Worldwide NZ LLC v QPAM Limited HC Auckland CIV-2006-404-1827
[2011] NZHC 1912
•24 November 2011
THISJUDGMENT HAS BEEN REDACTED IN ACCORDANCE WITH CONFIDENTIALITY ORDERS MADE ON 24 NOVEMBER 2011.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2006-404-1827
BETWEEN WORLDWIDE NZ LLC First Plaintiff
ANDJ J GOSNEY Second Plaintiff
ANDQPAM LIMITED First Defendant
ANDJACOBSEN VENUE MANAGEMENT NEW ZEALAND LIMITED
Second Defendant
AND JACOBSEN F.T. PTY LIMITED (ACN
108 254 440) Third Defendant
ANDJACOBSEN VENUE MANAGEMENT PTY LIMITED
Fourth Defendant
Hearing: 19-23 July 2010
2-6 August 2010
12-13 August 2010
Counsel: M J Fisher and K S Muston for Plaintiffs
A C Sorrell and S L Robertson for First Defendant
C P Browne and K J Sparrow for Second, Third and Fourth
Defendants
Judgment: 24 November 2011 at 11:30 AM
JUDGMENT OF POTTER J
WORLDWIDE V QPAM LIMITED HC AK CIV-2006-404-1827 [24 November 2011].
In accordance with r 11.5 High Court Rules
I direct the Registrar to endorse this judgment
with a delivery time of 11.30 a.m. on 24 November 2011.
Solicitors: Brookfields, P O Box 240, Shortland Street, Auckland 1140
S Germann Law Office, P O Box 1542, Shortland Street, Auckland 1140
Wilson Harle, P O Box 4539, Shortland Street, Auckland1140
Copy to: M J Fisher, P O Box 3236, Shortland Street, Auckland 1140
A C Sorrell, P O Box 3810, Shortland Street, Auckland 1140
S L Robertson, P O Box 854, Shortland Street, Auckland 1140K S Muston, P O Box 3236, Shortland Street, Auckland 1140
Table of Contents
Introduction [1] Background [4] Undertakings [9] The arena [16] Ownership and development structure [20]
Development Agreement [21] Design and construction contract [24] Other operational contracts [30]
Approach to valuation [31] Hindsight [43] Areas of difference between the experts [54] The Lucas approach to valuation [58] (a) Revenue assumptions [64] (b) Rental cost (reflecting land value increase) [99] (c) Small Company Risk Premium (―SCRP‖) [127] (d) ―Untested‖ cash flows discount [141] (e) Derivative proceeding value [148] (f) Minority and marketability discounts [190] (g) Pre-operational risks discount [217] Summary of determinations on valuation issue [241] Valuation of the ―B‖ units and shares of WWNZ [242] Other issues [245] Time for payment [247] Interest [258]] Rights of WWNZ pending payment for the ―B‖ units and shares [280] Summary of conclusions [324] Costs [327] Confidentiality orders [329] Appendix E
Appendix E1
Appendix E2
Appendix E3
Glossary of Terms
ACC Auckland City Council arena the Vector Arena
Bovis Bovis Lend Lease, project manager for the arena
CBD Auckland central business district
Court of Appeal 2006 judgment Worldwide NZ LLC v QPAM Ltd CA122/06, 10
November 2006
Court ofAppeal 2008 judgment Jacobsen Venue Management New Zealand Ltd v Worldwide NZ LLC [2008] NZCA 105
DCF discounted cash flow valuation methodology derivative proceeding the proceeding issued in 2005 by WWNZ and
(also referred to as ―the 2005 Mr John Utsick against the Jacobsen directors
proceedings‖) of QPAM under s 165 of the Companies Act1993
design and construction contract the contract dated 25 May 2004 between
QPAM and Mainzeal relating to the arena
development agreement the agreement dated 21 May 2004 between QPAM and ACC for the development of the arena
DPL Decision Programming Language – a financial modelling tool utilised by Mr Lucas
guaranteed maximum price the guaranteed maximum price under the design and construction contract
JVMNZ Jacobsen Venue Management New Zealand
Limited, the second defendant
JVM Pty Ltd Jacobsen Venue Management Ltd, the fourth defendant
Mainzeal the building contractor for the arena
PwC PricewaterhouseCoopers (the firm of which Mr
Lucas is a partner)
QPAM QPAM Limited, the first defendant
QPAM trust the Quay Park Arena Management Trust, the unit trust established by the unit trust deed dated 9 March 2004
QPAM trust deed/ the unit trust deed for the Quay Park Arena
unit trust deed Management Trust (QPAM trust) dated 9March 2004
SCRP small company risk premium
the Jacobsens the second, third and fourth defendants
the term the term of the development agreement – 40 years
Ticketmaster Ticketmaster7 Pty Ltd – party to a ticketing services agreement with QPAM
valuation date 26 April 2006
WACC weighted average cost of capital W T Partnership the project auditor for the arena WWNZ Worldwide NZ LLC, the first plaintiff
Introduction
[1] This judgment principally concerns the assessment and determination of the fair market value of the 25 per cent interest of Worldwide NZ LLC (―WWNZ‖) in the ―B‖ units in the Quay Park Arena Management Trust (―QPAM trust‖) and the
―B‖ shares in QPAM Limited (―QPAM‖) as at 26 April 2006 (―the valuation date‖).
It follows upon a declaration by the Court of Appeal in a judgment dated 16 April
2008 (―Court of Appeal 2008 judgment‖):1
... that the consideration to be paid for WWNZ’s units and shares is to be
their fair market value to be assessed if necessary by the court.
[2] The parties have not been able to agree the fair market value and therefore seek assessment and determination by the Court. WWNZ’s fourth amended statement of claim also refers to an option to be included in the fair market value but the parties agree the option has no value.
[3] This judgment also concerns the interim rights of WWNZ in the ―B‖ units and shares. In its fourth amended statement of claim WWNZ seeks further orders and declarations which I consider under the heading, ―Other issues‖, later in this judgment.
Background
[4] The background is usefully summarised in the Court of Appeal 2008 judgment2 and I adopt that summary.
[1] [QPAM] as trustee for the [QPAM trust] has developed the Vector Arena at Quay Park, Auckland, as a multi-use indoor sports and entertainment area. The QPAM trust was originally a joint venture between [WWNZ] as to a 25% interest and entities associated with the Jacobsen family of Australia (―the Jacobsens‖) as to 75 per cent. As might be expected in such a venture, the QPAM trust deed provides for rights of pre- emption which are triggered by, inter alia, a change in control of WWNZ. QPAM’s constitution provides that WWNZ’s shareholding in QPAM and units in the QPAM trust are ―stapled‖. The same is true of the interests held
1 Jacobsen Venue Management New Zealand Ltd v Worldwide NZ LLC [2008] NZCA 105 at [57].
2 At [1] to [5].
by the Jacobsens in both entitles. WWNZ is a subsidiary of The Worldwide Entertainment Group, a corporation based in Florida. Mr John Utsick was the WWNZ appointed director on the board of QPAM. The Jacobsens had three directors.
[2] In 2005, disharmony between the joint venturers led to WWNZ and Mr Utsick issuing proceedings (―the 2005 proceedings‖) under s 165 of the Companies Act 1993 alleging that the Jacobsen directors had preferred their own interests in concluding a ticket sales agreement for the Vector Arena.
[3] The Federal Court in Florida placed Worldwide Entertainment Group in receivership on 18 January 2006 and Mr Michael Goldberg of Florida was appointed as receiver. In early April 2006, Mr Goldberg purported to remove Mr Utsick as a director of QPAM and replaced him with Mr John Gosney of Auckland. There followed disputes between QPAM (and the Jacobsens) with Messrs Goldberg and Gosney about the process of appointing Mr Gosney, access by Mr Gosney to QPAM’s financial records and the adequacy of the records provided to him.
[4] In late April 2006, the Jacobsens’ solicitors emailed Mr Goldberg invoking their pre-emptive rights as holder of the ―A‖ units in the QPAM trust. This was on the basis that the receivership of The Worldwide Entertainment Group amounted to a change in control of WWNZ. They said that the Jacobsens were prepared to pay a ―fair price‖ for the ―B‖ units owned by WWNZ. They also maintained that WWNZ no longer had any rights in respect of the QPAM trust and QPAM. Mr Gosney’s appointment as director was thus said to be invalid. The Jacobsens have subsequently excluded WWNZ and Mr Goldberg from any participation in the affairs of QPAM or the QPAM trust. As well, they maintain that under the QPAM trust deed, the purchase price for the shares and units held by WWNZ in QPAM and the QPAM trust is to be fixed by QPAM.
[5] WWNZ and Mr Gosney issued a further set of proceedings (―the 2006 proceedings‖) in which they challenge the entitlement of QPAM and the Jacobsens to exclude them from participation in, and information about, QPAM and the QPAM trust and also the entitlement of QPAM to fix the purchase price for the shares and units of WWNZ. …
[5] The Court of Appeal summarised the relevant provisions of the constitution of QPAM and the trust deed for the QPAM trust:3
QPAM’s constitution provides for ―A‖ and ―B‖ shares. WWNZ’s shares in QPAM (amounting to a 25 per cent interest) are ―B‖ shares. The ―A‖ shares, which constitute the remaining 75 per cent, are held by the Jacobsens. The constitution contains no express rights of pre-emption. It does, however, provide that the ―A‖ shares ―correspond to and are stapled to‖ the corresponding ―A‖ units held by the ―A‖ unit holder in the QPAM trust. Similarly the constitution provides that ―B‖ shares in QPAM are stapled to the corresponding ―B‖ units held by the ―B‖ unit holder in the QPAM trust.
3 At [10].
[6] After considering the rights of pre-emption in the QPAM trust deed, which
the Court said were ―very badly drafted‖,4 the Court recorded:5
All parties agree that the Jacobsens may acquire the interests of WWNZ in QPAM and the QPAM trust and the consideration to be paid is their fair market value.
[7] Having considered the competing claims of the parties as to how the fair market value was to be established, the Court concluded that a more sensible approach was to construe cl 10 of the QPAM trust deed as requiring the ―B‖ unit holder to give the ―A‖ unit holder the opportunity to buy the shares and units at their fair market value, which could if necessary be fixed by the court.6
[8] The declaration that followed brings the issue of the fair market value before this Court. The Court of Appeal did not enter upon consideration of the interim rights of WWNZ, given that the appeal by the Jacobsens was against a refusal of summary judgment and dismissal of an associated strike out application.
Undertakings
[9] Certain undertakings relate to WWNZ’s claimed interim rights. It is
convenient to refer to them here.
[10] The Jacobsens gave an undertaking referred to by the Court of Appeal in its judgment dated 10 November 2006 (―Court of Appeal 2006 judgment‖)7 that the ―B‖ shares were not subject to any existing security interest created by the Jacobsens and that the Jacobsens undertook not to dispose of or charge the ―B‖ shares until:
(a) Jacobsen has paid for the shares in an amount fixed by QPAM as trustee, determined by the Court or determined as a result of a process either fixed by the Court or QPAM; or
4 At [18].
5 At [20].
6 At [40].
7 Worldwide NZ LLC v QPAM Ltd CA122/06, 10 November 2006.
(b) Jacobsen had paid $4.125m8 into a trust account to be held as security for its obligations to pay for the shares; or
(c) Further order of the Court.
[11] The Jacobsens gave the undertaking in the light of the following intentions:
(a) Once Jacobsen has paid the fixed amount it will be free to deal with the B shares even if Worldwide challenges either the amount paid or the process for fixing the amount; and
(b) If there is delay in determining the consideration to be paid and it becomes commercially necessary for Jacobsen to sell or charge the B shares Jacobsen will deposit money, equal to the cost of Worldwide’s acquisition of its interest, for retention of the shares.
[12] The Court said that while the undertaking refers to shares rather than shares and units, it was satisfied that it covered both. The Court noted that the ―B‖ shares and the ―B‖ units are ―stapled‖ which means that any restriction on disposal or charging of one must apply equally to the other. 9
[13] The Court considered that the undertakings provided reasonable protection for the position of WWNZ pending resolution of the disputes between the parties and completion of the pre-emptive rights process.10
[14] On 6 August 2010, during the hearing before me, QPAM filed an undertaking to the Court not to dispose of its rights to control the arena except on notice to the plaintiffs, in the following terms:
QPAM LIMITED undertakes to this Court that it will not dispose of the greater of 25% or $4.5m of the proceeds of any sale of its rights to control the Vector Arena. This undertaking shall remain in force until the expiry of
8 working days from written notice of the receipt by QPAM of any such sale proceeds to the Plaintiff care of its solicitors Brookfields, Attention David Neutze. Such undertaking is given without any acknowledgment that there is any actual or intended sale process by QPAM Limited of its interest in the Vector Arena.
8 $4.125m was the consideration provided in the Unit Subscription Agreement dated 4 March
2004 as varied by the Deed of Termination & Variation (undated but completed in or about November 2005) for the 15 ―B‖ units in the QPAM trust subscribed for by WWNZ. The consideration was $1.375m for the ―A‖ units subscribed for by JVMNZ. Debt funding was to be provided up to $4.125m by JVMNZ and $1.375m by WWNZ with JVMNZ paying $2.5m, and thereafter each party paying dollar for dollar up to the maximum amounts.
9 At [36]-[38].
10 At [39].
[15] The above undertaking by QPAM is referred to in my judgment of 6 August
2010 in this proceeding on WWNZ’s application for a freezing order. The application was declined on the basis that the above undertaking would be given by QPAM.
The arena
[16] Mr Lucas, the plaintiffs’ expert, provided relevant information in respect of the Vector Arena (―the arena‖). Mr Hussey, the expert for the Jacobsens, did not attempt to repeat the background in any detail but in evidence referred to certain aspects with which he took issue.
[17] QPAM as trustee for the QPAM trust developed the arena to provide Auckland with a world class multi-use indoor sports and entertainment arena. The arena was designed to provide up to 12,000 covered seats for national and international popular entertainment events; major indoor sporting events; and other concerts, dances, conventions, exhibitions, product launches, seminars and meetings.
[18] The arena was the first venue of its type in New Zealand. It was seen as a major drawcard for northern hemisphere acts which tour in Australasia and as a venue creating a ―golden triangle‖ between Sydney, Melbourne and Auckland, having advantages for acts coming from the United States.
[19] The arena project encountered some difficulties prior to the valuation date, including the termination of its initial architect and an extension of the Practical Completion Date from December 2005 to 31 August 2006. Mr Lucas identified a number of key issues as at the valuation date which are considered under the heading
―Pre-operational risks discount‖.
Ownership and development structure
[20] QPAM as trustee for the QPAM trust entered into a development agreement with Auckland City Council (―ACC‖) in relation to the arena on 21 May 2004. QPAM was willing to contribute financially to the project in return for exclusive
rights to operate and obtain revenues from the arena for the term (40 years) of the development agreement. The building contract was awarded to Mainzeal. Bovis Lend Lease (―Bovis‖) was appointed project manager.
Development Agreement
[21] The development agreement between ACC and QPAM is a BOOT agreement (―Build, Own, Operate and Transfer‖). It provides QPAM with the right to own and operate the arena for the term of the agreement (40 years), after which ownership would transfer to ACC.
[22] Key aspects of the development agreement identified by Mr Lucas are:
…
[23] Appendix 22 of the development agreement is an unsigned design and construction bond held by Great Lakes Reinsurance (UK) plc. The bond provides for payment of up to 10 per cent of the construction contract value payable in the event of default by Mainzeal. Mr Lucas said he has seen two signed bonds, each for five per cent of Mainzeal’s original contract price, which he treated as being applicable.
Design and construction contract
[24] The design and construction contract is made between QPAM and Mainzeal and is dated 25 May 2004. It provides for a guaranteed maximum price of … . Mainzeal accepts full responsibility and liability for the final design and its compliance with all law, and that completion of all design documentation and contract works as required by the deed will not give rise to any entitlement for an increase in the guaranteed maximum price. Thus QPAM, through the guaranteed maximum price negotiated with Mainzeal, has passed on to Mainzeal a significant portion of the risk and responsibility arising out of its contractual arrangements with ACC.
[25] Cost savings are to benefit QPAM up to $2m and to be shared 80 per cent by QPAM and 20 per cent by Mainzeal above $2m, but there is provision for certain construction cost savings to be passed back to ACC.
[26] Through its parent company Richina Pacific Limited, Mainzeal was required to provide a parent guarantee, guaranteeing Mainzeal’s ―punctual and proper observance of, and performance by Mainzeal of all Guaranteed Obligations‖. Mainzeal was also to provide a warranty for 12 months following completion for any defects in its work.
[27] All sub-contractors are required to hold professional indemnity insurance cover to a minimum level of $5m or Mainzeal is required to assume this liability. Other parties involved in the design and construction are also required to hold minimum professional indemnity insurance as provided in an annexure to the design and construction contract.
[28] The due date for practical completion of the arena was agreed to be 8
December 2005.
[29] If the arena was not completed by the practical completion date, liquidated damages were to be paid by Mainzeal to QPAM at the rate of … per calendar day for the first four weeks following the agreed practical completion date. Thereafter liquidated damages were payable at the rate of … per calendar day. (At the valuation date the practical completion date had been extended to 31 August 2006 and QPAM was charging Mainzeal liquidated damages at the rate of … per calendar day in accordance with this provision).
Other operational contracts
[30] Mr Lucas referred to other key operational contracts entered into by QPAM
before the valuation date:
(a) Ticketing Services Agreement with Ticketmaster7 Pty Limited
(―Ticketmaster‖) for a term of …, and a Box Office Agreement …;
(b) Arena Naming Rights Agreement with Vector Limited for a term of
…with certain provisions for renegotiation after the…;
(c) Catering Agreement with Delaware North Companies New Zealand for a term of… .
Approach to valuation
[31] There is common ground as to the definition of fair market value to be adopted:
The price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller, both acting at arm’s length.
(Mr Lucas gave this definition as an ―independent business valuation‖ in the manner prescribed by the New Zealand Institute of Chartered Accountant’s Advisory Engagement Standard No 2 (AES-2)).
[32] WWNZ and the Jacobsens each instructed an expert to assess the fair market value of the ―B‖ units and shares. Both valuers are well qualified for the task and both gave constructive and helpful evidence.
[33] Mr Lucas, the plaintiffs’ expert, is a Corporate Finance Partner with PricewaterhouseCooper (―PwC‖) specialising in valuations and dispute analysis, a role he has fulfilled for over 14 years. He has a degree of BA (Hons) from the University of Lancaster, England and is a Fellow of the Institute of Chartered Accountants in England and Wales and is also a member of the NZICA.
[34] Mr Hussey, the Jacobsens’ expert, is a chartered accountant and sole director and principal in the chartered accounting practice of Hussey & Associates Limited, trading as Hussey & Co. Mr Hussey said that for the past 16 years the majority of his professional time has been involved in the areas of expert financial investigation and other dispute resolution work. He and his team specialise in providing advice in relation to the assessment of losses, valuation of businesses and commercial matters
generally. He has been a member of the NZICA since 1989 and has been in public practice since 1997.
[35] For the Jacobsens, Mr Gary Cheyne also gave expert evidence in relation to land valuation.
[36] Mr Lucas and Mr Hussey met and conferred. They filed a joint memorandum of experts dated 17 July 2010. Attached to the joint memorandum is a table headed
―Comparison of Enterprise Values‖. It is attached to this judgment as appendix E, the designation adopted at the hearing. Amended versions of appendix E were filed during the hearing but appendix E provides the appropriate starting point.
[37] The experts were agreed that the approach to valuation of the ―B‖ units and shares adopted by Mr Lucas of applying a base case discounted cash flow (―DCF‖) to ascertain enterprise value, is appropriate. Mr Lucas described the DCF methodology as indicating the market value of a business enterprise based on the present value of the cash flows that the business can be expected to generate in the future. He said the DCF method comprises estimating future cash flows and discounting those cash flows to present value at a rate of return that considered the relative risk of achieving the cash flows and the time value of money, to indicate enterprise value. Any debt is then deducted from the enterprise value in order to estimate the value of the equity.
[38] Mr Lucas said he adopted a DCF methodology as his primary valuation approach for the following reasons:
(a) QPAM’s right to operate the arena is subject to the term (40 years)
and hence the cash flows in QPAM have a finite life; (b) Cash flow forecasts are available for the term;
(c) DCF is generally the theoretically preferred method of valuation, subject to the availability of required data; and
(d)The arena had no trading history which he typically required for application of a capitalisation of earnings approach, the most common approach otherwise applied.
[39] The valuers agreed the mid-point base case DCF at $21.47m. Following discussion they agreed certain adjustments to the base case DCF to reach an agreed adjusted base case DCF of $19.19m.
[40] Appendix E shows further adjustments to the agreed adjusted base case DCF that one or other of the valuers considers appropriate but with which the other does not agree. With these variations factored in, the total operational enterprise value (base case) shown in appendix E is: Mr Lucas $18.86m and Mr Hussey $13.76m.
[41] The valuers then made adjustments to those figures to derive their respective assessments of the fair market value for WWNZ’s 25 per cent interest in QPAM. The valuers have differing views as to the adjustments that should be made at this stage of the calculation, as reflected in appendix E. Mr Lucas’s resultant mid-point valuation of a 25 per cent interest is $3.52m and Mr Hussey’s is $1.3m. (Mr Hussey’s valuation was subsequently revised to take into account evidence of land value growth and other adjustments).
[42] Mr Lucas undertook and presented to the Court his own full valuation. Mr Hussey considered and critiqued Mr Lucas’s valuation identifying aspects where he disagreed with Mr Lucas’s valuation. Mr Lucas and the plaintiffs were critical of Mr Hussey’s approach, identifying that it ran the risk of merely being a criticism of certain areas rather than providing an overall objective and independent valuation perspective. The plaintiffs noted that Mr Hussey made only one minor positive adjustment (to Ticketing Commissions – included in Agreed Adjustments, and by an immaterial amount) while all others of his adjustments were negative. The plaintiffs suggested this evidenced a ―cherry-picking‖ approach.
Hindsight
[43] The ―B‖ shares and units are to be valued as at 26 April 2006, the date upon which the Jacobsens gave notice of their exercise of the pre-emptive rights under the unit trust deed. The extent to which the use of information which has become available only after the valuation date may be used in valuing the ―B‖ units and shares was considered by Associate Judge Doogue in a judgment in this proceeding on 29 August 2008. He concluded:11
… In general, the subsequent performance of a company cannot be relevant because that is not a matter that would be known to prospective purchasers as at the date of the valuation. However, if an inference can be drawn from an occurrence, particularly one soon after the date of valuation, which throws light on the understanding or expectations of the theoretical purchasers before the valuation date, then it may be admissible.
[44] Associate Judge Doogue referred to the relevant principles derived from authorities.
[45] In Wood v Wood,12 Hardie Boys J had to establish the value of matrimonial property including shares in a family company at a specific date some years earlier than the case. He adopted the general valuation principles formulated by the Court of Appeal in Hatrick v Commissioner of Inland Revenue.13 He said that although Hatrick was a revenue case, the valuation principles were now regarded as having general application.
[46] The principles assume as a starting point the hypothetical sale by a willing but not anxious seller to a willing but not anxious buyer. However the Court must look carefully at all the relevant facts and circumstances of a given situation in order to establish a fair value that does justice to the parties in the case at hand.
[47] When it comes to establishing the theoretical value of property such as company shares at a certain date in the past, an attempt must be made to ascertain the
value based on information and expectations that would have applied at the time.
11 Worldwide NZ LLC v QPAM Ltd HC Auckland CIV-2006-404-1827, 29 August 2008 at [34].
12 Wood v Wood (1985) 1 FRNZ 576 (HC).
13 Hatrick v Commissioner of Inland Revenue [1963] NZLR 641 (CA).
The Court must be careful to avoid substituting with hindsight what has subsequently become known. The value of hindsight is simply to use the knowledge of subsequent events to confirm the true worth of the property at the specific date. In Wood, Hardie Boys J said:14
In this case, whatever valuation date were chosen, the application of hindsight would mean no more than treating assets at their true worth, as established by subsequent events. The alternative would be to take them at their book values, which are likely to be unrealistic, and that would also be unjust. However it is not necessary to resort to the policy of the Act in order to adopt this view. For, first, the theoretical willing but not anxious vendor would not sell at a price that reflected inadequate asset values, and the like- minded theoretical purchaser would not expect to buy at such a price. And secondly, the law is clear that a valuer is required to take into account events that have occurred since the date at which the value is to be assessed; in order to determine the proper weight to attach to the circumstances pertaining at the material date.
[48] Hardie Boys J referred (inter alia) to McCathie v Federal Commissioner of Taxation.15 The Court was tasked with ascertaining the real value of shares at a specific date in the past, and said that market value is not always the same as real value. The High Court of Australia said that the ―market value‖ test should not be used ―so as to depress the value of the property by exaggerating temporary disadvantages to which it is subject at the date of valuation and failing to give proper weight to its more permanent advantages‖. Shortly before the valuation date, the company had considerably invested in remodelling the department store, which had a temporarily adverse affect on the company’s profitability, but it was expected that in the long-term this would have led to improved business. The Court was willing to consider evidence from the period following the date of valuation, because it would fill out the picture of the longer term trends and therefore avoid the possibility that the one-off event of renovations may have been anomalous and exceptional. The Court said, ―... these were matters existing and to be taken into account at the date of death, and the court should not be forced to speculate as to their future when the
facts are known and can speak for themselves.‖
14 At 584.
15 McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1 (HCA).
[49] More recently, Riddle v Riddle16 involved valuation of shares in a private company. The company had been incorporated to carry on the business of stock foods supplier. At the date when the parties separated, the business was only just getting underway. Subsequently it began to become profitable but then in the financial year 2003 it suffered a major setback from three causes. First, a major customer discontinued buying food from the company. Second, because of a mistake made in the factory toxic food was produced which killed a number of calves. Finally, there was a downturn in the dairy industry from which many of the customers of the business came. Fogarty J made the following comment about the use of post-valuation events in reaching valuations:17
I am satisfied that the use of hindsight by Mr Hadlee in Wood v Wood was orthodox. Events post valuation are commonly employed by valuers as a cross-check on judgments as to what were foreseeable or what the market demand was at the time of valuation. This is particularly so when the hindsight event occurs close to the valuation date.
[50] In essence the Court decided that an investor interested in acquiring the business would not have anticipated the loss of the customer or that a lethal dosage in the food mix would kill the calves. Nor did the experts apparently take the view that a downturn in the industry was something that was foreseeable by potential buyers at the date of valuation. Therefore, these post-event occurrences were not available as evidence confirming the likely suppositions that theoretical purchasers would have made about the business at the valuation date.
[51] Associate Judge Doogue said of the various authorities, and in particular Riddle v Riddle,18 that they make clear the limited basis upon which evidence of subsequent events can be admitted.
[52] Applying the principles from the above authorities in the present case requires, I consider, consideration of the relationship between the parties, including what they expected to gain from their joint venture in the development of the arena. At valuation date the arena had not been completed and there was no performance
history or any certainty about its future earning capacity. Thus, there may be an
16 Riddle v Riddle HC Christchurch CIV-2005-409-335, 17 August 2005.
17 At [26].
18 At [34].
appropriate basis for looking at subsequent events as the venture has in fact taken shape, in order to assist in assessing the fair market value of the units and shares as at 26 April 2006. Subsequent events which were broadly of a kind that would have been in the contemplation of the parties as they undertook the venture could be applied in hindsight. However, a subsequent event that was clearly outside the contemplation of the parties could not reasonably be taken into account in determining fair market value at valuation date.
[53] I shall assess the relevance of events and occurrences subsequent to 26 April
2006 in assessing the fair market value of the ―B‖ units and shares in light of these
principles.
Areas of difference between the experts
[54] Appendix E shows that Mr Lucas’s assessment of the fair market value for a
25 per cent interest in the ―B‖ units and shares is $3.52m whereas Mr Hussey’s valuation is $1.3m, a difference of $2.22m. During the course of the hearing, as new information and data was considered by the experts, changes were made to the Comparison of Enterprise Values table, and subsequent appendices, E1 and E2, were presented in evidence, reflecting these changes. Appendix E1 reflects a change in Mr Hussey’s approach to the minority discount. Appendix E2 adjusts for an alleged error in management revenue assumptions. Appendices E1 and E2 both reflect a change in approach to land values by Mr Hussey.
[55] The outcome was a reduction in the difference between the valuers of some
$300,000 to $500,000, so that the difference stood at somewhere between $1.7m and
$1.9m. Mr Lucas’s overall valuation of $3.52m did not change. Mr Hussey’s
valuation increased to $1.63-$1.68 (appendix E1) and $1.76-$1.81m (appendix E2). [56] The difference arises from seven areas:
(a) Revenue assumptions;
(b) Rental cost (reflecting land value increase);
(c) Small Company Risk Premium (―SCRP‖);
(d) ―Untested‖ cash flow discount;
(e) Derivative proceeding value;
(f) Minority and marketability discounts; (g) Pre-operational risks discount.
[57] Each of these areas will be addressed in turn.
The Lucas approach to valuation
[58] Mr Lucas utilised two sets of forecasts prepared by QPAM management, a five year forecast and a 40 year forecast. The five year forecast is dated February
2006 and the 40 year forecast, August 2005.
[59] The two sets of forecasts differed in several respects. Mr Lucas reconciled them to derive a consistent set of forecasts which he entitled ―Management Projections‖. He then adjusted these forecasts for a number of technical errors and factual inaccuracies.
[60] The changes made to the management forecasts about which there is no disagreement are:
(a) The absence from the five year forecasts of provision for income tax liability. Mr Lucas adjusted for income tax liability in those five years and also provided for the benefit of tax losses.
(b)The absence from the 40 year forecasts of an allowance for inflation in event rentals and merchandise sales from year 44. Mr Lucas adjusted for this.
(c) Adjustment in the depreciation rate applied to assess the sinking fund provided in the forecasts, to provide a higher rate applicable for furniture, fittings and equipment.
(d)Adjustment for the increased revenues from box office rights to apply the same basis as management had applied in relation to the naming rights agreement, to reflect a compounded rate of inflation.
[61] Having completed this process Mr Lucas developed a spreadsheet entitled Base Case Cash Flows. Mr Lucas discounted the Base Case Cash Flows at the discount rate he adopted, namely 13 per cent, to derive an enterprise value of
$21.47m. This is the agreed figure that appears in the three appendices as the base case DCF. This figure was then adjusted, as agreed by the two valuers, to derive the agreed adjusted base case DCF of $19.19m. The agreed adjustments to the base case DCF, as noted in appendices E, include adjustments to ACC and Auckland Regional Council rates, correction for a ticketing commission error in QPAM management’s original forecasts, allowance for electricity line connection charges and allowance for a minor delay in the commencement of the operation of the arena.
[62] Mr Lucas applied a discount rate for WACC (weighted average cost of capital) of 13 per cent. Mr Hussey says this discount rate should be increased to
15.5 per cent, that is, by 19 per cent. The 2.5 per cent increase is made up by:
(a) An additional small company risk premium (―SCRP‖) of 1 per cent.
(b) A factor of 1.5 per cent to allow for the cash flows being ―untested‖
and therefore more risk attaching to them; [63] These two issues are addressed below as (c) and (d). (a) Revenue assumptions
[64] In the appendices E Mr Hussey includes in relation to ―management revenue assumptions‖ the amount of $.49m. Mr Lucas includes for ―DPL uplift‖ $1.41m. The difference is $920,000.
[65] Mr Hussey’s assessment of $.49m is explained at para 5 of the joint statement
of experts dated 22 July 2010 as ―the effect on the enterprise value that arises
moving to recognising all revenue lines on the basis of management’s original assumptions (with the exception of box office rights from 2017 which we had previously agreed should be grossed up in 2017 to reflect the effect of inflation over the preceding ten years)‖.
[66] The experts state that if the Lucas model were adjusted to report the management forecast income, the effect on enterprise value would be broadly at this level, Mr Lucas’s estimate being in the order of $.56m. They have been unable exactly to reconcile the reasons for the variance, but note that it is relatively immaterial.
[67] Mr Hussey’s opinion is that there was no reasonable basis in April 2006 to depart from management’s revenue projections. He says that management processes appeared to be thorough and reliable. The initial base information came from a comparable Sydney venue. Importantly, the forecasts were updated regularly based on actual information from market participants and using the experience of Mr Mactaggart in operating a Melbourne venue (Mr Mactaggart did not give evidence) and of Mr Hines, General Manager for QPAM Limited (who gave evidence). Mr Hines considered that management’s projections were more compelling than placing reliance on Mr Lucas’s estimates as to performance numbers and average ticket prices.
[68] Mr Lucas’s approach, as set out in his brief of evidence, was as follows. He used management’s five year forecasts prepared to financial year 11 and the balance of the 40 year forecasts for financial year 12 through to financial year 46 (adjusted in relation to the matters agreed by the valuers).19
[69] He assessed the reasonableness of management’s key forecast assumptions
based on:
(a) Indicative evidence available from prior experience;
19 Refer [60] above.
(b)His research into other stadium operations with similar characteristics to the arena;
(c) Contractual agreements;
(d) Advice from PwC’s Sports Advisory Practice in the United States
(―PwC US‖).
[70] Mr Lucas adopted management assumptions in many areas including the average numbers attending performances, ticketing levies, cafe and catering commissions and commissions from merchandise revenues. In respect of these items, in the absence of evidence to the contrary, he accepted management’s projections as reasonable in his base case cash flows.
[71] He noted the importance in the forecast revenues of larger concerts which account for some … per cent of forecast arena rental revenues, and event rental revenues which account for … per cent of all forecast operating revenues.
Number of performances
[72] Mr Lucas noted management’s forecast of the expected number of annual performances at 101 covering a range of events and that larger concerts drive a significant proportion of the revenue based on gross ticket sales and estimated ticket numbers. He noted that while the arena is the only venue of its type in New Zealand and is ideally suited to holding large concerts, according to PwC US, the number of performances forecast would place the venue in the top ten arenas of the world. On the basis that at valuation date, the arena had not yet earned its place in the top ten, he adjusted down the number of performances to 91, being ten per cent lower than management’s projections.
[73] Mr Lucas referred to hindsight information, being the actual performances at the arena subsequent to valuation date which was available from the arena’s website. He noted that on an annualised basis for the period March 2007 (actual opening date) to December 2008 the information was consistent with management’s projections at
valuation date. But, he said, ―... this data does not give any cause to question the approach I have taken.‖ This second order check available with the benefit of hindsight information, did not identify for Mr Lucas any causes for concern in his assumptions.
Ticket prices
[74] Mr Lucas increased the average ticket price in the forecasts by 15 per cent above management’s projections, factoring in an average ticket price of … compared with management’s … .
[75] Mr Lucas said his review of actual prices for events in the arena either held or scheduled to be held in February and March 2009 indicated a current average price for large concerts in the region of … . After allowing for inflation over the period, he calculated that would indicate prices in 2006/2007 in the region of … per ticket. This was 30 per cent higher than management’s estimate of … as the average price for large concerts.
[76] He then referred to survey results from ―Venues Today Top Spots‖ which he said indicated an average ticket price at the arena over the period October 2007 to October 2008 of US$76, which in New Zealand dollars equated to a price of around
$100 during that period.
[77] He also referred to average ticket prices at the Brisbane Entertainment Centre over the period October 2005 to October 2008, sourced from ―Venues Today‖. These were in the range of NZ$99 to $112 per ticket.
[78] Finally, he referred to advice from PwC US that ―forecast average ticket prices are low in relation to comparable arenas‖. He concluded that the ticket price assumptions in management’s projections were ―conservative‖. Therefore, for valuation purposes he considered prices at a level 30 per cent higher than in the management projections with 15 per cent applied in the base case cash flows. That resulted in an average ticket price of … factored in the base case cash flows.
Event rental charges
[79] Mr Lucas noted that event rental charges were forecast by management in the range of … per cent of gross ticket sales for large concerts with an overall event rental margin of … per cent across all ticket sales. Mr Lucas referred to the difficulty in locating comparable data, but noted that the Adelaide Entertainment Centre (12,000 seats) reported event rentals of 13.1 per cent of gross ticket sales for the year ended 30 June 2007. He considered that based on the available evidence, management’s rates in the region of … per cent ―may be conservative‖ but within the range observed in the industry.
DPL assumptions
[80] Mr Lucas used Decision Programming Language (―DPL‖), which he described as a financial modelling tool which allows for uncertainty relating to key assumptions, individually and cumulatively, to be incorporated within the valuation range. He considered a range of possible cash flow outcomes by adjusting certain key assumptions on the evidence available to him. He showed these assumptions inputted into the DPL analysis in a table at page 48 of his brief of evidence. He adopted assumption ranges under the headings ―Low‖, ―Base Case‖ and ―High‖ and applied these assumption ranges for financial year 7 onwards, being the first period for which management’s detailed cash flow assumptions were available to him.
[81] In the base case column in the table of assumptions, Mr Lucas decreased the number of performances by 10 per cent, increased the average ticket price by 15 per cent and in relation to event rental charges, while taking the management assumption at 10.2 per cent in the low and base case ranges, adopted 12.2 per cent as the assumption in the high range. Mr Lucas explained in response to cross-examination that this assumption was based on data from the United States which indicated that
10 to 15 per cent was a reasonable range.
[82] Mr Hussey was critical of Mr Lucas in declining to apply the hindsight information available from the arena as to the number of performances.
[83] He criticised Mr Lucas’s increase in the average ticket price by 15 per cent, pointing out that in making this assumption Mr Lucas started with hindsight information, actual arena prices in February and March 2009, and then continued his verification by referring to further hindsight survey information available from
―Venues Today Top Stops‖ (October 2007 to October 2008). Mr Hussey observed that the PwC US confirmation relied on by Mr Lucas did not appear to be related to any period.
[84] In relation to event rentals, Mr Hussey pointed out that reliance on the information from the Adelaide Entertainment Centre, reported at 13.1 per cent for the year ended June 2007, also involved the application of hindsight information.
[85] Mr Hussey said that overall he considered the management projections (performance numbers, ticket prices and quantities sold) to be a more compelling guide as to likely revenues than Mr Lucas’s assessment as to performance numbers and ticket prices which appeared to be based on overseas arena performances and US dollar equivalent ticket pricing. Mr Hussey considered that the United States figures did not necessarily translate into New Zealand dollars without also considering whether the increased prices adopted would affect the number of tickets sold.
[86] The end result of these adjustments criticised by Mr Hussey was that the adjusted base case input into the DPL programme was below management projections by an amount of … .
[87] Mr Hussey also said that the inputs created an asymmetrical range of values around the event rentals, producing a shift in the midpoint which translated into the uplift to the total enterprise value of $1.41m in Mr Lucas’s valuation. He noted that the entire $1.41m uplift came from the manner in which the DPL has been applied to event rentals. While the other assumptions were symmetrical so that the central base case value remained the midpoint, the high range set for event rentals at 2 per cent above management’s event rental rate percentage of 10.2 per cent had produced the
$1.41m uplift.
[88] Mr Lucas confirmed in answer to cross-examination that the asymmetry in the event rental inputs was the driver to produce the $1.41m uplift. He said ―It will be. I can’t say I’ve proved that absolutely but the logic is right‖. He also confirmed that his reference point for adopting 12.2 per cent in the high range (which involves a 20 per cent assumed increase in event rental returns) was based on information sourced from the United States which suggested that 10 to 15 per cent was probably a reasonable range. He considered the comparison with Adelaide to be of less benefit because it was derived after the fact, in other words, was hindsight information.
[89] I consider Mr Hussey’s criticisms on these aspects have merit. While Mr Lucas approached his task in a methodical way and sought whatever external information was reasonably available to compare and contrast management assumptions, he has in fact relied considerably on hindsight information in making his assumptions about the number of performances, average ticket price and event rental rates. At the same time he has declined to use hindsight information available from the arena, which suggests that management assumptions were correct, particularly in relation to the number of performances.
[90] On the other hand, there is no evidence or information that suggests the management revenue assumptions were unreliable. Indeed, hindsight information suggests that they have been vindicated.
[91] I conclude that management’s assumptions as to the number of performances, ticket prices and event rental charges should be applied in the base case DPL analysis (subject to the alleged miscalculation addressed in the next section).
Alleged miscalculation in revenue forecast
[92] Mr Fisher extensively cross-examined Mr Hines and Mr Hussey about an alleged miscalculation in management’s projected income for June 2007. Mr Fisher put to the witnesses that the author of the spreadsheet inadvertently cut and pasted the formula used for the gymnastic event in May 2007 (which was not subject to the standard formula), to both the dance party and concert forecasts for June 2007.
Hence, instead of the standard formula of ―gross ticket sales x the specified rental percentage‖ being applied, the formula for the gymnastic event, being ―number of performances x …‖, was mistakenly applied.
[93] If this was an error then I understand the revenue for June 2007 was understated by approximately … .
[94] Mr Hines said the forecasts did not always treat similar events in the same way and that the forecasts were adjusted to reflect the necessity of accepting non- commercial terms for some events. He said this occurred sufficiently frequently to merit specific adjustment in the forecasts. Accordingly he did not consider the June
2007 entries were necessarily in error, but might equally have reflected discrete adjustment to recognise a flat fee rental. He said that situation was ―very common‖ so he was not sure there was an error in the spreadsheet.
[95] Mr Hussey said that on its face, it looked as if there could be an unintentional error in the spreadsheet. But he said he could not be categorical about it and referred to the possible explanation given by Mr Hines.
[96] Mr Hussey accepted that if the management forecast for June 2007 was in error in the respects identified this would make a difference of approximately $1.1m to his base case analysis; $1.3m if he used Mr Lucas’s discount rate of 13 per cent. Mr Hussey prepared appendix E2 showing the variation in his calculations that would result. He added an entry, ―Estimated effect if Hines spreadsheet in error‖, which showed his midpoint revised by $1.10m. This increased his base case enterprise value by $1.10m – to $16.19m applying Mr Lucas’s land growth values. Appendix E2 notes that ―the error‖ does not affect Mr Lucas’s calculations. Mr Lucas calculated his own inputs.
[97] The situation was not satisfactory. This issue was raised in cross-examination of Mr Hines and Mr Hussey but was not addressed by Mr Lucas. Neither Mr Lucas nor Mr Hussey treated the spreadsheet for June 2007 as being in error in their calculations. If there was an error, then neither valuer picked it up. But a knowledgeable, willing but not anxious purchaser might reasonably do so. When I
issued the interim judgment20 I sought input from Mr Lucas and Mr Hussey to check the June 2007 management forecast, and if they agreed there was an error, to take the agreed adjustment into account in re-running the DPL analysis. The experts advised that they were unable to agree whether there was an error in the June 2007 spreadsheet, having checked the 40 year and five year forecasts provided by QPAM, both as printed spreadsheets and as electronic Excel files.
[98] On the basis of the evidence I am not able to draw an inference that the spreadsheet is in error, inevitable as Mr Fisher submits the inference is. Therefore management assumptions are to be applied in the base case DPL analysis as I have concluded at [91] above.
(b) Rental cost (reflecting land value increase)
[99] In appendices E1 and E2 Mr Lucas allows for an adjustment in future ground rent of … . Mr Hussey’s allowance is …,21 based on Mr Cheyne’s valuation.
[100] The arena and carparks are situated on land owned by Ngati Whatua O Orakei Maori Trust. There is a head lease to ACC and a sub-lease to QPAM.
[101] The sub-lease dated 30 April 2007 is for a term of approximately 39 years from 30 April 2007 to 21 July 2046. The sub-lease essentially incorporates and requires observance by the sub-lessee, QPAM, of the terms and conditions of the head lease.
[102] Rental payable under the lease and sub-lease from August 2011 until expiry of the lease is the lower of:
…
20 See [242] below.
21 The figures in the second column headed ―Hussey midpoint‖ in the appendices E have been
revised as shown in the third and fourth columns, and can be disregarded.
[103] Rental for the carparks is to be separately assessed at three per cent per annum of the current freehold market value of the carparks (as defined), assessed as carparks and not on a highest and best use basis.
[104] It is common ground that:
The rental payable by QPAM from August 2011 is based on the current
freehold market value of the land.
Management assumptions did not take into account, or did not sufficiently take into account, prospective increases in land values in order to assess
future liability for rent.
The valuation by Mr Gary Cheyne as at the valuation date of … is accepted
as the freehold market value of the land at that date.
The data set sourced by Mr Lucas providing base data on Auckland Central
Business District (―CBD‖) commercial land prices from 1970 to 2009, but
most relevantly 1970 to 2005, is accepted.
The projected inflation rate for the period in issue is three per cent per
annum.
[105] The difference between the parties is in the projected growth in land values from 2006 to the expiry of the sub-lease in 2046. Mr Lucas’s midpoint adjustment allows for an increase in ground rent of … which assumes an annual percentage growth rate in the value of the Entertainment Centre and carparks at … per cent for all relevant periods. Mr Hussey’s revised midpoint adjustment of … assumes an annual percentage growth rate at … per cent for all relevant periods. These figures appear in columns 1 and 3 of appendices E1 and E2. In column 4 is Mr Hussey’s calculation applying Mr Lucas’s three per cent annual growth rate, the midpoint allowance being … . (The difference between this and Mr Lucas’s calculation is, as Mr Lucas said in evidence, immaterial).
[106] Mr Lucas’s position, taking into account the data set from 1970 to 2005, is that CBD land values are likely to increase in line with inflation. He therefore simply applied the agreed inflation rate of … per cent per annum to the freehold market value of the land. Thus Mr Lucas’s calculations are based on an assumption that there will be no real growth in the value of land during the relevant period. His end position is that management forecasts should be adjusted to reflect a ground rental charge of … per cent of market value from August 2011 and … per cent from August 2046, with seven year rests.
[107] Mr Lucas considered that in the context of a 39 year cash flow projection, reference should be made to long term historical trends. From the data set he obtained which showed compound nominal annual growth to 31 December 2005 of
… per cent, he derived a compound annual real growth rate for that period of minus
… per cent. He noted that substantial large increases and decreases can occur in any particular year and that a recent history of strong growth is not necessarily evidence that the growth rate will continue. He referred by way of example to the 10 year period from December 1991 during which CBD commercial land prices actually declined in real terms, followed by a substantial uplift in 2002. He therefore considered the data set he obtained from December 1970 to be the best estimate of future real price appreciation.
[108] Mr Lucas expressed the view that the data set he sourced showed that short term volatility is dealt with by taking a longer time series. Accordingly, his clear preference was to take the longest time series available which was that going back to December 1970. He considered it ―dangerous‖ to take a relatively short time series because ―the whole world is constantly changing‖, and when data is volatile, taking a relatively short time series (referring to the period from 1991 or 1992 as preferred by Mr Cheyne), ―... it’s not long enough to hang your hat on ...‖.
[109] Mr Cheyne based his original opinion on a data set from 1999 to 2006 and assumed an annual percentage growth rate of value in the Entertainment Centre at … per cent to August 2011 and at … per cent thereafter, and for carparks, … per cent
per annum for all periods. This resulted in the adjustment for ground rent shown in appendix E22 as Mr Hussey’s midpoint, of … .
[110] However, when the data set sourced by Mr Lucas became available, Mr Cheyne accepted it, with certain reservations, as a better data set from which to analyse past changes in CBD commercial land values for the purpose of making predictions about future rates of change in such values.
[111] Mr Cheyne’s reservations related to changes in the economic, legislative and
regulatory framework in New Zealand which persuaded him that the data set prior to
1992 should be set aside. He identified four categories in the data set:
(a) December 1970 to December 1983 – strongly regulated and controlled economy which he assessed as of very limited relevance to the current business framework.
(b)December 1984 to December 1991 – a period of regulatory change in the New Zealand economy with consequent dramatic rises and falls in CBD commercial land prices.
(c) December 1992 to December 2005 – a period he assessed as having a similar economic, legislative and regulatory framework to that anticipated for the future, and therefore a relevant period.
(d)December 2006 to December 2009 – a period which postdates the valuation date and therefore not relevant.
[112] He said he placed very little weight on the information for the period December 1970 to December 1983 because of ―the extreme differences between then and now/looking forward to the future‖. He categorised the period December 1984 to December 1991 as a period of significant economic restructuring and deregulation and thus ―a transitional period‖ between the controlled economic conditions up to
the change of Government in 1984 and the more liberal environment ―which is
22 Also in column 2 of appendices E1 and E2.
expected to apply looking forward‖. He considered that from December 1992 through to December 2005 there was a similarity in the economic, legislative and regulatory framework with that prevailing at the present time and projected for the future.
[113] On the basis of the data he assessed compound annual growth rates
(nominal):
to December 2004, at … per cent.
to December 2006, at … per cent.
[114] Adjusted for inflation, the real compound annual growth rates were:
to December 2005, … per cent.
to December 2006, … per cent.
[315] In Langen & Wind Ltd v Bell,69 the Court considered whether an unpaid vendor who is in default of his contractual obligations is entitled to a lien on the subject-matter of the sale, although the vendor has parted with possession of the subject-matter and although under the contract the purchase money is not payable until a future date.
[316] Mr Bell was entitled to hold shares in one of the plaintiff companies by virtue of his employment as a managing director. The agreement provided that on termination of his employment, Mr Bell would immediately execute transfers of his shares and deliver them with the relevant share certificates to the company. The price to be paid for the shares would not be ascertainable for two years because it was dependent on future events. Mr Bell refused to execute or deliver the transfers until he had been paid. The plaintiffs sought an order for specific performance of the transfers, essentially that Mr Bell execute the transfers and hand them over with the share certificates. There was no suggestion that Mr Bell, as the vendor shareholder,
would continue to exercise any shareholder’s rights in the intervening period.
67 See above at [297].
68 Claim D(iii) fourth amended statement of claim. See [280] above.
69 Langen & Wind Ltd v Bell [1972] Ch 685.
[317] The Court held there was clear authority that the equitable lien of an unpaid vendor applies in respect of such future instalments and that the equitable lien for unpaid purchase money is not lost by parting with possession.70 Brightman J cited from the judgment of Bacon V-C in Re Albert Life Assurance Co, ex parte Western Life Assurance Society:71
Now, although the rule of law upon which the doctrine of an unpaid vendor’s lien depends must be frequently influenced by the particular circumstances of each case in which it is said to arise, there is one plain principle which guides and governs its application in all cases. If it be expressed, or can be safely and properly inferred from documentary or other evidence, or from the nature of the contract, that it was the intention of the parties that the sale or transfer, however absolute in its terms, was subject to the condition that the purchase-money should be paid, or that the thing contracted to be done by the vendee should be performed, the lien will prevail. If, on the other hand, no such inference can be properly drawn – if the performance of the thing contracted to be done by the vendee was not the condition upon which the transfer was made, but the engagement to do the thing was the consideration for the transfer, the vendor, having accepted that engagement, has the very thing he bargained for, and cannot say that the consideration has not passed to him. In such cases the lien cannot prevail. ...
[318] The Court said there was no separate covenant or security for the purchase price. The agreement simply provided that the consideration payable to Mr Bell for each share transferred should be ―so much‖. Brightman J considered that:72
... the parties have not by their contract purported to exclude the lien which prima facie ... arises in the case of a vendor who has not (either under the terms of the contract or in the events which have happened) been paid the full purchase price.
[319] The Court concluded that Mr Bell was entitled in equity to a lien on the shares so transferred. Brightman J then noted the difficulty that arises because it would not be possible to require the company to accept notice of the lien. He determined that it was equitable that the Court not grant the equitable relief of specific performance unless the order sought would effectively safeguard the unpaid vendor’s equitable lien for the purchase money. The application for relief was refused but with leave to seek amended relief if proper security were available to Mr
Bell.
70 At 691.
71 Re Albert Life Assurance Co, ex parte Western Life Assurance Society (1870) LR 11 Eq 164 at
178-179
72 At 692.
[320] The Court was concerned only to ensure the availability of security for the payment of the purchase price to Mr Bell. There was no suggestion that Mr Bell would continue to exercise shareholders’ rights.
[321] The important distinction between the situation in Langen & Wind Ltd v Bell and this case is that, relying on the claimed vendor’s lien, WWNZ seeks declarations that would continue its shareholder and unit holder rights relating to the ―B‖ shares and units, pending payment.73 I have determined that WWNZ is not entitled to any such ongoing rights for the reasons given above. In addition, the reality of the situation is that since the change of control and the exercise by JVMNZ of its pre- emptive rights in April 2006, the business of QPAM has been controlled and managed on an ongoing basis to the exclusion of WWNZ. This inevitably followed from the refusal by the High Court (upheld by the Court of Appeal in the 2006 judgment) of an injunction requiring QPAM and JVMNZ to treat WWNZ as still being the lawful owner of the ―B‖ units and shares and Mr Gosney as a validly appointed director of QPAM. The relief sought by WWNZ would require the clock to be put back to 2006. This would place QPAM at risk of real detriment given its ongoing obligations under the development agreement with ACC. That risk and the impracticability of the situation which would result if the relief sought were granted, confirm that in the particular circumstances of this case, the declarations that relate to WWNZ’s claimed ongoing rights in respect of the ―B‖ units and shares must be declined.
[322] The change of control when Mr Goldberg was appointed receiver of Worldwide Entertainment Inc caused a default resulting in the deemed disposal of the ―B‖ units and shares and the subsequent exercise by JVMNZ of its pre-emptive rights under cl 10 of the unit trust deed. The clear intention of the parties under the unit trust deed is that the holder of the ―A‖ units and shares on exercise of the pre- emptive rights will pay the transferor of the ―B‖ units and shares the fair market value of those shares and units. The Jacobsens do not contend otherwise and so admit in their statements of defence. Indeed, Mr Browne’s concession to the Court
of Appeal recorded in the Court of Appeal 2006 judgment, acknowledged an ongoing
73 See the plaintiffs’ response to request by the second to fourth defendants for further particulars dated 17 August 2009 at para 2.3.
interest by WWNZ in the ―B‖ units to protect any lien or similar creditor’s right which it would have in the event of the Jacobsens defaulting in the payment of the purchase price.74 That acknowledgment was confirmed by the undertaking subsequently provided.75
[323] I conclude that the declarations as to WWNZ’s rights pending payment for the ―B‖ units and shares sought in claims D to I of the fourth amended statement of claim must be declined. The Jacobsens’ undertaking set out at [10] above, which is continuing pending payment for the ―B‖ units and shares of the amount determined by this Court, provides reasonable security to WWNZ.
Summary of conclusions
[324] I determine that the fair market value of the 25 per cent interest of WWNZ in
the ―B‖ units in the QPAM trust and the ―B‖ shares in QPAM as at 26 April 2006 is
$2.69m (see [244] above and appendix E3). [325] I make declarations that JVMNZ shall:
(a) pay interest on the amount determined as the fair market value of the
―B‖ units and shares ($2.69m):
(i) at the rate of 7.5 per cent from the valuation date 26 April
2006 to 30 June 2011; and
(ii)at the rate of 5 per cent from 1 July 2011 to the date of payment;
(The fair market value of the ―B‖ units and shares as determined ($2.69m) together with interest thereon being ―the
total sum payable‖); and
74 Worldwide NZ LLC v QPAM Ltd CA122/06, 10 November 2006 at [34].
75 See [10] above.
(b)Pay the total sum payable by tendering payment of the total sum payable in cleared funds at the address for service of WWNZ in this proceeding; and
(c) Make payment within 28 days of the date of this judgment.
[326] The declarations sought by WWNZ in claims D to I inclusive of the fourth amended statement of claim are declined.
Costs
[327] Both parties have had some success. My view overall is that the parties should each meet their own costs. However, specific issues relating to costs were raised and noted during the hearing. I therefore invite counsel to file memoranda addressing any costs issues within 28 days if costs cannot be agreed.
[328] On 30 January 2009, Associate Judge Robinson ordered that security for costs be provided by the plaintiffs agreeing to costs up to $227,320 being deducted from any amount which JVMNZ may be liable to pay to WWNZ in consideration for the shares and units pre-emptively acquired by JVMNZ, to be held as security by WWNZ for any amount to be awarded as costs in favour of any of the defendants.76
If costs have not been agreed or determined prior to the due date for payment by JVMNZ in terms of this judgment, the amount of $227,320 should be held in a solicitors’ trust account agreed by the parties until costs are fixed. Leave is reserved to apply.
Confidentiality orders
[329] Confidentiality orders made on 24 November 2011 apply to this judgment and these proceedings. The judgment has been redacted in accordance with the
confidentiality orders.
76 Worldwide NZ LLC v QPAM Ltd HC Auckland CIV-2006-404-1827, 30 January 2009.
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