Cooper-Davies Trustees Number 6 Ltd v Cooper Trustees Number 11 Ltd
[2013] NZHC 3526
•20 December 2013
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2012-409-000409 [2013] NZHC 3526
BETWEEN COOPER-DAVIES TRUSTEES NUMBER 6 LIMITED
Plaintiff
AND COOPER TRUSTEES NUMBER 11
LIMITED
First Defendant
LILLY JESSICA COOPER Second Defendant
Hearing: 24, 29, 30, 31 October & 1 November 2013
Appearances: G M Brodie for Plaintiff
G K Riach and M Crimp for Defendants
Judgment: 20 December 2013
JUDGMENT OF D GENDALL J
Table of Contents
Para No Introduction [1] Background facts [6] The transaction in question [16] The claim [17] First cause of action [18]
Second cause of action [20] Third cause of action [22] Fourth cause of action [25] Fifth cause of action [27]
Sixth cause of action [29]
General background to earthquake status of the Madras Street building and dealings between the parties
[31]
COOPER-DAVIES TRUSTEES NUMBER 6 LIMITED v COOPER TRUSTEES NUMBER 11 LIMITED [2013] NZHC 3526 [20 December 2013]
Re-opening of share sale and demolition of the Madras Street building [71]
Third cause of action – s 149 Companies Act 1993 [78]
Did Ms Cooper have relevant price-sensitive information that she did not disclose?
[93]
Issues as to share valuation [103]
- Mr Medlicott [104]
- Mr Hadlee [105]
- Mr Munn [115] My decision on “fair value” [132] Contractual Mistakes Act 1977 – mutual mistake [140] Contractual Mistakes Act 1977 – unilateral mistake [142] Contractual Remedies Act 1979 [144] Fair Trading Act 1986 [146] Breach of Fiduciary Duty [148] Conclusion [152] Costs [153]
Introduction
[1] This proceeding rather sadly involves an acrimonious dispute between members of the Cooper family over a share transaction. On the one side is the second defendant, Lillie Jessica Cooper (Ms Cooper), and her family interests including the first defendant. On the other side is Ms Cooper’s sister, Amanda Cooper-Davies (Ms Cooper-Davies), and her husband James Christopher Davies (Mr Davies) and their family interests. Together Ms Cooper and her interests as to a 50% share and Ms Cooper-Davies, Mr Davies and their interests as to the other 50% share were shareholders in various companies which carried out numerous commercial property developments in Christchurch. In the main those development projects were broadly successful until around 2010 when, unfortunately, these members of the Cooper family fell out in a major way.
[2] This culminated in Mr Davies and Ms Cooper-Davies indicating that they wished to sell to Ms Cooper their 50% shareholding in one of the development companies, Madras Street 323 Limited (the company). Negotiations for the sale of these shares took place on the basis of a broad assessment of value at the time. This
basis was that the major asset of the company, an earthquake damaged commercial building at 323 Madras Street, Christchurch (the Madras Street building), was to be repaired in terms of the insurance policy held over the building. Given this, a sale price for the 50% shareholding of Ms Cooper-Davies and Mr Davies’ interests in the company was agreed at $150,000 and the sale of the shares was completed.
[3] Subsequently, it transpired that the Madras Street building was no longer a repair but was to be a demolish and rebuild. It followed that the insurance company made a cash pay out to the company which it seems significantly increased the face value of the shares then held solely by Ms Cooper’s interests.
[4] Then, Mr Davies and Ms Cooper-Davies, who considered Ms Cooper had received a windfall, made unsuccessful approaches to her with a request to increase the amount she and her interests had paid for their 50% shareholding in the company. Ms Cooper refused. The present claim was then commenced. It raised a number of causes of action against Ms Cooper and her interests but principally claimed in terms of s 149 Companies Act 1993 that Ms Cooper as a director of the company had price sensitive information in her capacity as a director and thus could only acquire the shares of her sister and brother-in-law at “fair value” which had not occurred.
[5] Mr Davies and Ms Cooper-Davies therefore sue in this proceeding for
$728,000. They say this represents one half of the $1,756,000.00 true fair value of the company, less the consideration of $150,000 already paid by Ms Cooper.
Backgrounds facts
[6] Given the background to this whole matter which is somewhat complex, it is necessary to set out the facts and basis of the present claim in some detail.
[7] The plaintiff, Cooper-Davies Trustees Number 6 Limited was incorporated on
22 November 2006. As I understand the position it is a trustee company for a family trust set up for the benefit of Ms Cooper-Davies, Mr Davies and their family. At all material times Mr Davies, who is a solicitor, was the sole director of this company.
[8] The first defendant, Cooper Trustees Number 11 Limited, which was also incorporated on 22 November 2006, is a trustee company set up for the interests of Ms Cooper and her family. At all material times Ms Cooper, the second defendant, was the sole director of this company.
[9] As I have noted above, this proceeding involves the sale of a 50% shareholding in the company, which was also incorporated on 22 November 2006. Ms Cooper and Mr Davies at all material times were the directors of this company.
[10] In 2007, the company purchased the Madras Street building and property, which it called Novo House. It did so with a view to refurbishing the building, re- letting it and ultimately re-selling it at a profit. By early March 2008, the development had been substantially completed and the building largely re-tenanted.
[11] During the course of this development, the company borrowed certain monies on first mortgage from Southern Cross Building Society. The company also borrowed $500,000 from the M and R Cooper Number 2 Trust. The settlors and principal trustees of this trust were Mervyn and Rona Cooper. They are the parents of Ms Cooper and Ms Cooper-Davies, and the parents-in-law of Mr Davies. Their loan was due for repayment in September 2011. It seems that there was some sort of confusion/disagreement over whether the trustees expected repayment of the loan at that time. The plaintiff says that the trustees made it clear that repayment would be expected although Ms Cooper, in her evidence, seemed to suggest that the trustees may not have expected repayment or that it was not made clear.
[12] There appears to have been discussion around repayment of this loan in the second half of 2010 between Ms Cooper and Mr Davies. The personal relationship between the two of them, as I have noted, had also substantially broken down then and it became apparent that it was not going to be possible for them to work constructively together to arrange refinancing and repayment of this loan.
[13] Mr Davies says that he considered the best way of ensuring repayment of the loan was to sell all of the shares in the company held by the plaintiff to Ms Cooper’s interests.
[14] Mr Davies contends this would allow Ms Cooper to better negotiate refinancing arrangements in conjunction with her other mutual business affairs. As I understand it however, Ms Cooper’s position is simply that Mr Davies and her sister Ms Cooper-Davies wished to extract themselves from any issues concerning the company and that this was their sole reason for wishing to sell their shares.
[15] In any event, this course of action for the sale of the shares to Ms Cooper was pursued.
The transaction in question
[16] It is useful here to briefly summarise the transaction in question. In February
2011, Mr Davies proposed the sale of the plaintiff’s shares in the company. On Monday 9 May 2011, Mr Davies for the plaintiff and Ms Cooper entered into an agreement (the sale contract) whereby the plaintiff agreed to sell its 50% shareholding in the company to Ms Cooper and her interests in consideration for payment of the sum of $150,000.00 to be paid in accordance with the terms of the sale contract. There were specific conditions in the agreement which I will address later. All these matters and the fact of entering into the sale contract seem to be agreed between the parties to this proceeding. There are disputes however between the parties which include issues over the date of the share acquisition, the question as to what was the fair value of the shares at the time of the acquisition and also disputes over what information each party had at the relevant times. These matters will be addressed later in this judgment.
The claim
[17] The claim by the plaintiff, Cooper-Davies Trustees Number 6 Limited, is contained in the third amended statement of claim dated 14 October 2013. There are six causes of action in total with various remedies sought. It is useful to summarise those causes of action which I now do.
First cause of action
[18] The first cause of action is mutual mistake under s 6(1)(a)(ii) Contractual Mistakes Act 1977. The alleged mistake is that the parties entered the sale contract on the basis that the insurance company would pay only the cost of repairing the building rather than the greater amount representing the replacement sum insured. It essentially translates into that the value of the shares was greater than what the parties calculated.
[19] It is alleged that the net equity of the company (and thus its total shareholding value) was $1,756,000.00 and that one half of that would be $878,000.00. The plaintiff sues and seeks judgment for $728,000.00 being one-half of this fair value of the company less the consideration of the $150,000.00 already paid.
Second cause of action
[20] The second cause of action is unilateral mistake under s 6(1)(a)(i) Contractual Mistakes Act 1977. The alleged mistake was that the plaintiff entered into the sale contract in the mistaken belief that the Madras Street building was repairable where the existence of the mistake was known to the first and second defendants. Ms Cooper attended meetings on 9 May 2011 and subsequently to assess whether the building was economically repairable which changed the position dramatically. It is alleged that the plaintiff was not advised of these meetings and discussions and the major changes to the likely fate of the building which significantly affected the value of the company and its shares.
[21] The plaintiff sues and again seeks judgment for this $728,000.00 being one- half of the fair value of the company less the consideration of the $150,000.00 already paid as noted above.
Third cause of action
[22] The third and principal cause of action here is based on s 149 Companies Act
1993. The plaintiff ’s allegation is that at the date of the sale contract and right up to the date the plaintiff confirmed the contract as unconditional, Ms Cooper in her capacity as director of the company was in possession of information material to an assessment of the value of its shares which she did not disclose to Mr Davies or the
plaintiff. As a result it is claimed that Ms Cooper and her interests were prohibited from acquiring the shares in the company held by her sister and brother-in-law’s interests other than for fair value and that this did not occur.
[23] Pursuant to s 149 Companies Act 1993, it is alleged that Ms Cooper is liable to the plaintiff for the amount by which the fair value of the shares which the plaintiff sold exceeds the amount paid by the purchaser.
[24] Again, the plaintiff sues and seeks judgment for the $728,000.00 noted above representing one half of the fair value of the company less the $150,000 consideration already paid.
Fourth cause of action
[25] The fourth cause of action is based on the Contractual Remedies Act 1979. More specifically, it is alleged that Ms Cooper acting on behalf of the first defendant misrepresented the true position with respect to the state of repair of the Madras Street building and consequently the likely outcome of the insurance claim. It is alleged that by Ms Cooper’s misrepresentations and omissions the plaintiff was induced to enter into the sale contract.
[26] Again the plaintiff sues and seeks judgment for the $728,000.00 noted above.
Fifth cause of action
[27] The fifth cause of action is based on the Fair Trading Act 1986. Here, it is claimed that the defendants engaged in misleading and deceptive conduct. Essentially, they failed to inform the plaintiff of the true position prior to confirmation of the sale contract by Mr Davies.
[28] Again, it is claimed as a consequence, of the misleading or deceptive conduct of the defendants that the plaintiff has suffered the loss of $728,000.00. In addition the plaintiff seeks any other relief pursuant to s 43 of the Fair Trading Act 1986 as the Court thinks fit.
Sixth cause of action
[29] The sixth cause of action is based on a breach of fiduciary duty. Essentially, the plaintiff claims that the relationship between Ms Cooper-Davies, Mr Davies and Ms Cooper was a relationship of trust and confidence where they regarded themselves as in partnership. They were directors and shareholders of small closely held companies. They were each committed to the success of the company and worked without remuneration. There was a close and personal family relationship and they were accustomed to relying upon each other in relation to their business affairs. To the knowledge of Ms Cooper they all relied on the evidence of the company’s accountant, Mr Michael Medlicott (Mr Medlicott), and Mr Davies did not seek independent advice in relation to the sale contract. It is claimed that Ms Cooper was under a fiduciary duty to disclose all information relevant to the value of the assets and liabilities of the company.
[30] By acting in breach of her fiduciary duties, it is claimed Ms Cooper obtained the benefit of the plaintiff’s shares in the company at less than their fair value. It is claimed that Ms Cooper should account to the plaintiff for the loss of fair value in the sum of $728,000.00 noted above.
General background to earthquake status of the Madras Street building and dealings between the parties
[31] Christchurch suffered two catastrophic earthquakes on 4 September 2010 and
22 February 2011 with more aftershocks continuing for some time thereafter. These affected engineering assessments on buildings, a factor which is particularly relevant for the present case.
[32] Ms Cooper states that initially Mr Davies was responsible for dealing with Holmes Consulting Group (Holmes), structural engineers and the insurer for the Madras Street building, Zurich New Zealand. According to Ms Cooper, Mr Davies had a copy of the relevant insurance policy and was aware of its terms. It appears that the Madras Street building was assessed by Holmes during a rapid structural assessment on 5 September 2010 as “okay to occupy”. This was still the case on 9
September 2010 when a further rapid structural assessment was completed following
a large aftershock. On 24 November 2010, Holmes was engaged to complete a detailed structural review of the property. A further large aftershock occurred on
26 December 2010 with Holmes again reporting on its structural assessment that the
building was “okay to occupy”. On 11 January 2011, there was a Holmes site visit.
[33] On 9 February 2011 however, Mr Davies left New Zealand for Chile with his family. Their return to New Zealand on 29 March 2011 was the earliest possible date at which Mr Davies could return for a variety of reasons. He notes that while he was away in Chile, it was difficult to keep up to date with exactly what was happening with the Christchurch situation. For that purpose, he completely depended upon Ms Cooper for information as to their business affairs.
[34] In an email dated 16 February 2011 to the company’s accountant, Mr Medlicott, Mr Davies proposed that he sell “his” shares in the company to Ms Cooper for $205,500.00 and also proposed a range of other complex financial transactions in relation to the group of family-owned companies. Christchurch then suffered a further major and significant earthquake on 22 February 2011.
[35] On 27 February 2011, Ms Cooper emailed Mr Davies to the effect that the status of their buildings was unknown. Then, on 1 March 2011 Ms Cooper emailed Mr Davies with an update. This was to the effect that access to the Christchurch central city was restricted, that it appeared a significant number of buildings would need to come down, and that no one would be allowed back into the city for two to six months while everything was demolished. Ms Cooper sent a further email to Mr Davies on 1 March 2011 stating that the Madras Street building was going to be gutted, strengthened and refurbished and that it would take six to eight months to fix in the worst case. She noted that most of the tenants would stay and that the rental would go up as commercial space would be at a premium. She also mentioned another building owned by a family company in which they had interests at
145 Lichfield Street, Christchurch (Leftclick House), and said it seemed likely it would be demolished. Ms Cooper said that the initial report on the Madras Street building was not completed until 2 March 2011. A further update to Mr Davies from Ms Cooper was sent on 4 March 2011. On 6 March 2011, Mr Davies suggested that they look at taking the cash from the insurers. On 7 March 2011, Ms Cooper advised
that she was not interested in pursuing the cash option for the Madras Street building as it was a good building and she said it was easy to fix.
[36] On 9 March 2011, Ms Cooper stated in an email to Ms Jenny Ovens at Holmes, with a copy to Mr Davies that “we wish to repair [the building]”. Pace Project Management (Pace) were instructed to coordinate the repair of the building and Holmes were engaged to carry out a detailed structural report. On 28 March
2011, the loss adjuster advised Pace that he would like to confirm whether the Madras Street building was repairable or uneconomic to repair before further costs were incurred, and asked for a general outline of damage. Mr Andrew Christian of Pace advised that no one had indicated that the Madras Street building was not repairable and that everything from the engineers to date had been directed to how the Madras Street building was to be repaired.
[37] On 23 March 2011, Mr Davies advised by email that he wanted to continue
with the sale of ‘his’ shares in the company to Ms Cooper. His exact words were:
Don’t think that the latest quake has changed things too much in terms of the following and my preference is to push on and give Lilly as much time as possible to attempt to do something in terms of Merv’s $500k.
Mr Davies and his family returned to New Zealand on 29 March 2011. He attended a site visit/meeting on 31 March 2011 with Holmes and Pace.
[38] Ms Cooper did not discuss the share sale with the accountant, Mr Medlicott, until early April 2011. Then, on 13 April 2011, it appears Ms Cooper offered Mr Davies $88,000.00 for his shares in the company.
[39] On 15 April 2011, an Aurecon verticality survey on the Madras Street building was completed and sent to Ms Cooper and Mr Davies. That verticality survey noted significant slumping towards the northwest corner of the building by up to 200mm. Also on 15 April 2011, Mr Medlicott emailed Mr Davies and requested that he either accept Ms Cooper’s offer of $88,000.00, counter-offer or work with Ms Cooper to tackle the issues that were presenting themselves in respect of Leftclick House the Lichfield Street property and the Madras Street building.
[40] On 18 April 2011, Mr Medlicott again emailed Mr Davies on Ms Cooper’s behalf. Ms Cooper’s suggestion was that if Mr Davies did not accept her offer, he should look after Leftclick and she would deal with the Madras Street building. Mr Davies rejected that suggestion in an email dated 19 April 2011. Ms Cooper’s response to this email stated that “we need to work for nothing in a partnership” as Mr Davies had said that he was happy to do the work at an hourly rate of $100.
[41] On 20 April 2011, there is a chain of emails between Mr Davies and Ms Cooper that became increasingly acrimonious. They clearly disagreed over issues as to the Madras Street building. Mr Davies then agreed that Ms Cooper could deal with both the Madras Street building and the Leftclick building. Mr Davies is advised that the Holmes report on the Madras Street building is not complete and Ms Cooper suggests that Mr Davies attend the next meeting with the engineer about that building.
[42] On 21 April 2011, Mr Christian of Pace wrote to Ms Cooper advising that the report would take slightly longer to prepare as the levels “have come out on a bit of a slope”. Mr Davies was not copied into that email.
[43] At some point between 21 April 2011 and 25 April 2011, it appears there were discussions between Ms Cooper and her sister Ms Cooper-Davies with regard to the Davies/Cooper-Davies proposal to sell their shares in the company. Mr Davies emailed Ms Cooper on 25 April 2011 advising that his offer of mid-February 2011 still stood. Mr Davies in his email states:
As I’ve said all along, my primary and only motivation in making this proposal is that it gives you time to try and arrange for the repayment of Merv’s loan or making some other arrangement with him regarding this loan
– unfettered by me.
[44] Ms Cooper’s response was to the effect that:
I would like to buy you out and see left click knocked over and the partnership wound up in the next 3 months
I have made my offer
You need to counter thats how business works
Otherwise let me know when you want to have your weekly meeting
[45] On 28 April 2011, a report by Holmes dated 25 April 2011 was issued by email to Ms Cooper and certain others. Neither Mr Davies nor Ms Cooper-Davies were copied into that email. Mr Davies states that they did not see that report nor were they told about it. Ms Cooper gives evidence that she did not know why Mr Davies did not receive a copy of this report and at the time had understood that he did receive a copy.
[46] On 29 April 2011, Mr Christian of Pace sent an email to Ms Deb Fahey (director of a Madras Street building tenant) stating that the engineer’s report notes an “unknown structural hazard in relation to occupation and a structural assessment and repair of the damage is necessary before occupation can be allowed”.
[47] On 3 May 2011, a meeting was held between Ms Cooper, Mr Davies, Ms Cooper-Davies and Mr Medlicott. That meeting at times was rather heated but finally agreement was reached on a $150,000 price for the shares. This agreement however, according to Mr Davies, was always subject to a formal written agreement being completed and the consent of his in-laws, as effective second mortgagee, to the sale. Mr Davies also asked Mr Medlicott whether he had worked out certain tax issues over the share transfer and Mr Medlicott advised that he would get back to Mr Davies by the following day, 4 May 2011. Ms Cooper said that she specifically asked Mr Davies and Ms Cooper-Davies as to whether they were sure they wanted to sell their shares and the response was that they wanted out. However, her focus at the time she said was on dealing with the damage to the Madras Street building and having it repaired and tenanted as soon as possible.
[48] Ms Cooper maintained that it was only after a lot of discussion that she agreed to pay $150,000 for the shares. That figure was calculated at the meeting as the fair value of the shares using the last valuation of the land and building which Ms Cooper said she doubted, but was prepared to accept to settle. The share sale figure took into account that valuation less an amount representing the debts of the company including the Southern Cross Building Society and various entities that had advanced funds to it.
[49] On 4 May 2011 a meeting was arranged between Ms Cooper and her insurance broker to discuss the way forward with the Madras Street building – that meeting was proposed to be at 2pm on 9 May 2011. Mr Christian of Pace also wrote to Ms Jenny Ovens of Holmes advising that a walk through before the meeting on Monday 9 May 2011 might be a good idea.
[50] On 6 May 2011, Mr Davies sent a draft share sale contract to Mr Medlicott and Ms Cooper. Mr Davies noted that he was not acting for Ms Cooper and advised that she seek independent advice on the draft document. Ms Cooper responded late in the evening of 6 May 2011 stating that the agreement was acceptable, she would be signing it and would not need a solicitor to check it.
[51] Ms Cooper’s evidence is to the effect that the purpose of the written agreement was merely to record what had already been agreed to by them at the meeting on 3 May 2011. She contends that agreement reached on 3 May 2011 was not subject to a formal agreement being entered into. She also claimed that no changes were made to the terms of the actual agreement after 3 May 2011.
[52] On 8 May 2011, Mr Christian of Pace sent an email to a loss adjuster noting that the Madras Street building was more damaged than first thought. He said that the building may need to be jacked up and all the columns epoxy injected. It was considered that all the tenant fit-out would need to be removed.
[53] According to Mr Davies, he was unaware of the developments that had taken place in the week ending Friday 6 May 2011 with regard to the engineer’s report and the arrangements for the meeting which was to take place on Monday 9 May 2011. Mr Davies did not have a copy of the report that was released on 28 April 2011 and he confirms that it was not disclosed to him. He states that he was not privy to these detailed emails. He said he continued to be under the impression that the Madras Street building would be repaired and there was no indication that there was any doubt regarding this.
[54] Mr Medlicott replied to Mr Davies at 6.56 am on Monday 9 May 2011, asking Mr Davies to drop in and discuss the issue of transfer of company shares. Mr
Davies met with Mr Medlicott at 11.30 am on 9 May 2011 and at 12.27 pm, Mr Davies advised Ms Cooper that he had signed the sale contract. Mr Davies left the agreement with Mr Medlicott ready for Ms Cooper’s signature. Mr Davies’ email also stated that once Ms Cooper had signed the sale contract, he would go and see her parents regarding the condition in the contract and their consent to the share sale. An email was received by Mr Davies from Ms Cooper at 12.41 pm on 9 May 2011 saying that she would sign the document that day. At 3.50 pm, Mr Medlicott emailed a copy of the sale contract signed by Ms Cooper and asked for Mr Davies return confirmation of receipt of the signed agreement. Mr Davies confirmed receipt to Mr Medlicott by email at 9.14 am on 10 May 2011.
[55] On 9 May 2011, there was a meeting of experts regarding the Madras Street building where it was contemplated that the building might not be economic to repair. Mr Davies and Ms Cooper-Davies had earlier attended a meeting regarding Leftclick House only. This occurred a short time before the meeting about the Madras Street building. Ms Cooper notes that while Mr Davies attended the Leftclick House meeting, he did not attend the Madras Street building meeting. Ms Cooper notes that as far as she was aware, Mr Davies knew of the meeting but the deal had been done on 3 May 2011 and that Mr Davies no longer wanted to be involved in the Madras Street building. She would have been surprised if Mr Davies had wanted to attend the meeting she said, but would have had no difficulty with this. She states that she never told Mr Davies that he should not or could not attend the meeting. By way of contrast, Mr Davies in his evidence states it was made very clear to both him and Ms Cooper-Davies that they were not expected nor welcome to attend the Madras Street building meeting.
[56] Ms Cooper’s evidence is to the effect that at this time the fate of both buildings was still uncertain. She claims that in terms of the Madras Street building meeting, it was at that meeting that it was first raised with her that the building might not be economic to repair. It was not that the damage was so substantial that it could not be repaired. It was that the repairs required meant that perhaps it would not be economic to repair. Ms Cooper was advised that the building had deteriorated further since earlier inspections, and it was said there was not enough information to decide whether the building could be economically repaired. Ms Cooper also
claimed that she had made it clear that she wished to live in an apartment above the
Madras Street building if it were to be repaired.
[57] Ms Cooper maintained that she did not consider it necessary to inform Mr Davies about what happened at the meeting for several reasons. She said she was of the opinion they had already reached agreement in relation to the share sale and that agreement was instigated by Mr Davies. She considered that she had paid too much for the shares at the time although she did note that the need to demolish the building, which came later, had increased the asset base of the company significantly. She also understood that while the Madras Street building was more damaged than initially thought, further work was required to determine whether the building was economically repairable or not.
[58] Ms Cooper in her evidence outlines the risk that she was taking. As the sole effective owner of the building, she was taking the risk that she might suffer loss in the event that re-letting proved difficult or impossible. She was also taking the risk that the necessary repairs would not be completed within the indemnity period for the loss of rent policy (two years), which observation she claimed was a real likelihood. She notes that there was significant risk with the future of the Christchurch central city red-zone in which the Madras Street building stood. She also noted that given what she was told at the 9 May 2011 meeting, she had suggested to Mr Christian of Pace that they consider getting plans drawn up for a new building just in case. She states that that did not alter the fact that the building’s fate was not known. It was so that there was a plan going forward in the event that the Madras Street building was demolished.
[59] Turning now to the signed sale contract, clause 2 had provided that the agreement was conditional on Mr Davies being satisfied that the trustees of the M & R Cooper No 2 Trust, as second mortgagee of 323 Madras Street consented to the share sale. Clause 2 set out in full specified:
Agreement conditional – This agreement and the sale of the Shares by James to Lilly’s Shareholder are conditional on James, in his sole and absolute discretion in all things, being satisfied that the trustees of the M & R Cooper No. 2 Trust, as 2nd mortgagee over property owned by the Company, consent to the share transfer envisaged by this agreement, such
condition to be satisfied with [in] 5 working days of the date of this agreement. James will notify Lilly if this condition is satisfied or not and if not satisfied then this agreement will be at an end.
[60] Christchurch suffered a further aftershock earthquake on 10 May 2011 which again restricted access to the Madras Street building.
[61] Mr Davies had a meeting with Mr Mervyn and Mrs Rona Cooper at their home to discuss the share sale on 11 May 2011. Ms Cooper was not present during this meeting. Mr Davies was asked what was going to happen to the building which was unsurprising (according to Mr Davies) as the building was the security for the Trust’s loan which was secured by a caveat over the title for the property. Mr Davies can recall confirming that the building was fine, although a little damaged, that it was fully insured, and that it was going to be repaired.
[62] Mr and Mrs Cooper senior asked Mr Davies to write to their solicitor regarding their Trust’s consent to this share sale. Mr Davies wrote to that solicitor, Mr Mark Sherry of Harmans, on the evening of 11 May 2011 setting out the background to the transaction.
[63] The condition in the sale contract was due to be confirmed within five working days of the agreement – Monday 16 May 2011. On 16 May, Mr Davies advised Ms Cooper that Mr Sherry had asked for a further three working days to discuss the Trust’s consent to the share sale. Ms Cooper agreed to this extension.
[64] In the meantime, a further report on the Madras Street building had been prepared by Holmes and made available to Ms Cooper but not to Mr Davies or Ms Cooper-Davies.
[65] On 17 May 2011, an email was received by Ms Cooper from Mr Christian of Pace suggesting a further meeting on 20 May 2011 to discuss the Holmes report and what was required for the insurer to “knock the building down”.
[66] Mr Sherry sent an email to Mr Davies on 18 May 2011 advising that the Trust consented to the share sale. Mr Davies then emailed Ms Cooper confirming the condition in the sale contract.
[67] On 20 May 2011, there was a further meeting in relation to the estimated repair budget for the Madras Street building. Ms Cooper states that she had not seen this estimated budget prior to the meeting, and her understanding was that it was based on the Holmes report of 10 May 2011. However, she noted that the estimate was still well below the Madras Street building’s sum insured value of $5.6 million by almost $1 million. Further work was required. Ms Cooper says that her understanding was that, if a further revised budget was in excess of $5 million, then it was likely that the building would be condemned. That decision was for the insurer to make she said and in any event it was not certain.
[68] Settlement of the sale of the shares occurred on 26 May 2011 and settlement documents were also executed on that date. Ms Cooper then emailed the loss adjuster, Mr Ross Harvie, in relation to the Madras Street building. He responded on
10 June 2011 stating that he had recommended that the building be deemed a constructive loss. He noted there was still a difference of $500,000 between the sum insured and the estimated repair cost. Mr Harvie stated that the decision was going to be a difficult one for the insurer, Zurich.
[69] Christchurch then suffered a further earthquake on 13 June 2011. The Madras Street building was off limits until it was further inspected by an engineer. A copy of the report on this building following the earthquake noted that the Madras Street building was so badly damaged following the earthquake that it could potentially collapse in a foreseeable future earthquake event. Ms Cooper was advised that there had been a lot more damage to the building and Mr Christian of Pace advised that he was keen to begin the demolition of the building.
[70] As a result of the further damage caused by that aftershock, the fate of the building became clearer, although it was yet to be decided by the insurer. It was only at this point that Ms Cooper asked Mr Christian of Pace to obtain prices for the building’s demolition. It was obvious that as a result of the 13 June 2011 earthquake that the building was going to be demolished. However, the insurer had not authorised the demolition of the building nor had it confirmed whether the building would be deemed uneconomic to repair. On 27 July 2011, the company received a CERA notice requiring the building to be demolished.
Reopening of share sale and demolition of the Madras Street building
[71] On 16 August 2011, Ms Cooper received an email from her sister Ms Cooper- Davies. In that email, Ms Cooper-Davies expressed the view that given that the Madras Street building was being demolished and an insurance payment received on a replacement value that the sale contract was unfair. A further email was sent by Ms Cooper-Davies to her sister on 23 August 2011 to which Ms Cooper responded the same afternoon. Ms Cooper said that she was shocked first, to receive her sister’s email and also secondly that she had chosen to copy in Mr Medlicott, Mr Mark Sherry and their parents. Ms Cooper indicated that a draft response had been prepared and would be sent soon. It appears that Ms Cooper responded on
26 August 2011 to the effect that the land had been rezoned residential and the value would go down, there were no tenants and an insurance company that would not cover full replacement cost or building insurance were Ms Cooper to rebuild. She also noted that she was having trouble obtaining a suitable mortgage, she could not obtain construction insurance and that therefore rebuilding delays would continue. Ms Cooper noted also that as part of the share sale she had taken over the company’s liabilities (including an Adscalde debt of $24,000 and GST of $35,000), none of which Ms Cooper claimed was allowed for in the share calculation. She stated that the deal reached on the day was fair and was agreed by all parties at the time as the best way forward for the family, as Mr Davies and herself could no longer work together.
[72] Ms Cooper claims that Mr Davies drafted her sister’s subsequent response. In that email, it was proposed that the 3 May 2011 deal be reversed so that Mr Davies and Ms Cooper-Davies would now hold 45% of the Madras Street building instead of 50%. That 5% was aimed to compensate Ms Cooper for her risk. The email suggested that Ms Cooper-Davies become a director and that the proceeds of the Madras Street building should be split according to the shareholding.
[73] Ms Cooper’s response on 15 September 2011 rejected this offer and maintained that the decision by her sister and Mr Davies to sell their shares in the company was entirely their call and not hers. Ms Cooper maintained that she did not know the building was to come down and whilst it had been damaged on
22 February 2011, it was further damaged after that date as a result of ongoing earthquakes and aftershocks.
[74] There was further acrimonious email correspondence between the parties up to December 2011.
[75] In the meantime, a settlement agreement was reached by the company with its insurer, Zurich, on 7 October 2011 – that was on the basis of damage suffered on both 4 September 2010 and 22 February 2011 and this was formally recorded.
[76] The land at 323 Madras Street was sold in February 2013 by the company. The bare land was sold approximately two years after the February 2011 earthquake for $900,000.00. The land sale was settled on 28 February 2013.
[77] Throughout in her evidence Ms Cooper states that it is apparent from all the material before the Court that she and Mr Davies progressively clashed on various matters. In addition their respective views and that of her sister clearly differ in relation to what has happened here. Notwithstanding this, on a number of occasions in her evidence, Ms Cooper states that as far as they were concerned both she, Mr Davies and Ms Cooper-Davies still remained business partners with respect to their shareholdings in Leftclick House on a similar basis to their earlier business partnership arrangements in the company.
Third cause of action – s 149 Companies Act 1993
[78] The plaintiff’s primary cause of action here and the principal basis for its present claim is s 149 Companies Act 1993. It is convenient to turn first to consider this cause of action.
[79] Section 149 Companies Act 1993 provides:
149 Restrictions on share dealing by directors
(1) If a director of a company has information in his or her capacity as a director or employee of the company or a related company, being information that would not otherwise be available to him or her, but which is information material to an assessment of the value of shares
or other securities issued by the company or a related company, the director may acquire or dispose of those shares or securities only if,—
(a) In the case of an acquisition, the consideration given for the acquisition is not less than the fair value of the shares or securities; or
(b) In the case of a disposition, the consideration received for the disposition is not more than the fair value of the shares or securities.
(2) For the purposes of subsection (1) of this section, the fair value of shares or securities is to be determined on the basis of all information known to the director or publicly available at the time.
(3) Subsection (1) of this section does not apply in relation to a share or security that is acquired or disposed of by a director only as a nominee for the company or a related company.
(4) Where a director acquires shares or securities in contravention of subsection (1)(a) of this section, the director is liable to the person from whom the shares or securities were acquired for the amount by which the fair value of the shares or securities exceeds the amount paid by the director.
(5) Where a director disposes of shares or securities in contravention of subsection (1)(b) of this section, the director is liable to the person to whom the shares or securities were disposed of for the amount by which the consideration received by the director exceeds the fair value of the shares or securities.
(6) Nothing in this section applies in relation to a company to which
Part 1 of the Securities [Markets] Act 1988 applies.
[80] The section is essentially aimed at regulating share dealings by directors. The key provision in this particular case is s 149(1) which provides that if a director in his/her capacity as such has information material to an assessment of the value of the shares, the director can only acquire those shares if in the case of acquisition (as here) the consideration given for the acquisition is not less than the fair value of the shares. Section 149(2) alludes to what fair value means in this context – the fair value of shares is to be determined on the basis of all information known to the director or publicly available at the time.
[81] As noted, s 149 applies only if:
(a) A director has information in his or her capacity as a director or employee of the company or related company;
(b) The information would not otherwise be available to the director; and
(c) The information is price sensitive.
[82] If the information is publicly available the second limb of the test in s 149(1)
will not be met – Thexton v Thexton.1
[83] The relevant provision in this case is s 149(1)(a). Under s 149(4), if a director acquires shares or securities in contravention of subsection (1)(a), the director is liable to the person from whom the shares or securities were acquired for the amount by which the fair value of the shares or securities exceeds the amount paid by the director. It creates a form of strict liability – Insurego Limited v Harris.2
[84] As to fair value, the consideration for an acquisition must not be less than the fair value of the shares. The wording of s 149 requires the insider to trade at a price that reflects the value of the information. Even if the insider discloses the information to the other party, they cannot negotiate a price that represents less than the fair value in the case of an acquisition – Thexton v Thexton.
[85] Section 149 uses the term “fair value” rather than “fair market value”. This
distinction has particular relevance in the context of strategic minority shareholdings.
[86] The fair market value of a minority shareholding frequently incorporates a discount to reflect the minority shareholder’s lack of control over the company. That lack of control makes a minority shareholding less valuable to an arm’s length purchaser on an open market.
[87] However, a minority shareholding may have special strategic value to a majority shareholder. In those circumstances a minority discount may be
1 Thexton v Thexton [2002] 1 NZLR 780 (CA).
2 Insurego Limited v Harris [2013] NZHC 104 at [43].
inappropriate, particularly if the test is the fair value rather than the fair market value of that minority shareholding.
[88] But here we do not have a minority shareholding at issue – it is a 50% equal shareholding.
[89] There is a long background to this cause of action, in particular, disputes over what information the relevant people had in their possession and at what time.
[90] The key dates are as follows. An oral “agreement” or understanding appears to have been reached on 3 May 2011. On 9 May 2011 the conditional sale contract for the shares was signed by both parties. This contract as noted was conditional and it was not until 18 May 2011 (after an agreed extension) that this condition was satisfied. On 26 May 2011 settlement under the sale contract occurred.
[91] It is my view that no binding unconditional agreement between the parties came into effect until 18 May 2011. The actual transfer of legal ownership of the shares occurred on settlement on 26 May 2011. And, even taking the most favourable view of the events from Ms Cooper’s perspective, the conditional contract for the sale and purchase of the shares did not come into effect until it was signed in the afternoon of 9 May 2011.
[92] These are the possible operative dates as I see it when considering s 149
Companies Act 1993.
Did Ms Cooper have relevant price sensitive information that she did not disclose?
[93] Mr Harvie, the insurance assessor at [15] of his evidence considered what is an important issue here of when a building is considered to be “earthquake prone”. And significantly, as I understand it, in the case of Christchurch buildings he said that something around 90% of all buildings which are assessed as “earthquake prone” are considered not able to be economically repaired.
[94] His evidence also related to the 9 May 2011 meeting where he was present. Clearly the “bad news” which had been announced and passed on to Ms Cooper at that meeting was communicated to all present and the back of the envelope calculations from Mr Christian of Pace of some $4m - $5m increased repair costs mentioned to all including Ms Cooper.
[95] Mr Harvie’s clear evidence is also that on 17 May 2011 he confirmed his opinion this building was in all probability likely to be a demolition – his words were “the premises are likely to be demolished,” and this was also communicated to Ms Cooper. This demolition would be on the basis that the cost of repair would exceed about 80% of rebuild value.
[96] Mr Harvie stated that the 9 May meeting which was held with reputable consultants, and the Holmes May 2011 report, were both important here.
[97] Mr Christian of Pace in his evidence noted also that from early May 2011, he gave no information to Mr Davies about the Madras Street building (it being his view that Mr Davies was no longer involved.) And, about one hour after the 9 May
2011 meeting, Mr Christian also confirmed his opinion that the Madras Street building was likely to be a rebuild. On all of this, he acknowledged too that everyone at the meeting thought the building had deteriorated significantly.
[98] I am satisfied on all the evidence here that Ms Cooper from, at the latest,
9 May 2011 must have been aware that the Madras Street building was a possible potential rebuild rather than a repair. This would have resulted in a different insurance policy pay out figure in line with the back of the envelope calculations completed by Mr Christian at the 9 May 2011 meeting, and I am satisfied Ms Cooper must also have been aware of this. It is clear to me too that neither Mr Davies nor Ms Cooper-Davies were invited to attend this meeting. They did not then, earlier or later, receive what were in reality critical engineering reports and advice regarding the future of the Madras Street building. The evidence also suggests that Mr Davies and his wife had no involvement with the Madras Street property from, at the very latest, early May 2011.
[99] And certainly, I am satisfied that from the later date upon which the sale contract became unconditional (18 May 2011) much had happened with the assessments undertaken for the Madras Street building. On the evidence before me, I am left in no doubt that as at that later date, Ms Cooper had additional price sensitive information relating to the real possibility of a larger demolish and rebuild payout by Zurich insurance that was relevant here. And even more critically, from the date of settlement of the share purchase by Ms Cooper, being the date legal ownership of the shares was likely to have taken place (26 May 2011), even more vital information over the future of the Madras Street building was known.
[100] On this basis I consider that, as early as 9 May 2011 but certainly on
18 May 2011 and again on 26 May 2011, Ms Cooper did have specific information not publicly available in her capacity as a director of the company that would not otherwise have been available to her, which was material to an assessment of the value of the shares. Incidentally, this price sensitive information was not in any way disclosed to Mr Davies or Ms Cooper-Davies but, in any event, it had triggered the operation of s 149 Companies Act 1993.
[101] That said, in the case of a share acquisition like the present transaction, s 149 requires the consideration given by Ms Cooper for the purchase of the shares to be not less than their fair value. That must be determined in accordance with s 149 on the basis of all information known to Ms Cooper as the director at the time. It is of no moment that at that time, Mr Davies was a co-director (and indeed a lawyer). As I have noted at [83], s 149 applying here, if Ms Cooper’s acquisition of these shares at $150,000 is not at “fair value”, she will be liable to the plaintiff for the amount by which that fair value exceeds $150,000. This is a form of strict liability as Insurego Limited v Harris notes. The principle is clear – Ms Cooper was required to “abstain or pay full value” for the shares and she did not.
[102] I now turn to consider this aspect.
Issues as to share valuation
[103] The parties provided a certain amount of evidence in relation to the fair value of the shares here. I propose to traverse the relevant parts of that evidence to come
to what I consider is a reasonable assessment of the fair value of the shares at the time of this transaction.
Mr Medlicott
[104] Mr Medlicott, the original accountant to the parties here, gave evidence as to fair value of the shares. He outlined the background to the share sale contract and Mr Davies’ original offer on 16 February 2011. He noted that both Mr Davies and Ms Cooper were in possession of a valuation report and based on that report, they agreed the property’s value at the time. His assessment of the fair value of the shares in May 2011 however, (but calculated only on the basis of the actual final insurance payout) was $724,500.00. That took into account the land value at $700,000.00. He did say that this figure would be entirely flexible for risks, for example, if there was any further reduction in the land value or other risk factors. And significantly, as I understand his evidence, Mr Medlicott considered that the shares would be regarded as being acquired by a purchaser when an unconditional agreement for sale and purchase is effected. In the present case, this would have been on 18 May 2011.
Mr Hadlee
[105] Mr Hadlee, was called as a witness for Mr Davies and Ms Cooper-Davies. He is an experienced chartered accountant who has given evidence as an expert witness in many cases of this type.
[106] His brief was to place a fair value on the shares for the purposes of the sale contract transaction with a date for the valuation of between 9 May 2011 and 18
May 2011. The period of about one week he said made no difference to his opinion.
[107] The valuation method he used was the notional liquidation method which he says was standard practice in the case of a property investment company. He noted that the expression “fair value” as specified in share valuation literature, including comments of Mr Glover in the accountant’s digest, is “based on the desire to be equitable to both parties” and “must recognise what the seller gives up in value and what the buyer acquires in value through the transaction.” This was to be monetary
value alone and could not bring into account emotions or feelings of the parties concerned.
[108] Mr Hadlee said an important factor to take into account here was hindsight and he quotes from Adamson at [29] of his brief of evidence. In this regard he suggested that “to determine compensation an arbitrator should avail himself of all information at hand at making his award.”
[109] His conclusion at [38] of his brief of evidence was that “in examining what Mr Davies gave up and what Ms Cooper acquired it is self evident that the exchange was far from equal, being heavily in Ms Cooper’s favour.”
[110] Mr Hadlee did state that it was not for him to address the knowledge of the parties at the time the transaction took place, as this was a matter for the Court. Notwithstanding this he noted that, had Mr Davies known at the time that the Madras Street building was likely to be demolished with a potential upsurge in the value of the company, to accept anything less than a half share of the company’s adjusted liquidation value would make little sense.
[111] Adopting this valuation method he valued Mr Davies and Ms Cooper-Davies
50% shareholding in the company at a fair value of $852,500.
[112] In addition he noted that at 31 March 2012 the company had tax losses of approximately $583,000. If the company was retained by Ms Cooper for her future use the losses, he says, would have a value of .28 cents in the dollar, which is around
$163,000.
[113] On this basis, he considered it to be fair and reasonable that the value of a
50% shareholding should be increased in recognition of the tax loss advantage. He said it was not unrealistic to regard this benefit as being worth approximately
$80,000.
[114] And generally, on the $150,000 sale price for the shares, Mr Hadlee’s oral evidence was that “this concerns me greatly because there had been a fairly major
swing in the pendulum from this company from repair to demolition and total loss it
seems around this time and this had a dramatic effect on the value of the shares”.
Mr Munn
[115] Next, Mr Munn, a chartered accountant and corporate finance partner at Price Waterhouse Coopers, was called as a witness for Ms Cooper. He did not agree with Mr Hadlee’s valuation approach.
[116] At [16] of his brief of evidence, Mr Munn said that his instructions were to value the 50% shareholding in the company as at 9 May 2011 and 18 May 2011 and to consider whether the price of $150,000 paid by Ms Cooper represented fair value.
[117] At [17] of his evidence, Mr Munn records what he says is an important requirement here:
What reasonable considerations each of the parties should have had based on what was known (and unknown) at that time i.e. what potential risks and rewards were the parties taking on as a consequence of increasing/reducing their exposure to the Christchurch property market at that time.
[118] On this aspect, he notes that the Canterbury property market in May 2011 had considerable uncertainty and risk.
[119] In valuing the shares to estimate the fair value of the company he considered two possible outcomes:
(a) The first, in which the Madras Street building is deemed repairable, the repair and re-tenant scenario; and
(b)The second, in which the property is deemed irreparable by the insurer – full settlement and sale.
[120] Under each scenario, he considered what a low and high case could represent in terms of potential cash flow for the business. He considered this to be relevant, given that he had stated earlier that the potential value of the property, like any investment, was to be determined by considering what potential cash flow it could
generate, how certain were these potential cash flows, and what were the associated risks?
[121] In looking at highs and lows for the repair and re-tenant option, Mr Munn provided a high case of $4.79m and a low case of $3.39m.
[122] For the full settlement and sale option, he provided a high case of $7.05m and a low case of $5.45m.
[123] In doing so, he reached a point in his evidence at [55] where he stated that the transaction value of $150,000 for 50% of the shares in his view “appears fair.”
[124] In his oral evidence before me, Mr Munn confirmed that he had calculated this figure on the basis that in May 2011 there was an 80% likelihood that the Madras Street building would have been a repair and re-tenant situation, with only a
20% possibility that it would have been a demolition with full settlement and sale. At [59] of his brief he states “the owners were the best placed to assess the relative probabilities of potential outcomes and I have been advised that the evidence suggests that neither Mr Davies nor Ms Cooper considered the full settlement scenario more likely than not.”
[125] When Mr Munn was cross-examined on this by Mr Brodie, for the plaintiff, it does seem he accepted that, had Mr Munn known at the time the comments that were made in the 9 May 2011 meeting and the Holmes report, which indicated that demolition was likely, he would have adjusted this 80/20 conclusion.
[126] In saying this, again in his oral evidence Mr Munn confirmed that if he was told that the chances of repair were only 50% with a 50% chance of demolition, then his assessment of the total value of the company, instead of the $4.4m which he used for the 80/20 calculation, would have been around $5.1m.
[127] Then, when questioned further, Mr Munn said that if the calculation had been a 75% chance of demolition and 25% chance of repair and re-tenanting in May 2011, his total assessment of the fair value of the company would have been around $5.7m.
[128] He did say however that, in considering risk, people often placed greater emphasis on risk of failure matters even when the likely proportions were 50/50. This should be factored in in some way he concludes in his evidence.
[129] Mr Munn also seemed to indicate that in his view Mr Hadlee’s valuation was flawed in that Mr Hadlee had not factored in any amount for risk in his fair value figure of $852,500. Mr Hadlee, it seems, simply said that was the ultimate valuation outcome, for the company, notwithstanding that it was an outcome that was not concluded until the final insurance settlement and land sale payments were received many months later. Mr Munn opines therefore that Mr Hadlee should have factored in certain risk elements given possible uncertainties which existed as at May 2011.
[130] I agree. Whilst it might be appropriate on some occasions to use a pure hindsight valuation basis in completing a company share valuation (see Riddle v Riddle)3, in my view in this case that is not appropriate. A range of risk elements existed here as at 9 May 2011 and even as at 18 May 2011 and 26 May 2011. These would have included the following:
(a) The possibility (although extremely remote here given that the company was Zurich New Zealand) that the insurer of the Madras Street building (perhaps like an AMI situation) might have faced financial difficulty and been unable to pay out under the company’s building insurance policy.
(b)The possibility that Zurich Insurance for whatever other reason had refused a payout or endeavoured to negotiate a lower payout in terms of the insurance policy, meaning that the company would be required to sue to enforce its rights with the attendant cost that would involve.
(c) The possibility that Zurich Insurance would simply have delayed all policy payout negotiations, again resulting in the need for the
company to sue.
3 Riddle v Riddle (HC) Christchurch CIV-2005-409-000335, 17 August 2005, Fogarty J at [26].
(d)In both previous situations at (b) and (c), the delay in receiving any insurance company payout for a demolition and rebuild might have caused difficulty for the company in funding its mortgage payments (once the loss of rental insurance cover had run out) and paying other company debts in the meantime. In addition, the payment delay, legal and other costs to pursue litigation against Zurich Insurance to enforce the company’s rights under the insurance policy could be onerous and affect the company’s value.
(e) Structural engineering or other advice might have changed, such that any final payout to the company could be affected.
(f) The sale value of the land was quite unknown at the time and could have been detrimentally affected by re-zoning, new building requirements and indeed Christchurch CBD red zone issues imposed by the local authority or the Crown.
(g)Possible future risks might also arise generally for the property and its value simply because it was situated in the Christchurch CBD red zone area alone.
(h)Finally, although again rather remote, there might have been some issue over the original completion of the insurance policy proposal or the like, such that a question over the validity of the policy and the payout to the company might arise.
[131] With all these possible risk elements in mind, there must in my view be some discount for risk factors from the pure hindsight valuation undertaken by Mr Hadlee in this case. I say this bearing in mind that any consideration of what truly represents the fair value of the shares in question as at either 9, 18 or 26 May 2011 must take into account the state of knowledge existing at that time.
My decision on “fair value”
[132] Each of the quantum experts here (Mr Medlicott, Mr Hadlee and Mr Munn)
in their evidence considered that, given the state of knowledge which existed around
18 May 2011 as to the likelihood that the Madras Street building was a demolish and rebuild rather than a repair, the $150,000 purchase price paid for the plaintiff’s shares did not represent fair value. I agree.
[133] I do not however accept that in this case the pure hindsight valuation undertaken by Mr Hadlee, for the reasons outlined above, is appropriate. In May
2011 the risk factors identified meant that there was no absolute certainty that the final insurance pay out to the company made in a reasonably timely way would eventuate.
[134] The evidence before me on these quantum aspects in this case unfortunately is rather limited. In my view, the appropriate way forward here is really only that which is suggested by Mr Munn in his evidence for Ms Cooper. Broadly, this is supported by Mr Medlicott and arrives at a midpoint on the high and low cases spectrum for his full settlement and sale option.
[135] Taking a fair approach to the situation prevailing between these parties on
18 May 2011, I am of the view that the real chance of this being a demolition and rebuild here was 50%. The only evidence of any kind before me as to this 50% rebuild chance, factoring in all the other risks at the time, is that of Mr Munn noted at [126] above.
[136] I find therefore that the fair value of all the company shares in this case as at
18 May 2013 based on what figures are before me total $927,165.00. I do not make any adjustment from this figure for what Ms Cooper contends were debts of the company not taken into account in the original valuation. There is no substantiation before the Court of any of this.
[137] Nor am I prepared here to make any further adjustment to the share sale value based upon an amount representing the value of continuing company tax losses or the like. As I see it, there is always a degree of uncertainty as to whether matters
such as tax losses can be properly utilised in the future. No adjustment for this is appropriate here.
[138] I conclude therefore that the sale contract price for the plaintiff’s shares of
$150,000 did not represent fair value for those shares as at 18 May 2011, the unconditional date under the sale contract, when I consider a binding agreement existed. Instead, I find here that the fair value of this 50% shareholding in the company at that time was $463,582.00 This is calculated as follows:
(a) Total assessed gross value of the company as noted at paragraph [126]
above - $5.1m.
(b) Less company debts - $4,172,835.00.
(c) Net value representing total shareholding - $927,165.00.
(d) One half to equate a 50% shareholding equals $463,582.00.
[139] An order for payment by Ms Cooper of $313,582.00 being this $463,582.00 amount less the $150,000.00 already paid is to follow. That disposes of the plaintiff’s claim here but for the purposes of completeness I will briefly mention now their remaining causes of action.
Contractual Mistakes Act – mutual mistake
[140] For the plaintiff it is submitted that mutual mistake under s 6(1)(a)(ii) Contractual Mistakes Act is applicable here as both parties had a mistaken belief that the Madras Street building was economically repairable.
[141] Broadly speaking however, I do not consider that this is a situation of mutual mistake – it was a question of the available information and the ever-evolving situation in Christchurch at the time, a situation which to an extent still exists currently.
Contractual Mistakes Act – unilateral mistake
[142] The plaintiff also suggests that unilateral mistake under s 6(1)(a)(i) Contractual Mistakes Act applies here as Mr Davies had a mistaken belief that the building was economically repairable.
[143] In brief, my initial response is that I do not consider that this is a unilateral mistake. Again, it was simply a question of the available information and the ever- evolving situation in Christchurch at the time.
Contractual Remedies Act 1979
[144] In this cause of action, it is alleged that prior to the formation and/or confirmation of the sale contract, Ms Cooper misrepresented the true position with respect to the state of repair of the Madras Street building and consequently the likely outcome of the insurance claim.
[145] My initial view here is that there is insufficient evidence to find that Ms Cooper directly misrepresented the true position to Mr Davies and Ms Cooper- Davies with respect to the Madras Street building. The claim under this cause of action is also likely to fail here.
Fair Trading Act 1986
[146] It is also alleged that the first and second defendants engaged in misleading and/or deceptive conduct in relation to the sale contract in that they represented to the plaintiff that the Madras Street building was economically repairable on various occasions as set out in the statement of claim.
[147] Again, my initial response is that I do not consider that a breach of the Fair
Trading Act 1986 is made out on the evidence provided here.
Breach of fiduciary duty
[148] It is also alleged that the relationship between Mr Davies and Ms Cooper was a relationship of trust and confidence. In particular, they regarded themselves as
being in partnership – this is certainly the language used throughout the contemporary documents. Clearly they were each directors of small closely held companies. They were each committed to the success of their companies and worked for the companies often without remuneration. There was a close personal and family relationship. They were accustomed to relying upon each other in relation to their business affairs, and to the knowledge of Ms Cooper they both relied on the advice of the company’s accountant, Mr Medlicott.
[149] Beyond the s 149 statutory duty, a broader fiduciary relationship may arise in certain circumstances in the context of a closely held private family company (Coleman v Myers).4 This is when a director acquires shares from a shareholder whilst in possession of material information about the value of the shares which is not disclosed to the shareholders. A broader fiduciary duty does not arise automatically in every such situation. It requires the presence of additional factors.
[150] In this case, my preliminary view is that a fiduciary duty might be made out, given the close family relationships among those involved and the fact that their business affairs were conducted in an analogous way to a partnership.
[151] But did Ms Cooper breach that fiduciary duty? In my view, it is possible that she did in fact do so by not disclosing material information to Mr Davies. But given my decision on the s 149 breach above, I need give no final determination on this aspect here.
Conclusion
[152] For the reasons outlined above the plaintiff’s claim against the defendants under s 149 Companies Act 1993 succeeds. An order is now made that the defendants are to pay to the plaintiff the sum of $313,582.00 representing the difference between what was paid for the 50% shareholding in the company and
their fair value.
4 Coleman v Myers [1977] 2 NZLR 255 (CA).
Costs
[153] Costs are reserved. If counsel are unable to agree between themselves on the issue of costs they may file memoranda sequentially which are to be referred to me and in the absence of either party indicating they wish to be heard on the matter I will decide the question of costs on the material then before the Court.
...................................................
D Gendall J
Solicitors:
G M Brodie, Christchurch
Harmans Lawyers, Christchurch