Smalley v Williamson - [2023] NZCA 174

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

CA338/2022
[2023] NZCA 174

BETWEEN	JAMES HOWARD NIGEL SMALLEY Appellant
AND	GRANT ROBERT WILLIAMSON, IAN PERRY, DAVID MICHAEL HAYES, GRANT TREVOR DAVIES AND JEREMY DANIEL SULLIVAN Respondents

Hearing:	30 March 2023
Court:	Collins, Venning and Gendall JJ
Counsel:	D H McLellan KC and B K McLay for Appellant R W Raymond KC and J M McGuigan for Respondents
Judgment:	16 May 2023 at 9.30 am

JUDGMENT OF THE COURT

AThe application to adduce further evidence on appeal is declined.
BThe appeal is dismissed.
CThe appellant is to pay the respondents costs on a band A basis with usual disbursements. We certify for two counsel.

____________________________________________________________________

REASONS OF THE COURT

(Given by Venning J)

Table of Contents

Para no

Introduction

Background
The High Court proceedings and judgment

The issues on appeal
Further evidence
Summary judgment principles
Expert valuation
The terms of EY’s mandate
The appellant’s challenge to the summary judgment
Did EY comply with AES-2?
Analysis – EY’s compliance with AES-2
Post valuation date information
Inadvertent application of a discount
Reliance on significant new information after the draft report

Summary
The respondent’s support of the judgment on other grounds

Result

Costs

Confidentiality

Introduction

James Smalley formerly held shares in Hamilton Hindin Greene Ltd (HHG) and Overview Portfolio Ltd (OPL). The remaining shares were held by the respondents (the continuing shareholders). The companies provided financial advisory and investment services in Christchurch. In September 2018, Mr Smalley issued a transfer notice for the sale of his shares to the continuing shareholders.
The parties could not agree on the value nor, originally, the process for valuing the shares. After some time, in mid-2021, they agreed to instruct Ernst & Young Strategy and Transactions Ltd (EY) to value the shares.
EY issued a valuation report dated 22 December 2021 (the final EY report). Mr Smalley did not accept the valuation. The continuing shareholders sought an order for specific performance requiring Mr Smalley to transfer his shares at the value in the final EY report.
On 21 June 2022 Associate Judge Paulsen entered summary judgment for the continuing shareholders.[1] The Judge ordered Mr Smalley to specifically perform his obligation to transfer his shares in HHG and OPL at the amounts fixed in the final EY report.
[1]Williamson v Smalley [2022] NZHC 1452 (High Court judgment).
Mr Smalley appeals against the order for summary judgment.[2]

Background

[2]This Court has jurisdiction to hear the appeal as of right under s 56(4)(b) of the Senior Courts Act 2016.

Mr Smalley joined HHG as a financial adviser in 2001 and became a shareholder and director in 2013. Ultimately, he came to hold 30 per cent of the shares in both HHG and its related company OPL.
Mr Smalley resigned as a director and employee of the companies in mid-2017. On 23 March 2018 the parties agreed that he would provide his services to the companies as an independent contractor. The companies’ shareholders’ agreements were varied…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2023] NZCA 174
Decision Date: 16 May 2023 at 9.30 am

CaseChat Overview and Summary

Smalley v Williamson was a case before the court, where the dispute centred around the valuation of shares conducted by EY, a professional firm. The court was tasked with determining whether EY had acted within the terms of the contract and whether the valuation met the standards set out in the AES-2 standard. The primary legal issues revolved around whether EY exercised its professional judgment in accordance with the mandate and whether the valuation adhered to the specified standards and procedures outlined in the AES-2 Standard.

The court examined the interplay between clauses 33 and 34 of the AES-2 Standard, which outline the requirements for gathering evidence and the application of professional judgment in business valuations. Clause 33 mandates that sufficient evidence must be gathered to support the business valuation conclusion, while Clause 34 allows the valuer to exercise professional judgment in determining the extent of necessary evidence. The court concluded that EY was within its rights to use professional judgment, given its role as the sole arbiter of the relevance of any information provided. The case of Peregrine Estate Ltd v Hay was referenced to support the notion that the valuation is valid if carried out in accordance with the terms of the contract, regardless of any errors made by the expert, unless those errors were outside the scope of the expert's mandate.

In summary, the court found that EY had exercised its professional judgment appropriately and had acted within the bounds of the mandate and the AES-2 Standard. The valuation was deemed valid, and the court upheld the decision made by EY. The final orders reflected the court's findings, affirming the valuation conducted by EY as compliant with the contractual and professional standards.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

There is no suggestion that EY exercised its judgment other than in good faith. Further, the appellant’s reliance on cl 33 overlooks the position of that clause within the AES-2 standard overall. It is in a section of the AES-2 Standard headed ‘Performance standards and procedures’. The format followed in the standards is that the performance standard is set out in bold and then the following paragraph generally provides information as to the application of the standard. In that context cls 33 and 34 have to be read together as follows:33Sufficient evidence must be gathered by such means as inspection, enquiry, computation and analysis to ensure that the business valuation conclusion and the report are properly supported.34When determining the extent of evidence necessary to support the business valuation conclusion, the member should exercise professional judgement, considering both the nature of the business valuation and the use to which the report will be put. The application of cls 33 and 34 in this case is informed by the further instructions to the valuer, including that EY was to determine the information required and was to be the sole arbiter of the relevance of any information provided. Further, professional judgment by definition (even accepting the definition suggested by the appellant) supports a context specific discretion which vested in EY. In Peregrine the appellant’s accountant challenged the valuer’s assessment on the basis that she should have adopted a “notional liquidation” methodology and had wrongly applied a minority discount. This Court went on to review the decisions of Boat Park Ltd v Hutchinson, Legal & General Life of Australia Ltd v A Hudson Pty Ltd, and Hoffman LJ’s dissenting judgment in Mercury Communications Ltd v Director General of Telecommunications, which was endorsed by the Court of Appeal of England and Wales in Barclays Bank Plc v Nylon Capital LLP, and then concluded:[37][32] It is clear from these authorities that the critical question is always whether the valuation has been carried out in accordance with the terms of the particular contract. Errors on the part of the expert in carrying out the valuation assessment will not invalidate the determination unless the error was one the expert was not entrusted to make. Examples are where the expert has valued shares in the wrong company, valued the wrong number of shares, misunderstood the class of shares being valued or the legal rights attaching to them, valued the shares as at the incorrect date, or assessed the market value of the shares when the mandate was to assess their fair value. In mandating an expert to assess the fair value of speciﬁed shares, the expert is not authorised to: value shares in some other company; value a different number of shares; value shares in another class or having different legal rights; or assess the market value of the shares. That is not because there is an implied term that the expert must act rationally; it is because of the speciﬁcation in the mandate of the property to be valued and the stipulated basis on which the valuation is to be conducted.[37]Peregrine Estate Ltd v Hay, above n 20, citing Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA); Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 (NSWCA); and Hoffman LJ’s dissenting judgment in Mercury Communications Ltd v Director General of Telecommunications, above n 27, which was endorsed by the Court of Appeal of England and Wales in Barclays Bank Plc v Nylon Capital LLP [2011] EWCA Civ 826.

Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

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