- Albany v Commonwealth

Judgment 1These proceedings involve an application to determine the value of shares in Global Mortgage Equity Corporation Pty Limited ("GMEC"), which are to be acquired by One Australia Pty Limited ("One Australia"), an entity associated with Mr Sayer, from Australian Financial Services Corporation Pty Limited ("AFSC"), an entity associated with Mr Tomanovic. I should first set out the background to that determination. 2On 18 December 2008, the Plaintiffs brought oppression proceedings in respect of, inter alia, GMEC. The Court of Appeal noted, in its judgment in those proceedings, that Messrs Sayer and Tomanovic were in a business relationship from about 1999 to December 2004 through their respective entities, One Australia and AFSC. That business comprised a finance group and a non-finance group until about June 2003. The finance group's principal activities included mortgage broking, origination and funding and operated through companies that were owned in equal shares by AFSC and One Australia. The non-finance group's principal activities included provision of mortgage management systems to customers and the ownership of two properties situated in Parramatta. Those properties were owned by Argyle HQ Pty Limited ("AHQ") as trustee for the 9 Argyle Street Unit Trust ("9AS Trust") of which AFSC and One Australia were equal beneficiaries. Mr Tomanovic and Mr Sayer each held 50% of the shares in AHQ. GMEC was incorporated in June 2003 and became the holding company of existing entities in the finance group when a third party acquired a 10% interest in GMEC. 3On 4 May 2011, the Court of Appeal ordered that, if Mr Tomanovic so elected, Mr Sayer must purchase free from encumbrances the shares owned by Mr Tomanovic in AHQ at a price of 50% of the net value of AHQ as at 30 June 2010. Mr Tomanovic has not made that election and no question as to the net value of AHQ needs to be determined in these proceedings, except so far as it may be relevant to the recovery of loans made by GMEC to that entity. The Court of Appeal also ordered that One Australia purchase free from encumbrances the shares owned by AFSC in GMEC at a price equal to 45% of the net value as at 30 June 2010 of GMEC, subject to specified adjustments. Paragraph 4(c)(i) of the orders made by the Court of Appeal provided for the valuation to be undertaken by reference to the market value of the whole share capital of GMEC. Paragraph 4(c)(ii) of those orders requires that that market value not be subject to any adjustment with respect to oppressive conduct. Paragraph 4(c)(iii) of those orders requires that the market value of GMEC be determined subject to adjustment for the net liabilities referred to in that paragraph. Paragraph 4(c)(iv) of those orders provides for the market value of GMEC to be determined after making an adjustment for legal costs expended by GMEC, AHQ or any subsidiary prior to 30 June 2010 in the conduct of the three proceedings referred to in that order. 4The price to be paid is also subject to an adjustment with respect to any net liabilities of GMEC or their subsidiaries to any of Mr Sayer, One Australia, Mr Tomanovic or AFSC. The Court of Appeal also ordered that there be set-off between the amount owing by Mr Tomanovic and ASFC to Mr Sayer, Ken Sayer Investments Pty Limited and Mortgage House Australia Pty Limited pursuant to a judgment delivered in proceedings in 2009 and the amount owing to One Australia under the buy-out order, such that only the net amount after that set-off is liable to be paid. The Court of Appeal remitted the matter to the Equity Division for determination of these values. What is the "market value" of the whole share capital of GMEC? 5The first question to be determined in accordance with the Court of Appeal's orders, and in dispute between the parties, is the "market value" of the whole share capital of GMEC. In Spencer v Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418 at 432, Griffith CJ considered that concept in respect of the valuation of land, observing that: "In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, ie, whether there was in fact on that day a willing buyer, but by inquiring 'what would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural." His Honour also observed (at 432) that: "It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together." 6The nature of a "market value" test was described in MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; (2004) 63 NSWLR 167 at [55], in the context of the purchase of shares on exercise of a call option, by Spigelman CJ (with whom Mason P and Hodgson JA agreed) as follows: "A test of a "market value", whether in a statutory or contractual context, usually invokes the test long established and frequently applied in Spencer v The Commonwealth of Australia (1907) 5 CLR 418 esp at 432 and 440-441 of a willing but not anxious purchaser and vendor, bargaining with each other. This approach was most recently expressed in a joint judgment of three judges of the High Court in Marks v GIO Australia Holdings Ltd [1988] HCA 69; (1998) 196 CLR 494 at 514: "... The value ... is to be identified according to what price freely contracting, fully informed parties would have offered and accepted for it." 7The range of accepted valuation methodologies was noted by Dixon J in Smith v Gould [2012] VSC 461 at [125], where his Honour observed that: "In theory, all valuation methodology for a business is based on its cashflow. Discounted cashflow is the most commonly accepted valuation methodology. Other common valuation methodologies include capitalisation of future maintainable profits, capitalisation of future maintainable dividends, value of net tangible assets on a going concern basis, or notional realisation of assets (hypothetical liquidation)." 8The Plaintiffs rely on an expert accounting report of Mr Meredith dated 5 September 2012. The Defendants rely on an affidavit of Mr Sayer sworn 1 July 2013 and on an expert accounting report of Mr McGuiness dated 28 May 2012 and a reply report dated 31 July 2013. The Court made orders for conferral of the accounting experts and Mr Meredith and Mr McGuiness issued a joint report dated 21 August 2013 setting out matters on which they agreed and disagreed. 9Both accounting experts recognised that GMEC comprised two distinct businesses, one of which involved mortgage brokerage and the other of which involved origination and lending (McGuiness First Report [3.2.1], Meredith Report [3.1.1.1]-[3.1.1.2]; Joint Report Ex J1 [2.1.1]). Both accounting experts proceeded on the basis that their task is to determine the market value of the relevant shares, although there are significant differences between them as to the methodology to be adopted in that determination (Meredith Report [1.5.2], McGuiness First Report [3.1.1], Joint Report Ex J1 [4.1.2]). Both experts agree that "market value" is to be assessed in accordance with Spencer v Commonwealth of Australia above, as the value that a hypothetical prudent purchaser, who is a willing but not anxious buyer, would be prepared to pay to a vendor, who is willing but not anxious to sell, in the circumstances where both buyer and seller are reasonably informed of relevant information. 10Mr McGuiness adopted the test of "fair market value" for his valuation of the shares in GMEC (McGuiness First Report [3.1.1]), which he defined in substantially the terms identified in Spencer v Commonwealth of Australia, as follows: "The fair market value of an asset, business or equity interest is the value that a hypothetical prudent purchaser, who is a willing but not anxious buyer, would be prepared to pay to a vendor, who is willing but not anxious to sell, in circumstances where both buyer and seller are reasonably informed of operational and financial details." Mr McGuiness also noted that a buyer would consider the financial benefits he or she would obtain by being the owner of the particular asset after considering any inherent risks attached with it in determining that price (McGuiness First Report [3.1.2]). He distinguished "market value" from "special value", being the value that a "special purchaser" with particular connections or relationships with the business would be willing to pay and notes that a "special purchaser" may be willing to pay more than fair market value in recognition of extra benefits available to them (McGuiness First Report [3.1.3]). Mr Meredith adopted the same standard of value and also referred to the test in Spencer v Commonwealth of Australia (Meredith Report [1.5.2.3], [3.4.1]). Both experts agreed that a valuation should have regard to information that was reasonably available at or about the date of valuation, 30 June 2010, and should not have regard to information after that date which would involve use of hindsight (McGuiness First Report [3.1.20], Meredith Report [3.3.2], Joint Report Ex J1 [4.1.20]). 11The Plaintiffs contend that the Court should have regard, in determining the market value of the shares in GMEC, to wider concepts of "value" such as those articulated in Brisbane Water County Council v CSD [1979] 1 NSWLR 320 at 326, where Waddell J distinguished between the "value" of an item and the "price at which it might change hands in particular circumstances" and in Russell v Minister of Lands (1899)17 NZLR 241 at 235, as cited in Spencer v Commonwealth of Australia above at 435, where the Court distinguished the "value" of land compulsorily acquired from its "mere saleable value". I cannot accept this submission, since the orders made by the Court of Appeal define the task which was to be performed by this Court, which is to assess not the "value" of the relevant shares in a broader sense but their "market value". The term "market value" necessarily depends upon the saleable value of the shares on the relevant market. 12The Plaintiffs also submit that: "Where the purpose of the valuation exercise is to fix a price for a compulsory acquisition, the Court must be at pains to ensure that the party whose property is being taken from him is not under-compensated." The Plaintiffs distinguished that position from that of a freely transacting party who has the liberty to decide whether to accept or reject a valuer's estimate of value. I understand the Court of Appeal's directions as to the manner in which the valuation is to be undertaken to reflect a determination that "market value" in its usual sense would represent a fair value for AFSC's shares in GMEC in all the circumstances and a proper price to be paid by One Australia to acquire AFSC's interest in GMEC, consistent with the applicable principles: see, for example, Smith Martis Cook & Ragan Pty Ltd v Benjamin Cook Pty Ltd [2004] FCAFC 153 at [71]-[75]. The task I am required to undertake is to determine the value of the GMEC shares in accordance with the orders made by the Court of Appeal and the evidence before me; that should ensure that the Plaintiffs are not "under-compensated"; but it is not open to me to adopt a different approach from that which the Court of Appeal has directed to ensure that the Plaintiffs are more generously compensated. Earning-based valuations 13I directed each party to provide a statement of the valuation methodology that they would propound prior to the hearing. The Defendants indicated that they relied on a capitalisation of earnings method of valuation in respect of GMEC's mortgage brokerage business and a discounted cashflow method of valuation in respect of GMEC's origination and lending business as outlined in Mr McGuiness' First Report and his Response Report. It is convenient to address this valuation first, since Mr Meredith accepted that an earnings-based valuation would be the usual form of market valuation, although he adopted a different approach in this case on the basis that that usual form of valuation was not possible or appropriate in this case. 14Mr McGuiness determined the market value of GMEC as a whole by taking the value of the operating businesses, comprised of the mortgage brokerage business and originating and lending business, and then making an adjustment for the market value of surplus assets and non-operating liabilities to determine the market value of GMEC as a whole (McGuiness First Report [7.1.27-29]). In undertaking that analysis, Mr McGuiness had regard to the financial results of GMEC recorded for the financial years ending 30 June 2007, 30 June 2008, 30 June 2009 and 30 June 2010 and also to cashflow statements, budgets and other financial information and documents referred to in section 4 of his First Report. Mr McGuiness recognised that there were difficulties in establishing the reasonableness of the figures in GMEC's budget models by reference to the actual results of past periods; and that those models were complex and detailed and provide for the build-up of revenues, costs and cashflows on the basis of integers applicable to cashflows rather than accounting profits (McGuiness Report [3.2.4]). Mr McGuiness in turn undertook a replication of GMEC budget models, in a simplified model using inputs and balances set out in the worksheets in the budget models in section 4.9 of his First Report. He also noted that the budget adopted an aggressive assumption as to the increase in the value of the loan book, by comparison with GMEC's recent experience of limited settlements of mortgages. 15Mr Sayer gave evidence as to the structure of GMEC's business at the valuation date of 30 June 2010. His evidence was that, as at that date, GMEC did not trade but paid some expenses of the GMEC Group including consulting fees. The Paladin Process Pty Limited operated as an administration company, held an Australian financial services licence and employed most employees in the GMEC Group and otherwise did not trade. There were approximately 38 "Mortgage House" branches throughout New South Wales, Victoria, Queensland and Western Australia, less than the number of branches that had existed in 2008-2009 (Sayer [6]). Another entity, Mortgage House Broker Services Pty Limited provided mortgage broking services on a "broker to broker" basis. A third entity, Mortgage House of Australia Pty Limited ("MHA") was the principal trading entity in the GMEC Group and provided retail mortgage broking services to the public. Mr Sayer's evidence was that MHA sold home loan products of third party lenders to home owners; sold "Mortgage House" branded mortgage home loan products to home owners which were funded through the Adelaide Bank and the Paladin Mortgage Trust; acted as a representative of a number of lenders for the sale of home loan products; and obtained income from upfront fees and commissions received from third party lenders. Another entity, Paladin Wholesale Funding Pty Limited provided sub-broking mortgage services to major mortgage brokers (Sayer [6]). 16Mr Sayer also gave evidence as to other financial information prepared by GMEC, which was of considerable significance to the valuation undertaken by Mr McGuiness, but (with the exception of GMEC's balance sheet as at 30 June 2010) were of little significance for Mr Meredith's valuation approach. Mr Sayer's evidence was that, at relevant times, GMEC prepared rolling two year budgets for internal management services which were revised as necessary (Sayer [9]). Mr McGuiness was provided with GMEC's budgets for the financial years ended 30 June 2009 and 2010 and with an extract from GMEC's budget for the financial year ended 30 June 2011, which were tendered (Ex D4) (Sayer [9]), and Mr Meredith was provided the same information. The valuation of the origination and lending business 17Mr Sayer gave detailed evidence as to the position of the origination and lending business as at the valuation date, 30 June 2010. Mr Sayer's evidence was that, relevantly, the principal trading activity of the Paladin Mortgage Trust (No. 1) ("Trust") had been as a home loan lender on security of mortgages over residential land (Sayer [7]). Perpetual Trustee Company Limited was the trustee of the Trust as at the valuation date and MHA was the principal beneficiary of that Trust (Sayer [7]). Mr Sayer noted that the Trust's ability to lend money on security of mortgages over residential land depended on its ability to borrow money itself on competitive terms for on-lending purposes. Mr Sayer's evidence was that GMEC did not expect any significant growth in the origination and lending business of the Trust at the valuation date, for reasons that I will note below. 18Mr Sayer's evidence was that, as at the valuation date, the Trust's only source of finance to onlend was provided under a Senior Note Facility with the Commonwealth Bank of Australia ("CBA") dated 1 February 2007 ("Warehouse Facility"), which had initially had a limit of $750 million. His evidence was that it had previously been intended that the Trust would repay the Warehouse Facility by securitising mortgages to third parties and that the global financial crisis adversely affected the mortgage securitisation market and the Trust was unable to repay the Warehouse Facility; the limit to the Warehouse Facility was reduced on 15 January 2009 to $400 million; CBA undertook a review of the Warehouse Facility in April 2010 and further reduced its limit to $230 million; and by that time, the Warehouse Facility was almost fully drawn and there was very little capacity for the Trust to make new loans available. 19Mr Sayer's evidence was that CBA had also increased its margin under the Warehouse Facility from 0.20% as at 1 February 2007 to 1.75% as at the valuation date which made the Trust's mortgage products uncompetitive and that, by the valuation date, the Trust was advising existing borrowers who wanted to refinance or take out fresh mortgages to refinance elsewhere. As a result of the impact of the global financial crisis, Mr Sayer did not believe the Trust could source finance elsewhere at the valuation date and did not believe the Trust could expect any significant growth after the valuation date (Sayer [11]). At the valuation date, he believed the business of the Trust was in decline and he did not believe the Trust had the capacity to make new loans. Mr Sayer's evidence was that, as a result of its agreements with borrowers, the Trust also did not expect to receive the repayment of any deferred establishment fee on any loan exceeding 5 years' duration and, since the Trust was not lending at the valuation date, GMEC did not expect to receive the payment of any deferred establishment fees after 2015 (Sayer [22]). 20Important aspects of Mr Sayer's evidence as to the position of the Trust are supported by GMEC's Special Purpose Annual Financial Report for the financial year ended 30 June 2010. That Report discloses that the Trust had drawn down $223 million of its limit of $230 million at 8 January 2010. The audit report for the Special Purpose Annual Financial Report also referred to the dates to which the warehouse facility and working capital facility had been extended and noted that: "As a result of these matters there is significant uncertainty whether the Trust and MHA will continue as a going concern beyond this date, and therefore whether they will realise their assets and extinguish their liabilities in the normal course of business and that the amount stated in the financial report. The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the Trust or MHA not continue as a going concern." 21Mr McGuiness also noted evidence of a substantial reduction from GMEC's levels of activity before the global financial crisis in the middle of 2008, with a substantive reduction in the levels of origination as broker and the levels of origination for the Trust with little new business in the year ended 30 June 2010 (McGuiness First Report [4.2.2]). Mr Sayer's evidence in cross-examination also recognised the impact of the global financial crisis, and he observed that: "it was nasty, confidence disappeared, banks would not lend to each other, investors pulled out, liquidity virtually evaporated overnight. We could not obtain funding and if we did it was very expensive. As a result of that Macquarie Bank who was our main tenant [sic] pulled out on or about 2008" (T36). The audit report for the Special Purpose Annual Financial Report dated 30 June 2010 also referred to significant uncertainty regarding the going concern status of the entity. Mr Sayer's evidence, which is supported by the matters to which I have referred and which I accept, indicates that the origination and lending business was, at the valuation date, at least unlikely to grow and more likely in decline. 22Mr McGuiness adopted a discounted cashflow valuation (as described in paragraphs [3.1.9] ff of his First Report) as his primary method of valuation for GMEC's origination and lending business (McGuiness First Report [3.2.5]). Mr McGuiness expressed the view that the discounted cashflow method was appropriate for GMEC's origination and lending business where GMEC was expecting that activity to run down, and noted that the use of a capitalisation of earnings method would generally be applicable where there was an expectation of sustainable growth, which was not the case with the origination and lending business (McGuiness First Report [3.2.6]). 23Mr McGuiness determined the expected profitability and expected cashflows to equity of the origination and lending business in section 6.2 of his First Report. Mr McGuiness in his Response Report refers to a different basis for the calculation of the trustee fees to the loan book, disclosed in Mr Sayer's affidavit, than had been assumed in his First Report. He notes that the relevant adjustment would change the range of business values from his earlier report of $4.43m-$4.85m (McGuiness First Report [7.1.6]) to $4.51m-$4.85m (McGuiness Response Report [2.3.6]) and would change equity values from $2.69m-$3.11m (McGuiness First Report [7.1.27]) to $2.77m-$3.11m (McGuiness Response Report [2.3.6]). Mr McGuiness expresses the view that this difference is not material and Mr Meredith does not express a contrary view. I have made no adjustment in this judgment for this matter. 24Mr McGuiness applied a discount factor in the range of 16.75% to 17.25% to value the origination and lending business at between a low of $0.72 million and a high of $0.73 million (McGuiness First Report [6.2.3], [6.2.7]). While the expert accounting witness retained by the Plaintiffs, Mr Meredith, did not accept the appropriateness of this methodology, for reasons that I will note below, he did not seek to comment on the detail of its application. Mr McGuiness also undertook a "cross check" of the valuation on a discounted cashflow basis, by undertaking a capitalisation of earnings analysis, which derived a somewhat higher valuation of $0.81 to $0.86 million (McGuiness First Report [6.3.14]). 25Mr Meredith accepted that a discounted cashflow methodology (as adopted by Mr McGuiness in respect of GMEC's origination and lending business) would generally be an appropriate valuation methodology and observed in his oral evidence that: "I subscribe to the view that the DCF methodology generally speaking is the most appropriate methodology to apply ..." (T87). 26However, Mr Meredith rejected the use of a discounted cashflow methodology to GMEC or any part of its business in the particular circumstances. In the Joint Report, Mr Meredith observed that: "The foundation for the application of the DCF method is a long-term cashflow forecast, preferably covering a period of 10 years, prepared by those persons tasked with the stewardship of an enterprise, such as shareholders, directors and management, and based on their vision, strategic plans, business plans and business model for the enterprise. A long-term cashflow forecast for GMEC meeting the foregoing criteria prepared prior to or around 30 June 2010, is not available. Therefore, in my opinion, it is not possible to apply the DCF valuation methodology to GMEC to determine a fair market value of GMEC as at 30 June 2010" (Ex J1 [8.1.4]). 27Mr Meredith similarly emphasised in the oral concurrent evidence of the experts that he considered that the foundation for the application of a discounted cashflow methodology was a long term cashflow forecast, in the order of 10 years, prepared by persons tasked with the stewardship of the relevant enterprise (T87). He maintained his rejection of the use of an earning-based methodology in this case in cross-examination, on the basis that GMEC management did not prepare strategic business plans or 10 year forecasts and he considered that he was therefore unable to undertake a valuation on that basis (T88). Mr Meredith accepted in cross-examination that he had not asked GMEC whether or not there was a business plan or strategic plan of the kind he required (T135); however, Mr Sayer did not say that such long term strategic plans or forecasts were prepared by management not did Mr McGuiness rely on them in his valuation. 28Mr Meredith's second requirement for such a valuation was that the relevant long term forecasts had been prepared by management personally, rather than, for example, developed by the valuer from forecasts prepared by management covering a shorter period. That requirement was not directed to a question whether the valuer had adequate information to prepare such a forecast, since Mr Meredith rejected the possibility that a valuer could prepare such a forecast in principle, and irrespective of whether he or she had adequate information to do so. Mr Meredith again did not identify any reference in the valuation literature to his requirement that only management can prepare the necessary plans or forecasts. 29After Mr Meredith had made an opening statement in concurrent expert evidence, he and Mr McGuiness had discussed their respective views and he had been cross-examined, I asked him about how a valuer could go about a valuation if management had not prepared the strategic and business plans and cashflow forecasts that he considered necessary, and Mr Meredith indicated that a willing purchaser could ask management to prepare the plans and forecasts with the valuer's assistance or otherwise form a view as to the maximum price it would be prepared to pay on the basis of publicly available information (T170). Mr Meredith did not consider that such a valuation could be prepared if management had not prepared long-term plans and forecasts or they were not available to the valuer, for example during a global financial crisis scenario where management considered long term forecasts were not reliable or in a hostile takeover where they were not made available. 30On the other hand, Mr McGuiness expressed the view that: "That a company does not present long term budget models in one form or another does not prevent a valuer from making reasonable estimates of the expected integers relevant to forecast revenues, costs, earnings and cashflows. A valuer is expected to challenge inputs in a company's forecasts and make his or her own assessment." (Joint Report Ex J1, [8.1.20]). Mr McGuiness also indicated that he did not agree with Mr Meredith's observations as to the nature of information required for a discounted cashflow forecast, and he expressed the view that GMEC's budget models provided information as to the nature, timing and extent of integers relevant to its expected revenues, costs, profitability, cashflow and other factors (Joint Report Ex J1 [8.1.22], [8.1.24]). Mr McGuiness also took issue with Mr Meredith's suggestion that a valuer must arrive at a "definitive view", noting that that would not be achievable given the uncertainties in the financial performance of any business, and expressing the view that a valuer's task was "to provide reasonable estimates of the expected integers in the analysis so that the indicated values are unbiased", in the sense that actual values are equally likely to be higher or lower than expected values (Joint Report Ex J1 [8.1.25]-[8.1.26]). 31Mr Meredith also expressed the view that GMEC's budget for the 2011 year was of "inferior quality so far as providing confidence that it might be used to support a valuation process" (Joint Report Ex J1, [8.5.2]). Mr Meredith further observed, with perhaps an excess of rhetoric, that: "To attempt to synthesise what an estimate of earnings for GMEC would have been prior to or around the 30 June 2010 based solely on a valuer's retrospective invention and assumption of facts at that date and to then value an enterprise on that estimate of earnings is self-fulfilling and unequivocally fundamentally flawed." (Joint Report Ex J1 [8.5.3]) 32Mr McGuiness expressed the contrary view in the Joint Report, observing that GMEC's budget models provided sufficient information for a valuer to understand the integers inherent in those models, and that he had made assessments of those integers having regard to the past performance of the GMEC businesses, industry sectors and other factors, and that the absence of long-term budget models did not prevent a valuer from making reasonable estimates of expected integers relevant to forecast revenues, costs, earnings and cashflows (Joint Report Ex J1 [8.5.9]-[8.5.14]). He expressed the view that GMEC's budget models are more detailed than is regularly found in businesses of a comparable scale, and provide an indication of the integers that determine revenues, costs, profitability and other factors in a discounted cashflow, and provide a basis from which reasonable assessments of the nature, timing and extent of integers inherent in a discounted cashflow or capitalisation of earnings can be made (Joint Report Ex J1 [8.5.17]-[8.5.18]). 33Mr Meredith also initially raised a wider concern as to the reliability of the information available to him, although he qualified that concern in his cross-examination. In the Joint Report, Mr Meredith observed that: "the information [he was provided by GMEC] was not sufficiently detailed or reliable and in some cases independent or appropriate to use in assessing a market value of GMEC" (Joint Report Ex J1 [2.2.4]). However, in cross-examination, Mr Meredith indicated that that there was nothing he could recall about the information that he was provided which made him question its reliability or whether it was appropriate for use (T164) and he accepted that the part of the Joint Report referring to an issue as to the reliability of the information: "was prepared very rushedly [sic] but I could have chosen better words" (T165). 34Mr Meredith or, at least his staff, in fact commenced a discounted cashflow analysis in the course of preparing his report but did not compete that analysis because, in his view, the information available to him was incomplete (T138-139, 145, 147-148, 158). This does not appear to arise from any lack of cooperation by the Defendants, since email communications between the chief financial officer of GMEC, Mr Jones, and Mr Meredith between June 2012 and September 2012 offered Mr Meredith assistance as to any further information which he needed to complete the valuation, and Mr Meredith did not request the further information that he considered he needed. It appears that Mr Meredith did not make further inquiries to obtain that information given the view he took as to its reliability because of Mr Sayer's interest in the acquisition of shares in GMEC. It does not seem to me that the Plaintiffs have established, as a matter of fact, that the fact that information was provided to the valuers by GMEC raises, in itself, as any question as to its veracity. Mr Meredith also explained his not seeking this further information on the basis that it was important that he remain impartial (T159-160, 162). I find it impossible to see that an expert seeking necessary information from an entity that is the subject of his analysis could prejudice his independence or impartiality. 35It also appears that Mr Meredith's analysis of some of the information provided to him, and particularly information as to revenue and costs in respect of commission income in the loan book model, was incomplete. Mr Meredith's evidence in cross-examination was that: "I don't recall whether those costs, to be frank, were included in the loan book. I did - the loan book model that I was given, I do recall that there was a difference in the value generated by the model referred to as a loan book but calculating the net present value of the trailing commissions of approximately 1.5 million. I think that the model that I was given by GMEC derived a value of $20.6 million and ultimately the value reported in the financial statements of 2010 was of the order of $19.27 million. So there was some difference between that model and the figure recorded in the financial statements. That point I guess to be very frank, your Honour, I lost a bit of faith in that model as I couldn't reconcile the two amounts so I wasn't sure what the correct number was or in fact whether the auditors had questioned the calculation and perhaps called for a reduction in recording of the value" (T109-10) This evidence had the difficulty that the difference in the loan book model to which Mr Meredith referred resulted from a difference in the applicable discount rate, a variable in GMEC's loan book model, as between that model and GMEC's accounts for the year ended 30 June 2010. Mr Meredith had made no inquiry of GMEC to identify the reason for the difference nor recognised it himself before he "lost confidence" in the model (T160-161). It was put to Mr Meredith in cross-examination that the loan book model applied a discount rate of 10.9%; GMEC's accounts for the year ended 30 June 2010 applied a discount rate of 12%; and that the change to that single variable for the discount rate in the model from 10.9% to 12% reconciled the figures in the loan book to the statutory accounts. Mr Meredith was unable to recall any of those aspects of the model, and his evidence was that he did not contact GMEC's chief financial officer, who had been providing him with relevant information, to seek to inquire as to the apparent inconsistency, because of his concerns as to maintaining the independence of his report (T161). As I also noted above, I do not accept that that independence would have been compromised by inquiring whether there might be an explanation for an apparent discrepancy, since it would have been open to Mr Meredith to test the answer he was given had he asked the question. Had he done so, that apparent discrepancy would have been resolved. 36In my view, Mr McGuiness' explanation of the application of the discounted cashflow methodology to the origination and lending business was convincing, and I am not persuaded by Mr Meredith's criticisms of the application of this methodology, having regard to the matters to which I have referred above. In particular, Mr Meredith did not identify any academic or professional commentary which supports the view that he expressed concerning the necessity of 10-20 year forecasts proposed by management personally and it might be thought that, in periods of change in the business environment or the economic environment generally, there may be difficulty in producing reliable long-term estimates of future cashflows for a period of 10-20 years. It seems to me that I can properly also have regard to the fact that Courts have frequently accepted expert evidence adopting earnings-based methodologies by reference to shorter time periods: for example, Drinkwater v Caddyrack Pty Ltd [1999] NSWSC 851; Harding Investments Pty Ltd v PMP Shareholdings Pty Ltd (No 3) [2011] FCA 1370; (2011) 285 ALR 297. An earning-based valuation based on information for a shorter period that Mr Meredith required, or prepared by party other than management such as an investment analyst based on publicly available information, may need to allow for a higher level of uncertainty than a valuation based on the information which Mr Meredith required, but it does not seem to me to be either worthless or impossible to undertake. I am therefore not persuaded that Mr Meredith's views in respect of this methodology or its application to GMEC's origination and lending business should be accepted. The valuation of the mortgage broking business 37Mr McGuiness adopted a capitalisation of earnings method (as described at paragraphs [3.1.16]-[3.1.17] of his First Report) as his primary method of valuation for GMEC's mortgage broking business (McGuiness First Report [3.2.5]). Mr McGuiness initially determined the relevant inputs into his valuation, which included the weighted average cost of capital, a rate of growth at 3%, revenues, depreciation and capital expenditure and working capital as a percentage of revenue (McGuiness First Report [5.1.6]) and then determined earnings multiples to be applied to earnings and cashflows (McGuiness First Report [5.2.2]-[5.2.3]). He determined an adjusted enterprise value and market value of the brokerage business, on that basis, as in the range of $3.7 million to $4 million (McGuiness First Report [5.2.6], [5.2.11]). He also undertook a sensitivity analysis as to that valuation in respect of the rate of growth, which demonstrated that the value of the business decreased as its rate of growth increased. He noted that this somewhat unusual outcome reflected the additional working capital investment that would be required to sustain the growth of the business (McGuiness First Report [5.2.10]). Mr McGuiness also undertook a discounted cashflow analysis to cross-check his capitalisation of earnings valuation of the mortgage brokerage business, which he concluded indicated values in the range of $3.7 million to $4 million (McGuiness First Report [5.3.7]). Again, it seemed to me that Mr McGuiness' explanation of the application of this methodology, which was vigorously tested in cross-examination, was convincing. Mr Meredith did not comment on the detail of this valuation, having commenced but not completed preparation of his own model adopting a discounted cashflow methodology in the circumstances to which I referred above. 38Mr Meredith expressed the view that a capitalisation of earnings methodology cannot be applied in this case because GMEC had a relatively unstable pattern of historical earnings and it was not possible reliably to estimate future maintainable earnings for GMEC (Meredith Report [3.4.3.5]); Mr Meredith's view is that a reliable estimate of future maintainable earnings is a critical element of the methodology and, implicitly, that it is not possible to take into account variability of earnings in such a valuation. Mr Meredith maintained that view in the Joint Report, noting that it was not possible to apply a multiple of future maintainable earnings methodology to value GMEC as that methodology could only be applied in circumstances where the enterprise being valued had, historically, demonstrated a stable earnings record over 3-5 years, and GMEC did not demonstrate stable earnings in that period (Joint Report Ex J1 [8.1.7]). The correctness of this proposition stands or falls with Mr Meredith's assertion of it, since Mr Meredith did not identify any academic or professional literature which expressed the view that he expressed. The Defendants point out, and I accept, that this methodology has also been accepted by the Courts in an appropriate case: Re Quest Exploration Pty Ltd (1992) 6 ACSR 659; Re DG Brims & Sons Pty Ltd (1995) 16 ACSR 559 at 589; Drinkwater v Caddyrack Pty Ltd above; Smith Martis Cook above. I have addressed other issues raised by Mr Meredith as to the reliability and independence of the information provided by GMEC above. I am not persuaded by Mr Meredith's criticisms of the application of this methodology in this case. Further adjustments made by Mr McGuiness 39Mr McGuiness then adjusted total value for GMEC's mortgage brokerage and origination and lending businesses by deducting interest bearing current liabilities of $7.05 million and adding cash of approximately $3.8 million to determine an equity value before surplus assets and non-operating liabilities, and then further adjusted his valuation for such assets and liabilities as set out in paragraph 7.1.21 of his First Report. Mr McGuiness included a net liability of $3,040,000 of GMEC to Mr Sayer for employment services and a liability for legal costs of $1,568,431 at this point, before determining the value of GMEC. The Defendants contend that that approach was consistent with orders 4(c)(ii) and (iv) made by the Court of Appeal (McGuiness First Report [7.1.21]-[7.1.26]). I will address that question in paragraph 95 below. On that basis, Mr McGuiness assessed GMEC's market value as in the range of $2.7 million to $3.1 million (McGuiness First Report [7.1.27]-[7.1.29]). The Plaintiffs' wider criticisms of an earnings-based valuation 40In submissions, the Plaintiffs advanced several criticisms of the earnings- based valuation that overlap with, but are wider than, the views expressed by Mr Meredith. 41The Plaintiffs contend that an earnings-based valuation is not suitable because: "There are too many facts which are essential constituents of any valuation based upon projections of future earnings and projections of future cashflows which facts are unknown and unknowable, so that the result of using these methods of valuation necessarily produces as the valuation of GMEC a figure which is nothing more than the product of elaborate arithmetic which is, in truth, based upon sheer speculation." 42The Plaintiffs refer to the observations of Sir Kenneth Jacobs in Albany v Commonwealth (1976) 12 ALR 201 at 210ff concerning a discounted cashflow valuation undertaken by the plaintiffs in that case, which related to the value of land that had been compulsorily acquired by the Commonwealth. I do not understand those observations to be directed to the utility of discounted cashflow valuations generally, as distinct from a consideration of the issues arising in respect of the valuation of the land at issue in those proceedings. The Plaintiffs also draw attention to the observation of Sir Anthony Mason in Federal Commissioner of Taxation v St Helens Farm (1981) 146 CLR 336 at 381 that "[v]aluation is not a matter of precise mathematical calculation". However, the fact that valuation is not a matter of exact science, or that different persons might assess the value of an item differently, is not itself a reason not to adopt an accepted valuation process, but is instead a matter that is well recognised in the authorities: Drinkwater v Caddyrack above at [26]-[27]. 43The Plaintiffs also characterise the discounted cashflow and capitalisation of earnings methodologies adopted by Mr McGuiness in respect of GMEC's mortgage origination and lending business and brokerage business respectively as involving "speculation". It is obvious that any forward-looking exercise, such as an estimate of future cashflow, is potentially less certain than an exercise that has regard to historical facts. The Plaintiffs contend that a discounted cashflow valuation made in 2000 could not, for example, have anticipated the global finance crisis commencing in August 2008. That is no doubt correct, but the Courts have been prepared in various areas, such as the calculation of damages for loss of opportunity, to accept something less than absolute certainty as to future events. 44The Plaintiffs also seek to distinguish between forward-looking exercises which have a degree of certainty, of which they give the example of actuarial tables of life expectancy based upon verifiable data, and evidence of the earnings of a company in the future. It seems to me, however, that this question is one of degree and I do not consider that it is not open to an expert, having made an appropriate assessment of present earnings, budgets and other relevant variables, to project them forward to give rise to an estimate of future earnings or cashflows for the purposes of a discounted cashflow or capitalisation of earnings valuation. A fundamental difficulty with the Plaintiffs' approach is that, if it were correct, it would exclude the use of discounted cashflow or capitalisation of earnings methodologies in many or all circumstances. In doing so, it would prevent the Court undertaking a "market valuation" in those circumstances unless that is understood as an assets-based valuation in every case. The Courts have in fact adopted valuations on a discounted cashflow or capitalisation of earnings basis in many cases, including those to which I have referred above. 45The Plaintiffs point out that Mr McGuiness referred in cross-examination to the steps taken in economic modelling to develop a "measure of central tendency" (T197). These seem to me to be properly the application of accounting expertise rather than an exercise in "speculation" as the Plaintiffs contend. The Plaintiffs also point out that Mr McGuiness' valuation would have differed had he adopted a projected growth rate or 2011-2015 of 5.1% per annum, referred to in an Ibis industry report on which he relied, as distinct from a CPI growth rate of 3% per annum adopted by BIS Shrapnel. It seems to me that this proposition establishes no more than the fact, which seems to be hardly controversial, that any expert assessment of future earnings will depend upon the inputs into it, which will often be a matter for the application of the expert's expertise. I do not accept that this invalidates the application of a valuer's or accountant's expertise in this situation. It was open to the Plaintiffs to undertake, for example, a sensitivity analysis that would have demonstrated the different values which would arise from adopting different rates of growth, and place the Court in a position to adjust for the sensitivity of the valuation to that variable. They have chosen not to adopt that course, or indeed to lead expert evidence establishing the result of a capitalised earning or discounted cashflow analysis adopting any particular alternative rate of growth. 46The Plaintiffs also contend that the valuation undertaken by the Defendants is dependent on information provided by GMEC management which they contend is, in truth, Mr Sayer, who is said to be, in substance, the purchaser of AFSC's shares. The Plaintiffs contend that: "Any information derived from that source cannot be accepted as objective and proper for the Court to accept as the basis for determining a valuation on which Mr Sayer's interests are to acquire the AFSC shareholding in GMEC." 47It seems to me that there are several difficulties with this proposition. First, the Court of Appeal directed that a "market value" of the relevant shares be determined and it was common ground between the parties that such a value would be determined by reference to the price paid by a willing but not anxious purchaser from a willing but not anxious seller in an arm's length transaction. One might expect that, in such a transaction, a willing but not anxious purchaser would in fact seek information from the vendor as to the business to be acquired, rather than eschewing such information on the basis that the vendor had a self-evident interest in the sale of the business, notwithstanding that the purchaser might well then undertake analysis of that information to test its veracity. 48The Plaintiffs advance an analogy which is perhaps helpful in testing that proposition, observing that: "In substance, the position is the same as that of a farmer who has to buy particular farmland at a price based upon its estimated future productivity and the value is dependent upon the farmer as the source of information as to the future productivity of the land. Even if the valuer were objective, the source of the data on which the valuation is based is contaminated. The farmer is a judge is his own cause. The same is true of Mr Sayer in this case." One might ask, rhetorically, why would the vendor of the farmland not seek information from the farmer who is the potential purchaser of farmland as to its anticipated productivity, and then take such steps as he or she considered appropriate to verify the accuracy of that information? The Plaintiffs seek to distinguish the position where information could be sought from the vendor, and verified against other information, by contending that there is no external benchmark against which a valuer could have assessed the credibility of long term cashflow predictions for GMEC. However, that proposition is not self-evident where there were, of course, other mortgage broking businesses against which the income, costs and other financial variables within GMEC's business could have been assessed, but were not, to advance any challenge which the Plaintiffs sought to raise in respect of the information provided by GMEC to the accounting experts. 49Second, so far as the evidence goes, the information provided to valuers for the respective parties was provided by GMEC management, and primarily its Chief Financial Officer, rather than Mr Sayer and there was no evidence of any particular aspect in which that information was not accurate or was distorted by reason of the fact that it was provided by GMEC management. It was open to each of the valuers to test the integrity of the information provided, and it is apparent that at least Mr McGuiness took steps to do so. Third, while the Plaintiffs reject reliance on information provided by GMEC to undertake an earnings-based valuation, the statement of financial position (or balance sheet) of GMEC as at 30 June 2010 on which Mr Meredith places exclusive reliance (as I will note below) in undertaking an "assets-based" valuation included a substantial item reflecting the present value of future cashflow in respect of commissions, which was determined by reference to the loans model prepared by GMEC. It seems to me that neither source of information was any less "contaminated", to use the Plaintiffs' language, by GMEC's involvement. 50The Plaintiffs also contend that Mr McGuiness' valuation did not have proper regard to collateral advantages such as the possibility of a future stock exchange flotation (T36), the ability to use the economic group to raise money (T44) and the remuneration that a controller of GMEC could draw from the business (T225). I have noted above that Mr McGuiness drew attention to the difference between "market value" on the one hand and "special value" on the other. Mr McGuiness also noted in cross-examination that whether a buyer sought to personally assume executive control of GMEC and take the remuneration previously paid to Mr Sayer was not relevant to the valuation, which depended on the resources required by GMEC to continue to operate and the arm's length costs of retaining those resources, which would include retention of a chief executive or other senior management (T180). 51In any event, it seems to me that the possibilities on which the Plaintiffs rely to advance these submissions also depend on speculative, and unproved, assumptions. The possibility of a listing of GMEC was wholly speculative. Mr Sayer denied that he was concerned in 2010 with the possibility that at some future time GMEC might become listed on the stock exchange, and his evidence as that his only concern was "with survival" at that time (T36). I accept that evidence which seems to me to be plainly consistent with the objective probabilities. There is no reason to suggest that the ability to use the economic group to raise money, which is available to any economic entity, is not taken into account in orthodox valuation methodologies. The value that the remuneration that a controller of GMEC could draw from it would have to that controller would depend on whether that remuneration was higher or lower than the remuneration which he or she could earn in another occupation, without controlling GMEC, which is a matter which would depend upon the particular identity of a particular purchaser. 52The Plaintiffs also contend that the result of Mr McGuiness' valuation, as between $2.7 million and $3.1 million as at 30 June 2010, is "unrealistic", and that this is demonstrated by the fact that another financial institution paid $2 million for a 10% interest in GMEC in 2003, which was, as the Plaintiffs acknowledge, 7 years before the valuation date. The Plaintiffs acknowledge that that institution sold its 10% shareholding in GMEC to One Australia in November 2008, which they recognise was during the global financial crisis, and they contend that that sale attributed a value of $7.5 million to GMEC as a whole. It seems to me that the price for which that institution acquired an interest in GMEC 7 years earlier is of no assistance in testing the valuation, given the evidence, which I accept, that GMEC's business was at its strongest in the mid 2000's and thereafter in decline. It also seems to me that the sale price for a 10% interest in the business in November 2008, some 18 months prior to the valuation date, is also of limited assistance where the global financial crisis continued for a considerable time after that date and where, as Mr Sayer's evidence demonstrated, mortgage broking businesses were facing substantial business challenges and competition from the retail banks in that period. 53The Plaintiffs also contend that Mr McGuiness' valuation has the result that One Australia would acquire assets worth $12.5 million net (including, they contend, future trail commissions with a net present value of nearly $20 million, access to a source of remuneration in excess of $900,000 per annum and a financial services industry business having particular characteristics) at a valuation of $2.7 million-$3.1 million. It seems to me that that submission has the difficulty that it assumes that the value of future trail commissions are that figure, notwithstanding the evidence that it did not take into account the costs of earning such commissions and the qualifications to the financial reports (to which I will refer below); assumes that access to such remuneration had a value notwithstanding the matters to which I have referred in paragraph 51 above; and does not have regard to the evidence as to the challenges facing GMEC's business, including the question as to whether it could continue as a going concern, noted in its Special Purpose Annual Financial Report for the year ended 30 June 2010. "Asset-based" valuation 54The Plaintiffs' statement of valuation methodology propounded an assets-based valuation, as follows: "The valuation methodology to be relied upon as the appropriate method of valuation of [GMEC] is the going concern asset based methodology as articulated and adopted in the report of Douglas Meredith dated September 2012. Absent asset-specific valuations (of which there is none), the fair market value of GMEC as at 30 June 2010 is the net book value of its net assets as at 30 June 2010. Reliance will also be placed on an asset-based methodology which is, in part, described as a hypothetical orderly realisation of assets (as distinct from as a going concern) on the basis that a hypothetical buyer of the business of GMEC as at 30 June 2010 would be able to maximise the return on the purchase investment by realising the future trail commissions as a partial realisation of the GMEC asset pool rather than retaining them as assets of an ongoing business. (This is really an alternative justification for utilising the balance sheet value of the future trail commissions) The result of adoption of this partial orderly realisation of assets methodology is the same value as is derived by the going concern asset based methodology adopted by Douglas Meredith." 55In their outline of opening submissions the Plaintiffs contended that: "... the basis on which the value of GMEC is to be determined is, in the circumstances of this case, the audited financial statements of the GMEC business entity (GMEC and its controlled entities) as at 30 June 2010 and is no less than the net equity in the GMEC and its controlled entities group as at 30 June 2010, namely $12,515,000." The Plaintiffs submit that this approach should be adopted because a hypothetical seller and purchaser would negotiate on the basis of the audited accounts as at that date and no reasonable seller would negotiate at a lesser figure. 56Mr Meredith's evidence was that where a valuer had "no appropriate or sufficiently reliable information" available to conduct a valuation except "what he is told and provided by a purchaser in the compulsory sale and acquisition of shares in GMEC", and in the "absence of suitable independent information on which to base a valuation of market value", the most appropriate "advice" he can give the court is to rely on the independently audited financial position or "book value" of GMEC according to its statement of financial position as at 30 June 2010, which the auditors and director of GMEC had declared to provide a "true and fair view" (Joint Report Ex J1 [2.2.5], [8.1.5], [8.1.10]). 57Mr Meredith observes that the use of the "book value" of GMEC as at 30 June 2010 as a basis for the compulsory share and acquisition of shares in GMEC is supported by the fact that that net asset value has been tested to Australian auditing standards; the auditors of GMEC opined that the "book value" was a true and fair value; and the director of GMEC, in essence the compulsory purchaser of the GMEC shares, declared that the "book value" was a true and fair value (Joint Report Ex J1 [2.2.2]). This observation requires at least three qualifications. First, as Mr McGuiness points out in the Joint Report, the management, director and auditors do not in fact say in the Special Purpose Financial Report that the balance sheet is presented at either "market value" or "fair market value" (Joint Report Ex J1 [2.3.7]). As I will note below, that would not ordinarily be the case. Second, the special purpose financial reports themselves made clear that, irrespective of whether the audit complied with auditing standards, the accounts themselves did not comply with several Australian accounting standards. Third, the proposition that auditors opined that "book value" was a "true and fair value" has to be read subject to the explanation of the nature of an audit set out in the auditor's report to the members of GMEC and subject to the evidence of the nature of the task that GMEC's auditors in fact undertook. 58The Plaintiffs further submit that: "In the circumstances of this case, having regard to the nature of the GMEC assets and the basis on which the GMEC audited accounts were prepared (at a time when Mr Sayer had no motivation to produce anything other than true and accurate accounts as to the worth of the GMEC business enterprise) and the fact that the figures in the accounts were the subject of audit scrutiny by a reputable firm of auditors, the audited accounts as at 30 June 2010 provide the best guide to the true value of the GMEC business on that date." This submission again needs to be tested against somewhat more detailed scrutiny of the content of the audited accounts, the qualifications to them so far as the several applicable accounting standards had not been applied, the process adopted by the auditors in respect of the audit of those accounts, and the relevance of the information included in GMEC's balance date to a determination of the value of its shares. As the Defendants point out, GMEC's financial statements as at 30 June 2010 did not represent that the balance sheet was presented at "market value", and directors instead stated that the financial report and notes gave a true and fair view of the financial position of GMEC "in accordance with the basis of accounting described in Note 1". Note 1 in turn referred to the financial statements as being a special purpose financial report to satisfy the requirements of the Corporations Act 2001 (Cth) and then stated that the report had been prepared in accordance with the recognition and measurement requirements of Australian equivalents to International Financial Reporting Standards (CB 610, 622, 624). I will refer to the qualifications arising from the fact that certain accounting standards were not applied below. 59The Defendants point out, and I accept, that the assumption in the Plaintiffs' approach that auditors who conducted an audit of special purposes accounts had in some way satisfied themselves as to the market value of the entity's assets overstates the role of an auditor. The auditor was required to form an opinion about, inter alia, whether the financial report was in accordance with the Corporations Act, including the requirement for compliance with accounting standards and the true and fair view requirement under s 296 of the Corporations Act and the audit was required to be conducted in accordance with auditing standards under s 308 of the Corporations Act. GMEC's auditor, Mr Stevenson, who was called by the Plaintiffs on subpoena, properly made clear that he was not qualified to perform and did not purport to perform, in undertaking an audit, a valuation of GMEC's assets. Mr Stevenson presented as a knowledgeable and helpful witness and I accept his evidence. 60Mr Stevenson explained the audit process in cross-examination, observing that: "As the auditor it is to undertake an audit under the Australian Auditing Standards, so perform a series of test on a sample basis over the balances in the financial report and to confirm that they comply with the relevant Australian accounting standards and take into account materiality as the concept over the opinion we give." (T64) Mr Stevenson's evidence was that these relevant accounting standards give guidance as to how a company should recognise and measure assets and liabilities, but the standards do not determine the relevant figures (T67). 61Mr Stevenson also agreed in cross-examination (T71-72) with several propositions which Counsel put to him, drawn from a well-known Australian text on valuation (W Lonergan, The Valuation of Businesses, Shares and Other Equity, 4th ed at 604-606), namely that: