my reasoning
322 I accept the opinions of Mr Edwards and Mr Calder to the effect that the valuation should be on the basis of future maintainable earnings. As I have mentioned, they differ about what are the relevant earnings.
323 Both those experts agree that the revenue from operations net of direct costs, based on historic performance to 30 June 2002, is $2.35 million per annum. (Henceforth I shall not repeat "per annum"). I accept the validity of this calculation because (as Mr Edwards explained in his initial report) it was based on an approximate average of the actual gross fees achieved over the three years ended 30 June 2002 i.e. $2.7 million. By 10 May 2002 there were negative factors emerging, which I have already mentioned above. But I think Mr Edwards' use of an average is fair, because its computation includes the year ended 30 June 2000 in which total revenue for operations was the significantly lower figure of $2,390,000 followed by a substantial increase in the year ended 30 June 2001 to a figure of $2,808,000. In short I accept the starting point of gross revenues of $2.7 million.
324 I accept also that the first figure to be deducted from that sum should be $350,000 of direct costs. That comprised an approximate average of those direct costs, namely, 13% of total revenues, taken over the three years ended 30 June 2002. The result is the figure agreed between Mr Edwards and Mr Calder of $2.35 million.
325 For the reasons which I have earlier given in relation to my conclusion that the Company was a quasi-partnership and the further reasons set out below, I reject the approach taken by Mr Calder to calculation of fees payable to Authorised Representatives. That is, I accept Mr Edwards' calculation of FME on the basis that each of the Authorised Representatives is paid normal industry remuneration of 40% of gross fees (after deducting direct costs). I shall state my further reasons briefly.
326 Mrs Grace Cox (a chartered accountant employed by Messrs Price Waterhouse Coopers) gave evidence that Mr Cork told her at a meeting on 27 November 2002 that a generally-accepted industry standard remuneration for Authorised Representatives was commonly 30 of gross fees, so calculated. In his first affidavit Mr Cork said that normal commercial practice was to pay an adviser 30 of fees with "the rest to the owners". Mr Edwards said that this was consistent with his knowledge of other financial planning businesses. His knowledge was quite extensive. Mr Calder initially, (in his first report), stated that a "more typical" financial planning industry salary in his experience was equivalent to 30 of gross income with "rainmakers" perhaps receiving a larger share. In his March 2003 report, Mr Calder changed his mind and said that whilst 40% of gross fees was a commercial rate for a junior financial planner with a limited client base, a more experienced financial planner with a large client base would generally demand a significant premium to this rate.
327 My assessment is that Mr Calder's subsequent view on this point was very much influenced by his understanding that the Authorised Representatives employed by the Company (including the four individuals) would be at liberty to take clients with them upon ceasing such employment.
328 But this was legally impossible. The goodwill of the business belonged to the Company. The Company bought the Profit Watch portfolio management service, all trailer fees and the goodwill of JCLD pursuant to the terms of the JCLD Agreement. JCLD had, shortly before that time, ten Authorised Representatives. Six of them joined the Company in the same capacity i.e. the four individuals and Messrs Andrew Martis and Bruce Sivalingam. Each of them signed the employment contracts which I have described above, which included restraints on soliciting the Company's clients.
329 There are two further reasons why, so far as the four individuals are concerned, Mr Calder's understanding, and indeed Mr Mazengarb's assumption to the same effect, are wrong. First, a fair valuation assumes a willing seller (in fact, for present purposes five willing sellers - including Mr Andrew Martis). To obtain the best price for the business, those sellers would enter into such agreements as would ensure that the full value of the goodwill of the business passed to the purchaser. That is a reason which does not depend upon legalities.
330 The second reason does so depend. If any of the four individuals, each of whom were at all material times directors of the Company, attempted to take away from it the clients whom they were advising, the Company could obtain ample legal relief to restrain such conduct and full compensation for any loss - see the principles discussed by Hope JA (with whom Samuels JA and Priestley JA agreed) in Mordecai v Mordecai (1988) 12 NSWLR 58 at pp 68-71. See also Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari [2000] 2 Qd R 359 at 366-368 and 373-374, and Shamsallah Holdings Pty Ltd v CBD Refrigeration and Airconditioning Services Pty Ltd [2001] WASC 8 at [70]. The defendants adduced evidence from several accountants about their loyalty, in terms of referring business, to Mr Cork and Mr Smith rather than to the Company. In view of the conclusion which I have just expressed, that evidence is irrelevant.
331 The foundation for Messrs Calder and Mazengarb's opinions is, in my opinion, fundamentally flawed.
332 I accept the evidence which indicates that 40% is a reasonable commercial rate to apply for the purposes of these calculations. Mr Edwards' calculation involved adding 9% superannuation on the total notional salary, notwithstanding that there was no requirement for an employer to provide superannuation above certain prescribed maximum contribution levels. In my view, that adds a further degree of fairness to his estimate.
333 I have not overlooked the evidence of Mr Timothy Flavell who has been an Authorised Representative employed by the Company since 2000. Mr Flavell swore that if his remuneration were changed from 80% of the net fees of business written by him to 40% he would leave the Company and seek employment elsewhere on terms more acceptable.
334 The evidence suggests that in the year ended 30 June 2003, Mr Flavell's remuneration was significantly below 40% of his fees, yet he remained in the employment of the Company. I accept, to some extent, his explanation that it was an unusual year and that if things were not going to get any better he would certainly consider looking for another job.
335 However, my assessment is that if Mr Flavell were to leave the Company, it would not be difficult for it to find a replacement.
336 I differ from Mr Edwards in relation to the appropriate level of administration staff costs.
337 Mr Edwards reviewed a budget prepared by Mr Cork which included an estimate of additional recurring costs. The main additional items were for salaries payable to new administration staff, a rent increase and a Dealer Service Fee. Mr Edwards accepted all of those extra costs for the purposes of making a calculation which he described as "Scenario A". That involved a budgeted increase in administration costs of 2˝ times the actual administration staff salary costs paid in the year ended 30 June 2002.
338 In recognition of the size of that budgeted increase, Mr Edwards prepared a different set of calculations for what he described as "Scenario B". Scenario B assumed only one additional staff member (an administration officer at a recurring cost of $43,600) over and above the staff levels for the year ended 30 June 2002. Scenario B involved an acceptance of the other main additional items referred to in paragraph [337] above.
339 Over and above the budgeted figures, there was the question of whether a still further sum of $139,000 (in precise terms $139,418) should be added to these additional expenses. This sum comprised depreciation on Mr Cork's computer equipment ($5418), salaries paid by him to his brother Mr Fred Cork ($35,970) and Ms Marie Williams ($24,000) and salaries paid by Mr Smith to his sons Mr Brad Smith ($52,230) and Mr Scott Smith ($21,800).
340 I am not satisfied that the amounts which comprise this total of $139,000 should be added to the expenses for the purposes of calculating FME, as Mr Calder advocated in certain spreadsheets which he prepared fairly late in the proceedings. Mr Calder said that he was unaware whether these additional costs were appropriate and he had not studied whether each of the additional costs was appropriate. My reason for rejecting these extra costs is that I do not accept the proposition that it would be reasonable to incur these extra expenses over and above a reasonable increase in the budget for administration staff costs, an item to which I now return.
341 My impression from the evidence is that Mr Martis ran a very tight ship, particularly in relation to administrative salaries. The evidence suggests, and I so infer, that each of the Authorised Representatives carried out a fair amount of administrative work on their own behalf which might reasonably be expected to be carried out for them by office staff. The evidence also shows that the industry in which the Company operated was about to move into a more highly regulated state with increasing on-going compliance costs. I find that, on the balance of probabilities, a reasonable well-informed purchaser would probably have engaged some extra administrative staff upon taking over the business and could not have run quite as tight a ship as Mr Martis had managed to do. Mr Edwards accepted that extra administration staff costs had to be factored in to his Scenario B calculations.
342 Where I differ from Mr Edwards' Scenario B is that I do not think that the allowance for extra administrative costs which Mr Edwards made in that Scenario ($43,600) was sufficient. But, on the other hand, I do not accept the total additional administrative costs reflected in Scenario A which, for calculation purposes, assumed the reasonableness of all Mr Cork's budgeted extra administrative salaries for the year ending 2003 (other than the further $139,000 referred to above). I take into account the fact that actual administration salaries (excluding payments made to Ms Sharon Cork) for the 6 months ended 31 December 2002 were about $2,000 per month less than those allowed in Scenario B. I also gave consideration to Professor McMaster's calculation of additional staff costs. He considered two additional staff members were justifiable, i.e. an administrative officer ($48,600) and a practice manager (general manager $70,200). He had no opinion about salary levels, and applied Mr Cork's figures to reach a total of an additional $118,800. But although the Company appointed a general manager, his services were subsequently dispensed with due, so I understood, to the cost being too high. He was replaced by either an administrative officer or a part-time bookkeeper, or both (the evidence is not entirely clear).
343 In dollar terms, the difference between Mr Edwards' Scenario A and Scenario B was $92,000.
344 To accommodate the findings which I have referred to above I think that there should be an upwards adjustment in the item of the staff costs shown in Scenario B. I select a figure of an additional $46,000 for two reasons. First, it splits the difference between Scenario A and Scenario B i.e. the difference between $560,000 and $468,000 shown in columns 2 and 2(A) of the spreadsheet enclosed in Mr Edwards' letter dated 30 October 2003 to the plaintiff's solicitors. Secondly, that further increase ($46,000) is approximately equivalent to the salary of a second additional administration officer. This would bring the ratio of administrative support staff to Authorised Representatives more in line with the industry ratios referred to in, for example, Mr Calder's first report.
345 The next matter is whether in the FME calculations, there should be an allowance for the impact of Mr Martis' departure. Technically, I appreciate that this would not be logical in a valuation which assumed his on-going presence in the business.
346 However, the truth of the matter is that, although the defendants were originally minded (and by Mr Cork's letter dated 6 August 2002 attempted) to restrain Mr Martis from working for former clients of the Company, eventually they chose not to do so. Some of the clients went with Mr Martis. I accept Mr Edwards' calculation of the net impact on earnings caused by Mr Martis' departure as being $70,000 - see his letter dated 30 October 2003 paragraph 3(b). I think that factor must be taken into account to do justice between the parties.
347 Accordingly, a total of $116,000 ($46,000 plus $70,000) should be deducted from the figure of $847,000 assessed by Mr Edwards as the FME under his Scenario B. The resultant sum is $731,000 from which tax at 30% ($219,300) should be deducted to produce an after-tax figure of $511,700, which I round up to $512,000 for FME.
348 The next question is the multiple to be applied to that figure. Messrs Edwards and Calder are broadly agreed on the multiplier to be applied on the assumption that (contrary to Mr Calder's view) the Authorised Representatives would be paid by the notional purchaser at industry rates. The evidence establishes, in my view, that the industry scale was 30. As discussed above, I have decided that it is appropriate to apply a figure at the highest end of that scale of industry rates i.e. 40%. The agreed multiplier is a range of 5.7 to 7.1. I accept Mr Edwards selection of a multiplier of 6.4 as lying mid-way in that range. That puts a value on the business of $3,276,800. Applying a percentage of 22.5% to that resultant figure produces a valuation for the plaintiff's shares of $737,280 which I will round to $737,000. After I first reached that figure I reviewed again some of the financial evidence. I was comforted to note that my figure is within $13,000 (1.73%) of a figure described as "Preferred" in a document, Exhibit A13, prepared by Mr Edwards and headed "Adjustment to Valuation for Matters Agreed by Experts".
349 I have considered whether a discount should be applied to that figure for the fact that Mr Martis' interest is a minority interest. For the reasons discussed by the Full Court in Dynasty at 145-146, I have decided not to apply such a discount. See also the decision of Gillard J in MT Associates Pty Ltd v Aqua-Max Pty Ltd (No 2) [2000] VSC 78 at [636]-[640] and the further authorities there referred to.
350 I think that the plaintiff should be compensated for being deprived of what would have been the benefits of continued ownership and participation in the management of the Company. In terms of s 233 of the Act, I think that it would be appropriate for an amount equivalent to interest to be awarded to the plaintiff on the above amount.
351 I have given consideration to whether there may be an element of double-counting in allowing an amount equivalent to interest from 10 May 2002 if Mr Martis or the plaintiff had received remuneration or other distributions of income in respect of the period up to termination of his employment i.e. 13 August 2002.
352 Mr Cork swore to the accuracy of a document entitled "Final pay-out for Joe Martis for the period 1 July to 13 August 2002" which dealt with both the Company and the Trust. It purported to show that Mr Martis owed the former $11,683.51 and the latter $23,683.51. Mr Cork acknowledged in cross-examination that the service fees (13% of which were expensed to Mr Martis) were grossly overstated for the month of July. I note that the figure for August was for the whole month rather than for the period to 13 August 2002. I decided that it was not safe to rely on Mr Cork's calculations of the state of indebtedness as between Mr Martis and the plaintiff on the one hand and the Company and the Unit Trust on the other.
353 There was simply not enough evidence for me to assess who was in debt to whom and in what amounts.
354 I have decided that the fairest course in the circumstances would be to let the issue of any rights to payment or re-payment on account of remuneration and dividends for the relevant period be decided, if necessary, by an assessment in the nature of a taking of accounts before a District Registrar, in respect of the (13˝ month) period 1 July 2001 to 13 August 2002. If that process has to be engaged in, it is not to delay implementation of the orders for sale and purchase.
355 Mr Martis can be seen to have been working with his invested capital and enjoying the fruits of his labour and investment until the end of that period. From 13 August 2002 I consider he should receive compensation in the nature of interest calculated on the sum of $737,000 referred to above.
356 The next question is what would be an appropriate rate of interest. I have regard to Order 35 rule 8 which provides that a judgment debt carries interest at the rate of 10.5% per year unless in a particular case the Court determines that justice requires that a lower rate should be applicable. But the amount which I am considering is, in a non-technical sense, to be part of a judgment itself.
357 Section 51A provides that, unless good cause is shown to the contrary, a Court shall include in an amount for which judgment is given interest at such rate as the judge thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered. Again, strictly that is not the present situation.
358 Even in today's economic climate of gradually increasing interest rates, a rate of 10.5% is, in my view, on the high side. I take judicial notice from "The Australian Financial Review" 10 December 2003, that in relation to listed stocks it appears that a yield of about 4% in respect of market leader stocks is currently regarded as reasonable. However, in that situation there is the capacity for capital growth which to some extent compensates for a lower yield.
359 If the plaintiff had had the use of this sum since 13 August 2002, I doubt very much whether it would have been able to have invested it for a return of 10.5% with reasonable safety. Again from "The Australian Financial Review", I note 90 day bills of exchange yield around 5.5% and 180 day bills not much more.
360 All in all, I consider that the compensation payable to the plaintiff for being out of pocket to the extent of the abovementioned sum would be fairly assessed at a rate of 7% per annum on that sum. For the reasons given above, I think that it would be appropriate for the calculation to be from 13 August 2002 to the date of payment.