as she thought the partnership and the shareholding would be shortly concluding. She reasoned that a lack of payments would not cause harm to shareholders.
D.3.6 The passing of the Resolution
Ms Saunders was questioned about her reaction to the contents of Mr Holmes will, which she had found when helping clear out his house after his sudden death. She said that she was shocked, angry, distressed and upset, as she had not known about this will and in previous wills, he had left everything to her.
Ms Saunders gave evidence that as a result of the combined effect of COVID on NPS and her working hours, the passing of Mr Holmes, and her ‘distressing’ discovery that she was not a beneficiary under Mr Holmes’ will, she no longer wanted to work at NPS as an employee. Ms Saunders saw herself as having three roles at NPS – a shareholder, a director and an employee. Ms Saunders outlined that although she did not want to return to work as CEO of the company, her role as director of NPS forced her to methodically work things through and take different considerations into account. Ms Saunders believed that her departure as CEO would mean that the business would not survive as there was no one who could step into her role.
As a result, Ms Saunders believed that she needed something to motivate her to commit to the business throughout the COVID pandemic period and to stay at the business during this time. She said that she discussed this with Mr Saunders, and had some initial conversations with people familiar with the labour market, who thought it unlikely she would find a replacement CEO. These discussions, including who they were with, were not particularised.
Following Ms Saunders’ consideration of her position and the discussions referred to above, as director of NPS, Ms Saunders passed the Resolution on 7 July 2020.
D.3.7 Workload during COVID
In the first few months of the COVID pandemic and before the growth of its business, Ms Saunders gave evidence that most of the work associated with keeping the business going was done by her and Mr Saunders. They also gave evidence that due to lockdowns, they were working long hours under trying conditions.
Ms Saunders’ evidence is that from late July 2020, NPS enjoyed a huge surge in business activity brought about by entering into government contracts to facilitate the government’s response to the pandemic. Ms Saunders’ work at NPS involved managing the company’s payroll, accounts and compliance requirements. Due to the amount of work being performed by NPS, Ms Saunders would often work 80-hour weeks. These working conditions persisted for over two years, before eventually tapering off in September or October 2022.
D.3.8 Obtaining expert opinion in 2020 and the recording of the accrued charges in 2023
Ms Saunders gave evidence that after Mr Holmes’ death, she consulted her solicitors, who suggested she obtain a market remuneration report. Ms Saunders did so, and obtained a letter dated 17 July 2020 from Simon Hare of the HaRe Group (the Hare Letter).
It is convenient here to set out the conclusions in the Hare Letter. In that letter, Mr Hare opined as to benchmarks for remuneration for senior executives in similar sized companies to NPS. According to Mr Hare, the relevant benchmarks were for a fixed remuneration package and short-term incentive payments.[4] Based on market remuneration practices for 2020, the fixed remuneration package for a CEO of a company like NPS was $300,000 to $310,000 per annum. For an operations manager of a company like NPS, it was $210,000 to $220,000 per annum. In addition, the majority of senior executives in similar-sized companies would be eligible to receive short-term incentive payments, additional performance-based pay in cash or company shares. For a CEO, this would likely be calculated at 25-30% of the fixed remuneration package. For an operations manager, it would likely be calculated at 20-25% of the fixed remuneration package.
[4]He also gave an opinion about long term incentive plans, but concluded these were very rare for small proprietary companies.
Ms Saunders gave evidence-in-chief that on the basis that she and Mr Saunders had both been underpaid in the years 2006 to 2019, she caused a liability for accrued charges in the amount of $2,954,855 to be recorded in NPS’ balance sheet as at 31 October 2023. She said that she calculated this based on alleged historical underpayments in accordance with the Hare Letter. She said that she took the middle figure of $305,000 per annum for CEOs and the middle figure of $215,000 for operations managers. She then took it back to 2006, deducting 3% each year for wage growth.[5] From there, she calculated what they had actually been paid, and these gave a net result of $2,954,855 in underpayments.
[5]The plaintiff submits that it is not clear from Ms Saunders’ evidence whether she reduced the salary by 3% each year going back to 2006 or started with the figures in the Hare Letter and increased by 3% for each year from 2006. The plaintiff submits that it would be incorrect to apply the latter as Mr Hare’s figures were for reasonable remuneration as at July 2020, not 2006. I do not accept this submission, as I think Ms Saunders’ evidence was clear: she applied the former approach.
Ms Saunders stated that while this figure had been recorded in NPS’ financial records since around October 2023 as a liability, no payments have been made to her or Mr Saunders in respect of that liability.
Ms Saunders was cross-examined on this topic. She agreed that she had received a copy of the Murone Report (defined in paragraph 95 below) in around September 2023, and that she did not agree with Ms Murone’s opinion as to the value of NPS. Ms Saunders was asked why the accrued charges liability was not recorded in 2020 when she got the Hare Letter, but only after she received the Murone Report. Ms Saunders’ answer was that she wanted to be able to present a complete and clean balance sheet with accurate figures.
Ms Saunders caused the accrued charges liability to be increased in NPS’ financial records in 2024 to $4,450,000. She said that she re-calculated the accrued charges later in 2024 after she received the Hare Report (defined in paragraph 99(b) below) and that this time she included amounts for incentive payments. She said she calculated these by reference to the short-term and long-term incentive payment ranges in the Hare Report. She used the mid-point of the range for short-term incentives and slightly more than that for her for long-term incentives and slightly under for Mr Saunders. In one of the years, where she did not think they had performed well enough, she made no allowance for incentive payments.
Ms Saunders disagrees with the Joint Valuation Report (defined in paragraph 101(c) below) where it records that Ms Murone and Mr Sojka agree that for the purposes of valuing NPS, the accrued charges need to be reversed.
D.4 Evidence of Mr Saunders
D.4.1 Working on-call for NPS between 2005 to 2014
Mr Saunders initially worked for NPS for a 12-month period in about 1990, before commencing with NPS again in 2002 and progressing his work duties after 2003.
In around 2005 to 2006, Mr Saunders commenced in his full-time role as operations manager. Mr Saunders outlined in oral evidence that there is an on-call component to the role, which he was responsible for up until around 2014.
After that time, NPS was able to allocate that work to staff rostered at one of their sites, with a majority of on-call work looked after by on-call operators. However, Mr Saunders needs to be contactable 24/7 to oversee any major issues that the on-call team are unable to deal with.
D.4.2 Mr Saunders’ remuneration at NPS
Between 2003 to 2013 inclusive, NPS did not pay Mr Saunders any wages, superannuation or other remuneration, despite him working in the business on a full-time basis for most of that time. This was because Mr Saunders did not seek payment. He gave evidence that he took on his role within NPS in this period without pay because of his relationship with Ms Saunders, that he already had an income, and in the early stages he did not think the profits were that great. He said it never really entered his mind to seek a wage during that period, and that it never really became part of a discussion until 2013 when the relationship between Mr Holmes, Ms Saunders and himself deteriorated to such a degree that he decided it was an appropriate time to discuss payment of wages.
From 2014 to 2020, NPS paid Mr Saunders the following remuneration:
Year Ending 30 June
2014
2015
2016
2017
2018
2019
2020
Wage
$14,301.00
$23,400.00
$27,552.00
$41,394.00
$41,606.00
$43,623.00
$41,607.00
Superannuation
$1,323.00
$2,223.00
$2,617.00
$3,932.00
$3,953.00
$4,144.00
$3,953.00
In addition to the above, Mr Saunders received from FY2010 onwards, the use of a maintained and insured motor vehicle including fuel. He also received a benefit from management fees paid by NPS to the Lambert Family Trust.
D.4.3 Increased workload during COVID
According to Mr Saunders, there was a material change to NPS’ business during the COVID-19 pandemic. The company quickly found itself providing security for more than 20 hotels around Melbourne, as well as several homeless housing projects. The increase in work was something that neither Mr nor Ms Saunders could have anticipated. The influx of new staff also created new challenges, such as securing work permits as well as providing each NPS guard with safety vests, work shirts, face masks, face shields and eventually full protective equipment. NPS also had to deal with hotel managers, health workers, WorkCover claims, assaults involving its staff members, and complaints from the public. Mr Saunders’ evidence is that, during this period, he worked ‘a minimum of 60-70 hours [per week] and anywhere upwards from that depending on which weeks had more or less issues’.
D.4.4 Change in role after COVID
The evidence of Mr Saunders is that after the COVID-19 pandemic wound down, a ‘coordinator’ took on parts of the operations manager role and is now largely responsible for the hiring, firing and rostering of staff. Nowadays, Mr Saunders is mostly responsible for client management liaison.
D.4.5 Mr Holmes’ role at NPS
Mr Saunders described Mr Holmes’ involvement in NPS from 2003 as ‘very limited’ with no structure to when he came into the office. Mr Holmes had played a role in the coin counting programs that were firstly involved with City of Port Philip and later with the City of Melbourne. However, there was no real commitment to a structured rostering process.
After Mr Holmes ceased work due to illness, and he removed himself completely from the business, Mr Holmes remained a director and would have limited discussions about the running of the business.
E Expert evidence
On 4 May 2023, the Court ordered the parties to appoint an independent person to express an opinion as to the value of the shares in NPS. The parties agreed that Piera Murone, an independent business valuer and an executive director of Murcroft Business Valuations, be appointed to undertake that valuation. Ms Murone provided a report dated 12 September 2023 (Murone Report).
The defendants obtained a report as to the valuation of NPS from Michael Sojka dated 14 October 2024 (Sojka Report). Mr Sojka is a certified practising accountant and the managing director of Rose Partners accountants and advisors.
The defendants rely on the Sojka Report rather than on the Murone Report. There were a number of occasions where defence counsel referred to Ms Murone as the plaintiff’s expert: I do not accept that characterisation. Ms Murone was appointed jointly by the parties to provide a valuation report, in accordance with orders made by the Court. She was an independent expert appointed jointly by the parties. That the plaintiff chose to rely on the Murone Report[6] and call Ms Murone to give evidence at trial does not change that.
[6]Noting that by the time of closing address, the plaintiff contended for Mr Sojka’s valuation (modified so as to account for the overpayments) rather than Ms Murone’s, which I will come to in a later section.
In addition to the business valuation experts, both parties relied on reports from remuneration specialists. Broadly speaking, their remit was to provide their views as to whether the remuneration and bonuses paid to Ms and Mr Saunders were reasonable or excessive.
The defendants rely on the following two reports:
(a)The expert report of Mark Ritchie dated 10 October 2024 (Ritchie Report). Mr Ritchie is a workplace relations consultant and Managing Director of Workplace Wizards. The Ritchie Report covers the remuneration and bonuses paid from FY2021 to FY2023.
(b)The expert report of Simon Hare dated 21 October 2024 (Hare Report). Mr Hare is a Certified Professional member of the Australian Human Resources Institute (CAHRI) and Managing Principal at HaRe Group. He is the same person who provided the Hare Letter in July 2020, as referred to at paragraph 78 above. The Hare Report covers the remuneration and bonuses paid from FY2006 to FY2020.
The plaintiff relies on the expert report of Guy Sigston dated 6 December 2024 (Sigston Report). Mr Sigston is an executive search and professional recruitment consultant and Managing Director of Lawson Delaney. His report covers the period covered by the defendants’ remuneration experts, being the period from FYE2006 to FYE2023.
Prior to trial, the Court made orders that the experts confer with their relevant counterparts and produce joint reports. As a consequence, the following joint reports were provided:
(a)joint report dated 24 April 2025 from Mr Sigston and Mr Hare;
(b)joint report dated 2 May 2025 from Mr Sigston and Mr Ritchie; and
(c)joint report dated 5 May 2025 from Ms Murone and Mr Sojka (Joint Valuation Report).
The day before the experts were due to give evidence, Mr Sojka provided a supplementary report dated 13 May 2025 (Supplementary Sojka Report). In that report, he stated that having further reviewed the Joint Valuation Report, he had identified erroneous calculations made by Ms Murone in that she had added together underpayments for FY2006 to FY2017 and overpayments for FY2018 to FY2023, whereas the underpayment should have been deducted from the overpayment. The Supplementary Sojka Report provided updated schedules to correct that.
In response, Ms Murone prepared a marked-up version of the Joint Valuation Report dated 13 May 2025 (Murone Mark-ups), which reflected the errors identified by Mr Sojka described in the preceding paragraph. This was provided to the Court by the plaintiff’s solicitors - both in mark-up and in clean version - described in their covering email as the amended version of the joint report.
The defendants were critical of this, saying that what had been sent to the Court purported to be a joint report whereas it was not. Ms Murone had prepared the amendments and Mr Sojka had not been consulted about it. Counsel for the plaintiff clarified that it was not being adduced as a joint report, but was showing what changes Ms Murone had made to her opinion in light of the error identified by Mr Sojka.
The defendants’ criticism as to the Murone Mark-ups purporting to be a joint report is fair insofar as the covering email to the Court is concerned, but overstated, given that the Court and the parties were able to quickly get to the bottom of it at the start of day 3 of the trial. Criticism of Ms Murone in this respect is unwarranted: she presented it as mark-ups on the joint report, but it was the plaintiff who did not clarify its origins or status when providing it to the Court.
Ms Murone and Mr Sojka were called to give evidence concurrently as to the valuation of NPS.
Mr Ritchie, Mr Hare and Mr Sigston were called to give evidence concurrently as to the remuneration paid to Ms and Mr Saunders.
E.1 Expert remuneration evidence
E.1.1 Mr Hare
Although Mr Hare was located outside of Australia at the time of the proceeding, I was satisfied that the technical requirements in s 42G of the Evidence (Miscellaneous Provisions) Act 1958 (Vic) were met for Mr Hare to appear via Zoom. All parties consented to the making of the direction.
I found Mr Hare to be a knowledgeable witness with a great deal of experience in his field.
Mr Hare based his opinion in the Hare Report as to market remuneration on annual data published by Thomson Reuters (the Boardroom Remuneration Review) which analysed financial reports of most ASX listed companies, and on his many years working with a wide variety of clients. Those reports provided information about fixed remuneration packages (wages, allowances, superannuation, fees, cars, and other benefits, plus FBT costs), short-term incentives, long-term incentives, and total annual remuneration (being the sum of an employee’s fixed remuneration package and short-term incentives). Mr Hare’s view is that short-term incentives are typically an annual cash payment based on business performance and measurable objectives under the direct influence of the employee. Meanwhile, long-term incentives are generally limited to key people who have significant strategic business influence and are often based on enterprise value improvements over three or more years.
Mr Hare says that as NPS is a small proprietary company, annual revenue is the most accurate measure of organisation size, rather than employee numbers. As a small proprietary company, its CEO does not carry the same enduring accountabilities as most CEOs represented in the Thomson Reuters database, hence consistent with many CEOs of equivalent organisations, the most suitable benchmark for remuneration rates for the NPS CEO should be the 25th percentile.
As the COO information in the Thomson Reuters database is very limited for small companies, Mr Hare used market data on general manager remuneration to supplement that data. In his opinion, this approximates the responsibilities of a COO in a small proprietary company.
For each financial year from 2006 to 2020, Mr Hare’s remuneration data analysis has accounted for the changes in NPS’ annual revenue, leading to reasonable adjustments to the benchmark fixed remuneration package and total annual remuneration values for each position for each year. When calculating the fixed remuneration packages for Ms and Mr Saunders, in addition to the usual items included in those packages, Mr Hare included for each their share of the management fee paid to the Lambert Family Trust.
Mr Hare’s market range for a fixed remuneration package for a CEO, taking the FY2020 financial year as an example, was for $276,000 at the low end and $374,000 at the high end. In addition, his market short-term incentive as a percentage of the fixed remuneration package was 25-30%.
Mr Hare’s conclusions in respect of Ms Saunders’ remuneration are that:
(a)her fixed remuneration package is under the market ranges for FY2006 to FY2014;
(b)her fixed remuneration package is within the market ranges for FY2015 to FY2019;
(c)her fixed remuneration package is over the market ranges for FY2020;
(d)her total annual remuneration is under the market ranges for FY2006 to FY2014 in the amount of $608,555; and
(e)her total annual remuneration is within the market range for FY2015 to FY2020.
Mr Hare’s market range for a fixed remuneration package for an operations manager, taking the 2020 financial year as an example, was for $212,000 at the low end and $288,000 at the high end. In addition, his market short-term incentive as a percentage of the fixed remuneration package was 25-30%.
Mr Hare’s conclusions in respect of Mr Saunders’ remuneration are that:
(a)his fixed remuneration package is under the market ranges for FY2006 to FY2019;
(b)his fixed remuneration package is within the market ranges for FY2020;
(c)his total annual remuneration is under the market ranges for FY2006 to FY2019 in the amount of $1,661,932;[7] and
(d)his total annual remuneration is within the market ranges for FY2020.
[7]This comprises $1,190,000 for the years 2006 to2013 when he was not paid at all, plus $471,932 for the years 2014 to2019.
A spreadsheet setting out Mr Hare’s opinion as to the market rate for a CEO and an operations manager for each year from 2006 to 2020, together with the actual amounts paid to each of Ms and Mr Saunders, was attached to his report. In his opinion, the ranges he specified for market rate fixed remuneration packages plus short-term incentives were commercially reasonable ranges.
E.1.2 Mr Ritchie
Mr Ritchie was instructed to assess the reasonableness of remuneration and bonuses paid to Ms and Mr Saunders for the financial years 2021 to 2023, taking into account any applicable market rates, industrial awards, and any other matters he considered relevant.
Mr Ritchie obtained and analysed remuneration benchmarking information from talent acquisition-related sources that was available on the internet, such as Hays, Glassdoor, PayScale Australia and Seek.com. He did not have the additional benefit of any paid subscription or wage benchmarking information or software. He says that he also examined publicly available remuneration figures from comparable security services companies within Australia. In conducting his analysis, he took the view that Mr Saunders’ position was comparable to a chief operating officer (COO) position in other companies. The Ritchie Report sets out the averages and ranges for CEOs and COOs for remuneration packages ascertained from Hays, Glassdoor, PayScale Australia and Seek.com.
In respect of Ms Saunders’ non-bonus remuneration, Mr Ritchie concludes that it is commensurate with the average salary of CEOs in Australia, as:
(a)it is only approximately 4% above the average salaries provided by Hays and PayScale Australia;
(b)it is approximately 18% above the average provided by Glassdoor. However, he considers the difference reasonably accounted for by the additional work undertaken by Ms Saunders over and above the ordinary role of a CEO. This is due to the lean management team and the lack of any other executives at NPS, besides an operations manager; and
(c)it is above the estimated average provided by Seek.com, but that figure does not account for the additional duties undertaken by Ms Saunders and is exclusive of bonuses and other benefits.
In respect of Mr Saunders’ non-bonus remuneration, Mr Ritchie concludes that it is commensurate with the average salary of COOs in Australia, as:
(a)it is only 0.6% above the average COO salary according to Hays and Glassdoor; and
(b)it is higher than some average COO estimates, however the extent to which it exceeds those can be explained by NPS’ lean executive and management structure, the significant additional responsibilities of Mr Saunders beyond a traditional COO role and the lack of any other NPS executives to share the load with.
From this, Mr Ritchie concludes that viewed independently from industry-specific considerations, the non-bonus salaries paid to Ms and Mr Saunders appear to be reasonable and appropriate for their positions in a company of NPS’ size.
Mr Ritchie goes on to consider security industry-specific remuneration, which he considers supports his conclusion. He does so by considering the salary received by the CEO of Millenium Services Group Ltd (Millenium), who receives a base salary that is 10.6% higher than Ms Saunders. This is likely due to the higher revenue of that company. The CEO of Millenium also receives additional compensation for their role as a director, and share and cash bonuses.
Mr Ritchie then considers the bonuses paid to Ms and Mr Saunders and concludes that these were ‘considerable.’ He considers these excessive in ordinary market conditions, as they are above the acceptable and reasonable band However, he says that looking at the situation holistically, the bonuses paid were reasonable and proportionate.
It is necessary for me to set out the reasons for his opinion in some detail.
Mr Ritchie begins his analysis of executive bonuses by saying that:
This report is regrettably limited insofar as there is not any detailed publicly-available data on executive bonuses paid to CEOs and COOs within Australia, and especially within the security industry (different to the above relating to base salary). Hence, my ability to form a view as to whether the bonuses paid to Mr and Ms Saunders in the 2021-2022 period were reasonable or excessive – through an objective assessment derived via benchmarking comparable Australian corporations – cannot be done. As a result, the following assessment is not as complete and ‘concrete’ as the above relating to base salary, but has been formed instead based on based on my extensive experience and opinion specific to NPS and the environment the organisation was working within in the 2021-2023 period.
According to Mr Ritchie, a key factor in the adequacy of executive remuneration is performance. NPS’ revenue since 2018 shows a consistent increase in non-COVID related revenue over the period, and significant additional revenue for 2021 and 2022, together with a far higher gross profit for that period.
Mr Ritchie states that it is not uncommon for bonuses to be paid based on overall revenue generation ( as opposed to, say, company profit), and roughly approximate reasonable bonuses are commonly in the band of 5-10% of revenue generated. For NPS in financial years 2021 and 2022:
(a)the bonuses paid to Ms and Mr Saunders were some 35% of gross profit;
(b)expressed another way, the bonuses paid were 19.7% of overall revenue gained/new contracts won in 2021, and 24% for 2022, which is higher than his recommended band of 5-10%;
(c)for the combined 2021-2023 period, these were approximately 30% of overall gross profit or 21.8% of overall revenue gained/new contracts won.
Based on this, Mr Ritchie’s view is that the bonuses paid to Ms and Mr Saunders for that period ‘seem unreasonably high’. However, he says that the following matters weigh in favour of the reasonableness of the bonuses paid when an overall assessment is made:
(a)the challenges of the pandemic and the commencement of the pandemic-related contracts significantly increased the responsibilities of and pressure, including managerial pressure, on Ms and Mr Saunders;
(b)managing these new contracts likely played a vital role in Victoria’s public health response to the pandemic;
(c)given NPS’ lean organisational structure and lack of any other executives, it is reasonable to conclude that Ms and Mr Saunders were instrumental in performing the myriad of management duties required during this time and ensuring that NPS not only survived, but thrived in this period;
(d)their work created significant value for NPS, enhanced its reputation and market share, and likely generated further lucrative opportunities for NPS. It is reasonable to conclude that their work during this period was not contemplated by the non-bonus base remuneration prior to the pandemic, such that additional remuneration to reward this extra effort is appropriate.
Mr Ritchie concludes that for these reasons, the bonuses paid were ‘commensurate with what is reasonable and proportionate in the extraordinary circumstances of the time’.
E.1.3 Mr Sigston
Mr Sigston used his firm’s database containing 203,455 candidates and over 700 recruitment assignments (including over 300 CEO recruitments) from 2012 to 2024. He describes this database as Melbourne-centric and covering employees across small, medium and large companies, not for profit organisations, and government. He also relied on interviews he had conducted with owners and CEOs within the security industry, along with the premium talent search candidate database on seek.com.au.
In addition, Mr Sigston had copies of the Hare Letter, the Hare Report, and the Ritchie Report when preparing his report. The Sigston Report includes comments on those documents.
Commenting on the Hare Report, Mr Sigston states that:
(a)he agrees with Mr Hare that small private businesses rarely have long-term incentive plans for executives;
(b)he agrees with Mr Hare that small private businesses generally have short-term incentive plans for CEOs, usually dependent upon key performance measures for achievement of growth in gross and net profit targets, and which are usually calculated at around 10-30% of their fixed remuneration package;
(c)the fixed remuneration package for a CEO in 2020 in the Hare Report is inconsistent with that in the Hare Letter, in that the former fixed it to the highest level of $374,000, rather than the 25th percentile range of $300,000 to $310,000;
(d)the fixed remuneration package for the CEO in 2020 should have been $280,000 with a short-term incentive of up to 30% based on the achievement of key performance indicators of profit and revenue growth. Based on NPS’ performance, the short-term incentive for that year would likely have been 10% but possibly 20% depending on profit growth (for which he did not have the figures), such that total remuneration should have been $308,000 to $336,000;
(e)accounting for short-term incentives from one year to the next may create the illusion of under or over payment on a year-by-year basis. It is not uncommon for an incentive for one financial year to be paid in the following financial year, or partly in both. It is therefore prudent to look at cumulative short-term incentives over a number of years;
(f)it is not uncommon for the most senior operations manager to be the second-in-charge to the CEO, as Mr Saunders was;
(g)it is extremely rare for an executive to work in a business without any form of remuneration, as Mr Saunders did from 2006 to 2013;
(h)while the CEO wage was realigned to an appropriate market rate in 2013, this was not extended to the operations manager; and
(i)it is rare for short-term incentives for operations managers to exceed 20%, and the key metrics are usually different to CEOs and may include matters such as quality, gross profit, and client satisfaction.
Commenting on the Ritchie Report, Mr Sigston states that:
(a)the comparison of NPS to Millenium is irrelevant given the disparity between the two companies: Millenium is an ASX listed company with revenue of $257 million and a profit after tax for FY2020 of $16.6 million. That the CEO of Millenium receives a base salary only 10.6% higher than the CEO of NPS confirms that Ms Saunders’ base salary is too high;
(b)he agrees with Mr Ritchie that Ms and Mr Saunders faced significant challenges in FY2021 and FY2022;
(c)FY2021 presented a re-set in base remuneration for CEOs and, to a lesser degree, operations managers within the security industry, but also the opportunity to earn significant short-term incentives based on revenue growth and increase in profitability;
(d)Mr Ritchie’s statement that a reasonable band for bonuses is 5-10% of overall revenue gained/new contracts won is completely incorrect. CEOs are typically measured on a number of criteria including gross profit growth and profit/profit growth; and
(e)he does not agree with most of the Ritchie Report and does not agree with the conclusions expressed in that report.
The Sigston Report attaches a similarly formatted spreadsheet to that provided by the Hare Report, save that it covers the period from FY2006 to FY2023.
Mr Sigston gave his opinion as to the market rate for remuneration of a CEO and an operations manager within the security sector or similar, within three ranges: high, middle and low (each including superannuation and a car in the fixed remuneration package). He also used the same three ranges for short-term incentives. His opinion was that for FY2021 to FY2023, the performance of NPS was such that the high range was applicable.
Mr Sigston’s opinion in respect of the period FY2021 to FY2023 for the CEO position is that:
(a)the CEO should have received a significant uplift in the fixed remuneration package from 2020 to $330,000 in 2021 and the short-term incentive would have been received in full (ie, 30% of the fixed remuneration package), plus a one-off discretionary bonus of $100,000 to $200,000, taking the total annual remuneration to the range of $529,000 to $629,000 for FY2021;
(b)there should be a modest increase from FY2021 in the fixed remuneration package for inflation, taking it to $350,000. The full short-term incentive would also have been paid, and a more modest discretionary bonus of $50,000 to $100,000 would have been paid, taking the total annual remuneration to $479,000 to $529,000 for FY2022; and
(c)given the results for FY2023, the total annual remuneration would be $350,000 for that year.
In respect of the operations manager position for FY2021 to FY2023, Mr Sigston’s opinion is that:
(a)the fixed remuneration package would have been increased from $185,000 for the previous year to $220,000 for FY2021, a short-term incentive of 20% would have been paid, and a discretionary bonus of $100,000 would also have been paid. This would take the total annual remuneration for the operations manager for FY2021 to $364,000;
(b)for FY2022, the fixed remuneration package would have been increased to $235,000. A short-term incentive of 20% would have been paid, along with a discretionary bonus of $50,000 This would take the total remuneration package for the operations manager for FY2022 to $332,000; and
(c)for FY2023, the fixed remuneration package would have been $240,000 with no short-term incentive or discretionary bonus paid.
Mr Sigston concludes that in terms of total annual remuneration (ie, fixed remuneration package plus short-term incentive) for Ms Saunders for financial years:
(a)2006 to 2012, Ms Saunders was underpaid by $524,620. This would have increased the profit of NPS by a similar figure, from which she may ultimately have benefited given her shareholding;
(b)2013 to 2019, Ms Saunders’ remuneration was appropriate;
(c)2020, there was a reduction in profit from 2019 and given the uncertain times, the short-term incentive would not be more than 10%. Hence, Ms Saunders was overpaid by $114,732;
(d)2021, Ms Saunders was overpaid by $2,098,763;
(e)2022, Ms Saunders was overpaid by $1,949,810; and
(f)2023, Ms Saunders was overpaid by $80,857.
Mr Sigston concludes that in terms of total annual remuneration (ie, fixed remuneration package plus short-term incentive) for Mr Saunders for financial years:
(a)2006 to 2013 and assuming there was no other form of remuneration, Mr Saunders was underpaid by $1,275,638;
(b)2014 to 2019, Mr Saunders was underpaid by $376,996;
(c)2020, Mr Saunders was overpaid by $80,060;
(d)2021, Mr Saunders was overpaid by $2,224,327;
(e)2022, Mr Saunders was overpaid by $957,331; and
(f)2023, Mr Saunders was overpaid by $48,740.
E.2 Expert valuation evidence
E.2.1 High level observations regarding Mr Sojka and Ms Murone
I found Mr Sojka and Ms Murone to be confident and knowledgeable witnesses, who did their best to assist the Court and made concessions where appropriate to do so.
The defendants were critical of Ms Murone, pointing to errors made in her section of the Joint Valuation Report. The errors referred to were the one identified in paragraphs 102 and 103 above, and one identified in the course of oral evidence, as I will now describe.
During the course of their concurrent evidence in relation to the 31 August 2024 valuation and questions about each valuer’s surplus asset figure, it emerged that Ms Murone had thought Mr Sojka’s figure for surplus assets included $4.45 million for the accrued charges as per NPS’ balance sheet. Taking the view that it should not be included, she had backed it out. It became apparent that Mr Sojka had not included the $4.45 million and so therefore there has been no need for Ms Murone to back it out. The effect of Ms Murone backing it out when she did not need to was that her surplus asset figure was inflated by $4.45 million. That being the case, Ms Murone corrected those amounts during oral evidence. Ms Murone explained that when she was preparing this part of her opinion for the Joint Valuation Report, she did not have critical documents such as a balance sheet for that time.
Despite the defendants’ submissions, I do not consider that this error undermined her credit as an expert witness. Nor do I accept the defendants’ submission that the error made which led to Murone Mark-ups means that the wider accuracy of her report should be called into question. Ms Murone’s conclusions largely align with those of Mr Sojka, and if the defendants wished to point out other mistakes in her report, they were at liberty to do so.
E.2.2 The methodology employed by Ms Murone and Mr Sojka
Ms Murone prepared a valuation of NPS as at 30 June 2023. Mr Sojka prepared a valuation of NPS as at 30 June 2023 and 31 August 2024. Ms Saunders provided documents, engaged in interviews, and responded to queries for both valuers. Ms Murone and Mr Sojka were ordered to prepare their joint report identifying the matters with which they agreed and matters with which they disagreed. During that process, Ms Saunders provided profit and loss statements, balance sheets, BAS statements, but otherwise did not have any involvement.
To value the shares in NPS, Ms Murone adopted the market value. She says this is defined as the price at which a business or its equity would change hands between a knowledgeable willing buyer and a knowledgeable willing seller – with neither being under a compulsion to buy or sell, and both having a reasonable knowledge of the relevant facts.
Ms Murone refers to three different methodologies for conducting the valuation: capitalisation of future maintainable earnings; assets-based approach; and discounted cash flow methodology. She has followed the first of these, taking the view that an assets-based approach would undervalue the equity and a discounted cash flow methodology was not appropriate as the projections indicate a significant decline in revenue and earnings, and there is insufficient data to assess the reasonableness of the assumptions. A capitalisation of future maintainable earnings approach involves estimating the future maintainable earnings of the business and capitalising the earnings at a rate which reflects the risks and growth opportunities associated with the business and the earnings it generates.
Mr Sojka also used the capitalisation of future maintainable earnings approach.
I have found the Joint Valuation Report, together with Ms Murone’s and Mr Sojka’s oral concurrent evidence, to be very helpful in this case. The joint report and oral evidence reveal that while there are a number of matters on which the Sojka Report differs from the Murone Report, most of these differences do not make a material difference, with the exception of how to treat the remuneration payments - both in terms of assessing future maintainable earnings and whether to treat the overpayments as a surplus asset. In respect of remuneration payments, Mr Sojka had been instructed by the defendants to assume that the payments made were reasonable. Ms Murone was not given that instruction, and she made adjustments for overpayments.[8] In the Joint Valuation Report, the two experts state:
The significant difference between the two valuations reflects primarily the difference in instructions pertaining to the remuneration of the Saunders. If not for this, the values derived by the single experts would not be materially different.
[8]Their respective approaches to remuneration will be explained in more detail later.
Other factors upon which they differ and which make a tangible difference in the valuation are the valuation date and whether a minority discount ought to be applied.
That being the case, I see little utility in setting out the detail of each of their respective reports. Rather, it is only necessary to set out their conclusions as expressed in the Joint Valuation Report, as updated to reflect the Sojka Supplementary Report, the Murone Mark-ups, and their oral evidence (together, the Updated Joint Valuation Report).
As noted above, the Murone Report provided a valuation as at 30 June 2023 and the Sojka Report provided valuations as at that date and as at 31 August 2024. However, in the process of conferring with Mr Sojka and preparing their joint report, Ms Murone considered Mr Sojka’s valuation as at 31 August 2024 and included in the Joint Valuation Report her assessment as to value as at that date.
The opinions of Ms Murone and Mr Sojka as to a valuation of NPS as at 30 June 2023 expressed in the Updated Joint Valuation Report are summarised in the below table:
Valuation as at 30 June 2023
Item
Murone $’000
Sojka $’000
Difference $’000
Maintainable EBITDA
1,100
1,000
100
Multiple
3.375
3.375
-
Assessed Business Value
3,712
3,375
337
Surplus Assets
12,411
8,215
4,196
Equity Value
16,123
11,590
4,533
Minority Discount
-
506
506
Equity value less minority discount
16,123
11,590
4,533
1/3rd interest
5,374
3,695
1,679
The opinions of Ms Murone and Mr Sojka as to a valuation of NPS as at 31 August 2024 expressed in the Updated Joint Valuation Report are summarised in the below table:
Valuation as at 31 August 2024
Item
Murone $’000
Sojka $’000
Difference $’000
Maintainable EBITDA
2,000
1,900
100
Multiple
3.375
3.375
-
Assessed Business Value
6,750
6,413
337
Surplus Assets
11,244
6,387
4,857
Equity Value
17,994
12,800
5,194
Minority Discount
-
962
962
Equity value less minority discount
17,994
11,838
5,194
1/3rd interest
5,999
3,946
2,053
Below, I provide a brief overview of the conclusions in the Updated Joint Valuation Report and explanations for amounts in these tables.
E.2.2.1 Maintainable EBITDA as at 30 June 2023 and as at 31 August 2024
There were some differences between the two experts in respect of the components of maintainable EBITDA, however with one exception, these were not material and are not necessary to describe. The key difference between their respective figures is that Ms Murone has made adjustments for commercial levels of remuneration to the CEO and COO, whereas Mr Sojka has not.
In this regard, Ms Murone had adjusted earnings by approximately $2.1 million in FY2022, $1.2 million in FY2023, and $127,000 in FY2024 to remove the excess remuneration paid to the Saunders. In determining the commercial remuneration for her report, Ms Murone adopted the midpoint of the amounts indicated in the Hare Letter. Since then, she reviewed the expert remuneration reports and their joint reports, and adopted the following:
(a)she made no change to the commercial remuneration adjustment for FY2017[9] to FY2019 as the amounts were not materially different to that in the expert reports;
(b)she made no change to the commercial remuneration adjustment for FY2020 as the amount was not materially different to that in the Sigston Report;
(c)she reduced the commercial remuneration adjustment for FY2021 from $4.766 million to $4.323 million in line with the Sigston Report;
(d)she reduced the commercial remuneration adjustment for FY2022 from $2.144 million to $1.832 million in line with the Sigston Report;
(e)she increased the remuneration adjustment by $11,000 from $1.194 million to $1.205 million for FY2023 in line with the Sigston Report; and
(f)she increased the remuneration adjustment by $3,000 to $130,000 for FY2024, which is based on the market remuneration for FY2023 in the Sigston Report increased by 3%.
[9]To assess normalised EBITDA, Ms Murone had reviewed the financials back to 2018.
In contrast, Mr Sojka was instructed to assume that the remuneration and bonuses were justified and do not require any adjustment. In addressing likely future maintainable earnings, he considered FY2024 and projected FY2025 which exclude bonuses.
Their joint conclusion on this issue was that the amount which should be adopted for the Saunders remuneration when calculating maintainable future earnings is that which is ultimately considered by the Court to reflect the commercial level of remuneration based on the expert remuneration reports.
In respect of other adjustments to maintainable EBITDA where the experts originally differed:
(a)Ms Murone’s adjustments to revenue and earnings for the abnormally high revenue and gross profit due to the impact of COVID have been accepted by Mr Sojka;
(b)they agree that their differences in respect of payroll tax and Workcover should be adjusted based on what the Court concludes is a commercial level of remuneration;
(c)they have each maintained their respective positions regarding uniforms and computer expenses, but agree these do not have a material impact on the assessment of EBITDA;
(d)normalisation adjustments made to consultants, legal fees and motor vehicle expenses by Ms Murone have been accepted by Mr Sojka; and
(e)various revisions were made due to FY2024 actuals being available at the time of preparing the Joint Valuation Report.
I do not accept the defendants’ submission that this case is akin to the circumstances in Hylepin v Doshay. In that case, the alteration to the share register was erroneous and based on a mistaken view. It was found not to be commercially unfair as it was both a mistake and no payments or commercial benefits were affected by it.[52]
[52]Hylepin v Doshay, [205].
In my view, in the circumstances of this case, the recording of the accrued charges in NPS’ balance sheet was oppressive. It did not represent a genuine liability of NPS and was done as a consequence of this litigation in order to influence the valuation of the company. The amount of the accrued charges is significant, and I consider it to be commercially unfair to represent them as a liability of NPS when that is not the case.
However, on its own, the issue of the accrued charges does not give rise to any tangible remedy for the plaintiff. If the accrued charges are not treated as a true liability on NPS’ balance sheet, then it will not impact upon the valuation of the company.
K.5 Non-payment of dividends
Apart from Ms Saunders’ unchallenged oral evidence as to the rationale for and practice of paying dividends during Mr Holmes’ lifetime, there was no evidence as to any dividend policy of NPS. I note that Ms Saunders’ evidence was unchallenged, as Ms Lowson was not in a position to give contrary evidence, given her lack of knowledge. Neither party called NPS’ accountant, who presumably could have corroborated (or not) Ms Saunders’ evidence as to the practice of recording cash payments to Mr Holmes after 2005 against his loan account and then declaring dividends to match at the end of the financial year. It seems reasonable to assume that Mr Holmes agreed with this practice, as there was no suggestion that he did not.
The defendants seek to characterise the expectation as being that payments from NPS’ cash reserves would be made to the plaintiff on an ‘as needs’ basis and treated as dividends, and that following Mr Holmes’ death there was no reason to make such payments or declare dividends in respect of them. The defendants also submit that not paying a dividend after Mr Holmes’ death was consistent with previous practice and was entirely justified. This was because there was no suggestion the plaintiff was experiencing cashflow or funding needs that needed to be addressed by paying a dividend.
The defendants’ position that the allegation concerning non-payment of dividends is premised on the plaintiff having a reasonable expectation of receiving dividends is only part of the consideration required here.
Context is crucial here. Dividends had historically been paid, but after Mr Holmes’ death, they were not. At the same time as the payment of dividends ceased, remuneration payments to Ms Saunders and Mr Saunders increased dramatically. The sole director of the company ensured that the interests associated with her - being herself, her husband, and Lambert Properties - received vastly increased payments when the profit of the company increased by unprecedented amounts, via remuneration payments and a management fee. By taking those increases in that way, rather than through dividends, or a combination of methods involving dividends, Ms Saunders and her interests benefited whereas the plaintiff did not. In this regard, the situation falls squarely within that described by Robson J in Slea (No 9) as set out at paragraph 201 above, and not within the description from the same case as relied on by the defendants and set out at paragraph 241 above.
It is the non-payment of dividends at a time of vastly increased remuneration payments to the Saunders’ interests - payments which I have found exceeded reasonable remuneration - which means that the non-payment of dividends in this case is oppressive. I accept the plaintiff’s submission at paragraph 200 above and consider that it aptly applies to what has occurred in this case.
I do not accept the defendants’ submission that no shareholder was prejudiced by the non-payment of dividends after June 2020 because net profits were retained in NPS. True it is that any retained profits remain available to be declared as dividends in the future or will be reflected in the valuation of the company, such that shareholders would benefit from retained profits. But the defendants’ submission misses the key point: it was net profits that were retained, that is, profits left after expenses (including the excessive remuneration) had been met. Accordingly, all shareholders did not share in profits net of reasonable expenses.
L Valuation of NPS
L.1 Plaintiff’s submissions on value of NPS
L.1.1 Principles
The plaintiff submits that the Court has a broad discretion as to the mode of valuation. The Court’s task is to fix a price that is fair in all the circumstances having regard to the value the shares would have had, but for the oppressive conduct.[53] The price to be paid is compensatory in nature, aimed at redressing the wrong done, so the price is not confined to ordinary valuation principles and will not always reflect the real worth of the shares.[54]
[53]Re Scientific Management Associates Pty Ltd [2019] NSWSC 1643, [309] (Scientific Management); ANIT Australia, [434].
[54]Scientific Management, [309]; Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Limited (2004) 207 ALR 136 (Smith Martis Cork); Shirim.
To the extent that the defendants suggest that fair value requires some assessment of what is fair in the circumstances to both shareholders, the plaintiff submits that fair value is aimed at redressing the role and is compensatory. As such, the Court’s task is to fix a price that will remedy the oppression, rather than conduct a balancing act of fairness between both shareholders.
The plaintiff submits that valuation is not a precise science and methodologies adopted by the expert valuers are merely guides to determining value.[55]
[55]Scientific Management, [309]; In the matter of OTS (Australia) Pty Ltd [2017] NSWSC 175, [59].
L.1.2 Valuation date
The plaintiff submits that the date of valuation ought to be 31 August 2024. It says that the general rule is that the date of valuation is a date that is comparatively recent to the date of the order.[56] Furthermore, the appropriate date for valuation is said to be as close to the date of the Court’s judgment as possible.[57]
[56]Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121; [2011] NSWCA 104, [298].
[57]Mopeke Pty Ltd v Airport Fine Foods Pty Ltd (2007) 61 ACSR 395; [2007] NSWSC 153, [94]–[96].
The valuation experts valued NPS as of 30 June 2023 and 31 August 2024. The valuation as of 31 August 2024 is higher than that of 30 June 2023, which reflects the increased value of the NPS. In addition, the valuations as of 31 August 2024, although some projection was used, was based primarily on actual financial data, as opposed to budgets.
The plaintiff submits that the only basis for adopting the 2023 valuation date, which would reduce the value of a share currently held to a date almost two years ago, is the expert valuers’ evidence that the 2023 date is more robust. However, the valuers have still given sworn evidence of the value of NPS as of 31 August 2024, which is evidence that can and ought to be accepted.
The plaintiff further submits that the date of valuation should be motivated by what is fair. The fairest date of valuation is the date that is as close to the current date as possible. Otherwise, the Court would be ascribing an outdated value to the share, which is based on or guided by sworn evidence of expert valuers.
L.1.3 Treatment of Remuneration payments
The plaintiff submits that the remuneration payments made to the Saunders were excessive and should therefore be paid back to NPS or added back to the balance sheet to the extent that they are excessive per the findings of Mr Sigston.
L.1.4 Fair value
The plaintiff submits that Mr Sojka accepts that Ms Murone’s adjustments for abnormal expenses and non-arm’s length transactions are appropriate, including adjustments for COVID-related revenue and expenses, which are considered abnormal. This is required to arrive at an accurate value of the enterprise.
The plaintiff makes the following observations about the expert evidence at trial:
(a)Ms Murone and Mr Sojka agreed that an adjustment would be required in the event that the Court finds that the payments received by the Saunders were excessive; that is, because they were abnormal and do not reflect a commercial level of remuneration.
(b)Ms Murone gave evidence that, should the Court find that the accrued charges will never need to be paid by NPS, then the amount would not be a liability, so no adjustment for those would be made.
(c)Mr Sojka agreed that in the event the Court finds that there is an overpayment it will need to be added back as a surplus asset.
In the Joint Valuation Report, Mr Sojka made the following adjustments to his valuation of the plaintiff’s share in NPS:
30 June 2023 31 August 2024 Sojka Report $3,326,000 $3,695,000 Joint Valuation Report $3,695,000 $3,946,000
The plaintiff submits that Mr Sojka’s adjustment to his 2023 valuation was after working through some of the key points with Ms Murone. Meanwhile, Mr Sojka’s adjustment to his 2024 valuation was made because he had been provided with the actual financial performance of NPS, which had improved from that which was budgeted. The plaintiff submits that Mr Sojka’s later opinion is based on more current date and is more accurate. Further, the maintainable earnings figure in Mr Sojka’s first report was a blended number arrived at by weighting two different periods. Meanwhile, the revised number in the Joint Valuation Report was based on financial results that had subsequently been provided.
The plaintiff submits that, in oral evidence, Mr Sojka was taken through an exercise and asked to assume that there have been overpayments, and to ignore the minority discount. He was asked to do so as of 30 June 2023 and as of 31 August 2024. He said that tax would need to be accounted for. However, in its written closing submissions, the plaintiff submits that tax ought to be ignored because NPS will not need to pay tax on this amount, but Holmes Properties will need to pay tax on any ultimate buy out figure. Therefore, to take into account tax in the valuation process would be to tax Holmes Properties twice unnecessarily. Therefore, taxing it as part of the valuation process, which will not in fact be paid, and then taxing it again once paid to the plaintiff, is a double taxation.
The plaintiff submits that Mr Sojka was of the view that a minority discount ought to be applied. While the valuers agreed that a 15 per cent discount would be appropriate if applied, it is ultimately a legal issue. Delany J held in Joint v Program IT Pty Ltd that:[58]
The law is clear that if oppression is established, there should be no discount on account of the interest being a minority interest.
[58][2020] VSC 867, [4] (Joint v Program IT) (citations omitted).
The plaintiff submits that his Honour cited the Full Federal Court decision in Dynasty Pty Ltd v Coombs[59] for this proposition. Delany J’s view in Joint v Program IT has been quoted and relied on subsequently by Button J in Re Skytraders Pty Ltd (No 2),[60] and by Osborne J in ANIT Australia.[61]
[59](1995) 59 FCR 122, 145 (Dynasty v Coombs).
[60][2022] VSC 523, [36].
[61]ANIT Australia, [437].
The plaintiff submits that, if Mr Sojka’s opinion is accepted, and Mr Sigston’s opinion that the Saunders were overpaid $7,230,231 is accepted, and no minority discount is applied, the value would be as follows as of 30 June 2023:
Maintainable EBITDA: $1,000,000
Multiple: 3.375
Assessed Business Value: $3,375,000
Surplus Assets: $8,215,000
Overpayments: $7,230,231
Equity Value: $18,820,231
One-third Share: $6,273,410,33
The plaintiff submits that, if the same exercise is followed as of 31 August 2024, the following value results:
Maintainable EBITDA: $1,900,000
Multiple: 3.375
Assessed Business Value: $6,413,000
Surplus Assets: $6,387,000
Overpayments: $7,230,231
Equity Value: $20,030,342
One-third Share: $6,676,780.66
The plaintiff makes the following further observations and submissions about the expert evidence:
(a)Mr Sojka’s surplus assets as of 30 June 2023 of $8,215,000 does not include an adjustment for overpayments or underpayments.
(b)Mr Sojka’s assessed business value for 31 August 2024 takes into account underpayments of $2,900,000. If the Court were to find that there is no liability for underpayments, it would follow that the assessed business value as of 31 August 2024 would need to be increased by $2,900,000. That would place a value on Holmes Properties’ share of $7,643,234.66.
(c)Ms Murone accepted that her valuation as of 31 August 2024 contained a margin for error.Ms Murone’s evidence was that the valuation process for 31 August 2024 was much less rigorous than the process undertaken for the valuation as of 30 June 2023.
(d)In the Murone Report, Ms Murone arrived at a maintainable EBITDA figure of $800,000, which she revised up to $1,100,000 following receipt of NPS’ actual, rather than budgeted, financial information. However, Ms Murone did not have an opportunity to test the actual financial information received, which could have been relevant to characterising the information as maintainable. Notwithstanding her inability to test the financial information by conducting interviews, it is not clear that it would have had an impact in any event. Ms Murone’s evidence was that, in arriving at her valuation, she took into account actual earnings for FY25 but also considered the historical information. Further, Ms Murone considered future contract risk, which is reflected in the multiple that was selected in the valuation process.
(e)Ms Murone accepted that the valuation she can be most confident in is her most recent valuation for the 30 June 2023 date.
(f)In relation to abnormal expenses and profits in the COVID years, Ms Murone’s evidence was that both profit and remuneration require an adjustment because they were abnormal.
(g)Ms Murone arrived at a valuation of NPS of $17,994,000, which means the plaintiff’s share as at 31 August 2024 is worth $5,998,000.
The plaintiff submits that, given some of the problems that arose with Ms Murone’s valuation during her evidence at trial, Mr Sojka’s opinion ought to be accepted, but with an adjustment for overpayments (but not for taxation) and with no minority discount applied.
The plaintiff’s submission is, therefore, that the fair value of its share is $7,643,234.66.
L.2 Defendants’ submissions regarding value of NPS
L.2.1 Principles
The defendants submit that, in valuing the plaintiff’s share in NPS, the role of the Court is to arrive at a fair price to be paid and it is not required to focus on traditional valuation concepts and methods. The price to be paid may not reflect the actual or real worth of the shares as it is intended to be ‘compensatory in nature and is aimed at redressing the wrong done (the oppressive conduct)’ and will usually take into account various adjustments to remove the effect of the oppression.[62]
[62]Renex, [732].
L.2.2 Valuation date
The defendants submit that there is no firm rule by which the valuation date is selected; rather, the ‘overriding requirement is one of fairness and justice to both parties in all the relevant circumstances of the case’.[63]
[63]Foody v Horewood [2007] VSCA 130, [37].
The defendants submit that the Sojka Report included a valuation of NPS as at 31 August 2024 while the Murone Report did not. As part of the Court-ordered conferral, Ms Murone sought to undertake a valuation by reference to that date. This was despite having not been engaged to perform that task and where the information sought by and provided to the experts for the purpose of the conferral was considerably more limited than had been provided to them for the purpose of the preparation of the Murone Report and Sojka Report respectively.
The defendants submit that, unsurprisingly, both experts confirmed that, of the valuations undertaken by reference to alternative dates, each had the most confidence in their revised 30 June 2023 valuations. Having regard to that evidence and the material deficiencies with Ms Murone’s contribution to the Joint Valuation Report, any value attributed by the Court to NPS should be informed by the assessed value of NPS as at 30 June 2023 rather than 31 August 2024. Also supporting that approach is the fact that 30 June 2023 is proximate to when the proceeding was issued, such that its adoption as the valuation date reflects a relatively common approach to selecting a valuation date.[64]
[64]Renex, [647].
L.2.3 Treatment of Remuneration payments
The defendants submit that Ms Murone saw fit to make material value adjustments in her report by reference to the quantum of the remuneration payments despite recognizing that she is not a remuneration expert. In addition to increasing the EBITDA attributed to NPS for the purpose of her valuation on account of such adjustments, Ms Murone also increased the value of NPS’ assets by adding the post-tax amount of the overpayments to the surplus assets.
The defendants submit that this aspect of Ms Murone’s approach (which Mr Sojka did not adopt) accounts most materially for the differences in the valuations arrived at by them. The differential in maintainable EBITDA is a point of departure but the difference is relatively modest. The defendants submit that where doubt attends the reliability of Ms Murone’s contribution to the Joint Valuation Report, Mr Sojka’s calculation should be adopted.
For the reasons already set out in paragraphs 233 to 235 above, the defendants submit that if overpayments are to be added back as surplus assets for the purpose of valuing NPS, then these should be adjusted for historical underpayments. In other words, it would be the overpayments, less the historical underpayments, which would be added back as a surplus asset. The post-tax adjustment would also need to be made.
L.2.4 Fair value
The defendants submit that the plaintiff’s issuing of this proceeding was a regrettable pre-emptive step. As described in section I.1 above, Ms Saunders had actively sought to engage with the plaintiff regarding a separation of the parties’ interests in NPS and the York Street Property. A meeting was proposed, cancelled and then never rescheduled. An approach via email by Ms Saunders to the plaintiff’s director was rebuffed, only for this proceeding to be issued days later without notice.
The plaintiff seeks that Lambert Properties or Ms Saunders purchase its shares, rather than an order that NPS buy back those shares with a reduction of share capital (as provided for by s 233(1)(e)). The defendants submit that the plaintiff’s selection of that form of relief can be assumed to be the more advantageous outcome for the plaintiff but will cast a burden upon Ms Saunders or her company.
The defendants submit that, in addition to issuing this proceeding pre-emptively, the plaintiff did not avail itself of the process for the transfer of NPS shares provided for in the SHA, including the specified method of valuation of such shares. Had that agreed process been engaged - in addition to a likely minority discount (referable to lack of control and quantified by Mr Sojka and Ms Murone at 15%)--the plaintiff could have expected to have secured a price for its shares that reflected a marketability discount (attributable to the relative lack of market for shares in a company such as NPS). For instance, under clause 6 of the SHA, if the plaintiff’s share had not been purchased by Lambert Properties within the 30-day ‘Offer Period’, the plaintiff would have had a period of less than three months in which to transfer its share to a third party acceptable to Lambert Properties on terms no more favourable than those terms first offered to Lambert Properties. Ms Murone accepted in oral evidence that a marketability discount could be as high as 40-50%.
The defendants rely on Strategic Management Australia AFL Pty Ltd v Precision Sports and Entertainment Group Pty Ltd (No 3),[65] where Sifris J, in the course of fixing the ‘fair value’ of shares to be purchased under a buyout order, referred to ‘the discount amount for the minority interest (20%) and the lack of marketability of the shares (35%) and any other adjustments considered desirable in the circumstances, in order to arrive at a fair value’. In undertaking an evaluative assessment, Sifris J concluded:
…the minority shareholding cannot simply be ignored. It is most unlikely that any purchaser of a minority interest, if there was one, would simply pay 40% of the net asset value. Although this may not strictly be relevant given the nature of the valuation, it is artificial, unrealistic and unfair to require a co-shareholder to pay what (on one view) is suggested to be a fair amount or value for the shares ($400,000) in circumstances where that amount could never (otherwise) be obtained.[66]
[65][2017] VSC 35, [44].
[66][2017] VSC 35, [48].
The defendants also rely on Leviston v PQ Management Pty Ltd, where Derrington J stated the following: [67]
Whilst it can be accepted that the Court is not in any way bound in the exercise of power under s 233 by the share valuation method agreed between the parties in a shareholders agreement, that is not to say that it is irrelevant. On the contrary, it may provide an indication of what the parties, when entering into the agreement, had considered was a fair method of valuing a departing member’s interest in the company.
[67][2022] FCA 787, [165] (Leviston).
In Leviston, it was determined that the valuation of the plaintiff’s shareholding in the subject company, for the purpose of formulating a buyout order, should ‘roughly follow the price for which [they] would have been transferred if they [the shares] had been sold under the Shareholders Agreement’.[68]
[68]Leviston, [168].
The defendants submit that, taking into account the aspects of the plaintiff’s conduct identified above and the nature of its shareholding (33.33% of the shares in a two-shareholder company that is governed by the terms of the SHA, including the restraints on share transfers imposed by clause 6), the Court should exercise its discretion to apply a material discount. This is based upon the market value being attributed to the plaintiff’s share in granting a buyout order of the type sought by the plaintiff. While Mr Sojka has applied a minority discount of 15% in his assessments of value in the Joint Valuation Report, the quantum of that discount does not properly account for the above factors.
The defendants submit that if the plaintiff is to obtain an order for the purchase of its minority share in NPS, by means of this proceeding and without recourse to the process mandated by the SHA, fairness dictates that a discount of at least 30% be applied to the 30 June 2023 valuation by Mr Sojka (as revised in the Joint Valuation Report). Adopting that approach (applying a 30%, rather than 15% discount, to Mr Sojka’s valuation), a fair price to be paid for the plaintiff’s share in NPS is $3,526,000.
L.3 Consideration regarding value of NPS
L.3.1 Summary of the parties’ positions
It is helpful for me to start with a summary of the parties’ final positions regarding valuation.
The plaintiff contends for a valuation of its share in NPS in the amount of $7,643,234.66. On the other hand, the defendants contend that the plaintiff’s share should be valued at $3,526,000.
The key differences between the parties are:
(a)valuation date: the plaintiff says 31 August 2024; the defendants say 30 June 2023;
(b)maintainable EBITDA: the plaintiff says this should be adjusted for excessive remuneration payments; the defendants disagree, but note that while it produces a difference it is not very large;
(c)overpayments: the plaintiff says these should be added back as surplus assets, without any adjustment for taxation or historical underpayments; the defendants say that overpayments should not be added back, but if they are, then those adjustments should be made; and
(d)minority/marketability discount: the plaintiff says there should be no discount; the defendants say there should be a 30% discount to account for the plaintiff’s share being a minority share and for marketability reasons and as a consequence of the plaintiff’s conduct.
L.3.2 Principles in respect of valuations for shareholder oppression cases
In Renex, I surveyed and summarised the authorities regarding the general principles regarding valuation in the context of shareholder oppression cases.[69] Without repeating all that here, in short:
(a)the Court’s discretion to order a buyout is very wide;
(b)the Court’s task is to fix a price that represents fair value in all the circumstances. The Court is not constrained by ordinary valuation principles;
(c)the purpose of a buyout order is to compensate the oppressed shareholder for the oppression which has taken place;
(d)if oppression has taken place, the Court is free to override an earlier agreement between the parties as to the manner of valuing shares for transfer purposes; and
(e)as a consequence of these principles, the price to be paid is aimed at remedying the oppression and will not always reflect the actual or real worth of the shares which might be obtained on the open market.
[69]Renex, [639]-[642], referring to Smith Martis Cork, [70]-[78] and to Wain v Drapac (No 2) [2013] VSC 381, [39].
I also surveyed the authorities on the relevant principles regarding the valuation date in Renex.[70] Again, without repeating all of that here, in short:
(a)there is no definite rule as to the appropriate date for determining the value of shares for the purpose of setting a price for the buyout;
(b)the overriding requirement is one of fairness and justice to both parties in the circumstances of the case;
(c)the date on which proceedings commence is a date regularly used for valuation of shares in oppression proceedings; and
(d)other commonly used dates for valuation include as at the date of the order, immediately before the acts of oppression, and as at the date of the last balance sheet.
[70]Renex, [643]-[649].
L.3.3 Valuation date
Given that the only valuations I have are as at 30 June 2023 and 31 August 2024, the task here is really to choose one of those dates as the valuation date.
In my view, the appropriate valuation date here is 30 June 2023. My reasons for this are set out below.
First, it is the valuation date closest in time to the commencement of this proceeding, which as noted above is a date regularly chosen in these sorts of cases.
Second, there is an arbitrariness to 31 August 2024 as a valuation date: it seems to be a product of the defendants’ instructions to Mr Sojka, as he was instructed to prepare valuations as at 30 June 2023 and 31 August 2024. There is no explanation in those instructions as to the choice of 31 August 2024. Given that the letter of instruction to Mr Sojka from the defendants’ solicitors is dated 13 September 2024 and the documents provided to him included NPS’ management accounts as at 31 August 2024, I infer it was chosen by the defendants’ solicitors by reason of its proximity to the date Mr Sojka would provide his report.
Third, both experts, but particularly Ms Murone, were more confident in their valuations as at 30 June 2023 than they were for 31 August 2024. Both thought their opinions for the earlier date were more robust due to the amount of information available to them for each of the dates.
L.3.4 Maintainable EBITDA
Given my findings that the remuneration payments made to Ms and Mr Saunders for the Relevant Period were excessive, it follows that adjustments of the type done by Ms Murone to assess maintainable EBITDA must be made.
Since the assessment of maintainable EBITDA involves normalising various items in the actual results for what can be regarded as maintainable going forward, if the actual remuneration paid is abnormal then it needs to be normalised when undertaking a capitalisation of future maintainable earnings approach to valuation.
Given that Ms Murone’s assessment of maintainable EBITDA involved an adjustment for commercial remuneration and Mr Sojka’s did not, I prefer Ms Murone’s method in respect of maintainable EBITDA.
I do not accept the defendants’ implied criticism of Ms Murone’s approach in this regard, as set out at paragraph 362 above. Ms Murone used the information available to her in the Hare Letter and later, when preparing the Joint Valuation Report, the expert remuneration reports. She expressly stated that she was not a remuneration expert and it was appropriate for her to use those materials as the basis for making the adjustments to the EBITDA.
L.3.5 Treatment of Remuneration payments
As already set out earlier in these reasons at section K.3.3 above, I have come to the conclusion that the quantification of the amount by which the remuneration paid to the Saunders for the Relevant Period was excessive was the sum of $6,644,431. I regard this as the overpayment for the purposes of the valuation. For the reasons already expressed, I have rejected the defendants’ proposition that the historical underpayments should also be factored into the calculation.
I accept the approach taken by Ms Murone and endorsed by Mr Sojka that when adding back the overpayment, it must be reduced by 25% due to taxation. The rationale for this was clearly and persuasively explained during the concurrent oral evidence, and I accept it. The plaintiff’s submission to the contrary seems to me to be based on a fundamental misunderstanding of what and whose tax was being accounted for, and I reject the plaintiff’s submission that I should not make any discount for taxation.
Accordingly, the amount which should be added back to surplus value by reason of the overpayment, adjusted for taxation, is $4,983,323 (that is, 75% of $6,644,431).
L.3.6 Whether to apply a discount for minority interest and/or marketability and/or the plaintiff’s alleged conduct
I do not consider it appropriate or necessary for a discount to be applied to the plaintiff’s share on the basis that it is a minority interest in NPS. I agree with the approach taken by Delany J in Joint v Program IT, in which he applied the Full Federal Court decision in Dynasty Pty Ltd v Coombs.[71] Where oppression has been found, it is generally not appropriate to apply a minority discount to the value of the minority shareholder’s shares.
[71]Dynasty v Coombs, 145. See also Byrne v AJ Byrne Pty Ltd [2012] NSWSC 667, [66]-[71]; ANIT Australia, [437].
I reject the defendants’ submission that the value of the plaintiff’s share should be reduced by reason of its alleged conduct. As set out in section K.1 above, I have already rejected the defendants’ submission about that conduct. Therefore, there is no basis to apply a discount for the allegations which I have rejected.
Given that oppression has been found, the defendants’ criticism that the plaintiff seeks a valuation on a different basis to that contained in the SHA must be rejected. The Court is, and must be, free to override the SHA where it makes a finding of oppression.[72] To do otherwise risks not properly compensating the plaintiff for the effects of the oppression. Further, ‘it would be unfair that the oppressed shareholder be bought out on the fictional basis applicable to a free election to sell the shares in accordance with the articles “or indeed on any other basis which involved a discounted price”’.[73]
[72]Smith Martis Cork, [77].
[73]Smith Martis Cork, [78], citing Nourse J in Re Bird Precision Bellows Ltd [1984] Ch 419, 430.
There is another reason to reject the defendants’ position that the plaintiff’s share should be discounted by 30%. That is that the discount level chosen is completely arbitrary. Apart from the expert valuers’ agreement that if there is to be a minority discount, 15% is reasonable, there is no evidence to support the defendants’ position. The question posed to Ms Murone by defendants’ counsel as to a marketability discount and her answer does not provide any real support for the defendants’ position, particularly where it was only marketability that was put to her and not the plaintiff’s alleged conduct as a basis for the discount.
L.3.7 The fair value to be paid for the plaintiff’s share in NPS in the circumstances of this case
It is convenient to note at this juncture that I reject the plaintiff’s submission that Mr Sojka’s valuation, modified to add back overpayments and without any minority discount, should be preferred. In my view, the plaintiff’s approach in this regard was an opportunistic attempt to increase the value of NPS and its share. Further, I do not accept the plaintiff’s submission that Ms Murone’s opinion was somehow diminished by the calculation errors identified during the trial, even though that submission aligned with that of the defendants. As already noted, the errors were identified, explained, and corrected. That does not undermine Ms Murone’s adjusted figures.
In my view and in light of the above discussion, the fair value to be paid for the plaintiff’s share in NPS in the circumstances of this case is as set out in the below table.
Valuation as at 30 June 2023
Item
$’000
Source/comment
Maintainable EBITDA
1,100
Murone, updated Joint Valuation Report
Multiple
3.375
Updated Joint Valuation Report
Assessed Business Value
3,712
Murone, Updated Joint Valuation Report
Surplus Assets
13,198
Sojka surplus assets as per Updated Joint Valuation Report + overpayments adjusted for taxation as per paragraph 389 above
Equity Value
16,910
Minority Discount
nil
As per paragraph 390 above
Equity value less minority discount
16,910
1/3rd interest
5,638
Equity value x 33.34%
I realise that the expert valuers indicated that further adjustments to those made by Ms Murone may need to be made to payroll tax and Workcover as components of maintainable EBITDA, depending on what the Court found in respect of the remuneration issue. Since Ms Murone had already factored those aspects into account, although the amount of remuneration she adjusted for was likely slightly different to what I have found, I do not consider any further adjustment for those items necessary. They are likely to be immaterial, and I was not given the method for calculating those components.
Accordingly, I find that the price to be paid for the plaintiff’s share in NPS is $5,638,000.
L.4 Appropriate remedy
It was common ground by the time of trial that if the Court found oppression, then a purchase of the plaintiff’s shares was the appropriate remedy. By the time of oral closing submissions, this position had been further refined: if there was to be a purchase, the defendants’ preference was for a buyback of the plaintiff’s share by NPS, rather than a purchase by Ms Saunders or Lambert Properties. The plaintiff accepted this position. It would only be if the order that NPS buy back the plaintiff’s share was not complied with that Lambert Properties should be ordered to buy it.
Accordingly, orders will be made that NPS buyback the plaintiff’s share in NPS at the price of $5,638,000.
Therefore, there is no need for me to consider the alternative relief of winding up NPS.
M Conclusion
For the above reasons, I have found for the plaintiff and NPS will be ordered to pay the plaintiff $5,638,000 for its share in the company.
The parties are to confer as to the form of orders to give effect to these reasons, including as to matters such as interest and costs.
By 4pm on 22 August 2025, the parties are to:
(a)provide my Chambers with an agreed form of orders; or
(b)if the form of orders are not agreed, each party’s preferred form of order.
If paragraph 403(b) applies, the proceeding will be listed for 29 August 2025 at 10am for the making of final orders.
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