Mr Catto's oral submissions went somewhat wider than this document. As well, though not ultimately pressed by him in submissions, some other points were raised by Mr Catto in his cross-examination of Mr Gibson, which I should take into account in deciding whether 16¢ is a fair value.
The Makita v Sprowles Attack
60 Mr Catto referred me to the decision of Heydon JA in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705, especially at [80] and [82]. He criticised the Ernst & Young report for having relied on a range of material reported to them or provided by others, and as not making explicit the authors' own reasoning processes in deciding whether to adopt, and if so in what fashion to use, that material. He criticised the report for not laying out the intellectual basis of the opinion contained in it.
61 The Ernst & Young report was admitted into evidence without objection. So also were the earlier expert's reports prepared by Grant Samuel. Even though the reports were in evidence, Makita v Sprowles remains relevant as a reminder of matters to take into account in assessing the cogency or persuasiveness of the conclusions arrived at.
62 Bromley Investments Pty Ltd (ACN 001 109 628) v Elkington (2003) 47 ACSR 273 is a decision of the Queensland Court of Appeal. In that case, at [18], Williams JA (with whom Jerrard JA and Holmes J agreed) considered a submission which Mr Catto (who also appeared in that case) advanced, that a judge at first instance in a trial such as the present "had an inquisitorial role and was obliged to investigate fully all aspects of the expert's report in order to be satisfied that the price offered for the shares was fair." Williams JA said, concerning that submission:
"Even though the minority shareholders do not bear any onus of proof, the role of the judge is not inquisitorial. The essential task of the judge is to determine whether the price offered is fair and that decision must largely be based on the report of the expert furnished pursuant to s 667AA. Of course, if at the end of the hearing the judge was of the view that there were such deficiencies in the report that it made it impossible to determine whether or not the price offered was fair, approval would be refused. But that does not mean that the report must be beyond criticism before the judge could act on it and conclude that the price offered was fair." (emphasis added)
63 I have set out at some length the structure of the report. That structure is a clear one. It makes clear that the experts were addressing the questions which they are required to address by section 667C Corporations Act 2001 (Cth) (and which is also the question which the Court must address for the purpose of section 664F(3)). The nature of the valuation process is inherently one which does not permit of strict deductive proof and involves assessment, judgment, and some degree of approximation. In my view, the report makes clear the basis upon which it proceeds. Further, the basis upon which it proceeds is one which is of a type often encountered in business valuations.
The 'Insufficient Expertise' Attack
64 Mr Catto criticised the authors of the report for not having obtained specialised advice on the valuation of Lake's intellectual property. He pointed to the way that if a company has a specialised type of agricultural business, an expert called upon to value that company will frequently engage a valuer with experience in that type of agricultural business to value the company's land, and to the way in which an expert called upon to value a mining company will often engage specialists to provide estimates of the amount, location and grade of the available ore, and of the costs of extracting it.
65 The expertise of the authors of the present report lies in the valuation of businesses and intangible assets, including shares and other securities. Mr Westphal's experience includes experience in the technology industry, including valuation of intellectual property of various companies in that industry. I do not accept that the valuation of intellectual property necessarily involves a separate area of expertise to the valuation of an individual business. The value of an item of intellectual property is closely connected to the value of the right to carry on the business of exploiting that intellectual property, or alternatively of selling that right to someone else. If there were to be a challenge to the validity of a patent, specialised scientific or technical expertise might be involved in assessing the chances of the attack on validity being upheld, but no such question arises in the present case. Even accepting, as I do, that the existence of intellectual property is a significant contributor to the value of Lake's enterprise, I do not accept that the authors of the Ernst & Young report were unfitted to value that enterprise without the assistance of someone with more specialised knowledge than they had.
The 'Failure to Take into Account Relevant Subsequent Information' Attack
66 Another attack which Mr Catto made in address related to the time as at which the Court ought determine the value of the securities being acquired. He submitted that the Court can, and should, take into account events which are known at the time of the hearing and which cast light on the value of the securities proposed to be acquired.
67 For the reasons which I gave in an interlocutory ruling in this matter (Dolby Australia v Catto [2004] NSWSC 1196) I accept that the relevant time for determination of the value is the date of service of the notice under section 664C Corporations Act 2001 (Cth) on ASIC, but that events occurring after that date can sometimes cast light on what was the value of the securities as at that date. In the present case, however, there is no evidence of there being any relevant events which have occurred after 20 August 2004 (the date when the notice was served upon ASIC), and which can cast light on the value of the securities as at that date.
The 'Failure to Recognise Importance of Lake's IP' Attack
68 Another attack which Mr Catto makes on the report is that it does not recognise the importance of Lake's intellectual property. I find no basis for that submission. The expert report states, at page 8:
"Lake developed and patented Lake Personal Surround (the predecessor to Dolby Headphone) in 1997. The Company approached Dolby to licence and market the technology, and following further refining of the technology, the Dolby Headphone product line was established. Dolby was given exclusive marketing rights of the product, and marketed the product under its existing umbrella of licensable products. Dolby began to license the Dolby Headphone technology in personal computers in 2000, and the technology has been incorporated in the products of Dell, Packard Bell, Fujitsu, Sony Vaio, Toshiba, NEC and Hitachi. The technology has also been incorporated in the consumer audio products sold by Sharp, Pioneer, Marantz and Denon."
69 At the same page, in a section of the report appearing under the heading relating to Lake's company profile, and a subheading of "Licensing of Intellectual Property" the report says:
"Dolby Virtual Speaker is a DSP [Digital Signal Processing] technology that can recreate the aural experience of surround sound from as little as two ordinary speakers. The Dolby Virtual Speaker works by processing audio channels through advanced filters that simulate the sonic signature of five-speaker sound from as little as two physical speakers. The advantage of Dolby Virtual Speaker over earlier technology is that the Dolby Virtual Speaker technology is able to create surround sound whilst preserving the integrity of the key centre channel dialogue.
The Dolby Virtual Speaker technology has a relatively wide range of applications, and can be incorporated into products such as televisions, personal computers, DVD players, game consols, and other devices that have two or more speakers."
Lake signed an agreement in 2002 granting Dolby the exclusive license over Dolby Virtual Speaker."
70 The technical innovation involved in an item of intellectual property, and its potential attractiveness to consumers, does not ensure that it will produce large (or any) profits. In relation to each of those products, the exclusive licensing agreement which Lake entered into with Dolby means that Lake is very much in Dolby's hands concerning the marketing of the intellectual property. As the report recognises, at page 8, "the effect of the agreement with Dolby, however, is that Lake has little control over the pricing, marketing and uptake" of either the Dolby Headphone technology or the Dolby Virtual Speaker technology. Those license agreements were entered into in 1998 and 2002, well before the date as at which the securities are to be valued. The securities cannot be valued in a way which places a value on technology, but ignores the inhibitions on Lake's ability to derive value from that technology because of the existence of the licensing agreements.
The 'Regurgitating Grant Samuel' Attack
71 Mr Catto put to Mr Gibson in cross-examination the fact that he had read both of the Grant Samuel reports, and that the same comparables were used in the Ernst & Young report as in the Grant Samuel reports for possible comparable companies. Mr Gibson agreed with those propositions. Mr Catto did not put to Mr Gibson, in the way procedural fairness demands, any suggestion that he had "regurgitated the Grant Samuel reports", as stated in Mr Catto's outline of contentions, with the suggestion inherent in it that he had followed Grant Samuel unthinkingly. Even so, when the general topic of the comparables was being used, Mr Gibson gave evidence that Ernst & Young had carried out their own research concerning what were appropriate comparables. I accept that evidence. Further, Mr Gibson's manner of answering questions in cross-examination makes clear that he has applied his mind to how the valuation should be carried out, and formed judgments concerning both methodology and quantum.
The 'Failure to be Forthcoming' Attack
72 Mr Catto's complaint about Dolby and the Lake directors having been less than forthcoming in the provision of information was explained by him, in opening, as relating in part to their failure to make available a document, filed with the Securities and Exchange Commission in the United States in November 2004, relating to an Initial Public Offering, made, or proposed to be made, by Dolby Laboratories Inc. Mr Catto endeavoured to tender that document in the course of the trial, and I rejected it. The document was in any event available on the internet, and Dolby's solicitor wrote to Mr Catto informing him of the internet address at which it could be found. I do not find that this complaint has any tendency to show the price offered for the shares is, or might not be, fair. There were some other complaints on this score, for which there was no evidentiary foundation, and which I shall not repeat or consider further.
73 Mr Catto submitted that on an application such as the present the company seeking approval of the compulsory acquisition of securities should make a full and frank disclosure to the Court of any relevant information which it has. In my view, section 664C(1)(e) Corporations Act 2001 (Cth) imposes an obligation on a person who becomes such an applicant to make disclosure at the time of lodgement of the notice with ASIC, ie, well before any occasion for disclosure to the Court arises, of material information known to it. If litigation is brought seeking approval of a compulsory acquisition, and that case proceeds as an ex parte application, the plaintiff would have the usual duty of frankness to the Court which is required on an ex parte application. Further, any solicitor preparing affidavits in connection with an application for approval of a compulsory acquisition has the usual professional obligation of not allowing a client to swear an affidavit which the solicitor knows will create a misleading impression: In re Thom (1918) 18 SR(NSW) 70. Though there are these various sources of obligation on a plaintiff in an application such as this to make frank disclosure of relevant information - and further thought might possibly find other sources of such obligation - in the present case I am not persuaded that there is any information relevant to the question of what is a fair value of the securities at the appropriate date which has not been disclosed.
Effect of Using Unaudited 2004 Accounts
74 The accounts of Lake which were used for the Ernst & Young valuation were audited accounts for years up to the year ending 30 June 2003, but unaudited accounts for the year ending 30 June 2004. By the time of the trial, the audited accounts for the 2004 year were available. The only material difference between the unaudited accounts as at 30 June 2004 and the audited balance sheet as at that date was that in the audited balance sheet the value of intangibles (ie, the value attributed in the accounts to the Clair technology) was $453,590 by comparison with the amount of $1,058,000 contained in the unaudited accounts. That is a difference which would have the effect of depressing somewhat the value of the enterprise as measured by the net assets method.
Accepting the Write-Down of Clair Technology
75 Mr Gibson accepted that he had used the figure shown in the unaudited 30 June 2004 accounts for the Clair technology, knowing that it had been written down from the previous year. In the audited accounts of 30 June 2003, its value was shown as $1,836,000. Mr Gibson said that in accepting that write down he took into account information which he had obtained from Mr Gilbey and Mr Altman, in the management of Lake, to the effect that sales of the technology were disappointing, and the likely future profits from it were limited. Even if Mr Gibson were not to be justified in accepting the write down on the basis of that sort of information (and I do not decide that he was not so justified), it would affect only the net asset value method of valuing, and make no difference to the top of the range at which Mr Gibson valued the Lake enterprise.
Failure to Add Back the Amount Paid on the Stellar Settlement
76 As mentioned in para [9] above, Lake made a payment to Stellar in May 2004 to settle litigation brought by Stellar alleging a breach of its distribution contract. The precise amount of that payment is not disclosed, but it is part of an amount of $1.8m shown in the June 2004 accounts of Lake as abnormal items. Mr Catto suggested that Mr Gibson should have found out the amount of payment to Stellar, and added it back for the purpose of his valuation. Mr Gibson rejected that suggestion, saying that it would have been appropriate to add back the payment to Stellar in an earnings-based (ie profit-based) valuation, but because Lake had no earnings he had not been able to conduct an earnings-based valuation. Mr Gibson said, and I accept, that adding back the amount of the payment to Stellar was not appropriate for the three particular types of valuation method which he ultimately used.
Valuation of the Tax Losses
77 Mr Gibson was criticised for not setting out the reasoning by which he arrived at his decision to allow a figure of $650,000 for tax losses. The report (see para [46] above) identified the size of the tax losses, and the fact that they had been valued at 10¢ for every dollar. The report also referred to the practical difficulties which there would be in utilising the tax losses.
78 Ascribing a value to tax losses involves, essentially, an exercise of prediction of the likelihood of the company with the losses ever being in a position to use them, in whole or part. On the available information about the likely future of Lake, I do not see any error in Mr Gibson's having arrived at a view that the losses should be valued at 10¢ in the dollar.
Method of Valuing Technology
79 Mr Catto criticised the method by which the technology had been valued, for the purpose of the net assets method. I agree that the present value of the cost of reproducing the technology is not a particularly persuasive way of valuing it. However, as Mr Gibson explained in the course of his cross-examination, no other method is available. Lake has in fact made consistent losses in the course of developing and exploiting its technology. Further, the share market's assessment of the value of the technology is a factor which would have influenced Lake's share price. Mr Catto described the Lake technology as the "blue sky" which attracted investors to Lake. The present value of that "blue sky" is reflected in the present share price, regardless of the fact that the "blue sky" seemed more attractive to purchasers of Lake shares at a time when the share price was more than it was during 2004. Lake's shares were issued in the initial public offering at 50¢ per share, listed at a 90% premium to the offer price, and in the course of December 1999, the month of listing, rose to $2.28. From then on, the trend of the share price has been continually down. In 2001 its shares traded in a range from 81¢ to 19¢, in 2002 in a range from 33¢ to 17¢, in 2003 in a range from 29¢ to 9¢, and in 2004 in a range from 17¢ to 11¢. The fact that the audited accounts of the company (which, pursuant to section 305 Corporations Act 2001 (Cth) are required to give a true and fair view of the financial position of the company) did not attribute any value to the technology which Lake itself developed, is basis for an inference that neither the directors of Lake, nor its auditors, regarded the attribution of that nil value as something which caused the accounts to not give a true and fair view of the company's financial position. Even though the experts having valued the technology on a present cost of replacement basis is not very persuasive, the fact that the experts included that method of valuing the technology in their net asset method of valuing the Lake enterprise does not lead me to a conclusion that their ultimate opinion about the fairness of the price is incorrect.
Value Attributed to Options
80 Mr Catto criticised the value attributed to the options. He suggested to Mr Gibson that, when the exercise price of the options were practically all above 20¢, the highest having an exercise price of 71¢, it could hardly be right that they were worth, collectively, $190,000. Mr Gibson responded that he had used a recognised method of valuing options in listed securities.
81 I observe that Mr Catto's argument that the options are hardly likely to have as high a value as $190,713, given their exercise price, does not sit very well with his argument that the value of the shares has been materially understated by the valuers. It suffices for present purposes that the value of $190,713 attributed to the options is not an amount which makes any material difference to the high end of the experts' valuation of the ordinary shares. The high end of the valuation of the enterprise as a whole, namely, $22m, is one which the experts arrived at after having rounded up a valuation of $21,900,000 derived from the share price method. Even if the options were all regarded as worth nothing, this would make no material difference to the experts' opinion that the shares were worth, at the top of the range, 16¢.
Reasons of the Objectors
82 Though the objectors each expressed their reasons for objection in their own words, there are some common themes, apart from saying that the price offered is too low. One is that the objector purchased the shares at a price well above 16¢, and does not want to be forced to take a loss. Section 664F(3) Corporations Act 2001 (Cth) obliges the Court to approve an acquisition if the 90% holder establishes that the terms set out in the compulsory acquisition notice give a fair value for the securities. Giving a fair value for the securities is not necessarily the same thing as being fair to an individual shareholder. Section 667C limits the factors which can be taken into account in deciding what is a fair value for securities. In consequence, the individual circumstances and wishes of a shareholder whose shares are acquired are not a matter which enters into the question of whether the terms set out in the compulsory acquisition notice give a fair value for the securities.
83 Another theme is that some shareholders object to the very principle of their shares being acquired without their consent. One shareholder filled out the space in the objection form for giving reasons for objection by saying he did not need to give reasons, he just objected. Objections of this type are to the legislation itself, and cannot affect how the Court acts when seeking to play its role in the regime for compulsory acquisition which the legislation establishes.
84 A variant on the objection in principle to compulsory acquisition is that the shareholder deliberately purchased the shares intending them to be a long-term investment, and does not wish to be deprived of the opportunity of maintaining the investment for the long term. Such an objection depends on the individual circumstances of a particular objector, a matter which cannot be taken into account under the statutory regime for compulsory acquisition. As well, it is inherent in the nature of shares that they can be the subject of a compulsory acquisition under Part 6A, Corporations Act 2001 (Cth) regardless of the intentions with which the shareholder originally purchased the shares.
85 Another theme was that, if the shareholders' shares had to be acquired, they would prefer to receive shares in a Dolby company, rather than cash, so as to be able to continue to participate in the enterprise of developing and exploiting Lake's technology. The answer to that objection is that 664B(1) allows of no alternative other than the shares being acquired for a cash sum.
86 Another theme in the objections is that the offer is an opportunistic one, made at a low price when Lake is in a position of weakness. That is not a matter which affects the question of whether the terms offered give fair value for the shares.
Conclusions
87 Taking into account all these matters, I have come to the view that the terms set out in the compulsory acquisition notice give a fair value for the securities. In those circumstances, I shall approve the acquisition.
Order
88 The Court approves the compulsory acquisition by Dolby Australia Pty Limited of all ordinary shares in Lake Technology Limited not held by it or any related body corporate of it, on the terms of the compulsory acquisition notice dated 20 August 2004.
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