Burnett v Patterson
[2015] NZHC 1974
•19 August 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2014-409-000653 [2015] NZHC 1974
BETWEEN ALEXANDRA JANE BURNETT
Plaintiff
AND
SEAN PATTERSON First Defendant
JOHN DENHOLM PATTERSON Second Defendant
SCIMED LIMITED Third Defendant
Hearing:
Closing
Submissions28 April 2015 - 1 May 2015
14 May 2015 - Defendants
15 June 2015 - PlaintiffAppearances:
B P Henry for Plaintiff
B Nathan and S Galbreath for DefendantsJudgment:
19 August 2015
JUDGMENT OF GENDALL J
BURNETT v PATTERSON [2015] NZHC 1974 [19 August 2015]
Table of Contents
Para No
Introduction [1] The dispute [5] Was there oppressive or unfairly prejudicial conduct? [12] Legislative framework [12] Meaning of “oppressive, unfairly discriminatory or unfairly
prejudicial conduct”?
[14] Removal as a director and from management roles? [20] What does Alexandra seek in her pleadings? [35] Fair market valuation of the shares [45] Introduction [45] Calculating fair market value [46] Capitalisation of Future Maintenance Earnings (FME) [49] Date of valuation [55] What years of trading should be considered when assessing FME? [59] Should a possible credit to the Capital Coast District Health Board be
taken into account?
[70] How is Sean’s sick leave to be treated? [78] How should Denholm’s consultancy fees be treated? [82] Have the acts or omissions of the defendants caused missed sales? [86] Multiplier [88] The Court and valuation issues [101] The “open offer” of 17 April 2015 [104] Conclusion [110] Orders [111] Costs [112]
Introduction
[1] SciMed Limited (SciMed), the third defendant in these proceedings, is a company incorporated in New Zealand on 29 September 2009 under the Companies Act 1993 (the Act). From its inception the plaintiff, Alexandra Jane Burnett (Alexandra), has been a 40 per cent shareholder in SciMed and in the past she has occupied the position in SciMed of its life science business manager. She was also a director of SciMed until she was removed on 18 March 2014. The first defendant, Sean Patterson (Sean) and the second defendant, his father John Denholm Patterson (Denholm), are both directors of SciMed. Sean has held a 40 per cent shareholding in the company from its inception and Denholm held the other 20 per cent.
[2] SciMed has carried on business since 2009 as a distributor in New Zealand of specialist scientific equipment to District Health Boards, research laboratories, biochemists and molecular scientists. It was set up principally to take over a distributorship of high-tech products produced by a United States company PerkinElmer Inc. SciMed holds that agency agreement with PerkinElmer to distribute in New Zealand some of its extensive analytical instrumentation equipment. PerkinElmer is a very substantial United States based company listed on the New York Stock Exchange with an equity value of over $5,000,000,000. SciMed’s business is that of technical sales, applications, support and servicing of this high level technology equipment in New Zealand. SciMed generates 98 per cent of its revenue from the sale by it of PerkinElmer equipment under the agency. There is no doubt therefore that the agency agreement that SciMed holds with PerkinElmer is fundamental to SciMed’s continued operation.
[3] SciMed came into existence when the previous New Zealand distributor for PerkinElmer, New Zealand Scientific Ltd (NZS) lost its distributorship rights. SciMed’s operation is split into three divisions for management and accountability purposes: analytical, diagnostic and life sciences.
[4] Alexandra’s role in SciMed was managing the life sciences division as well as sales and support. Sean managed the diagnostics and analytical division with application product support for life sciences. Denholm was involved in an
administrative and managerial position, as it was accepted at the outset that Sean and Alexandra had no previous experience in running their own business. Previously, Sean had represented PerkinElmer at NZS, a company for whom he worked at the time, and Denholm, as I understand it, had dealt with PerkinElmer actively for some
20 years.
The dispute
[5] Alexandra claims that since the incorporation of SciMed, Sean and Denholm have conducted the company’s affairs in a manner that is oppressive, unfairly discriminatory and/or unfairly prejudicial to her in her capacities as an employee, shareholder and former director of the company, in terms of s 174(1) of the Companies Act 1993.
[6] She claims that the underlying relationship between her and the defendants has been eroded by actions of those other directors as part of a strategy she says they had to remove her entirely from the business. This relationship it seems is now entirely dysfunctional to a point of no return.
[7] On all of this, Alexandra makes a number of claims:
(a) dividends intended to compensate her for her early outlay for start up of the company have been withheld;
(b) unauthorised payments of rent and director’s fees were made by the
company to Denholm;
(c) Sean and Denholm removed her from any position of control without warning or discussion. She was excluded from meetings and removed from all remote access to the company server;
(d)SciMed was restructured, disestablishing Alexandra’s position as business unit manager. She was given no opportunity to voice her concerns. A demotion with unreasonable terms and conditions was
forced on her. Annual sales targets also forced on her were unachievable;
(e) an attempt was made to diminish Alexandra’s position as a shareholder by transferring the shareholdings of Sean and Denholm into a family trust, effectively she says (although without any real explanation) giving full control of the company to them;
(f) her removal as a director was oppressive and unfairly prejudicial to her; and
(g)company accounts were manipulated by Sean and Denholm in order to justify the company restructure and the disestablishment of Alexandra’s role. These actions were not taken in the best interest of SciMed, but rather for the purpose of oppressing Alexandra.
[8] The specific relief claimed by Alexandra in her statement of claim is described as:
(a) a declaration under s 174(2) of the Companies Act 1993 that she has been oppressed as a minority shareholder by Sean and Denholm;
(b) an order that a fair valuation of Alexandra’s shareholding be
determined by an expert;
(c) an order that Sean and Denholm acquire Alexandra’s shares in
SciMed for the fair value found at (b); and
(d) costs on an indemnity basis.
[9] Sean and Denholm deny any oppressive, unfairly discriminatory and/or unfairly prejudicial conduct on their part. However, the parties have agreed between themselves that their relationship has irretrievably broken down and is beyond repair. Sean and Denholm have acknowledged that the best way forward for all, including SciMed, is for the defendants to purchase Alexandra’s shareholding (subject to price)
and she has seemed to accept this. Sean and Denholm caveat, however, that this is not to be taken as an acceptance by them that there has been any oppression, discrimination or unfairly prejudicial conduct on their part here.
[10] Morrison’s Companies and Securities Law1 notes at [37.9] in addressing s 174 of the Act:
Even if the parties are deadlocked and agree that a Court ordered buy out is the only answer, the Court must establish unfair prejudice before proceeding to grant relief – Norager v Charles Norager & Son Limited, High Court, Auckland, M222/98 10 November 1998, Laurenson J.
[11] Here, as I have noted, the parties accept that a deadlock exists and have suggested that a Court ordered buy out is the proper remedy, but nevertheless unfair prejudice is still required. For that reason I turn now to consider this aspect, albeit reasonably briefly.
Was there oppressive or unfairly prejudicial conduct?
Legislative framework
[12] The statutory remedy for a prejudiced shareholder is set out in ss 174 – 176 of the Act. These sections provide the court with a wide discretion to review the conduct of a company and its shareholders and they outline a wide range of relief where necessary. The sections protect minority shareholders from the “majority rules” principle.
[13] Section 174 of the Act provides:
174 Prejudiced shareholders
(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2) If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit
1 Morrison’s Companies and Securities Law (Lexus Nexus Looseleaf).
including, without limiting the generality of this subsection, an order—
(a) requiring the company or any other person to acquire the
shareholder’s shares; or
(b) requiring the company or any other person to pay compensation to a person; or
(c) regulating the future conduct of the company’s affairs; or
(d) altering or adding to the company’s constitution; or
(e) appointing a receiver of the company; or
(f) directing the rectification of the records of the company; or
(g) putting the company into liquidation; or
(h) setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3) No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
Meaning of Oppressive, unfairly discriminatory, or unfairly prejudicial conduct?
[14] The leading New Zealand case on the meaning of “oppressive, unfairly discriminatory, or unfairly prejudicial” conduct is Thomas v H W Thomas Ltd.2 In that case, Richardson J stated:3
I do not read the subsection as referring to three distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates some only as a legitimate foundation for a complaint under s
209 [the predecessor to s 174]. The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company.
[15] Oppressive conduct has been further judicially defined as conduct which is “a
visible departure from the standard of fair dealings and the violation of the
2 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA).
3 At 693.
conditions of fair play”,4 “burdensome, harsh and wrongful”,5 and a “lack of probity or fair dealing”.6 However, oppressive conduct need not be unlawful, nor does it require bad faith.7
[16] In Latimer Holdings Ltd v Sea Holdings New Zealand Ltd the Court of
Appeal held:8
[113] The operative words of the provision express a general principle which is directed to “an unjust detriment to the interests of a member of the company” (Thomas at p 693). That test is an objective one. The provision may be prayed in aid even if the conduct accords with the company's constitution, because even then inappropriate prejudice may still arise. Relief can be given even if the conduct complained of does not involve a want of good faith or a lack of probity. The fact that all members are treated uniformly as members will not necessarily make conduct fair. The reasonable expectations of members are distinctly relevant – though this factor is not in and of itself necessarily determinative – and those expectations are not necessarily restricted to purely “internal”, or “formal” expectations. There are no fixed categories of cases to which s 174 apply. The provision is one of general application. Relief may be sought even with respect to a listed company.
[17] In that case, the Court of Appeal also observed three well established principles:9
(a) errors of judgment by management, inefficiencies, and poor business management without distinct elements of bad faith or self-interest cannot amount to oppression;
(b)Judges should be slow to impose their own business judgments as they are ill-equipped to evaluate business strategies; and
(c) the remedy should not be used to facilitate the exit from a company by a shareholder where that shareholder merely has a straight-out
disagreement over company strategy. Something more is required.
4 Elder v Elder & Watson Ltd [1952] SC 49 per Lord Cooper at 55.
5 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 342 (HL).
6 Elder v Elder & Watson Ltd [1952] SC 49 per Lord Keith at 60.
7 Sturgess v Dunphy [2014] NZCA 266.
8 Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328
9 Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328.
[18] Section 174(1) refers to “a shareholder or former shareholder of a company, or any other entitled person” as having a right to apply. An “entitled person” is defined in s 2(1) as “a shareholder” and “a person upon whom the constitution confers any of the rights and powers of a shareholder.” As a 40 per cent shareholder, Alexandra falls within both categories so is entitled to make an application under s
174.
[19] And it needs to be noted at this point that, although there is no exhaustive list of what type of actions amount to oppressive conduct, over time a number of categories have developed, and here Alexandra makes several different allegations of such conduct.
Removal as a director and from management roles?
[20] A common allegation in cases of oppression is that a minority shareholder has been excluded from participating in management decisions of the company.10 If a minority shareholder is found to have a reasonable expectation of continued participation in the management of the company, the removal of that shareholder from a position of management could be found to be oppressive.
[21] This ground was expressly recognised by Richardson J in Thomas:11
That detriment may be to the financial interests of the member as a member or it may be conduct which is adverse to his interests in other capacities, as where, for example, he is excluded from management participation in the company.
[22] In Dunning v Chabro Holdings Ltd, in circumstances where the plaintiff was removed from office both as a senior manager and director, the Court held that the company was bound to ensure that he was able to sell his shares at fair value.12 In such circumstances of exclusion, any prejudice or oppression would be made good however by a reasonable offer to purchase the shares of the affected party at fair
value.13
10 See Re Federated Fashions (NZ) Ltd (1981) 1 NZCLC 95,011 (HC).
11 At 694.
12 Dunning v Chabro Holdings Ltd (2007) 10 NZCLC 264, 313 (HC) at [73].
13 O’Neill v Phillips [1999] 1 WLR 1092.
[23] In Cornes v Kawarau Hotel (1994) Ltd14 the plaintiff was again excluded from any involvement in the management of the company. There, Wild J held that:15
Whatever the rights and wrongs of Mr Cornes' management of the Partnership business, there seems no valid reason why he should be removed as a director of the Company. Applying the principles so clearly set out by Richardson J in Thomas, I consider the events of 14 and 28 August 1997 are oppressive, unfairly discriminatory, or unfairly prejudicial to Mr Cornes in his capacity as a shareholder of the Company. First he was excluded from the benefits he was intended to receive from the assets owned and held by the Company, then he was excluded from any management involvement in the Company itself. He was, to use the vernacular, put well and truly “out in the cold”. On this basis alone, I consider that it is just and equitable for the Court to require the Company or Messrs Taylor and Finnigan to acquire Mr Cornes' shares i.e. to buy him out of the Company. Further, I consider that the manner in which Mr Cornes was excluded from the Company was oppressive, unfairly discriminatory and unfairly prejudicial...
[24] In another management dispute case, the Supreme Court of Western Australia in Hogg v Dymock considered an application for an interlocutory injunction to maintain the plaintiff’s position as an employee of the defendant company.16 The Court found that there was a serious question to be tried and granted the injunction with the following comments:17
Removal from a salaried position within the company may be unfair, even though it might be a valid exercise of the powers of the majority of the directors: Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 378-9 per Lord Wilberforce. While that case involved a partnership which had been converted into a company, it is common ground that the parties in this case envisaged in the first instance that they would be partners and share equally in the day to day conduct of the business as well as in the management of it at the level of directors. In the Westbourne Galleries case there was an expectation of continuing participation. This was also the case in Diligenti v RWMD Operations Kelowna Ltd (1976) 1 BC 36 in which a founding member was removed as a director and dismissed as a salaried manager.
As against this, the board may properly decide what is in the best interests of the company, even where the majority of the directors decide to terminate the employment of an equal shareholder. In Re Terri Co Pty Ltd (1988) 12
ACLR 457; 6 ACLC 402 a business judgment, which was judged to be objectively reasonable and untainted by improper motives, was described as
one which will be respected by the courts.
14 Cornes v Kawarau Hotel (1994) Ltd (1999) 8 NZCLC 261,815.
15 At 825.
16 Hogg v Dymock (1993) 11 ACSR 14.
17 At 20.
[25] In the case before me, the lead up to Alexandra’s removal as a director can be traced back to late 2013. On 12 December 2013, a series of emails began between the three directors discussing the sales performance of SciMed and the need for a potential restructure. There was considerable disagreement between Alexandra and Denholm in these emails. On 19 December 2013, Alexandra sent an email which Denholm later confirmed was the “final trigger” to his taking legal and accounting advice to remove her.
[26] When asked about professional advice he had received from the accountants about removing Alexandra as a director, Denholm replied:
I discussed it with David McPhedran [the company’s accountant] and how do we do it and I believe I discussed it with the lawyers here, is there a way to address this job change in the restructure, I – and that was – and these were clinical, nothing to do with Alex Burnett except she happened to be the person, we wanted to go from this title that was causing the company difficulties to have a sales operations manager, and then we had that meeting and it was, it occurred and within a week we had vehement emails and I do not know if they’re in the bundle here, but they were very very vehement and we consulted again and the only thing was to remove her as a director, simply because of the utter dysfunction it would have to have her aboard but there will be other letters in the bundle…
[27] On 30 January 2014, an email was sent from Denholm to Alexandra, stating that:
If your Director performance continues to create the company with stress, with the inexperience shown to date (in-spite of the goodwill shown to reflect the past, prior to fiscal 2013, and the hope for redeeming performance for fiscal 2015.) we should seek advice on the continuation of this dysfunctional governance position.
[28] The perceived issues were unable to be resolved. On 24 February 2014, Denholm sent Alexandra an email stating:
To stop this ongoing dysfunction at a perceived board level, I will be proposing a resolution for you to step down as a Director of Scimed. Under NZ Companies Act 1993 Part 8, section 156 removal of Directors. The notice of meeting will be advised within the next 10 days. This action was not considered prior to the “restructure resolution” in early February, however the communications received below show a Board perspective completely in dysfunction with little chance of all working in the best interests of Scimed and in a company of 6 FTE is unacceptable.
[29] Despite protestations from Alexandra, at a shareholder’s meeting on 18
March 2014, Denholm moved a resolution for her removal as a director. Denholm and Sean both voted in favour of the resolution and Alexandra against, the resolution being carried by their 60% majority shareholding.
[30] In his evidence, Sean explained that the concern was that Alexandra was putting her personal position ahead of that of SciMed’s and that this was in conflict with her obligations as a director. This did not allow her, he said, to objectively continue dealing with governance issues in the best interests of SciMed and its shareholders. The tension he acknowledged was also causing increasing dysfunction.
[31] It must be accepted in this case that there were clear issues at a governance level of the company that needed to be resolved. Sean and Denholm contend they had the best interests of the company in mind when passing the resolution, but this is disputed by Alexandra. It has been made clear in the cases set out above, that even if a resolution removing a director has been undertaken legitimately, it can be considered prejudicial. In a closely held company, such as this one, the removal of a director will more readily be considered to prejudice them. This is because the directors will typically be major shareholders in the company as well and there is an expectation that they will participate in the decision making of the company.
[32] Despite any dysfunction that was caused by Alexandra in her management position, I find that as a founding and 40 per cent shareholder of a closely held company with two other director/shareholders, she had a legitimate expectation to have some continued role in management. Even if Sean and Denholm had considered that Alexandra in her position as a director was making the management of SciMed difficult, resolving to remove her from that position could still be seen as oppressive, discriminatory or prejudicial. For all these reasons I find that her removal as a director was unfairly prejudicial to her.
[33] I leave on one side other complaints of prejudicial conduct advanced by Alexandra here. Amongst these are complaints relating to alleged restructuring of SciMed, claims to manipulation of the company accounts, unauthorised payments of
rent and director’s fees to Denholm, and removal of access to the company’s server. Much disputed evidence is before the Court over these issues. Suffice to say that, in my view, Alexandra has done sufficient, but perhaps only by a reasonably fine margin in the circumstances of this case, to establish that she has been unfairly prejudiced in terms of s 174(1) of the Act in her removal from management roles and as a director, such that it is just and equitable to grant some form of relief.
[34] And, as I have already noted above, the parties have generally agreed that the best course of future action is for Sean and Denholm to purchase Alexandra’s shares for fair value. That valuation question is really the major issue between the parties that was before me, given that it is another matter that has led to a significant level of disagreement between them.
What does Alexandra seek in her pleadings?
[35] But, before I turn to the share valuation issue, it is useful here to reflect again on the pleaded relief sought by Alexandra in her statement of claim as noted at para [8] above. The first aspect of this relief, relating to a declaration under s 174(2) of the Act that Alexandra has been oppressed as a minority shareholder, creates no real issue here.
[36] Next however, at (b) and (c) of Alexandra’s prayer for relief, I repeat the
claims she makes for:
(b) an order that a fair valuation of the plaintiff’s (Alexandra’s)
shareholding be determined by an expert;
(c) an order that the first and second defendants (Sean and Denholm) acquire the plaintiff’s (Alexandra’s) shares in SciMed for the fair value found at (b);
…
[37] A possible option for this Court at this point is simply to make the remedial orders sought that a fair valuation of the plaintiff’s shareholding is to be determined by an expert valuation to be obtained now, and that Sean and Denholm are then to acquire Alexandra’s shares for that fair value. In this regard it is also useful to note the pre-emptive right provisions in the constitution of SciMed agreed to by all
parties. These include a process for the offer of a departing shareholder’s interest in the company and a valuation mechanism. The default process for fixing the “fair value” of the departing shareholder’s share parcel is set out at 2.9 and 2.10 of SciMed’s constitution in the following way:
2.9 Fixing of Fair Value
If the proposing transferor receives a bona fide unconditional offer for the purchase of the share parcel [from a person found by the company who is willing to purchase that share parcel], then the value of the share parcel will be deemed to be the amount specified in the offer, provided that the proposing transferor has given to the Company all evidence that the Company reasonably requires in order for the Company to be satisfied as to the terms of the offer, the bona fides of the offer, and offeror’s ability to complete the purchase.
If the proposing transferor has received no bona fide offer in terms of clause
2.9 and any difference arises between the proposing transferor and a purchasing Shareholder as to the value of the share parcel the fair value will
be fixed on the application of either party by the arbitration of a single arbitrator who will determine the fair value by reference to the price that
would be accepted by a willing seller under no compulsion to sell, and paid by a willing buyer under no compulsion to buy. Such an application must be made within 3 months of the date of the transfer notice. If the parties fail to
agree on a single arbitrator then the matter will be determined by the arbitration of 2 arbitrators, one to be appointed by each party. The
arbitrators shall appoint an umpire before entering upon their reference.
Upon the fair value being so fixed the value specified in the transfer notice will be deemed to have been the fair value given by clause 2.9 of this Constitution.
The arbitration will be determined in accordance with the Arbitration Act
1996 or any statutory modifications or re-enactment of that Act for the time being in force. Subject to the provisions of clause 2.10 of this Constitution the costs of any arbitration will be borne equally between the proposing transferor and the purchasing Shareholder.
2.10 Right to Revoke
If the fair value fixed in accordance with clause 2.9 of this Constitution is less than the sum specified by the proposing transferor in the transfer notice as the sum the proposing transferor considers to be the value of the share parcel, the proposing transferor will be entitled, at any time before the expiration of 7 working days after the date of receiving notice of the award fixing the fair value, to revoke the transfer notice.
…
[38] It is therefore open to this Court to simply declare now that the value of
Alexandra’s shares is to be determined in terms of the process set out in the
constitution for voluntarily departing shareholders, a process clearly accepted by all parties at the outset.
[39] This is not, however, how matters proceeded before me in the four days of trial in this proceeding or in the later submissions advanced by counsel for the parties.
[40] Instead, and despite Alexandra’s pleading for the specific relief outlined in her statement of claim, the parties have clearly sought a decision from this Court, first, as to the fair value of SciMed’s shareholding and, secondly, as to the appropriateness of orders being made at this figure for the purchase of Alexandra’s shares by Sean and Denholm.
[41] It is on this basis that I proceed now to consider a fair market value for the shares in question and orders for their sale and purchase.
[42] Section 174(2) of the Companies Act sets out, by way of examples, various types of relief available, as noted at para [13] above. One of these is the purchase of Alexandra’s shares by the company or the other shareholders and another is putting the company into liquidation. The position of Sean and Denholm is that if a fair value cannot be established for these shares at a figure which they are able to afford, then SciMed should be liquidated.
[43] Liquidation, however, has been said to be a drastic way to deal with oppressive conduct or a dysfunctional relationship between shareholders and it will not lightly be ordered if, as here, the company in question is a going concern – Cornes v Kawarau Hotel (1994) Ltd.18 In addition, liquidation here would no doubt place Sean and Denholm in a better position than Alexandra first, to purchase and take over the business, given their longstanding relationship with PerkinElmer and
secondly, to perhaps achieve this purchase at an undervalue to the detriment of
Alexandra.
18 Above n 14.
[44] It is clear in this case that liquidation is not an appropriate remedy. This is not the extreme situation which was seen in Vujnovic v Vujnovic.19 And, as I have noted at [9] and [34] above, all parties here accept that ideally a purchase by Sean and Denholm of Alexandra’s shares, subject to price, is the best way forward.
Fair market valuation of the shares
Introduction
[45] Given, as I have said, that a common form of relief provided to disadvantaged plaintiff shareholders under s 174 of the Act is an order that either the company or other shareholders buy out the plaintiff, issues as to the value to be paid for those shares are at the forefront and often are the focus of much dispute. On this aspect, in Company and Securities Law in New Zealand20 the valuation of shares in situations such as the present was addressed in this way:
The Courts aim to find a “fair value” for shares ordered to be purchased under s 174, taking into account all the circumstances of the case before them. The approach is thus in keeping with the general policy of applying just and equitable principles to the unfair prejudice provision. The emphasis is on the “overriding principle that the price to be fixed by the Court on an order for the acquisition of shares under…s 174 is to be a fair price in all the circumstances of the case” – M Yovich & Sons Ltd v Yovich [2001] 9 NZCLC
262,490 (CA) at [35].
Calculating fair market value
[46] Calculating the fair market value of shares is not an exercise in certainties. The generally accepted rule of valuation is expressed in Hatrick v Commissioner of Inland Revenue:21
The test has been variously phrased but in essence it calls for an inquiry as to the value at which a willing but not anxious vendor would sell and a willing but not anxious purchaser would buy. This, it must be emphasised, is essentially a practical question, not to be overlaid by philosophical or legal niceties.
[47] In that same case, McCarthy J stated:22
19 Vujnovic v Vujnovic [1988] 2 NZLR 129 (CA).
20 Company and Securities Law in New Zealand (2nd Ed) Thomson Reuters, Editor J Farrar, at para
23.6.2.
21 Hatrick v Commissioner of Inland Revenue [1963] NZLR 641 at 661.
The Commissioner is bound to take into account all those matters which would, in fact, influence a potential purchaser. This does not mean that he must make allowances for mere possibilities. In approaching a practical question in a practical way, he is obliged to give attention only to those considerations which can reasonably be said, in the particular case, to be likely materially to affect the mind of a vendor or of a purchaser. Of course, if the shares are quoted on the Stock Exchange no great difficulty arises; but if the shares are not quoted, and especially in the case of family companies, the application of the test mentioned is not a simple matter. There are various methods or lines of approach to this test which have been accepted over the years, and in some cases approved by the Courts; for example, the assets- value method, the dividend-yield method. But the method of approach must not be elevated to become the test itself it is only an aid to ascertain the market value. Each method of approach, and whether more than one should be employed, depends in each case on the circumstances which will include the type of business which the company conducts, its record of earnings and dividends, its likelihood of future profits, the classes of potential buyers of the particular shares, the extent of those classes, the nature of the asset of the company, and whether those assets are readily convertible to cash.
[48] In Holt v Holt, Cooke P emphasised the uncertainties of the exercise:23
Among some accountants and some lawyers, on or off the Bench, there seems to be a persistent disinclination to accept, or at any rate to act on, the principle of such decisions. It may reflect a yearning for the certainty of rules of thumb, or a sense that shares and other items of property must have an intrinsic value capable of being revealed by some formula. The latter, however, is an illusion. Money value is simply what is obtainable in an actual or notional market. In some cases, such as shares quoted on the stock exchange, it is easily ascertained. At the other extreme are cases where the valuer can do little more than identify the factors likely to influence the parties in bargaining for a fair price in a friendly negotiation, and then arrive at a discretionary judgment.
Capitalisation of Future Maintainable Earnings (FME)
[49] Experts for the respective parties have been able to agree on one thing in this case. This is that the most appropriate methodology for valuing SciMed in all the circumstances prevailing here is capitalisation of future maintainable earnings (FME):
… the shares in Scimed Limited (‘the Company’) should be valued as a going concern and that the valuation should be based primarily on the following key factors: the assessed level of future maintainable earnings (‘FME’); allowance for non-recurring, extraordinary, or unnecessary items when referencing historical results; and the application of an appropriate multiple to the FME taking account of market factors.
22 At 661 – 662.
23 Holt v Holt [1987] 1 NZLR 85 at 90 (CA).
[50] This FME method was explained by Brockett:24
Capitalisation of future maintainable earnings is the most generally accepted method of valuing an actively trading business. Lonergan states that ‘in the absence of reliable long-term cash flow forecasts it is normal valuation practice to assess the fair market value of a profitable company or business on the basis of the capitalisation of future maintainable earnings. The value of the business is represented by its core underlying earnings capitalised by an earnings multiple. This multiplier should reflect the risk and future potential of those earnings. The determination of this multiple is at the discretion and professional judgment of the valuer.
[51] And in Practical Share Valuation, ‘maintainable earnings’ was further
explained:25
Maintainable earnings represent an estimate of the annual earnings of the business which are likely to be achievable on an ongoing basis. The estimate can be based on historical or forecast earnings, although any unusual or non- recurring income and expenditure should be eliminated from the estimate. When historical earnings are considered, if the business has experienced rapid growth or its earnings stream is maturing, the historical earnings can be weighted by placing greater emphasis on more recent results.
[52] The FME valuation approach is summarised as follows: (a) Assessment of the FMEs of SciMed’s operations;
(b)Capitalisation of the FMEs using an appropriate capitalisation multiple;
(c) Deduction of net debt.
[53] Agreement on this methodology, however, is where agreement between the parties and their respective experts comes to an end. Before me it seemed clear that the parties could not agree on the following matters:
(a) What is the appropriate date of valuation?
(b) What years of trading should be considered when assessing FME?
24 Richard Brockett “The Valuation of Minority Shareholdings in an Oppression Context – A
Contemporary Review” (2012) 24 Bond L. Rev. 101 at 110 (footnotes omitted).
25 Nigel A Eastaway and others Practical Share Valuation (6th ed, Bloomsbury Professional, London, 2014) at [11.05].
(c) Should a possible credit to the Capital Coast District Health Board, for a claim by it to a full refund for the supply of an allegedly defective machine, be taken into account?
(d) How should Sean’s sick leave be treated?
(e) How should Denholm’s consultancy fees be treated?
(f) Have the acts or omissions of Sean and Denholm caused missed sales and how should these be treated?
(g) What is the correct multiplier?
[54] I will address each of these briefly in turn. But before doing so, it is useful at this point to note the huge discrepancy in the expert share valuations before the Court advanced on the one hand by Mr Grace for Sean and Denholm, and on the other by Mr Beylefeld and Mr Walker for Alexandra. Mr Grace puts a total valuation on the company of $400,000 and a value for Alexandra’s 40% shareholding at $160,000. Mr Beylefeld, however, initially assesses a total value for the company of around $1,000,000 and a value for Alexandra’s 40% shareholding at a figure of $537,500. Mr Walker in turn goes further and he suggests this valuation for Alexandra’s shareholding should be increased by a further figure of somewhere between $250,000 and $500,000 to a final figure of up to $1,000,000.
Date of Valuation
[55] The starting point for the Court here is that there is no general rule as to what is to be the appropriate date for valuation.26 As I note above, it needs to be a date that is equitable to all parties involved:27
…there is an overriding principle that the price to be fixed by the Court on an order for the acquisition of shares under what is now s174 is to be a fair price in all the circumstances of the case.
The matter falls within the Court’s discretion to determine what is just and equitable
in light of all the circumstances and the overall fairness of the case.28
[56] Alexandra submits that possible dates to assess fair value could be:
(a) 31 March 2013 – the date she says oppression was commencing; or
(b) 10 September 2014 – the date of filing these proceedings; or
(c) 28 April 2015 – the date of trial.
She considers that 31 March 2013, is the most appropriate date here.
[57] Sean and Denholm recognise that one approach is to determine the share valuation from the date at which the shareholder was effectively excluded.29
Although the defendants do not accept that Alexandra was effectively removed from SciMed, they submit that if she was, then the fair date for valuing her shares is no earlier than 31 March 2014.
[58] There does not appear to be any really major and significant contest here over the date of valuation itself. Rather, the dispute between the parties linked to this is over what annual accounts for SciMed should be considered in providing this valuation. The prejudicial event in this case, as I see it, was Alexandra being removed as a director. I find therefore that this is the most appropriate date from which to assess fair value. That date is 18 March 2014.
What years of trading should be considered when assessing FME?
[59] One matter which was vehemently disputed before me related to which years of trading were to be considered when assessing FME. Alexandra asserts that the only safe sets of accounts to rely on here are those prior to and including the 31
March 2013 accounts (with some suggested uplift). It was submitted that from this point on, the accounting practices for SciMed were tainted by the oppressive conduct
of Denholm and Sean. Alexandra also suggests that after 31 March 2013, she was effectively removed from her management and leadership roles within SciMed.
[60] Mr Beylefeld, Alexandra’s expert accountant was instructed to value her shares as at 31 March 2013 based on the three financial years from 2011 to 2013. It seems to be his belief initially that there were concerns about the financial reports after that date so any later reports could not be relied upon.
[61] On the other hand, Sean and Denholm maintain that the necessary adjustments have been made to SciMed’s 31 March 2014 accounts (which they say all the experts are happy with) so they can also be relied on. Their expert, Mr Grace, valued the shares as at 20 September 2014 and he has considered the three financial years ending from 31 March 2013 to 31 March 2015 to determine the share value. He did not consider the 2011 and 2012 financial years. He said those years were anomalous because:
(a) for the first two years, SciMed benefitted from a strong pipeline of sales that in reality were generated after Sean had worked at NZS under the previous PerkinElmer agency. Significant amounts of overhead cost on the sales had already been incurred by NZS and thus the early profits of SciMed it is said were inflated;
(b)the performance of the life science division reduced significantly from the end of the 2012 financial year due to declining demand, poor sales performance and an increasingly competitive market; and
(c) business overheads increased post 2012 to support sales in both the life science division and the analytical division.
[62] In his affidavit evidence, Sean makes comments of relevance to the 2011 financial year that:
On transfer of the agency to Scimed, I brought across a large pipeline of potential sales developed over the previous 5 – 10 years. Accordingly, Scimed’s operations commenced with an established and stable platform of
potential sales and relationships underpinning its operations which Scimed was able to convert into actual sales at very little cost.
[63] And of the 2012 financial years, he says:
The reasonably strong 2012 year was unusual and due to Scimed selling several large items of equipment with strong margins, from the pipeline developed over the last 4-5 years and brought over when the agency was transferred. These included two Quantulus nuclear counting instruments and a hyphenated Raman/DSC instrument with a combined value of approximately $680,000. These sales had been in the sales prospect pipeline for as long as 7 years.
[64] Based on what the experts have each said about the FME method of valuation, I tend to agree with the defendant’s expert, Mr Grace, on this point. It does not appear that the margins on sales made in the first two years would be able to be maintained in the years to follow. This is because SciMed did not have to incur the same level of expenses involved in the sales. The parties’ experts agreed that the FME methodology should make “allowance for non-recurring, extraordinary, or unnecessary items when referencing historical results”. Therefore, allowance must be made for the higher margins in the 2011 and 2012 accounts.
[65] However, that is not the end of the matter because the plaintiff also makes claims about why the 2013 and 2014 accounts are not reliable. One of the plaintiff’s expert chartered accountant witnesses, identified three changes in accounting policy for these periods:
(a) the timing or recognition of revenue; (b) the impairment of inventory; and
(c) particular sales to Orica and Gough, Gough and Hamer.
[66] That expert chartered accountant valuer engaged by Alexandra, Geoffrey
Donald Campbell Walker (Mr Walker), in evidence before the Court stated:
There are significant questions around the accounting adopted by the Company, particularly after 31 March 2013. At the time of writing the lack of this information leaves open to question whether the draft financial statements for 31 March 2014 have been completely and properly prepared.
…
Because of significant outstanding questions concerning financial statements of the Company, particularly after 31 March 2013, and because the dysfunction within the Board and management inevitably manifested itself in poor financial performance, I consider that:
- a valuation based on information as at 31 March 2013 is the relevant starting point from which to assess the conduct of the defendants rather than attempt a valuation based on what in my opinion is fraught information provided for trading after that date; and
- in my opinion, the Company diligently managed, is capable of achieving considerably greater profitability and this should be taken account of for the purposes of this claim. Put another way, there are examples of US company shareholders suing their boards of directors for undervaluing their companies for the purposes of merger or acquisition transactions.
[67] However, when it came to the memorandum of accounting experts, directed by the Court pursuant to r 9.44 of the High Court Rules, the experts agreed that:
… the Company changed its policy in accounting for inventory for the year ended 31 March 2014 and that this has resulted in a reduction of $22,400 in the value of inventory and also reduces that year’s profit.
Subject to the foregoing, it was agreed that the 2014 financial statements were accurate enough to be relied upon for the purposes of these proceedings.
(Emphasis added)
[68] The memorandum goes on to conclude that:
Mr Walker now accepts that the 2014 accounts can be relied upon as materially accurate for the purposes of these proceedings subject to the determination of the facts associated with 5.16 of Mr Walker’s affidavit with regard to the return of equipment from the Capital Coast District Health Board.
[69] The issue in question at 5.16 of Mr Walker’s affidavit is that:
The plaintiff via her counsel received a revised set of accounts from Scimed by email on 19 September 2014…There is $35,000 deducted from the total sales revenue when comparing the draft accounts provided earlier on 28
August to those provided on 19 September 2014, and later on 28 November
2014. There has been no evidence provided of an actual credit note issued to
CCDHB, which is the supposed reason for the revenue deduction. Scimed’s stock on all sets of accounts remains at $190,907.00. It is unclear what has happened to the actual equipment concerned, or how it has been accounted for. This is important because equipment is valuable and can be sold elsewhere.
[70] Both parties appear to have concerns about which set of accounts is used. As the courts have stated on many occasions, calculating the fair value of shares is an art, not a science. In that respect, there is a certain level of guess work involved. The most simple and equitable solution in my view is therefore to calculate FME based upon all the generally accepted accounts which were available, being the accounts for the financial years ending 2011, 2012, 2013 and 2014. Although the early 2011 and 2012 years for SciMed may unusually have resulted in inflated profit results from maturing pipeline sales, as I see it Sean and Denholm here, as parties long-experienced with the negotiation and sale process for PerkinElmer products, are well-placed to achieve possibly similar one-off FME figures in the future.
Should a possible credit to the Capital Coast District Health Board be taken into account?
[71] This issue involved a major instrument supplied at a price of about $200,000 to the Capital Coast District Health Board (CCDHB) in 2013. Alexandra, it seems, was involved with this sale until she went on maternity leave in July 2014. Prior to installation of the instrument, CCDHB raised some concerns with its capabilities. However, it is said Alexandra advised that the issues had all been addressed and the instrument was installed in October 2013.
[72] Further issues continued to arise and a meeting took place in April 2014 between Alexandra, Sean, representatives from PerkinElmer and the CCDHB. Unfortunately this failed to remedy all of the concerns as the CCDHB said it continued to experience issues. Even after SciMed ran tests and demonstrations on the instrument and provided CCDHB with a comprehensive report addressing the issues, the CCDHB were still unhappy with its performance and on 5 September
2014 advised the Company that it wished to return the instrument.
[73] SciMed, it seems, continued to try and satisfy the issues the CCDHB was experiencing, even offering to take the instrument back for a full credit and replace it with a more appropriate one. But CCDHB insisted that SciMed remove the instrument at its own expense and provide a full refund.
[74] Although a final decision has not been made, it is likely that SciMed will have to accept the instrument back due to the importance of its relationship with the District Health Board. The result of this is that it will need to be recognised as a loss of a profit margin of $50,000 in the 2014 accounts.
[75] Alexandra claims that the defendants have sought to take advantage of this matter to reduce the 2014 earnings and that the issue arose because business was ignored due to management distractions.
[76] I find, however, that Alexandra’s claims are unfounded. They ignore the reality of the industry that SciMed operates in. The Company needs to maintain a good relationship with District Health Boards as major potential ongoing customers. A supplier may need to compromise at times, even when it is in a strong legal position, in order to retain an important relationship. SciMed directors Sean and Denholm have determined that it is in the best interests of the company to do so here, and it is hard to question this in any substantial way.
[77] It is proper therefore that the 2014 accounts should reflect the loss in margin caused by the return of the CCDHB instrument.
How is Sean’s sick leave to be treated?
[78] There is also a dispute between the parties as to how a period of Sean’s sick leave should be treated. At the beginning of 2013 Sean suffered a heart attack which caused him to be away from SciMed for a short period. It is submitted by Alexandra that this should be accounted for in the 2013 accounts.
[79] In the Leave History Report, Sean is recorded as taking 104 hours of leave or
13 days in total during that period. This is supported in his affidavit. However, in
Mr Beylefeld’s report, in terms of the sick leave, it is stated:
We understand that the First Defendant took an extended period of sick leave from 17 January 2013 to mid April 2013. It is the Plaintiff’s evidence that the First Defendant performed minimal duties during this period.
We estimate that the salary costs associated with this period of sick leave amounts to approximately $22,000 ($130,000 salary for 73 days [17
January 2013 to 31 March 2013] at productivity of 85%).
We added back the costs associated with this event as:
oIt is unlikely that this cost (nearly three months’ paid sick leave) would have been granted or paid if the First Defendant was not a shareholder; and
o It is unlikely that this cost would be repeated in future years.
This position was later revised so that the costs that needed to be added back were
$11,201.
[80] When examined on this further, Mr Beylefeld stated that the only evidence that he had of Sean’s extended sick leave (beyond the 13 days recorded) was what Alexandra had told him. In addition he did volunteer that, in his opinion, he did not believe that 13 days was a long enough period of sick leave for recovery from a heart attack. He did however recognise that Sean continued to send work emails, even during the time that he was recorded as taking sick leave and was recovering from his heart attack.
[81] I find that this claim that $11,201 should be added back into the 2013 accounts when calculating FME is also unfounded. The leave record, which Mr Beylefeld admitted was the best evidence of Sean’s absence, showed that he was on sick leave for only 13 days. There is even evidence of him working during that period. There is therefore no need to account for the sick leave when undertaking the valuation.
How should Denholm’s consultancy fees be treated?
[82] This disagreement pertains to fees Denholm charged to SciMed for his consultancy serviced. These fees amounted to:
(a) $26,769 for the 2012 financial year;
(b) $25,203 for the 2013 financial year; and
(c) $29,999 for the 2014 financial year.
[83] Alexandra claims that there was never any agreement that Denholm would be paid a consultancy fee, although, in Mr Beylefeld’s report he allows for a consultancy fee of $12,000. He explained in oral evidence that this was an estimate of the value of the additional work that Denholm was doing for the company.
[84] The defendants disagree, their evidence being that Denholm provided consultancy services to SciMed for cash flow forecasting, checking sales to budget and giving input into management issues. Mr Grace’s opinion was that the fees were not unreasonable.
[85] Given the absence of any further evidence as to the unreasonableness of the consultancy fees, and without either of the defendant’s having been fully questioned before me on the reasonableness, I find myself unable to rationalise any significant reduction in the consultancy fees in the accounts.
Have the acts or omissions of the defendants caused missed sales?
[86] There is no evidence that the acts or omissions of the defendants caused missed sales. However, it would seem that the internal dysfunction caused by the parties may have necessarily caused sales to be missed. Calculating FME is always an estimate of the earnings that SciMed will continue to make into the future. Therefore, if the dysfunction is removed one would expect sales to increase.
[87] However, at one level this might be accounted for in the valuation by the inclusion of the early 2011 and 2012 accounts which showed what are alleged to be the results of earlier pipeline sales negotiated largely by SciMed’s predecessor. The margins of those years were higher than expected which, if these particular years are to be included in valuation calculations, would go some way to balancing out any later dysfunction in the company’s operations.
Multiplier
[88] Another area of disagreement is what is the appropriate multiplier. A multiple is applied to the estimated maintainable earnings before interest and tax to determine a value for the business. In Practical Share Valuation, it is said:30
The choice of an appropriate earnings multiple reflects, inter alia, expectations about the prospects for growth of the business; a higher multiple generally reflects higher growth and/or lower risk expectations (and vice versa).
[89] The text also discusses the need to adjust the multiple:31
It is rare to find a directly comparable listed company or transaction to the business or asset being valued and therefore it is likely that adjustments to the market data will be required….
…
… Other adjustments are likely to be required to reflect differences in size and operations of the subject entity compared to the quoted comparators, which may be much larger, more diverse and operate in a difference range of geographical locations.
[90] It is important to keep in mind when calculating the fair value of the shares that, “mathematical precision is impossible in these cases, and the final figure is as much a matter of judgment on the part of the experts as it is on the part of the trial judge.”32 That necessarily means that there is no “correct” multiple.
[91] Mr Grace, in his report, identified four relevant factors in the assessment of a multiple:
(a) comparable or similarly sized companies;
(b) the extent and nature of the competition in the industry; (c) quality of earnings, future growth opportunities; and
(d) relative risk compared to other investments.
30 At [11.08].
31 At [11.09].
32 Brant Investments Ltd v KeepRite Inc (1991) 80 DLR (4th) 161 (OntCA) at 205.
[92] Mr Beylefeld assessed the multiplier to be applied to FME as between 6 and
6.5. When the mid value, 6.25, is applied to the mid FME value, 240, a total enterprise value of $1,500,000 was reached. Due to the lack of reported external debts or surplus assets as at 31 March 2013, Mr Beylefeld assessed the Company’s shares to be of the same value, $1,500,000. However, the multiplier it seems was later increased to around 7.5 when a mistake was admitted.
[93] This can be contrasted with the opinion of Mr Grace who assessed the appropriate multiplier to be substantially lower, being between 2 and 2.5. By identifying observable multiples for transactions relating to similar size companies in sectors involved in the import and distribution of equipment, he arrived at a multiple of 4. These sectors, although not involving medical equipment sales, were considered to have characteristics and risk profiles that were broadly similar. The multiple was then reduced he said as SciMed was considered to carry more operating risk compared to the comparable companies he had identified. This reduced the multiple to between 2.0 and 2.5. Alexandra’s 40% shareholding was therefore valued by Mr Grace at $160,000, with the total company value assessed at $400,000.
[94] The significant difference appears to arise out of the difference in companies that were used for comparison. Mr Beylefeld assessed the multiple based on companies from within the same industry, but, all the companies used were publicly listed and the majority of them were either listed on the New York or Nasdaq stock exchanges. These companies were global manufacturers, designers, and suppliers of medical and technical equipment who employ thousands of people and all have market value equities in the billions of dollars.
[95] On the other hand, Mr Grace, was not able to find any companies that were directly comparable to SciMed, so instead he used companies with a type of distributorship business operating in an agency arrangement to form his assessment. These companies were all New Zealand companies with agency distributorships. The average multiple of these companies he noted was 4.0. Mr Grace reduced this however to account for what he said were SciMed’s specific risks first, in its concentration on the PerkinElmer agency agreement and secondly, in its heavy reliance on Sean and his continued services.
[96] Were I asked to do so, I would be inclined to prefer something nearer Mr Grace’s calculation. The companies selected by Mr Beylefeld to undertake a comparison (many of them long-standing cutting-edge manufacturers with large research undertakings and international reputations), appear to have few similarities to Scimed other than sharing a similar industry. But the industry cannot be the most important factor. Mr Beylefeld recognised that multiples are significantly influenced by the “size, strength, diversification and market share of a company”, but he failed to explain how this was compensated for in the present case when comparing SciMed to the other overseas billion dollar, publicly listed companies he had selected.
[97] Although SciMed’s relationship with PerkinElmer is currently a strong one, particularly because of the longstanding and firm relationship between Denholm, Sean and PerkinElmer, fundamentally the Licence Agreement can be terminated with
30 days’ notice if there is a breach, or with 90 days’ notice without cause. Clearly some degree of potential risk exists in this arrangement. There is also no guarantee that Sean, a key person in the company, will continue to work in the field as he does at present or, that he will always do so in the future and continue to enjoy the present strong relationship he has with PerkinElmer.
[98] However, it also appears, in my view, that Mr Grace has accounted too much for what he said were the risk factors associated with SciMed. Although the company is heavily reliant on the PerkinElmer agency agreement, as I have noted both Denholm and Sean have a positive history and long relationship with PerkinElmer. There does not appear to be any reason for this to change. Nor has Sean expressed any desire to leave the company – quite the contrary. That being said, the matters outlined above must still be considered possible risks to some extent. If I was required to do so, my present inclination would be to fix the appropriate multiplier here at 3.8.
[99] This multiplier is more in line with the starting point of 4 adopted by Mr Grace who, in my view, in relying on six New Zealand companies in completed transactions, took a more realistic approach here. The claim by Mr Beylefeld that the multiplier should have been 6.25 based on the multipliers used for large,
generally overseas, public companies (who were involved in the scientific research and manufacturing area with long specialised histories and reputations), in my view, is inappropriate. To endeavour to apply this same multiplier to SciMed, a reasonably small New Zealand company formed only in 2009 with a necessarily limited history and no manufacturing base, would seem to me to be wrong. The suggestion, too, by Mr Walker that the fair value for Alexandra’s shares should be uplifted by somewhere between $250,000 and $500,000 from Mr Beylefeld’s figure of $537,500 to a figure of up to $1,000,000 in my view, based upon all the evidence before the Court, is also entirely wide of the mark. It is not supported by any cogent material that has been placed before the Court. Indeed, as I understand the evidence he provided to the Court, Mr Beylefeld, the other accountant expert put forward by Alexandra, even went so far as to disagree essentially with his colleague, Mr Walker, relating to this suggested uplift.
[100] Alexandra also endeavoured to place before the Court much evidence and argument over what she said were problems involving miscoding and mis-timing of revenue and expenses in the accounting treatment provided by SciMed at operative times, suggested to show profitability or a lack thereof. In my view, however, all this is generally irrelevant in the overall scheme of things, and to the total final value reached for the company.
The Court and valuation issues
[101] Lastly, an issue must arise as to whether it is appropriate in a case such as this for the Court, in making a determination of the fair value for SciMed’s shares, in reality to fix upon a value for the shares which may be simply somewhere between the valuation amounts suggested by the two sets of experts provided by the parties. Whilst at times, in other cases before this Court, concerns were noted over whether a process of this sort to an extent was somewhat flawed, nevertheless, a finite determination of share value is clearly what the parties seek by way of outcome here. Despite these considerations, I need to note too that additional material was also before me here which I am satisfied is useful and assists to some degree in making the calculation the parties seek. This additional material included the terms of an “open offer” I will outline at [104] below.
[102] The comments I have outlined earlier, serve to point out what must be seen as a gross divergence in both the share valuation figures reached and to an extent the processes adopted by the individual accountant valuers in this case. A not dissimilar situation arose in Multiply Limited v Old Mill Farm Limited.33 In that case Barker J, in noting a wide difference between the valuers, went on to state:
Before attempting to resolve the difficulties caused by these wildly differing valuations, I set forth certain appropriate legal principles applicable to valuations of shares in private companies.
…
(a) The test is what a person desirous of buying the shares at the nominated date would have to pay to a vendor willing to sell at a fair price, but not desirous of selling.
(b) For a company operating as a going concern, it is not appropriate to fix the value of shares purely by reference to an assets valuation on a notional liquidation. Such a valuation can be useful as a check.
(c) Where there is no external measure of value such as a stock exchange quotation, resort may be had to various methods of valuation but only as an aid to the ascertainment of the market value at the relevant date.
(d) The value that the shares may have to a limited or number of purchasers or to an available sole purchaser is a factor which may be taken into account. The Court must take into account all matters which would influence a potential purchaser including the earnings and dividend record of the company, the company’s business, its likelihood of future profits, the classes of potential buyers of shares, the nature of the company’s assets and whether these are readily convertible to cash.
(e) A prudent purchaser does not buy shares in a going concern with a view to winding-up the company; therefore the more important enquiry is into the probable profit which the company may be reasonably expected to make in the future; dividends can only be paid out of profit and a prudent purchaser would be interested mainly in future dividends reasonably expected.
(f) The value of a potentiality open to the company may be taken into account, even if the vendor of the shares is himself unable to exploit it and even if there is only one potential purchaser who could do so. This criterion is of especial importance in this case. Realistically speaking, the only likely purchasers are one, some or all of the present Japanese investors and/or some person or persons approved by and sympathetic to them.
33 Multiply Limited v Old Mill Farm Ltd [1995] 7 NZCLC 260,746.
[103] In that case Barker J concluded at page 260,770:
In the end, the Court is bound to making an assessment of valuation from all the material placed before it. This is an extreme case where all the Court can do is arrive at a “discretionary judgment after identifying the factors likely to influence the parties in bargaining for a fair price in a friendly negotiation”. (See Holt v Holt per Cooke P, [1987] 3 NZCLC at page 100,111)…Doing the best I can in an impossible situation, I consider that the value of a 20% share in Milbrook is in a range between $500,000 - $700,000…
The “open offer” of 17 April 2015
[104] In the case before me, overlaying all the divergent accounting evidence as to valuation of the shares, is a formal “open offer” (the open offer) dated 17 April 2015 (being only about 10 days before the hearing of this matter commenced), made by Sean and Denholm through their solicitors, Duncan Cotterill, to Alexandra’s counsel, Mr Henry.
[105] Relevantly here, the open offer states:
1Despite the consultation process between the experts having now completed, there remains a significant gulf between the parties as to the value of the shares the subject of this litigation.
2The clear advice our clients have received from BDO is that the position adopted by Crowe Horwath is unrealistic and does not properly reflect the nature of the business of Scimed. According to the Crowe Horwath valuation, Scimed is valued at approximately
$1,500,000. The value of the shares owned by Sean and Denholm
Patterson (that is 60% of the company) is $900,000. We consider it very unlikely that Crowe Horwath would advise your client to spend
$900,000 to take over complete ownership of Scimed Limited.
3BDO’s advice is that Scimed is worth $400,000, and your client’s shares (40% of the company) worth $160,000. Our clients consider that even this results in a considerable windfall to your client. That said, that is the expert advice they have received and they are prepared to purchase your client’s 40% interest as follows:
3.1 $160,000 within 21 days of acceptance;
3.2Two annual payments of $15,000 subject to Scimed Limited retaining the rights it has under the distribution agreement with PerkinElmer.
4Our clients consider this a generous offer as it provides for the possibility of an additional $30,000 over and above what BDO has assessed as the fair value for your client’s shares.
5 As an alternative way to resolve this litigation, Sean and Denholm
Patterson are prepared to sell their shares to your client for
$450,000; therefore representing a $450,000 discount on the
$900,000 your client considers their collective interest in the business to be valued. While our clients do not wish to sell their
shares in the business, nor do they consider this offer reflects the
value of Scimed, they are prepared to do so on this basis if it will result in a resolution of the dispute.
6To avoid any doubt, our clients as well as their independent experts do not consider that Scimed is worth anything near Crowe Horwath’s valuation, nor the value that the offer in paragraph 5 represents. That offer is made solely in an effort to resolve the litigation. Our clients are not willing to purchase your client’s shares based on either the Crowe Horwath valuation or the valuation in paragraph 5 above, nor are our clients willing for your client to purchase our clients’ shares based on BDO’s company valuation of
$400,000. We also note that your client does not seek to purchase our clients’ shares as relief in her statement of claim, nor does section 174 provide for this outcome.
[106] The open offers contained in the 17 April 2015 letter were rejected by Alexandra. Notwithstanding this, in my view these offers should take on some relevance in this case, given the need for the Court to determine what is a “fair value” for the shares.
[107] Certainly, in April of this year, just before the hearing of this matter, Sean and
Denholm were prepared to sell their 60% shareholding in SciMed to Alexandra for
$450,000. On this basis, a total value for SciMed at that point would have been
$750,000 and Alexandra’s 40% shareholding would have attracted a value of
$300,000.
[108] This is opposed to the accounting evidence Sean and Denholm have put forward to suggest the total value of SciMed calculated on an FME basis is only
$400,000 with Alexandra’s 40% share amounting to $160,000. That is also despite
the fact that total retained earnings alone shown in SciMed’s annual accounts to
31 March 2013 and 31 March 2014 (accounts which the experts generally seem to accept now) are recorded at almost that $400,000 figure being $349,181 and
$337,047 respectively. Also, SciMed’s net tangible book assets as at September
2014, even on the evidence accepted by Sean and Denholm, are recorded in its accounts at a figure of at least $374,000.
[109] And, although the open offer clearly stated that the position taken by Sean and Denholm was that the value of the company was not accepted at the $750,000 figure necessarily resulting from their $450,000 sale offer, there can be no doubt that this was an amount which Sean and Denholm were prepared to accept for the sale of their shares at the time. Perhaps they may have thought that, at this figure, it would have provided them with somewhat of a windfall for their investment in SciMed. But, noting nevertheless that a fair market value of shares in any company is the value at which a willing but not anxious vendor would sell and a willing but not anxious purchaser would buy, this effectively unconditional open offer from Sean and Denholm, would seem to me to go some way towards establishing what might be seen as something around the true market value of these shares. And, after all, Sean and Denholm must be regarded as informed and qualified parties here, given that they were intimately involved in SciMed from its formation and with the PerkinElmer agency business from well before that time. I reach that view again emphasising that the divergent accounting evidence which is before the Court from the experts engaged by each party does not overly assist here. Barker J in Multiply Ltd v Old Mill Farm Limited, as I have noted at para [102] above, recorded that this is a type of situation where real difficulties exist for the Court in “doing the best [it] can in an impossible situation” to reach a fair market value for the shares in question.
Conclusion
[110] With that in mind, and in all the circumstances of this case, I therefore arrive at a total value for SciMed as at 18 March 2014 of somewhere in the range $700,000 to $750,000. I fix the total fair value for the company at the midpoint $725,000 and a value for the 40% shareholding held by Alexandra at $290,000. This is some
$100,000 more than Sean and Denholm were prepared to pay Alexandra for her shares under the open offer. As I understand the position, it also appears to represent a good return on Alexandra’s original investment in SciMed. It reflects too a reasonable increase on the amount shown as Alexandra’s shareholder’s equity funds in the company in the last financial accounts, no doubt to an extent representing some element of goodwill for the value of SciMed with its continuing PerkinElmer licence. And, given their undoubted wish to continue operating SciMed (as they have shown with Sean’s constant full-time commitment to the company right up to
the present) both Denholm and Sean in seeking 100% shareholding and control of a business they have known well for many years would be paying less per share for Alexandra’s shares than they sought from her in the open offer for the sale of their own shares.
Orders
[111] Pursuant to s 174(2)(a) of the Companies Act 1993 I make the following orders:
(a) Sean and Denholm jointly and severally are to purchase and acquire the 40% shareholding in SciMed held by Alexandra at a total price of
$290,000.
(b)The share purchase price of $290,000 is to bear interest on that figure calculated at 5% per annum from 18 March 2014 to the date of final payment.
(c) Settlement of the purchase of the shares is to take place within
30 working days of the date of this judgment.
(d)Included in the purchase of Alexandra’s 40% shareholding is to be any credit shareholder’s loan account she may hold in SciMed (if any) together with any other interest of any kind she may have in the company, other than as an employee of the company.
(e) Should Alexandra have a debit shareholder’s loan account with SciMed and/or owe any monies to the company by way of debt or loan then upon the date of settlement noted above the third defendant, SciMed, shall forgive any such debts or loans at that point.
(f) On settlement Alexandra shall complete and deliver to Sean and Denholm any required instrument of transfer of her shareholding in the company free from encumbrances in favour of Sean and Denholm or to such other purchasers as they may nominate. Payment of the
$290,000 plus interest shall be made by Sean and Denholm on settlement without deduction by way of proper bank transfer or legal tender.
(g)Neither Sean and Denholm nor Alexandra shall be obliged to have conformed previously with the pre-emptive provisions as to share transfers contained in the constitution of SciMed or to have obtained any necessary consents with respect to the transfer of Alexandra’s
40% shareholding ordered herein.
Costs
[112] As to costs, counsel requested that I might hear further submissions with respect to these.
[113] Costs are therefore reserved. In the event that the parties are unable to agree between themselves on this issue of costs, then counsel may file memoranda (sequentially) and, in the absence of either party indicating they wish to be heard on the question of costs, I will decide that issue based upon the memoranda filed and the other material before this Court.
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Gendall J
Solicitors:
Brian Henry, Auckland
Duncan Cotterill, Nelson
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