Re: Rankine Bros Pty Ltd
[1998] QSC 46
•3 April 1998
IN THE SUPREME COURT
OF QUEENSLAND
Application No. 171 of 1993
Brisbane
Before Chief Justice P de Jersey
[Re: Rankine Bros Pty Ltd]
IN THE MATTER of the Corporations Law
- and -
IN THE MATTER of Rankine Bros Pty Ltd
ORDER FIRST RESPONDENTS TO PURCHASE THE APPLICANT’S SHARES FOR $1.7MILLION; ADJOURN PROCEEDINGS TO A DATE TO BE FIXED FOR SUBMISSION OF MINUTES OF JUDGMENT; RESERVE COSTS; LIBERTY TO APPLY.
CATCHWORDS: CORPORATIONS LAW - oppression - order for purchase of shares - valuation of shares to determine price to be paid - appropriate date of valuation, date of application or date proximate to trial - relevance of taxation consequences and cost of realizing assets to valuation - claim for interest.
Counsel:Mr Fleming QC and Mr McQuade for the applicant.
Mr Chesterman QC QC and Mr Rolls for respondents.
Solicitors:Flower and Hart for the applicant.
Gilshenan and Luton for the respondents.
Hearing Date: 2, 4-6, 9-13, 16, 18-20 February 1998
JUDGMENT - de JERSEY CJ
Judgment delivered 3 April 1998
The applicant, Roy McNay Rankine, claims an order pursuant to s.260 of the Corporations Law, that the company, Rankine Bros Pty Ltd be wound up, or alternatively, an order that the other shareholders (the first respondents, his brothers) Trevor George Rankine, Keith Scott Rankine and Ralph McAuslan Rankine, purchase the applicant’s shares in the company. It is common ground between the parties that I should order the first respondents to purchase the applicant’s shares in the company, at “a price to be determined” (cf. Rankine v. Rankine & Ors (1995) 18 A.C.S.R. 725, 727).
The first respondents effectively conceded the applicant’s entitlement to such an order as long ago as September 1995, leading to an order by Moynihan SJA on 13 September 1995, made in the course of his Honour’s comprehensive - and, if I may respectfully observe, most effective - pre-trial management and supervision of the case, (with the valuable assistance of Ms Christine Figg, the Supervised Case List Manager) that a special referee value the shares “on the basis that (they) have a value equal to one-quarter of the value of (the) company either as a going concern or by reference to its underlying assets, whichever is the greater”. His Honour later, on 24 April 1996, discharged the referee from the performance of his obligation. He also then formally recorded the first respondents’ admission that the applicant is entitled to an order that they or the second respondent (Rankine Bros Pty Ltd) purchase the applicant’s shares in the second respondent. It now falls to me to determine the price to be paid for the shares.
To facilitate that determination, Moynihan SJA on 24 April 1996 also listed a number of issues which might be addressed in the course of the determination; including the value of the applicant’s shares on 30 June 1992 (or such other date as may be considered appropriate), the nature of any oppression on the part of the first respondents and its effect on the amount to be paid, the extent of any tax burden falling upon the applicant in consequence of the purchase, and the amount of any interest to be paid. The substantial body of evidence before me dealt comprehensively with those and many other matters.
Put broadly, my task is to determine a fair price for the shares, but for the oppression. How the Court should proceed in cases like this is discussed in detail in many cases, including Re Golden Bread Pty. Ltd; The Queensland Co-Operative Milling Association [1977] Qd.R. 44; Scottish Co-Operative Wholesale Society Ltd v. Meyer [1959] A.C. 324, Dynasty Pty Ltd & Ors. v. Coombs (1995) 138 A.L.R. 64 and Rankine v. Rankine, supra. I will return as necessary to those principles.
The applicant contends that oppressive acts on the part of the first respondents do bear actively on the assessment of the appropriate price. Because of that contention, and regardless of my eventual particular assessment of it, it will aid an appreciation of the ultimate rulings if I begin this judgment with an account of the (largely uncontroversial) history of the relationship between the applicant and the first respondents. I will, however, in the course of what follows indicate my characterisation of some of the challenged conduct, to foreshadow at least further subsequent detailed treatment of the particulars of the oppressive conduct relied on by the applicant. Some of what follows has no, or little, bearing on the resolution of the case, but I will nevertheless record it in the interests of providing a reasonably comprehensive outline at least of the relationship between the brothers.
In 1941 the applicant and the first respondents commenced business in partnership together. They were involved in the timber industry in Far North Queensland. In 1954, the four brothers began to assume particular responsibilities for different aspects of the business, a matter to which I will return. The business was operated originally by their partnership of four, later a partnership of eight persons including their wives, and yet later partnerships of twelve and then twenty, through the addition of family companies. The second respondent company was incorporated in 1958. By that time, the applicant and his brothers were carrying on a diverse business as “Rankine Brothers”, based in the timber industry of Far North Queensland, including logging locally grown rainforest timber.
The actual date of incorporation of the second respondent, Rankine Bros Pty Ltd, was 19 June 1958. From that date of incorporation, each of the four brothers held one-quarter of its issued capital. They were all, and have remained, directors.
It was on 1 June 1965 that the partnership became a partnership of twenty, comprising the four brothers, their wives and twelve companies (“the holding companies”). There were four “A” class shareholders in each of those companies, being the brothers, and there were “B” class shares held by the brothers on trust for the various Rankine children. Three companies represented the interests of each of the four families.
There is no doubt upon acquiring their shares in the company, the parties were effectively “constituting a partnership in corporate form”, in the manner discussed in Re Dalkeith Investments Pty. Ltd. (1985) 3 A.C.L.C. 74, 79.
The four brothers worked very hard over many years and succeeded in establishing a profitable business. They worked well together, making decisions collaboratively as to how the business should be run. The conduct of the business was, in short, characterised by co-operation and enthusiasm amongst the four brothers who were determined to “get on with the job”.
In 1969 they entered into a further partnership agreement, to record the circumstance that the partnership was then trading under the names Rankine Bros, J.M. Johnston Pty Ltd, Cairns Plywoods Pty Ltd, Rankine Bros Stratford, Rankine Bros Cairns, and Clark and Hanley, the latter becoming Rankine Bros Kairi.
Then on about 24 January 1986, the Queensland Government made a decision with dramatic ramifications for these litigants, substantially reducing - by about 50% - timber quotas attached to the sorts of licences held by the company, for the period 1986 to 1991. This had very important consequences for the brothers, to which I will later refer.
The next significant event in the chronology occurred in the middle of that year. By deed, on 26 June 1986, between Overseas Corporation (Australia) Ltd, the second respondent company and Foxwood Ltd, the company purchased, for the sum of $1 all of the issued shares in Foxwood Ltd, and for the sum of $296,698, all the issued capital in Foxwood (Ingham) Pty Ltd and also assumed responsibility for payment of an inter-company loan, between Foxwood Ltd and Overseas Corporation, in an amount exceeding $5million.
Earlier, on about 27 March 1986, the company had acquired, from Foxwood Ltd, all of the issued capital it held in the company Foxwood (Mareeba) Pty Ltd. It had borrowed $1million from Westpac Banking Corporation to facilitate that acquisition.
The business conducted by Foxwood Ltd as at 26 June 1986 (as defined in clause 1 of the Deed) was the sawing and peeling and sale of timber, conducted at Innisfail, the peeling and slicing of logs conducted at Ingham, the manufacture of trusses and sale of timber conducted at Edgehill (Cairns), and the drying and sale of timber conducted at Hardy (Cairns). For the purpose of acquiring Foxwood Ltd and assumption of the inter-company loan, the company obtained a $7.5million facility from Lloyds Bank, comprising a $7million loan and a $500,000 guarantee facility. (Lloyds Bank had refinanced the earlier borrowings from Westpac Banking Corporation in respect of the acquisition of the shares in Foxwood (Mareeba) Pty Ltd.)
Lloyds Bank took various securities for that facility: first registered debentures over the assets and undertakings of Cairns Plywoods Pty Ltd, Rankine Bros Cooktown Pty Ltd, Solander Sawmills Pty Ltd, Northern Hardwoods Pty Ltd and J.M. Johnston Ltd; fixed and floating charges over the company, Foxwood Ltd and the other subsidiaries of that company; and joint and several guarantees from each member of the partnership. There were also real property mortgages over a mill at Draper Street, Cairns, the Yungaburra Mill owned by Cairns Plywoods Pty Ltd, land at Lake Barrine Road, and other land owned by the company.
(From this point I will need to refer to the brothers more substantially. For ease of reference, I will refer to them by their Christian names. Of course I intend no disrespect in doing that, and I note that this course was followed at the trial.)
As at the date of the Foxwood acquisition, Trevor was particularly involved in the administration of the company, and then he assumed a dominant role in the control of Foxwood. At that point, the businesses were run in an aggregated way, as if one entity. The four brothers held weekly meetings at Malanda: managerial decisions were discussed at those meetings.
I mentioned earlier that the brothers took on particular areas of responsibility. The applicant Roy’s responsibility related to the logging, and maintenance of plant and machinery. Keith was responsible for running the Malanda veneer mill and sawmill, and for the production of sliced veneer at Malanda. Ralph was responsible for running the Kairi sawmill and truss making plant, and for the sale of the products from Kairi.
Roy developed a substantial concern in relation to the acquisition of the shares in Foxwood Ltd and Foxwood (Mareeba) Pty Ltd. He was especially worried about the further substantial financial obligations incurred in the acquisition of the shares, the absence of monthly financial figures regularly produced by the company, and the significance of the advancing age of the four brothers. In that particular regard, Roy considered that they should be reducing their workload rather than increasing it, and bringing in some of the “younger generation” to assume the workload. As to the absence of regular monthly figures, the position was that the only financial figures produced were annual results. Roy asked Trevor to produce the monthly trading figures, but Trevor told Roy that they were not set up to produce those figures and he would not do anything to produce them. Roy requested that systems be established so that regular financial information could be given.
Roy discussed these concerns with his brothers. It was agreed that they should gradually introduce some of the “younger generation” to the running of the business, that they should produce trading figures on a monthly basis, and following his requests, that Roy should be allowed to change his motor vehicle and undertake a trip to the United States.
To that time, major decisions were still the subject of agreement by all four brothers, not just some of them. After the purchase of Foxwood Ltd, there were no separate meetings of that company, the only meetings which did occur were meetings of the group of directors, together, running all entities as a group. Over time, Foxwood Ltd came to be run more and more by Trevor.
Trevor agreed in his evidence that Roy had sought regular accounts, if Foxwood Ltd were to be purchased. He agreed that Roy sought financial information on a regular basis, and particularly, that at the partners’ meeting on 15 March 1990, Roy asked for monthly accounts for each entity, Trevor responding that the systems were not designed to cater for that.
In response to the submission made to me, I confirm my view that it was perfectly reasonable that such financial information be provided to Roy, especially given that the acquisition of Foxwood Ltd would require close management (as was accepted by Trevor in his evidence), that the group, or Rankine Bros, was assuming a debt of proportions hitherto not experienced, that the acquisition of Foxwood Ltd was a new type of venture, especially involving, as it did, such a substantial debt, that Foxwood Ltd was capable of producing financial figures on a monthly basis and did produce monthly accounts: Trevor himself accepted that it was fair for Roy to know what his potential liability might be at any given time, and important to know how the company was going from time to time.
Trevor acknowledged that he did not provide that financial information. In my view he gave no sufficient, reasonable explanation for failing to do so. His explanation was that he was too busy, and that he did not want his otherwise busy staff to be diverted unnecessarily to such issues. Trevor was himself aware of the position of the company and Foxwood Ltd from time to time, he looked at the bank accounts and was able to question people. Yet he did not enlighten Roy.
I am asked to infer that Trevor withheld information “for the purpose of obtaining dominance over (Roy) and the other brothers in the running of the administration and financial matters of the company and Foxwood Ltd”. While it is true that Trevor acknowledged that a company director should be entitled to have access to the financial information of the company for which he is partly responsible, and that if a director is to do his job properly, he really should have financial information and other details at his fingertips, and while I found his explanation for not co-operating in the provision of the information to Roy to be inadequate, I am not prepared to take the further step and draw the inference urged upon me. The more likely explanation is that as Trevor ran the Foxwood business with steadily increasing success, he became more and more impatient with Roy’s persistence in seeking the financial data, and determined for personal rather than business reasons not to co-operate. In any case, this issue is not critical to my resolution of the case: in fact, as will emerge, it lacks consequence.
In 1990 the relationship between the four brothers deteriorated substantially. Many circumstances contributed to that. Trevor became particularly upset about Roy’s comments to the effect that Rankine Bros Pty Ltd should not have purchased Foxwood Ltd. Then there was the dramatic World Heritage listing of the North Queensland rainforests. The Rankine group was engaged in the harvesting of logs from those rainforests and producing them into sliced veneer for fancy veneer, pill veneer and plywood: they also manufactured plywood, as well as selling the veneer to other manufacturers, and the production of cabinet woods in sawn timber form for sale, and then building timbers. The harvesting of the timber dried up. The sawmills at Ingham, Wangan, Mareeba and Millaa Millaa closed and their licences were transferred to other mills. Following World Heritage listing, the only properties being effectively utilised were the Edgehill property, for merchandising, and Stratford, where the company bought timber with transfers to Yungaburra and Mareeba for resale. The purchasing of timber from outside the Rankine group was a business not conducted prior to the World Heritage listing.
The brothers discussed among themselves the significance of World Heritage listing to the direction of the company. Roy expressed his opinion that the capital invested was not being used properly. At a meeting on 27 September 1989, Ralph and Roy went so far as to say that they wished to withdraw from the group. During 1990 there were discussions between the four brothers as to whether Roy should be paid out for his share in the Rankine group, which included the company. Also, a number of the children raised concerns about their entitlements in the holding companies under the trusts held by the brothers through the “B” class shares. Some of the children wanted to draw money from the partnership. Trevor did not want that to occur until he was ready. Indeed, he took the view that the money built up by the Rankine brothers was really their own, as most clearly evidenced by the letter of 1 August 1991 from Gilshenan & Luton to Garland Hawthorne Brahe (Exhibit 117). Trevor’s view was that the four brothers had the control, which they should retain.
In 1990, Roy also queried whether the four brothers had not breached their fiduciary duty as trustees of the “B” class shares in the holding companies, by mortgaging the assets of those companies, and those of the partnership, in favour of Lloyds Bank, with relation to the acquisition of the shares in Foxwood Ltd and Foxwood (Ingham) Pty Ltd. Senior counsel’s advice was obtained by both Martin and Roy (Exhibits 44, 45 and 94).
Doug Rankine, Roy’s son, called a meeting of the four brothers, their wives and children, to be held at the offices of the solicitors, Macdonnells, on 8 November 1990. Trevor, Keith, and Ralph Rankine did not attend, and neither did their wives nor some of their children.
1990 culminated with Roy giving notice of dissolution of the partnership on 12 November 1990 (Exhibit 40). I accept that Roy delivered the notice after a lot of consideration, involving his wife and children, in context of his perceptions of his three brothers’ treatment of him. The partnership was effectively terminated one week after that notice. Roy was entitled to give the notice under clause 20 of the Articles of the partnership dated 28 August 1969 (see page C47 Exhibit 1).
Mr Chesterman QC, who appeared for the respondents, conceded that the company was predicated upon there being a good working relationship between the four brothers, and that that came to an end sometime in 1990. Trevor agreed that the trust between Roy and him broke down in 1990, and that after that time, matters became very difficult. He described the significance of the giving of notice of dissolution on the basis that everyone was profoundly upset, that the brothers thought it totally unnecessary, and that he, Trevor, considered that Roy was “spoiling” the family enterprises unnecessarily.
The demeanour and evidence of Keith strongly supported the conclusion that all three brothers (Trevor, Keith and Ralph) were very angry that Roy had given that notice. The strength of the view of the brothers who are the first respondents, is well illustrated by the comment in their solicitors’ (Gilshenan & Luton) letter of 12 July 1991 (Exhibit 42), to the effect that they regarded Roy’s disloyalty to the family interests in that respect as more morally reprehensible than Trevor’s shooting of Roy and his wife.
That shooting occurred on the night of 14 November 1990, and not surprisingly ended any prospect thereafter of mutual trust and confidence between Roy and his other brothers. Trevor was charged with attempted murder and found “not guilty” on the ground of non-insane automatism. Regardless of the verdict, and again not surprisingly, the fact of the shooting bore profoundly upon the relationship between the brothers. The very next day Keith said to Roy, with relation to the notice of dissolution of partnership, “You will withdraw that notice”, “you withdraw it or take the consequences”.
The relationship between Roy and his brothers then deteriorated dramatically, as illustrated by subsequent conduct of the three brothers, and graphically by the evidence and demeanour of Keith. Roy was completely shattered by what had happened: he lost all trust in his brothers. He lacked sufficient confidence in them even to discuss issues. For their part, the three brothers thereafter oppressed Roy in various ways, as will emerge.
The oppressive acts
It is important first to elucidate how oppression could, in theory, be relevant to the determination of the price to be paid for the shares. Oppression, which is conceded, is relevant if it has oppressed, or unfairly prejudiced, or unfairly discriminated against Roy (s.260 Corporations Law, and see Wayde & Anor. v. New South Wales Rugby League Limited (1985) 180 C.L.R. 459, 466-8, 471-2 and Thomas v. H.W. Thomas Ltd. (1984) 1 N.Z.L.R. 686). But further, the oppression must have led to financial detriment. It is said that the amount ordered to be paid should represent a fair price for the shares “had it not been for the oppression”, or some similar form of words. The oppression will be relevant to the determination of price, obviously enough, only if it has affected the value of the shares. By way of contrast, one notes, for example, that the price may not be increased with a view to punishing the oppressor.
In Rankine v. Rankine, supra, McPherson JA said (page 727):
“On the question of valuing the shares, it is plain that what I said in Re Dalkeith Investments Pty Ltd (1984) 9 A.C.L.R. 247 is, if applied generally, too widely stated. In saying as I did there that ‘the proper course in a case such as this is to assess the value of the petitioner’s shares without reference to the matters that give rise to the oppression’, I was primarily concerned to exclude the impression that the value arrived at for shares ordered to be bought or sold might include some component of a punitive or exemplary character for the acts of oppression alleged.
It was not intended to mean that, in arriving at the value to be paid for shares in such circumstances, nothing was to be allowed for the value of corporate assets shown to have been misappropriated by the wrongdoers, or for the fact that their depredations or mismanagement might have reduced the value of those assets, and correspondingly of the shares themselves. Of that phenomenon, Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 is an illustration. There the inaction of the majority shareholder in deliberately starving the company of supplies of essential raw materials had a debilitating influence on the business of the company, and a consequently depressing effect on the value of the petitioner’s shares. That this was a factor which properly entered into the valuation, or the price to be paid for the petitioner’s shares, can be seen both from reports of the proceedings in the Court of Session, and from what was said particularly by Lord Keith in the House of Lords: see SCWS v Meyer [1959] AC 324, 364.
In arriving at a ‘payout’ figure for the shares of the complaining shareholder, factors of the kind mentioned must therefore be accommodated and allowed for. Otherwise the essentially compensatory nature of the remedy would be defeated, and the relief granted would fail to rectify the oppression complained of. It is for these reasons that in a proceeding like this investigation of the alleged oppression and its consequences are often called for.”
Thomas J spoke of the need to quantify any effect of the oppression, considering whether it had “any effect upon the value of the company” (page 731).
That being the approach, I turn to the particular acts of oppression ultimately pursued before me. As part of his eventual written submission, Mr Fleming QC, who appeared for the applicant, provided me with nine schedules canvassing the evidence relevant to the particular acts of oppression which were being pursued. The first four schedules related to what was styled “general oppression”, and the other five, “specific acts of oppression”.
General Oppression
The matters of general oppression may be summarised as follows:
The unreasonable failure of Roy’s co-directors, and especially Trevor, to meet Roy’s reasonable (and persistent) requests for the provision of detailed financial information in relation to all entities, but especially Foxwood Ltd: as would be apparent from my earlier findings, I accept that the applicant established this contention.
Notices of meeting were not given to Roy sufficiently in advance of the meetings to facilitate his due consideration of the matters to be dealt with. I did not accept Trevor’s claim that this was a consequence of Roy’s failure to give adequate addresses, or in other words, his own inaccessibility. Roy could have been contacted effectively through his post office number, his son,
or his solicitors. There is in evidence a collection of letters which amply illustrates these matters: Exhibits 58 to 74.From mid November up to and including 19 December 1990, Roy was substantially occupied attending to his seriously injured wife consequent upon the shooting. On 12 December the directors of Rankine Bros Pty Ltd resolved to appoint Ralph as that company’s representative at the annual general meeting of Foxwood Ltd. Then on 19 December, the directors of Foxwood removed Roy as that company’s public officer and secretary. The other brothers had resolved upon that matter before the meeting. There was no particular justification in Roy’s conduct for that removal: he had done what was required of him in that capacity. I did not accept Trevor’s assertion to the contrary, or the adequacy of Trevor’s attempt to rely, as justification, on Roy’s action in preparing notices to debtors and creditors (not actually sent) following the partnership dissolution.
The general attitude of the other brothers to Roy, especially from the time of the notice of dissolution, was unco-operative. Keith’s evidence demonstrated a substantial element of hostility. A good illustration of the absence of proper collaboration between the four brothers, and the determination of the other three to act regardless of Roy, may be seen in the way the other three engineered in advance the outcome of meetings: the outcomes were effectively preordained, and ensued regardless of Roy’s protests.
I pause to note, now, with relation to these four matters of “general oppression”, that there is no evidence that they resulted in any diminution in the value of Rankine Bros Pty Ltd and thereby its shares. There is no suggestion, emerging from the evidence bearing on these general matters, of any particular decision which was taken other than in the interests of the company as a whole and which had adverse financial ramifications for the company. The adjustments claimed by the applicant related to “specific acts of oppression”, allegedly wrongful individual items of expenditure to which I will come shortly. There was no claim for general diminution in the value of Roy’s shares, established by the evidence, referable to these general matters. Therefore, while these four matters obviously indicate an unfortunate attitude amongst the brothers, I do not conclude that they warrant adjustment, or consideration, in the manner described in Rankine v. Rankine, supra.
Specific Acts of Oppression
I turn now to the five “specific acts of oppression”.
On 14 May 1992 the Directors of Foxwood Ltd resolved to pay $375,000 to Trevor for “services rendered to the company”. Trevor did not participate in the making of the decision. Roy has protested against this payment. There was an insinuation through cross-examination that the payment was made to reimburse Trevor for his substantial costs incurred in defending the attempted murder charge, but this was not sustained, as a careful reading of the evidence at pages 656-662 shows. See especially page 661, line 38 to page 662, line 15.
I accept that the directors wished to recompense Trevor for what was regarded as a very substantial and successful effort with relation to Foxwood, generating large profits for the shareholders. The payment equates to $20 per hour.
In claiming a monetary adjustment to the value of his shares in respect of this matter, the applicant undertook a substantial burden.
“There is no appeal on merits from management decisions to courts of law; nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.”
Per Lord Wilberforce in Howard Smith Ltd v. Ampol Petroleum Ltd [1974] A.C. 821 at
832 quoted with approval by Brennan J in Wayde v. New South Wales Rugby League Ltd , supra at 469. See also Zephyr Holdings Pty Ltd v. Jack Chia (Australia) Ltd (1988) 14 A.C.L.R. 30, 37; Re Dernacourt Investments Pty Ltd (1990) 8 A.C.L.C. 900, 925 (left hand column).
The applicant has not established that the payment was made in bad faith. The reason offered as justifying the payment was sufficient. It is not to the point that Roy disagreed with it, or may have preferred that a payment in the same amount be made to him as well. The payment was not oppressive or unfairly prejudicial to or discriminatory against Roy in the manner discussed earlier. While I am constrained in the end, and properly so, by the Howard Smith approach, because of my finding of an absence of dishonesty, I am prepared to add that I was satisfied that there was evidence to justify the directors taking the decision they did, to recognise the substantial additional contribution apparently made by Trevor.
This item cannot, in these circumstances, warrant adjustment in the valuation process.
The essence of this aspect of complaint is that in 1989, new motor vehicles were provided by the partnership to the three brothers, but not to Roy. The resolution was passed by the partners on 25 October 1989. They transferred the vehicles to themselves on 19 November 1990 by deduction from their capital accounts, and later sold them to Foxwood Ltd. Roy complains that he requested a new vehicle in 1990 but that the others denied him a new vehicle. But a new vehicle was in fact offered to him. See pages 659 line 56 to 660 line 6, and Exhibit 111 paras 36 to 40. One infers that by his own choice, Roy declined a new vehicle - his own was then only four years old. This conduct was not oppressive.
The next item claimed in the schedule produced during submissions concerns the company’s claims upon Roy for rent, cost of replacing fixtures removed following the shooting, and the cost of replacing blood stained carpet removed by Roy, in relation to the house at Peeramon previously occupied by Roy and his wife. The amount involved - $7,920.56 - was eventually deducted from a dividend payment otherwise due from Rankine Bros Pty Ltd. This was a most regrettable claim. Any adjustment for valuation exercise would, however, not be substantial. But there is another reason why this item should not now be pursued. That is because no adjustment was claimed in the schedule of oppressive acts (see pages A208-217, Exhibit 1, volume 1) which, as part of the pre-trial management and direction in the case, Moynihan SJA directed on 24 April 1996 be provided. Mr Chesterman QC took objection on that ground to further consideration of this matter, which I consider should be upheld.
This concerns the Foxwood Ltd Edgehill site. In 1989 discussions between Trevor and Bailleu Knight Frank raised the possibility that Caterair, an American syndicate, might purchase the site for an airline catering operation. The price mentioned was $6.7million, to which the brothers would agree. But Trevor unilaterally determined that the land not be sold, because the site could not be cleared within the apparently prescribed six months, and for other reasons. Roy objected to this unilateral action on Trevor’s part. There is no evidence that an offer capable of acceptance, for purchase of the property, was made - see the transcript page 53 line 25, and page 254 lines 15-17, so that at best for the applicant, on the admissible evidence, Trevor’s unilateral action in withdrawing from the negotiations might be criticised. But could that properly be characterised as oppressive?
That may arguably have been a questionable commercial decision - see the transcript pages 256 line 40, to 257 line 5 - but not oppressive, unfairly prejudicial or unfairly discriminatory. See Wayde v. NSW Rugby League Ltd, supra. If a real commercial opportunity was lost, and the value of the company affected - and all of this is quite speculative on the evidence - then the critical point is nevertheless that any effect was ultimately borne equally by the shareholders. This was not conduct which in any way “singled out” the applicant for unfair treatment.
The applicant’s evidence at page 256 lines 40-53 and 257 line 1-6 illustrates his misconception about this matter.
The Commonwealth has sued the members of the former partnership, the company and Foxwood Ltd, to recover part of the compensation moneys paid by the Commonwealth following World Heritage rainforest listing. On 19 December 1993, the directors of Foxwood Ltd resolved to indemnify all parties to the Commonwealth action, except Roy and his wife, in relation to the costs of the litigation. Then on 19 November 1993 the company advised Roy positively to the effect that he and his wife would not be indemnified.
An indemnity in relation to Roy’s wife was forthcoming at the hearing. But in any case, she is not an applicant and does not complain about the decision not to indemnify her.
The company’s refusal to indemnify Roy arises from his taking up, with Price Waterhouse who acted for the Commonwealth, a possible discrepancy in the accounts of Foxwood Ltd, suggesting its receipt of an amount of $236,000 from J.M. Johnston Pty Ltd. This would bear on the assessment of compensation payable by the Commonwealth. Roy’s query to Price Waterhouse in relation to that claimed receipt led to an investigation by the Federal Police, to whom Roy gave a statement, and ultimately the court action.
Roy denies that his complaint was false. Why did the directors resolve not to indemnify him? Obviously enough, because he was seen at least mischievously to have embroiled the company in the investigation and litigation (cf. transcript page 248 line 1 to page 250 line 38). It is also relevant to note that when on 14 January 1993 the directors resolved to defend the action brought by the Commonwealth, Roy opposed the resolution (Exhibit 89).
The litigation remains outstanding. Whether or not Roy’s conduct was justified therefore is unresolved. If it was justified, from a public viewpoint, and the directors knew it was, they may arguably have acted oppressively, notwithstanding Roy’s having opposed the resolution to defend the action. But how is the resultant loss to be quantified?
It was alleged that Roy should be taken to have foregone one-quarter of the legal fees paid by the company, and interest. But that is not correct. Only the additional costs incurred by Roy in his personal defence of the proceedings would result from any oppressive conduct by the first respondents. There is no evidence of those, so the necessary quantification could not reliably be carried out. One may surmise that they would not be substantial, however, and in any case, once discounted for the prospect of a finding favourable to the defendants in the litigation (which of course I could not begin to assess on the evidence before me anyway), this item may well not have borne significantly on the assessment.
The other maters referred to in the schedule of oppressive acts as items 9 - payment of $133,311 under a vesting agreement, and item 11 - payment of $100,000 in satisfaction of any alleged breach of fiduciary duty, were the subject of some evidence, but were without substance and ultimately not pursued by Mr Fleming.
Item 11, further, has been crossed out on page A214 of Exhibit 1 volume 1, although not so with item 9. Neither item was mentioned in the schedules presented as part of Mr Fleming’s final submission. But lest there be any doubt about whether those items were pursued, I will briefly indicate why I have concluded that neither of them has substance.
(a) On the dissolution of the partnership on 19 November 1990 and the resolution of each of the company, J.M. Johnston Pty Ltd and Cairns Plywoods Pty Ltd exercising the option given pursuant to the various lease agreements (see C26 Exhibit 1 and Exhibit 84), “ the whole of the assets employed by the lessees (Rankine Bros) in the said businesses shall immediately become vested in the company”. Consequently, relevant assets were immediately transferred from the partnership to the company. Pursuant to clause 3(e) of the leases (page C25 Exhibit 1), upon the vesting of the assets, the price payable by the company to the partnership was as agreed, or failing mutual agreement, as “determined by arbitration”. The ultimate price was to be payable without interest by five equal annual instalments.
On 15 November 1991 the directors of the company resolved to accept valuations of those assets and to pay the first instalment of $133,311. That first instalment is not the subject of complaint in these proceedings. Neither does the applicant complain about the subsequent resolution of directors relating to the third, fourth and fifth instalments. (See D48, D57, and D61 Exhibit 1). Surprisingly, and without real explanation, complaint is made only in respect of the second of the payments. This second payment was made by the company directly to the members of the partnership. The applicant received his share of the payment without complaint.
The basis of the applicant’s complaint about the payment remained unclear. See page 222. Members of the partnership, including the applicant, took no action to rectify any wrong which might have been done to the interests of the partners.
The applicant conceded that the company by virtue of the vesting probably obtained a benefit (transcript page 223, lines 52-53), and he was unable to explain why or how this amounted to oppression (see page 224). If, by mistake, assets were under-valued or wrongly included, the company benefited at the expense of the partnership. No action has been taken by any member of the partnership to address any perceived wrong pursuant to the vesting agreement. The payment is not an act of oppression nor does it unfairly discriminate against the applicant or unfairly prejudice him in any way. It does not affect him in his capacity as a shareholder of the company. An invocation of s.260 is inappropriate to remedy any perceived injustice. This allegation of oppression is misconceived.
(b) The payment of $100,000, pursuant to the resolution of the directors of the company made on 28 February 1992, was to compensate for any possible loss flowing from breach of duty by the applicant and respondents arising out of transactions entered into in order to secure funds for the purchase of Foxwood Ltd in 1986. Roy had obtained an opinion from Mr Keane QC, suggesting the partners or the beneficiaries of the “B” class shares in the corporate partners may have a claim. The respondents obtained advice from Mr Fryberg QC (as he then was) and from their solicitor as to the quantum of any payment. Thus $100,000 was paid to the members of the partnership.
The applicant and his wife together received $13,000. No consequent proceeding has been instituted by any of the partners or any beneficiary. (See transcript pages 243, line 59 to 244 line 3). Thus, there was a perceived risk to which the company reacted by means of the payment now complained of. It cannot be said that this payment is unfairly discriminatory, unfairly prejudicial or oppressive. Nor does the applicant say that this payment is relevantly unfair (see page 244, line 35, pages 246-247). The claim is unsustainable.
Consistently with the findings I have made, and the legal approach discussed at the outset, none of the alleged acts of oppression warrants adjustment in the process of determination of the price to be paid for the shares.
Date of Valuation
“The date at which shares are to be valued in oppression cases varies having regard to all relevant circumstances.” (Dynasty v. Coombs supra, 85).
Two dates have been urged here - 30 June 1992 by the applicant, and 30 June 1996 by the respondents.
The Applicant’s Contention
30 June 1992 is the end of the first financial year prior to the date of the filing the application on 4 March 1993. Mr Fleming relied on the approach of Vinelott J in Re a Company (1986) 2 B.C.C. 99,199; 99,453; 99, 492, that the date of the application is “the correct starting point”, because the applicant “elects (then) to treat the unfair conduct of the majority as in effect destroying the basis on which he agreed to continue to be a shareholder”. He pointed to the breakdown of the relationship between Roy and his brothers by November 1990, Roy’s request that he be bought out, and the allowance of a reasonable period for negotiations - which had broken down by November 1992. Mr Fleming urged me therefore to value the shares as at 30 June 1992, allowing interest thereafter for loss of use of the money (cf. Dynasty v. Coombs, supra).
Mr Fleming also referred to a concession by the respondents’ then Senior Counsel before Moynihan SJA on 15 December 1995 that 30 June 1992 was the appropriate date. But I observe at once that no case of estoppel was made out, and I do not regard that concession as precluding the respondents from contending now for the later date.
It also concerns the applicant, of course, that the market for sawmilling equipment and timber products fell after 1992, reducing the value of the company. As it was put:
“The respondents have chosen to continue the operations of the company in a changing environment and therefore they themselves in a declining market have elected to risk the investment of the applicant beyond 30 June 1992, when the market for the plant and equipment was far superior to that in 30 June 1992 and the market for the products sold had not decreased. (Tr.p.505 l.10). The applicant should not be prejudiced by the decisions of the respondents to risk the applicant’s investment in circumstances of these changing markets to his detriment.”
The Respondents’ Contention
In urging 30 June 1996, as being the closest practicable date to the making of an order by the Court, Mr Chesterman QC for the respondents, relied especially on In Re London School of Electronics Ltd (1985) 3 W.L.R. 474, 484 per Nourse J:
“If there were to be such a thing as a general rule, I myself would think that the date of the order or the actual valuation would be more appropriate than the date of the presentation of the petition or the unfair prejudice. Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased. But whatever the general rule might be it seems very probable that the overriding requirement that the valuation should be fair on the facts of the particular case would, by exceptions, reduce it to no rule at all.”
The Full Court of the Federal Court referred to that passage with approval in Dynasty v. Coombs, supra, page 85, and similarly to this passage from Peter Gibson J in Re D.R. Chemicals Ltd (1989) 5 B.C.C. 39,54:
“(The minority shareholder), acting entirely within his rights and not unreasonably, has remained a minority holder and only now is he obtaining an order requiring the respondents to purchase his shares. Accordingly logic and fairness dictate that the valuation should be at the date of my order.”
If one has to select a “starting point”, I would be influenced by the recognition that an applicant who obtains an order for purchase, sells at the date of that order. The respondents buy his shares in the company as it then is. Adjustments for oppression aside, the date of acquisition of the shares is the logical date for valuation. That is when the shares are exchanged for money: the price to be paid should reflect the value of the company at that time. In this case, for reasons already expressed, no adjustment for oppression is warranted.
But the overriding criterion governing selection of a date for valuation is that it should be “fair” having regard to the facts of the case (see Re London School of Electronics Ltd, supra; Re Quest Exploration Pty Ltd (1991) 6 A.C.S.R. 659; and Dynasty v. Coombs, supra.) The notion of fairness involves, of course, not only fairness to the applicant, taking into account any oppressive conduct said to affect value, but also fairness to the respondents.
What date is “fair”?
I have reached the conclusion that fairness warrants selecting, in this case, as the date for valuation, 30 June 1996. The following particular considerations have combined to lead me to that view.
The alternate date, 30 June 1992, is some years ago, and the applicant has not established subsequent oppression relevantly bearing on the valuation of the company, thence the shares.
Since the World Heritage listing, the assets have not been used as before, and the value of the company has fallen. But this has been substantially the result of the act of a third party, and unconnected with any even alleged act of oppression. To value as at 1992 would allow the applicant a “windfall”.
It is unrealistic to suggest - as was contended - that the respondents should, acting reasonably, have purchased the applicant’s shares as at 1992. I note the following matters:
(a) The applicant’s conduct of the hearing, in which he has failed to establish relevant oppression reflecting on value, against a concession that the shares had to be purchased, suggests that it would have been virtually impossible, prior to a hearing, to agree on price. In court the applicant has presented extensive evidence on the acts of oppression, consuming a substantial amount of time. That he did so, and unsuccessfully, against substantial opposition from the respondents, creates real doubt in my mind whether the price itself could have been the subject of any agreement out of court.
(b) The applicant has been insistent on being paid unrealistically high amounts. Amounts up to $9million have been sought (see page A205 Exhibit 1, solicitor’s letter of 1 August 1996, page F93). The applicant also sought compensation for the monetary effects of the alleged oppression. Some of those claims were abandoned, as late as 2 January 1998 (Exhibit 112) and at the trial itself.
(c) It is, accordingly, clear to me that the parties needed the assistance of the court to determine the price. They negotiated unsuccessfully for over two years (see Exhibit 132). Their efforts included attending at a mediation conducted in the court. There is no suggestion that the parties negotiated in bad faith. They simply could not agree.
(d) The applicant first nominated a price for his shares in the submissions furnished on his behalf pursuant to the order of Moynihan SJA in mid-1996 the figure of just under $9million. The applicant insisted upon being paid interest from June 1992 on the value of his shares fixed at that date. Additionally, the applicant claimed an indemnity against any income or capital gains tax to which the purchase of the shares might expose him. Those demands were unreasonable, and confirm the improbability of any reasonable agreement in 1992.
(e) The respondents have not positively alleged, in any pleaded material, that the respondents should have purchased Roy’s shares in 1992. Absent operative oppression thereafter, it is helpful to note what Ongley J said in Re H.W. Thomas Ltd (1983) 1 A.C.L.C. 1256, 1262 (cf. Re G. Jeffery (Mens Store) Pty Ltd (1984) 9 A.C.L.R. 193, 198):
“Generally speaking, however, where a number of persons is tied into a company structure, sharing some interests but having others which diverge, the fairness or unfairness of any conduct relating to the company’s affairs cannot properly be considered in relation to an individual shareholder except against the background of fair treatment of the whole body of the shareholders. In this particular case no active wrong has been done to the petitioner. He has, by inheritance, become the holder of shares in a corporate body the affairs of which are conducted in a manner with which he does not agree. All other members are content that the company’s operations should continue as heretofore.”
The applicant offered his shares under Article 35, but did not nominate a price. He could have offered them again, nominating a price. He had the benefit of the company balance sheet and services of accountants.
The applicant has since 1992 had the benefit of his investment in the company. See Exhibit 139.
In these circumstances I consider it fair to adopt 30 June 1996 as the date for valuation.
Valuation of Land and Plant and Equipment
It is necessary to value the plant and equipment owned by the second respondent and its subsidiaries, and their holdings of real property.
The value of the real property as at 30 June 1996 is agreed at $6,701,500. The valuers disagree as to the value of plant and equipment as at that date, Mr McLean (for the applicant) ascribing $3,868,171 and Mr Gray (for the respondents), $1,038,219. See Exhibit 99.
There are problems about aspects of each valuer’s approach. Mr McLean has had regard impermissibly to offers (see, for example, page 342, line 58 to page 343, line 3), and he effectively conceded that he could not justify his values by reference to sales (page 341, line 59). On the other hand, Mr Gray has been unduly conservative, especially in light of the sales of plant and equipment which have occurred since 1996 (especially items 23, 24 and 81 in Exhibit 100).
The confident valuation of this equipment is extraordinarily difficult, as counsel recognised. Much of the equipment is very old and technically obsolete, with no ready market either here or overseas. The greatest area of dispute concerned the larger items, which had been available for sale for more than a decade. All of this would suggest that one might generally prefer the approach of Mr Gray. I am urged to adopt a conservative approach. On the other hand, Mr Gray has in my view been unduly pessimistic in his approach, as those subsequent sales tend to show.
Some adjustments to the approach of Mr McLean are necessary in any event. Looking at Exhibit 99, the timber stock must be excluded, if one is to follow the approach of Mr Cooper of Pannell Kerr Forster, because he has already caused it to be separately valued and included in his valuation of the applicant’s shares. Beyond that, the items not sighted but nevertheless valued by Mr McLean should also be disregarded. To do otherwise would be speculative and irresponsible. It was not asserted that any of those items had been concealed by the respondents in an endeavour to frustrate the valuation exercise undertaken for the applicant: there is simply no sufficient evidence that they exist. I accepted, furthermore, the evidence of Mr Douglas
Rankine as to the items owned by third parties. Those are the “sundry items” included in the Isles Love Valuation but not included in the GEM Valuation: in Exhibit 99. See Exhibit 122.
In the end, the respondents, through Mr Chesterman QC, effectively invited me to proceed on the basis of Mr McLean’s values subject to adjustment by subtracting $1,025,200 for the timber stocks (otherwise brought to account by Mr Cooper), $273,230 for the “unsighted” items, and $454,966 for the items owned by others on the evidence of Douglas Rankine. See addresses, page 790, lines 35-37. One may see how Mr Cooper has made those adjustments in Exhibit 141. The total of Mr McLean’s valuation ($3,868,171) would be reduced in that way to $2,114,775.
I consider that to be the appropriate way to proceed. I was particularly impressed with the evidence of subsequent sales, suggesting Mr Gray had been unduly conservative. Allowing for the extraordinary difficulty of the exercise, and the obvious impossibility of any sort of precision, I do therefore propose to take a broad approach and allow, for the purpose of the subsequent calculation, in respect of plant and equipment as at 30 June 1996, that sum of $2,114,775.
Share Valuation
I heard evidence from two accountants, Mr Blanch (for the applicant) and Mr Cooper (for the respondents). One notes at once that this valuation is not one to be resolved with mathematical accuracy by the application of strict accounting principles: Scottish Co-Operative Wholesale Society Ltd v. Meyer supra at 364; cited in Re Golden Bread: Qld Co-Operative Milling Association v. Hutchison supra at 55.
The order of Moynihan SJA on 13 September 1995 contemplated valuation “on a basis that such shares have a value equal to one-quarter of the value of that company either as a going concern or by reference to its underlying assets, whichever is the greater”. It was common ground - and is obvious - that a “net asset backing” basis should be adopted.
The applicant has approached the valuation on the basis that the company and its subsidiaries continue as a going concern, with the possibility of realizing so-called “non-core assets”. The valuation was done on a net asset backing basis. The respondents value the applicant’s interests on a notional realization of assets basis (transcript page 712, line 50).
Mr Cooper has assumed an orderly realization of the assets over five years following 30 June 1996, making allowance for the costs of sale, tax payable on the sale of the assets, tax payable by the shareholders, and discounted cash flows. He has assumed sales to independent purchasers (cf. Spencer v. Commonwealth of Australia (1907) 5 C.L.R. 418).
The major differences between Mr Blanch “reworking” (Exhibit 106) and Mr Cooper (Exhibit 108 and other “updates”) concerned:
(a) whether one should take into account, when assessing the realizable value of assets, all of the tax liabilities imposed on the proceeds of sale and the distribution of funds to the shareholders, or only some of them; and
(b) whether one should ascribe to some assets, gross value, and not the value which would in fact be realized; that is, ignoring costs of sale and tax payable on the proceeds of sale and return of capital to the shareholders.
As to (a), Mr Blanch did not take into account tax payable on a distribution of moneys from the company to shareholders consequent upon a sale of the company’s assets. Yet he agreed that that tax liability would be taken into account in the assessment of the value that a potential purchaser, of the Spencer variety, would pay for the shares in the company (page 398 lines 36-40). He conceded that he had not looked at the taxation consequences of the ultimate distribution of the shareholders “in totality” (page 402, lines 18-41). His approach was in this respect flawed, and I preferred Mr Cooper’s.
Neither can I see justification for Mr Blanch’s approach in relation to (b). It appears to assume that the company will not sell off all its assets, thereby incurring the costs of realization and tax liabilities, but will maintain, into the foreseeable future, the land identified by Mr Blanch as “core assets”, with those assets being taken into account at their full gross value without reduction for cost of realization or tax.
I should say, however, that I had no hesitation accepting the evidence of Trevor, Keith and Douglas Rankine that all of the assets of the company would be sold in an orderly staged process to maximise returns, as Mr Cooper has assumed. The four brothers are now in their mid to late 70s. Of the children, only Douglas and John are engaged in Rankine businesses, and different ones.
In any event, if “core assets” were, against reasonable expectations, maintained, then they should really be valued at nil, simply because they are generating no income. As put by Mr Chesterman QC, “If they are not to be sold, they are not worth having. If they are to be sold, then one must, as Mr Cooper does, value the net realizable amount not the gross amount.”
I accept Mr Cooper’s evidence that the shares have no value apart from the underlying assets of the company (page 719 line 50, page 720 lines 1-10, lines 50-60). (Mr Blanch also conceded that any value lay only in the underlying assets, not a capacity to generate profit: page 392 lines 20-30.) I also accepted Mr Cooper’s view that when valuing shares on the basis of asset backing, one must take into account realization costs and the tax effect on realization (page 721 lines 22-35, page 722 lines 25-30, page 723 lines 45-55, page 724, Exhibits 135,136).
For these reasons, I accept the valuation of Mr Cooper rather than that of Mr Blanch. Mr Cooper’s valuation based on the varied approach to the valuation of plant and equipment appears in Exhibit 141 ($1,656,571).
Exhibit 138 illustrates the sort of variation in value one might expect depending on the particular period for realization of assets. I heard evidence from Mr Brett and Mr Quinn, the latter probably having a closer acquaintance with the local market, and therefore somewhat more compelling. There is great inexactitude about this. Allowing for that and other necessary uncertainties in the exercise, and in light of the observations with which I began this part of the judgment, I propose at this stage to adopt a broad approach, resulting in my valuing the applicant’s shares at $1,700,000. I note that Mr Chesterman QC invited such an approach (page 790 line 51) - in my view it is the most realistic approach.
Interest
The applicant seeks simple interest on the amount ordered. His claim was pursued particularly in context of a valuation as at 30 June 1992, and the significance of the claim is obviously lessened with relation to a valuation as at 30 June 1996.
Mr Fleming relied on Dynasty Pty Ltd v. Coombs, supra. In that case, interest was allowed as a means of adjusting for an increase in the value of the company since the date as at which the applicant’s shares were valued. It was not an award of interest qua interest, but a case where interest was allowed as a useful measure of the increment of increase in the value of the applicant’s investment in the company appropriate to reflect the fact that the respondents had the beneficial use of the applicant’s investment over a number of years. See (1996) 138 A.L.R. at 86:
“When one accepts his Honour’s finding that oppression commenced in March 1988, it seems to us that, in this case, there were only two dates that could have been appropriate for the valuation - either the date immediately before the acts of oppression were implemented or the date of trial. In opting for the former, his Honour permitted the Thomas group to benefit from its conduct for it enjoyed, wholly, all subsequent benefits. In that sense, we see nothing wrong in treating the interest factor as “compensation” for Mr Coombs not participating in those benefits. As counsel for Mr Coombs put it in his final submissions, the learned trial judge did not award Mr Coombs interest qua interest; rather he used interest as a proxy to measure the increment in the value of Mr Coombs’ investment in the company appropriate to reflect the fact that the Thomas interests had the use of Mr Coombs’ investment since March 1988.”
That sort of consideration does not arise here. In principle, I accept that until the Court makes an order, the applicant has no “entitlement”, for the deprivation of which he may seek recompense by way of interest. I agree with what was said by Nourse J in In Re Bird Precision Bellows Ltd [1984] Ch 419, 437:
“The first point to be made is that in a normal s.75 case where there has been no agreement of any kind, I cannot see how there can be any question of interest being payable before a purchase order is made. Until that stage is reached there is no obligation to pay any sum at all, either quantified or unquantified. I have never heard of interest being payable before there is an obligation to pay principal.”
Purchas LJ specifically endorsed that passage on appeal ([1986] Ch 658, 679).
There will therefore be an order that the first respondents purchase the applicant’s shares the subject of these proceedings at the price of $1.7million. I adjourn the proceedings to a date to be fixed so that the parties may prepare minutes of judgment covering such incidental aspects as time to pay, a matter raised with me at the hearing. The parties also foreshadowed a need to make submissions with relation to costs. I reserve costs for that purpose. There will also be liberty to apply.
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