Cronin v Mackintosh
[2011] NZCA 408
•23 August 2011
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA888/2010 [2011] NZCA 408 |
| BETWEEN VICKI ANNE CRONIN AND CHARMAINE MACKINTOSH |
| AND ALISTAIR ROBERT MACKINTOSH AND RUSSELL GARTH WILSON |
| Hearing: 14 July 2011 |
| Court: O'Regan P, Arnold and Stevens JJ |
| Counsel: G A Hair for Appellants |
| Judgment: 23 August 2011 3 pm |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe decision of the High Court declaring the value of the preference shares in Glenafric Run Limited to be $50,000 is quashed.
CWe quash the costs award made in the High Court.
DWe make no award of costs.
EWe reserve leave to apply for an order that costs be met from the estate of Ian Mackintosh.
_______________________________________________________________
REASONS OF THE COURT
(Given by O’Regan P)
Introduction
This is an appeal from a judgment of Chisholm J determining a preliminary issue in relation to a claim under the Family Protection Act 1955.[1]
[1] Cronin v Mackintosh HC Christchurch CIV-2009-409-1329, 1 December 2010.
The preliminary issue concerned the valuation of certain shares in a family company, which Chisholm J found to be worth $50,000. The issue on appeal is whether Chisholm J adopted the right approach to the valuation and reached the right result. For reasons which we will set out later, we have real misgivings about this preliminary issue being dealt with separately from the underlying Family Protection Act dispute.
In order to provide a proper context for the present appeal we will briefly outline the background to the Family Protection Act dispute and the decision of the High Court Judge.
Background
Vicki Cronin commenced a claim under the Family Protection Act against the executors of the estate of her father, Ian Mackintosh, in November 2008. The executors are the respondents to the present appeal. They were not represented at the appeal and abide by the decision of the Court. Ms Cronin’s sister, Charmaine Mackintosh, filed a notice of intention to appear at the hearing of Ms Cronin’s application in support of that application. Their two brothers, John Mackintosh and Andrew Mackintosh, filed notices of intention to appear in opposition. In broad terms, therefore, the dispute is between the daughters of Ian Mackintosh on the one hand and his sons on the other. For ease of reference we will refer to them by their Christian names.
Mr Mackintosh senior and his wife Ruth owned a farm in North Canterbury. As part of an estate planning arrangement, the farm was transferred to a company owned by a family trust. The company was called Glenafric Run Limited. The share capital of the company was 2,000 shares, of which 1,600 were preference shares and 400 were non-voting ordinary shares. The preference shares had a par value of $1 per share. They carried a right to a preferential dividend of five per cent of their par value per annum ($80) and on liquidation entitled the holder to be paid that par value ($1,600).
On re-registration of the company under the Companies Act 1993, the preference shares ceased to have a par value, and the rights attaching to them under the constitution adopted on re-registration are unclear. However the parties have agreed that the preference shares currently have the same rights as they had at the time of the incorporation of the company (a preferential dividend of $80 per year and the right to be paid $1,600 on liquidation).
The non-voting ordinary shares were held by the family trust and the preference shares were held by Mr Mackintosh senior. It was clear from the contemporary correspondence between Mr Mackintosh senior and his advisers that the intention was that the economic benefits of farm ownership should accrue to the family trust through its holding of non-voting ordinary shares and that Mr Mackintosh senior should retain complete control of the farm through his holding of the preference shares.
Initially, the company leased the farm to Mr Mackintosh senior under a lease entered into in the 1970s. Later, a farming partnership was formed between Mr Mackintosh senior and John. Later this became a partnership under which Mr Mackintosh senior had a half share and Mrs Mackintosh and John had quarter shares. When Mrs Mackintosh died in 2002, her quarter share passed to Andrew. When Mr Mackintosh senior died his half share was divided equally between John and Andrew. So the position now is that the farming partnership comprises John and Andrew who have equal shares. The partnership leases the farm from the company but, because the original lease has expired, it does so under a tenancy at will, terminable at a month’s notice.
Under the terms of the family trust, John and Andrew became holders of the 400 non-voting ordinary shares in the company. The trustees have transferred 200 of those shares to each of them. Under Mr Mackintosh senior’s will, the preference shares were left to Vicki and Charmaine in equal shares. This has created significant difficulties for the parties because, in essence, it has disaggregated control of the company from the economic ownership of the company.
The executors of Mr Mackintosh senior’s estate have not transferred the preference shares to Vicki and Charmaine, apparently because they are awaiting the outcome of the present proceedings. The executors have used their powers as holders of the preference shares to appoint one of their number, Alistair Mackintosh, as well as John and Andrew to be directors of the company. Vicki and Charmaine were not consulted about this and their complaints about it have not been heeded. So although Vicki and Charmaine have inherited the shares, the powers attaching to the shares have been used to appoint as directors the parties with whom they are engaged in litigation over the estates.
We do not have information about the other aspects of the family protection claim commenced by Vicki.
Vicki’s claim was commenced in the Family Court but was removed to the High Court for hearing. At a telephone conference in July 2010, all counsel asked that there should be a hearing “devoted to the preliminary issue concerning the proper approach in this case to the valuation of shares”. Chisholm J acquiesced in that request. The hearing took place in November 2010. The judgment of Chisholm J records that the judgment is an interim judgment, and that it “concerns the value of the preference shares in Glenafric Run Limited”. It notes that the issue was argued as a preliminary issue “because the outcome is critical to the underlying family protection proceedings”.
Expert evidence
The Judge had before him two expert views on the value of the preference shares. Each was from a Christchurch accountant. The first was put forward by Vicki and Charmaine. The witness, Ms Julie Millar, said that the value of the preference shares was between 20 and 25 per cent of the market value of the company’s assets, adopting an approach modelled on that taken in Holt v Holt.[2]
[2] Holt v Holt (1987) 3 NZCLC 100,096 (HC); [1987] 1 NZLR 85 (CA); [1990] 3 NZLR 401 (PC).
Adopting this approach led her to set a fair value of $1,200,000, which was a mid-point between 20 and 25 per cent of the notional liquidation value of the company. After the value of the farm was reassessed downwards, and the notional liquidation value fell commensurately, Ms Millar revised her valuation to a figure between $735,000 and $918,000.
The expert evidence on behalf of Andrew was from Mr Barry Hadlee. However, his report was prepared on the basis of an instruction given by counsel for Andrew “to consider the value of the preference shares under circumstances in which Section 174 of the Companies Act 1993 may apply”. He elaborated on this as follows:
My instruction is to assume that if the voting rights attaching to the preference shares were used in a manner that might breach Section 174, that Andrew and John Mackintosh would seek relief from the High Court. My further instructions are to assume that the right of control might be removed or neutralised by the granting of relief under Section 174(2). I take the matter no further because these are legal issues.
Against that background, Mr Hadlee said that the preference shares were worth only $1,600, that is the amount to which the preference shareholders would be entitled on a liquidation. However, he qualified this by what he called an alternative approach, which recognised that the ownership of the preference shares was a matter of importance to John and Andrew because the current ownership structure prevented them from proceeding with their own estate planning arrangements. He described this as a “nuisance value”. This led him to place a value of $15,000 on the preference shares on the basis that there was “an inconvenience cost which will be avoided as a result of their transfer to John and Andrew Mackintosh”.
Holt v Holt
As noted earlier, the valuation prepared by Ms Millar was underpinned by the decisions of the High Court, this Court and the Privy Council in Holt v Holt. That case was a relationship property case. In establishing the wife’s claim, it was necessary to value the husband’s shares in a farming company which had some similarities with Glenafric Run Limited. The Holt family company had a capital of 1,000 shares of $1 each. One of these was an A share which was held by the husband. The remaining 999 shares were B shares, and were owned by a family trust (and therefore not relationship property). The single A share carried 10,000 votes whereas each B share carried one vote. This meant that the holder of the A share had voting control. However the A share was entitled only to a pari passu share on liquidation (1/1,000).
In the High Court, Heron J said that the husband, as holder of the A share, had control of the farming operation and could pass that control on to others. He saw the acquisition of the A share by the B shareholders as something which would have considerable value to them. Ultimately he determined that the true market value of the A share was between $150,000 and $200,000, and settled at the lower figure. This compared with a notional liquidation value of the company of $640,000.
In this Court, Cooke P noted that the figure settled on by the High Court Judge was in the region of 20 to 25 per cent of the market value of the company’s assets. He said:[3]
Without proposing any invariable rule, I should have thought that 20 per cent to 25 per cent of the market value of the company’s assets could well represent the fair value of control.
[3] At 91.
McMullan J and Somers J agreed in the conclusion, though both indicated some concern that the value was at the high end of the available range.[4]
[4] At 95 per McMullin J and at 98 per Somers J.
In the Privy Council, Lord Templeman described the position of the A shareholder as akin to:[5]
[T]he position of a tenant for life impeachable for waste. He can appoint himself sole director and in that capacity take possession of the farm estate, the farmhouse, the livestock, the machinery and equipment and all other assets of the company. He can occupy the farmhouse as a family home, he can run the estate as he thinks fit. Unlike a farming manager he cannot be dismissed and is not obliged to consult or take instructions from anyone. He is as much the squire of the Woodah farm estate as a tenant for life and can even cause the estate to be sold if he pleases. He cannot sell capital assets and put the money in his pocket, he cannot commit waste and he cannot artificially increase the profits of the farm for his own benefit by allowing the condition and state of repair of the estate to deteriorate. But if he would like to farm the estate and enjoy the advantages of being a farmer in the Wairau Valley as long as he likes, drawing reasonable remuneration, he cannot be interfered with.
[5] At 403.
The Privy Council upheld the Court of Appeal’s decision.
Chisholm J distinguished Holt v Holt for three reasons, namely:[6]
(a)Whereas the husband in Holt v Holt was the director of the company, in the present case the directors were John and Andrew. That meant that in order to remove day to day control of the company from them, they would need to be removed from office by Vicki and Charmaine. In fact, as noted earlier, John, Andrew and one of the executors, Alistair Mackintosh, are the directors of the company. In our view, this factor should not have been seen as a basis for distinguishing Holt v Holt. While Vicki and Charmaine are not currently directors of the company, they are entitled to be directors (or at least will be entitled once the preference shares are transferred to them by the executors).
(b)The second reason Chisholm J gave for distinguishing Holt v Holt was that a purchaser in the present case would take into account that any attempt to remove John and Andrew might trigger an application under s 174, of the Companies Act 1993, given that John and Andrew may have reasonable expectations of being in control of the company.[7] We do not see how that can be the case. The constitution provides for five directors. The executor could be expected to resign as a director when the shares are transferred to Vicki and Charmaine, and at that point all they would need to do to obtain control would be to appoint three directors (whether including themselves or not). We do not see how s 174 could be engaged in those circumstances. Indeed, we do not see the removal of John and Andrew triggering a successful action under that provision either given neither was a director in Mr Mackintosh senior’s lifetime and the clear decision made by Mr Mackintosh to leave the preference share to Vicki and Charmaine. In other words, we do not see that this second basis for distinguishing Holt can be sustained. As we understood it from the counsel for John and Andrew, they accepted this.
(c)The third basis for distinguishing Holt was that John and Andrew were in actual possession of the farm which formed the primary asset of the company, whereas in Holt the husband had that position. We accept that John and Andrew as the partners of the partnership are currently in possession of the farm, but that is the case only because the partnership is operating under a monthly tenancy from the company. Their tenure is, therefore, perilous. Nevertheless, we do accept that the husband in Holt v Holt was able through his holding of the voting control in that case to effectively assert the right to farm the property himself during his lifetime, and a similar right could be exercised by any successor entitled to the shares giving voting control. While that appears to be theoretically the case here, there would be obvious difficulties for Vicki and Charmaine in terminating the lease and evicting their brothers from the farm which makes the position of the holder of the preference shares in this case somewhat less attractive than the position of Mr Holt in Holt v Holt.
High Court judgment
[6] At [37]-[40].
[7] Latimer Holdings v SEA Holdings NZ Ltd [2005] 2 NZLR 328 (CA).
Having distinguished Holt v Holt, Chisholm J rejected Ms Millar’s valuation which was based on the premise that Holt v Holt applied. He did not, however, adopt Mr Hadlee’s valuation either. He considered that Mr Hadlee had understated the cost of liquidating the company and had wrongly omitted to make some allowance for the fact that a purchaser would pay a premium for the preference shares to avoid litigation. He determined that the value of the preference shares was $50,000.
Our approach
As will be apparent from our comments on Holt v Holt, we do not consider that the prospect of litigation under s 174 neutralises the control of the company that Vicki and Charmaine will have when the preference shares are transferred to them and they use their power and appoint directors. We consider that the assumption on which Mr Hadlee’s valuation was made is incorrect. We therefore put to one side his valuation. We also differ from the conclusions reached in the British Columbian case, Re Mann Estate, in which an approach similar to that taken by Mr Hadlee was applied to the valuation of 10 voting shares in a company which also had 990 non-voting shares. We see that case as specific to the particular expert evidence on market value that was before the Court.[8]
[8]Re Mann Estate [1972] 5 WWR 23 (BCSC); aff’d [1973] CTC 561 (BCCA); aff’d [1974] CTC 222 (SCC).
That leaves us with Ms Millar’s valuation. But we see difficulties in applying that as well. While we can accept that there are similarities between Holt v Holt and this case, we do not see that case as mandating any rule which must be applied in valuations in these circumstances. We consider there is a degree of artificiality in attempting to apply valuation methodology involving willing seller and willing buyer in circumstances where neither party, in reality, has an interest in the company which is able to be attractively marketed.
That leads us to consider the apparent pointlessness of litigation to answer this preliminary question in the absence of any commitment by one party to buy the other’s shares. Chisholm J was aware of this because, after he set his value, he concluded his judgment by saying:
If John and Andrew are prepared to purchase the shares at that figure [$50,000], one of the contentious issues will have been resolved. The corollary is, of course, if Andrew and John are not prepared to purchase the shares at that value nothing is achieved in the resolution of the family protection proceedings.
Indeed we were told that, if the value was set at too high a figure, then John would himself commence proceedings under the Law Reform (Testamentary Promises) Act 1949 and the Family Protection Act. We were advised by Mr Till QC that John was willing to pay the $50,000, but would not commit beyond this point. Mr Rennie confirmed the same position for Andrew. In those circumstances we do not see how the setting of a value in the present context really assists the parties at all. This case is quite unlike Holt v Holt where the shares being valued were held in the name of the husband and all the Court was deciding was the way of valuing the amount which the husband had to pay to the wife to represent her interest in those shares in terms of the Matrimonial Property Act 1976. The Court’s decision resolved the issue. In this case the Court’s decision resolves nothing.
We see this case as illustrating the difficulties that often arise when a separate question is tried apart from the context of the overall dispute. As Lord Scarman once remarked:[9]
Preliminary points of law are too often treacherous short cuts. Their price can be, as here, delay, anxiety and expense.
It is exacerbated in this case by there being no formal application and therefore no real record of what the separate question is. As we noted earlier, the way the issue was defined in the telephone minute and the way it was defined in the Judge’s decision was slightly different, and there is no pleading to which we can refer.
[9]Tilling v Whiteman [1980] AC 1 (HL) at 25. A similar sentiment was expressed by Lord Evershed MR in Windsor Refrigerator Co Ltd v Branch Nominees Ltd [1961] 1 Ch 375 (CA) at 396.
At the hearing we gave counsel the chance to consider the position and asked whether, in the circumstances, they wished us to proceed to issue a judgment in the present case. After that consideration, they said they did.
We have given full consideration to the parties’ wishes and to the submissions made both orally and in writing, but have determined that the preliminary question cannot properly be answered in isolation from the fundamental issues that arise in the Family Protection Act claim made by Vicki and supported by Charmaine. In our view, the High Court Judge should have declined to answer the preliminary question and directed that the issue raised be dealt with at trial, to the extent that it needs to be resolved in order to resolve the underlying claim. In those circumstances, we have concluded that the appropriate course is for us to formally allow the appeal and quash the High Court decision, but not to substitute a new answer to the question answered by the High Court Judge.
We are satisfied that the Court has jurisdiction to follow this course. This Court has, on appeal, all the powers of the High Court and can give any judgment that could have been given by that Court.[10] It is clear that the High Court could have declined to answer the preliminary question, and instead ruled that it be determined at the trial. We have considered whether we should adjourn the appeal.[11] That would allow it to be reactivated after the trial if need be. But we do not see that as appropriate, given that the preliminary question has been answered by the High Court. We see the quashing of the High Court decision as the best means of clearing the way for all issues to be dealt with at the trial.
Observations
[10] Court of Appeal (Civil) Rules 2005, r 48.
[11]As was done in Graham v Attorney-General [1966] NZLR 937 (CA) at 961 per North P. See also Jacobsen Venue Management New Zealand Limited v Worldwide NZ LLC [2008] NZCA 105 at [54].
In case it assists the parties in their settlement efforts, we make the following observations:
(a)An indicator of the value of the preference shares in this case, given the shareholding structure and the entities involved in ownership of the land and the farming business, is the amount by which the value of the ordinary shares is diminished by the absence of voting control of the ordinary shareholders. The land tenure exposure that lack of voting control creates for the farming partnership is an important additional factor. In our view, Mr Hadlee’s estimate of the “nuisance value” did not adequately reflect these realities, and the Judge’s higher valuation did not do so either.
(b)The approach taken by this Court in Holt v Holt needs to be viewed with some caution on the facts of this case. Two of the three Judges of this Court considered that the 20 per cent rule of thumb adopted in Holt v Holt was at the very top of the range available. The rights attaching to the shares in Holt v Holt were, in the context of that case, more attractive than in the present case where the control which the preference shares give is essentially a negative control preventing action by John and Andrew, but without really enhancing value for Vicki and Charmaine. We also consider that any attempt by Vicki and Charmaine to extract value from the company by, for example, taking over the farm themselves, selling the farm and creating another business or the like would be fraught with difficulties and litigation risk, making it unattractive to them.
The purchase of the preference shares by John and Andrew will give them absolute control of the farm. Such a purchase could also realise some value for Vicki and Charmaine that may obviate the need for litigation. In our view the positions presently taken by all parties on price are both unrealistic and unhelpful. However, purchase price in the region of $150,000 could, we believe, have the potential to advance the litigation. A purchase at that price would resolve a matter of dispute among the family members and provide a clear picture from which all parties can make a realistic assessment of the prospects of success of any present or future claims on the estate of Mr Mackintosh senior.
We emphasise that the figure of $150,000 is a suggestion, not a determination. Assessing a valuation for the preference shares in the present context is difficult and the exercise needs to be approached with some caution. If the suggestion does not prove to be of assistance to the parties and the case proceeds to trial, the trial Judge would not be bound to apply it and should not attach any significance to it in coming to his or her own view of the value of the preference shares, if a determination of their value is required.
Result
We allow the appeal. We quash the declaration made in the High Court.
Costs
This decision does not represent a win for any party. However, the appellants have succeeded to the extent that the High Court decision that they challenged has been set aside. In the circumstances we do not see that it is appropriate to award costs to any party and we consider that any costs award in favour of John and Andrew in the High Court should be quashed, so that costs in both Courts lie where they fall. Alternatively, costs of all parties should be met by the estate. If a ruling is required in this regard we reserve leave to any party to apply.
Solicitors:
Malley & Co, Christchurch for Appellants
Young Hunter, Christchurch for Respondents
Rhodes & Co, Christchurch for Interested Party Andrew Mackintosh
Saunders Robinson Brown, Rangiora for Interested Party John Mackintosh
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