The question in this appeal is whether the appellants, as shareholders in Canberra Eye Hospital Pty Ltd (CEH) and Canberra Eye Hospital Management (CEHM), suffered loss or damage as a consequence of conduct engaged in by the respondents in relation to the affairs of CEH and CEHM. In proceedings brought in the Commercial List of the Equity Division by the appellants (the Minority Shareholders) against the respondents (the Majority Shareholders), a judge of the Equity Division (the primary judge) concluded that identified conduct of the Majority Shareholders was not in the interest of the shareholders as a whole and was oppressive and unfairly prejudicial to and unfairly discriminate against the Minority Shareholders. However, the primary judge also concluded that the Minority Shareholders had failed to establish that, had that conduct not occurred, they would have been in a better position than they are now. His Honour therefore ordered that the proceedings be dismissed and ordered the Minority Shareholders to pay the costs of the Majority Shareholders.
By notice of appeal filed on 15 October 2018, the Minority Shareholders appealed from the orders made by the primary judge. The Majority Shareholders filed a notice of contention on 14 November 2018 seeking to uphold the orders made by his Honour on grounds other than those relied upon by his Honour.
[2]
Background
From about 1 July 2004, the Minority Shareholders held 43% of the issued share capital of CEH and the Majority Shareholders held the remaining 57%. CEH conducted an eye hospital in Canberra and derived its income from services associated with the preparation of patients for surgery, from the provision of an operating theatre and nursing and support staff during the surgery, and for providing after surgery care and medication.
Surgery at CEH was undertaken by two groups of surgeons. The first (the Respondent Surgeons) held shares in CEH. The second (the Non-Shareholder Surgeons) did not hold shares in CEH. Two of the Minority Shareholders, Drs Shanahan and Saunders, who had founded the practice from which CEH evolved, ceased to perform surgery by about 2001. The Respondent Surgeons resented the fact that Drs Shanahan and Saunders and the other Minority Shareholders enjoyed a passive dividend income from their shareholdings in CEH, to which the Respondent Surgeons contributed through their surgery at CEH. That resentment lead to various attempts by the Majority Shareholders between 2006 and 2010 to restructure the distribution of income generated by CEH.
The Respondent Surgeons resigned as directors of CEH in late 2010 with the result that Drs Shanahan and Saunders were the only directors of CEH. In February 2013, the Respondent Surgeons notified CEH that from 1 July 2013 they would perform the majority of their surgery at another hospital. As a result, it became necessary for CEH to find replacement surgeons. In June 2013, the Majority Shareholders voted to remove Drs Shanahan and Saunders as the directors of CEH and to replace them with Ms Tegen and Mr Chynoweth. There was no rational or legitimate reason for the removal of Dr Saunders and the purported removal of Dr Saunders was ineffective. From July 2013, the directors of CEH were Ms Tegen, Mr Chynoweth and Dr Saunders, with Dr Shanahan appointed as his alternative.
From no later than the time that Ms Tegen and Mr Chynoweth were directors of CEH, its affairs were conducted in a sustained and deliberate way both contrary to the interests of the members as a whole and oppressive to, unfairly prejudicial to and unfairly discriminatory against, the Minority Shareholders. They acted in concert with the Majority Shareholders first to prefer the interests of the Majority Shareholders over those of the Minority Shareholders. The Minority Shareholders complained about three matters in particular. The first was the appointment by the directors of an administrator of CEH. The primary judge found that the appointment of the administrator was in bad faith and for improper purposes. The second matter concerned the manner in which the directors dealt with the accreditation of Dr Frumar, a world-renowned eye surgeon. Dr Saunders proposed that Dr Frumar undertake surgery at CEH's hospital. However, Ms Tegen and Mr Chynoweth frustrated the accrediting of Dr Frumar, who would have been in a position to commence in generating revenue for CEH by 1 March 2014. It is relevant that Dr Frumar in fact died in April 2016.
The primary judge held that the conduct of the Majority Shareholders, in the manner in which they dealt with Dr Frumar, was not in the interests of the shareholders as a whole and was oppressive and unfairly prejudicial to and unfairly discriminatory against the Minority Shareholders. The third matter about which the Minority Shareholders complained, which was not accepted by the primary judge, was that, but for the conduct of the Majority Shareholders about which complaint was made, other surgeons would have commenced working at CEH's hospital. Thus, they say, the unexpected death of Dr Frumar would not have frustrated the carrying on of the business of CEH's hospital on as profitable a basis as prior to the departure of the Respondent Surgeons and other Non-Shareholder Surgeons to a competing hospital.
The Minority Shareholders formulated their claim on the basis that on 11 June 2015 they sold their shares in CEH to the Majority Shareholders for $1,776,000. They contended that that was the value of their shares at that time but that, but for the conduct complained of, their shares would have been worth substantially more than that sum.
[3]
The Appeal
The grounds of appeal upon which the Minority Shareholders rely may be stated as follows:
1. Having found that the affairs of CEH had been conducted in a manner that was contrary to the interests of its members as a whole and oppressive to, unfairly prejudicial to or unfairly discriminatory against the Minority Shareholders, and that the Minority Shareholders sold their shares in CEH to the Majority Shareholders as a result of such conduct, the primary judge erred in holding that the Minority Shareholders had not suffered any loss.
2. The primary judge mistook the facts or failed to take into account material considerations in:
1. failure to approach the assessment of damages on the basis that the shares sold were worth the sum of $1,776,000 as at the date of sale;
2. failure to assess damages as being the greater amount that would have been paid for those shares had it not been for the oppressive conduct; and
3. ignoring the effect of the oppressive conduct when assessing damages;
1. The primary judge mistook the facts or failed to take into account material considerations, by not taking into account that the oppressive conduct caused CEH to pay fees to the improperly appointed voluntary administrator, and caused CEH to forego the income that would have been generated by Dr Frumar and other surgeons.
2. The primary judge erred at law or failed to take into account a material consideration in failing to resolve doubtful questions against the Majority Shareholders in favour of the Minority Shareholders and in failing to infer that surgeons in addition to Dr Frumar would have operated at CEH.
3. The primary judge erred in taking into account in the calculation of the value of the Minority Shareholders shares in CEH as at the date of sale the fact of the death of Dr Frumar in April 2016.
By their notice of contention, the Majority Shareholders assert that the primary judge erred in finding that Dr Frumar would have operated at CEH's hospital on two days per week, and should have found that he would have operated for no more than one day per week.
In the course of address, it became apparent that the contentions of the Minority Shareholders could be summarised as follows:
1. The primary judge erred in failing to apply a "simple method" of assessing loss, involving the assumption that the sale price received by the Minority Shareholders for their shares reflected the value of their shares as effected by the oppressive conduct, and adding to that price an amount representing the contribution that Dr Frumar and possibly other doctors would have made to the profits and underlying assets of CEH had the oppressive conduct not occurred, together with the funds expended by CEH consequent upon the appointment of the administrator which would not have occurred but for the oppressive conduct.
2. The primary judge erred by failing to make any allowance in his valuation for the possibility that had the oppressive conduct not occurred the non-shareholder directors may have returned to the hospital, or the presence of Dr Frumar would have attracted other doctors to carry out their practice at the hospital premises.
3. The primary judge erred in taking into account the untimely death of Dr Frumar in his Honour's assessment of damages.
I have had the advantage of reading in draft form the proposed reasons of the Chief Justice and the President for concluding that the appeal should be dismissed with costs. I agree with their Honours' reasons. In particular, there was no error on the part of the primary judge in failing to adopt the "simple method" outlined above, and the primary judge made no error in failing to include in the assessment an amount referrable to income from other surgeons. I also agree that the death of Dr Frumar was a matter that the primary judge properly took into account in reaching a conclusion as to the value of the shares. It follows that the appeal must be dismissed with costs.
[4]
SCHEDULE
SHANAHAN & ORS V JATESE PTY LTD & ORS
SIMPLE METHOD
A. Additional income from Dr Frumar (1 March 2014 - 11 June 2015) and an equivalent to Dr Frumar (1 March 2014 - 11 June 2015) and from non-shareholder surgeons (August 2013 - 11 June 2015)
STEP CALCULATION RESULT
Gross Annual Income [1] :
(a) 10 surgeries per list x
Calculate Dr Frumar's gross annual income (b) 2 lists per week x $1,720,000
(c) 40 weeks per annum x
(d) $2,150 per surgery
10 x 2 x 40 x $2,150 = $1,720,000
Calculate the annual variable expenses attributable to Dr Frumar's income Annual variable expenses = Gross annual income x 46.9% [2] $806,680
$1,720,000 x 46.9% = $806,680
Calculate Dr Frumar's net annual income Net annual income = Gross annual income less variable expenses $913,320
$1,720,000 less $806,680 = $913,320
Revenue (1 March 2014 - 11 June 2015) = Annual net revenue x
Calculate Dr Frumar's net revenue for 15.3 months from 1 March 2014 to 11 June 2015 15.3 months [3] $1,164,483
12 months
$913,320 x 15.3/12 = $1,164,483
Calculate the increase in value to the appellant's shares Net revenue (1 March 2014 - 11 June 2015) x 43% $500,727.69
$1,164,383 x 43/100 = $500,727.69
Add equivalent of another surgeon (Burt etc) $500,727.69
43% (shareholding) x
50% (assumed percentage of non-shareholder surgeon revenue staying with CEH) x
Add back 43% x 50% of the net revenue from non-shareholder surgeons $1,995,000 [4] (2013 annual revenue from non-shareholder surgeons) $417,558.49
x .531 (1 less .469 variable expenses) x
22/12 (22 months from August 2013 when the non-shareholder surgeons left until June 2015)
= $417,558.49 [5]
At trial, the costs of the administration were claimed as $467,579.70. See:
(a) Plaintiff's Outline Re Compensation (Black 2/720 at 725D and 727-729):
(b) Plaintiff's Closing Submissions Re Compensation (Black 2/747 at 7571 and 759-761.
These figures were derived from Blue 4/1990 at 1998-2005.
It appears that the respondents did not address these calculations.
The appellants' submissions in chief on appeal made the same claim (Orange 45P).
The respondents' submissions on appeal (Orange 86R) suggest that this amount should be reduced because some of the costs of the administration were borne by:
(a) a loan from the respondent surgeons of $183,000, of which $59,449 was refunded;
(b) tax refunds. It is not clear to the appellants as to the basis and effect of this item.
The appellants' submissions in reply (Orange 61T) contend that the loans and tax refunds occurred after the date of sale (11 June 2015) and thus should be ignored.
However, the original calculation included amounts after that date, so an amendment to the calculation is required. The re-calculation is $349,426.97 (of which 43% is $150,253.59).
C. INTEREST
Interest at Supreme Court rates on the above amounts, from the date of the Share Sale Agreement, 11 June 2015.
On the base case, i.e. items 1-5 in the above table ($500,727.69) plus the administration costs of $150,253.59 (total $650,981.28), the interest from 11 June 2015 to date is $139,714.
On the extended case, i.e. items 1-5, 6 and 7 in the above table (total $1,419,013.87) plus the administration costs of $150,253.59 (total $1,569,267.46) the interest from 11 June 2015 to date is $336,796.
[6]
Endnotes
Red 142 D-R; 143C-F
Red 143F
15.3 months = 1 March 2014 (when Dr Frumar should have started at CEH) and 11 June 2015 (Share Sale Agreement)
Orange 51Q (Blue 2/984-986)
This calculation replaces the calculation at Orange 53O-Q [106(c)]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 20 May 2019
Solicitors:
Thomson Geer (Appellants)
Snedden Hall & Gallop (Respondents)
File Number(s): 2018/245265
Publication restriction: Nil
Decision under appeal Court or tribunal: Supreme Court of NSW
Jurisdiction: Equity - Commercial List
Citation: [2018] NSWSC 1088
Date of Decision: 16 July 2018
Before: Hammerschlag J
File Number(s): 2014/317132
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
HEADNOTE
[This headnote is not to be read as part of the judgment]
The Court of Appeal has dismissed an appeal from a decision of a judge of the New South Wales Supreme Court dismissing a claim made by the appellants for relief under s 233 of the Corporations Act 2001 (Cth) as a consequence of the affairs of Canberra Eye Hospital Pty Ltd (CEH) being carried on in a manner oppressive to and unfairly prejudicial to the appellants. Despite finding that the affairs of CEH had been carried on in a manner oppressive to the appellants, the primary judge concluded that the fair value of the shares that the appellants sold in CEH was less than what they had received for the shares and thus, the appellants had suffered no loss.
Two of the appellants, Drs Shanahan and Saunders were ophthalmologists and the remaining appellants were associated with Dr Shanahan and Dr Saunders. Three of the respondents, Drs Dunlop, Duncan and Khannah were also ophthalmologists and the remaining respondents were associated with them. The appellants formerly held 43% of the shares in CEH, whilst the respondents held the remaining 57% of the shares in CEH.
In mid-2005, CEH commenced to operate as "Canberra Eye Hospital" (the hospital). Surgery at CEH was undertaken by two groups of surgeons: surgeons who held shares in CEH, and surgeons who did not hold shares in CEH. CEH was profitable at least up to June 2013. The majority shareholders were discontented that after Dr Shanahan and Dr Saunders stopped performing surgery in 2001, their entitlement as shareholders to share in the profits remained unchanged. Drs Dunlop, Duncan and Khannah resolved to establish a new hospital, Canberra Micro-Surgery Pty Ltd (CMS) in which they became shareholders and directors. In November 2010, Drs Duncan and Khannah resigned as directors of CEH.
On 6 February 2013, the majority gave written notice to CEH that from 1 July 2013 they intended to perform the majority of their cataract surgery at CMS. Dr Saunders unsuccessfully attempted to find new doctors to perform cataract surgery at the hospital. In August 2013, Drs Dunlop, Duncan and Khannah and other non-shareholder surgeons stopped performing surgery at the hospital.
On 29 November 2013, Dr Burt, an ophthalmologist who proposed to practice predominantly in extraocular surgery applied to CEH for accreditation. Dr Burt's appointment was confirmed on 6 February 2014. In February 2014, Dr Frumar submitted an application to the company for appointment as a Visiting Medical Officer. Dr Dunlop with the assistance of two directors whose appointment the majority had procured, actively frustrated the accreditation of Dr Frumar.
On 11 June 2015, the appellants sold their shares in CEH to the respondents for a sum of $1.776 million on 11 June 2015. Dr Frumar died on 10 April 2016.
The appellants claimed that as a consequence of the oppressive conduct, they were forced to sell their shares in CEH to interests associated with the respondents at less than their fair value. The appellants sought an order that the respondents pay them compensation, representing the difference between the fair value of the shares and what they had received for them. The primary judge applying a capitalised maintainable earnings method of valuation concluded that the value of the appellants' shares, absent the oppressive conduct, was less than the amount for which they were sold.
On appeal, the appellants contended that the appropriate method of valuation was a method described as the "simple method" of valuation, rather than the application of the capitalised maintainable earnings method. The simple method involved first, assuming that the sale price received by the appellants for their shares reflected the value of their shares as affected by the oppressive conduct, and second, adding to that price an amount said to represent the contribution that Dr Frumar and possibly other doctors would have made to the profits and underlying assets of CEH, had the oppressive conduct not occurred, together with the administration costs which would not have been incurred but for the oppressive conduct.
The three main issues on appeal were:
Whether the primary judge erred in failing to apply the "simple method" of valuation?
Whether the primary judge erred by failing to make any allowance in his valuation for the possibility that had the oppressive conduct not occurred, the non-shareholder directors may have returned to the hospital, or that the presence of Dr Frumar would have attracted other doctors to carry out their practice at the hospital premises?
Whether the primary judge erred in taking into account the death of Dr Frumar in his assessment of capitalised maintainable earnings?
The Court (Bathurst CJ, Bell P and Emmett AJA) held, dismissing the appeal:
1 Failure to apply the "simple method" of valuation
The primary judge did not err in failing to apply the "simple method" of valuation. It was not appropriate for the "simple method" to be raised on appeal as the parties and their experts should have been able to consider any methodology proposed at the trial and to the extent necessary, lead evidence or cross-examine in relation to it. Given that the methodology was not raised "squarely before the Court at first instance", the primary judge did not err in failing to apply it. Furthermore, there were "significant problems" with this method of valuation: [61]-[76] (Bathurst CJ); [131]-[142] (Bell P); [153] (Emmett AJA).
Suttor v Gondowa Pty Ltd (1950) 81 CLR 418; [1950] HCA 35; Coulton v Holcombe (1986) 162 CLR 1; [1986] HCA 33; Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12; Whisprun Pty Ltd v Dixon [2003] HCA 48; 200 ALR 447 referred to.
2 Failure to include an amount referable to income received as a result of the activities of Dr Burt, other surgeons and the non-shareholder surgeons
The primary judge did not err in not including in his assessment of capitalised maintainable earnings an amount referable to income from cataract surgery conducted by Dr Burt or other surgeons, or from the possible return of some or all of the non-shareholder surgeons. The primary judge was correct in only including hypothetical income from Dr Burt and the non-shareholder surgeons, if he was satisfied, on the balance of probabilities, that it would be achieved: [93]-[101] (Bathurst CJ); [130] (Bell P); [153] (Emmett AJA).
Commissioner of Succession Duties (SA) v Executor Trustee and Agency Company of South Australia Ltd (1947) 74 CLR 358; [1947] HCA 10; Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547 at 565; [1971] HCA 2 referred to.
3 Error in taking into account the death of Dr Frumar
The primary judge did not err in taking into account the death of Dr Frumar in his assessment of capitalised maintainable earnings. Even if the death of Dr Frumar had not been taken into account, the capitalised maintainable earnings achieved through Dr Frumar would not have resulted in a valuation which had the effect of valuing the appellants' shares in a greater amount than what they received for them. The primary judge was correct in his conclusion that the appellants suffered no loss as a result of the oppressive conduct of the respondents: [102]-[110] (Bathurst CJ); [118]-[129] (Bell P); [153] (Emmett AJA).
Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4; HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54; Mopeke Pty Ltd v Airport Fine Foods Pty Ltd [2007] NSWSC 153 considered.
Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153; 207 ALR 136; Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549; Rankine v Rankine (1995) 124 FLR 340; ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536; Dynasty Pty Ltd v Coombs (1995) 59 FCR 122; Foody v Horewood [2007] VSCA 130 referred to.
.
The primary judgment
The primary judge noted that two of the appellants, Dr Leo Shanahan and Dr Stuart Saunders, were ophthalmologists, the other appellants being associated with them. The appellants held 43% of the shares in the company which operated an eye hospital.
The respondents, Dr Iain Dunlop, Dr Martin Duncan and Dr Gagan Khannah, were also ophthalmologists and in particular, cataract specialists. The other respondents were associated with them. Together, the respondents held 57% of the shares in the company.
From about 1992, Dr Shanahan, Dr Saunders and Dr Dunlop carried on practice at premises which they jointly owned. In 1999 it was decided the day surgery should be incorporated and named Canberra Eye Hospital. The company was formed in May 1999, with each of Drs Shanahan, Saunders and Dunlop holding equal shares.
In 2001, Dr Shanahan stopped performing surgery, although he continued to consult until about 2005. In December 2001, Dr Saunders stopped performing surgery. He continued to consult until December 2015, when he too retired from practice.
On 30 October 2002, the respondent Dr Khannah bought 19% of the shares in the company, whilst on 1 July 2003 Dr Duncan bought 19% of the shares. On 1 July 2004 the shareholding structure of the company was altered so as to compromise issued capital of 300 shares, 43% of which were held by Dr Shanahan, Dr Saunders, their wives and Mr Michael Shanahan, Dr Shanahan's son, whilst as I have pointed out, Dr Dunlop, Dr Duncan, Dr Khannah and companies associated with them, held 57% of the shares.
In mid-2005, the company commenced to operate as "Canberra Eye Hospital" (the hospital) at premises at North Symonston, Canberra. The hospital consisted of a day surgery, consulting rooms and a laser centre. On 18 July 2005, the company took a lease of the hospital which with options, extended to 2027. The primary judge recorded that about 60% of the lease area of the hospital was taken up by consulting rooms, 30% by the day surgery and 10% by the laser centre. The company derived income from charging patients for services associated with the preparation of patients for surgery, for provision of an operating theatre and nursing and support staff, and from providing after surgery care and medication.
The surgery performed at the hospital fell into three categories, cataract surgery, ocular plastic surgery and intravitreal injections. It was common ground that cataract surgery was the most profitable to the company.
In addition to the shareholder doctors, other ophthalmologists used the consulting space in the hospital. They included Dr Rohan Essex, Dr Phil Larkin, Dr Salim Okera, Dr Christiane Lawin-Bruessel and Dr Andrew Chang.
The principles to be applied in the assessment of compensation
It was not in dispute between the parties that the appellants were to be compensated for the loss (if any) caused by the oppressive conduct. In determining that question in the present case, the method of compensation is arrived at by comparing the value of the shares at the time that they were disposed of and the value that they would have had at that date had the oppressive conduct not taken place: Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 369; Rankine v Rankine (1995) 18 ACSR 725 at 727; Smith Martis Cork & Rajan Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136; [2004] FCAFC 153 at [70]-[74].
Further, the requirement to assess a fair price is not constrained by ordinary valuation principles, nor does it require the price to be the market value of the shares: United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514; [2003] NSWSC 910 at [34]-[38]. The Court has a wide discretion in fixing a fair price. In Re Bird Precision Bellows Ltd [1986] Ch 658, Oliver LJ at 669, described "the 'proper' price" as "the price which the court in its discretion determines to be proper having regard to all the circumstances of the case".
However, as McPherson JA pointed out in Rankine v Rankine at 727, the price is not to be determined in a manner which provides punitive or exemplary damages. Nor, in my opinion, is it to be determined by making allowances in favour of the oppressed party for conduct carried on by the other shareholders which, whilst resulting in a diminution of the value of the shares, was conduct which they were entitled to undertake irrespective of whether it resulted in such a diminution.
There was some debate between the parties as to what precisely constituted the oppressive conduct. The appellants contended that the oppressive conduct was that summarised in those passages of the judgment of the primary judge which I have set out at [35] above, in particular that referred to in [308] of the judgment. The respondents, by contrast, submitted that it was the conduct summarised at [327] of the judgment, namely the delay in the accreditation of Dr Frumar and the appointment of the voluntary administrator.
It seems to me that the relevant oppressive conduct found by the trial judge was that referred to in [327] of his judgment. Paragraph [308] of the judgment set out what the respondents sought to achieve by that conduct. Whatever their motivation, the question is whether the conduct was oppressive. In particular, it was not suggested that the respondents had an obligation to fund the business, or for that matter to attract other surgeons. There was no finding that the offering of employment to the hospital manager to work for CMS constituted oppressive conduct, whilst the respondents' attempt to seek an assignment of the company's Head Lease was unsuccessful. The primary judge recognised this in his more limited finding of oppressive conduct.
Second issue - Should the possibility of Dr Burt and other surgeons operating from the hospital have been taken into account in the calculation of maintainable earnings?
It was common ground in the Court below that the appropriate method of valuation was the use of the capitalisation of maintainable earnings methodology. Apart from the simple method with which I have dealt above, the appellants did not contend for any other method of valuation either in the Court below or on appeal. Further, the capitalisation rates used by the experts and adopted by the primary judge were not said to be erroneous.
Rather, the issue was whether the primary judge erred in his assessment of future maintainable earnings, by failing to include in the estimate monies received from practitioners other than Dr Frumar using the facilities of the hospital.
Future maintainable earnings (or profits) are the level of profits which, on average, the business being valued can be expected to maintain in real terms, notwithstanding the vagaries of the economic cycle: Wayne Lonergan, The Valuation of Business, Shares and Other Equity (4th ed, 2003, Allen & Unwin) at 34; Commissioner of Succession Duties (SA) v Executor Trustee and Agency Company of South Australia Ltd (1947) 74 CLR 358 at 362; [1947] HCA 10; Gregory v Commissioner of Taxation (Cth) (1971) 123 CLR 547 at 565; [1971] HCA 2.
The primary judge correctly adopted this approach in concluding at [388] that "[e]arnings are not earnings" for the purpose of the methodology if, as a matter of probability, they would not have been made. In particular, he was correct to reject the approach taken to the assessment of damages for a loss of a commercial opportunity.
Conclusion
I would make the following orders:
1. Appeal dismissed.
2. Appellants to pay the respondents' costs of the appeal.
BELL P: I, too, would dismiss the appeal with costs and agree with the reasons of the Chief Justice.
These short, supplementary reasons adopt the Chief Justice's description of the background to and nature of the various issues in dispute between the parties.
This case was a somewhat unusual oppression case in that the Appellants (the minority) had sold their shares to the Respondents (the majority) after the commencement of proceedings but before the hearing. In the Share Sale Agreement (SSA), both groups of shareholders were astute to preserve their forensic positions. In the case of the minority, cl 3.9(c) of the SSA recorded that:
"Nothing in this agreement constitutes an admission or waiver by the Sellers in respect of Proceedings No. 2014/317132, and in particular:
(1) this agreement does not constitute an admission by the Sellers that the Purchase Price represents the fair value of the Sale Shares after taking into account the conduct of the Company's affairs as alleged, or to be alleged, related to or arising out of the matters pleaded in Proceedings No. 2014/317132 or the conduct of the affairs of the Company or Canberra Eye Hospital Management Pty Ltd."
In the case of the majority, cl 3.9(e) recorded that they were:
"… not prevented by this agreement from contending that value of the Sale Shares is a fair value or from raising any other argument that they wish to raise arising out of this agreement."
As the Chief Justice has recorded at [33], the SSA resulted in the majority acquiring the shares of the minority for a sum of $1.776 million plus 43% of the value of their stock. Accordingly, by the time the case came on for trial, the minority needed to establish not only oppression but also that the value of their shares exceeded that for which they sold them to the majority pursuant to the SSA. Otherwise, the oppressive conduct could not be said to have caused any loss or damage.
Both sides called expert forensic accountants and, as the primary judge recorded (at [330]), there was "consensus as to the appropriate valuation methodology for th[e] case." At [334], his Honour went on to record that:
"Conventionally, the business (if it would have been profitable) is to be valued using the capitalised maintainable earnings (or CME) method which entails an assessment, as at the appropriate date, of what the maintainable annual earnings before interest and tax (EBIT) were and applying to the figure a capitalisation multiple. There is added to this the value of surplus net assets, that is, the assets owned but not necessary to generate the maintainable earnings."
It should be noted, although it ultimately did not loom large in the proceedings, that a shelf company, Canberra Eye Hospital Management Pty Ltd (CEHM) was acquired to be the management company for CEH. CEHM provided rooms, office staff, orthoptists, a practice manager, furniture and some equipment to doctors who consulted and performed surgery at the hospital. CEHM paid rent monthly in arrears to CEH for the use of the consulting rooms under an undocumented arrangement.
The company was profitable at least up to June 2013. The financial statements for the year ended 30 June 2013 showed that for that year the company earned income of $5,489,418 and incurred expenses of $3,743,603, resulting in an operating profit of $1,745,815. The financial statements showed that it had retained profits at the end of that year of $1,650,145 and net assets of $1,650,742.
In contrast, the financial statements for the year ended 30 June 2014 disclosed total income of $1,167,802 and total expenses of $1,356,625, resulting in an operating loss of $188,823. Its retained profits at the end of the year were $978,974.
The genesis of the dispute between the parties arose from the fact that after Dr Shanahan ceased to practice and Dr Saunders was no longer doing surgery and had reduced his consulting time significantly, the appellants were contributing little to the income of the hospital, but their entitlement as shareholders to share in the profits remained unchanged.
The majority shareholders were discontented with the position and in 2006 and 2007 proposed various exit strategies.
In 2009, the majority shareholders sought to pass resolutions which would have the effect of requiring profits to be distributed in a manner favourable to the majority shareholders. That led to the minority shareholders instituting proceedings in the Federal Court of Australia alleging oppressive conduct and claiming certain relief. Those proceedings ultimately were resolved.
As the primary judge recorded, notwithstanding the resolution of those proceedings, the underlying grievance remained. As a consequence, Drs Dunlop, Duncan and Khannah resolved to establish a new hospital. They established Canberra Micro-Surgery Pty Ltd (CMS) in which they became shareholders and directors. In early November 2010, Drs Duncan and Khannah resigned as directors of CEH.
The primary judge noted that by the end of 2012 it was anticipated that the hospital operated by CMS would be ready to start in July 2013. Dr Dunlop offered employment at CMS to the company's hospital manager who accepted, resigning from the company with effect from 21 December 2012.
On 6 February 2013, the majority gave written notice to the company that from 1 July 2013 they intended to perform the majority of their cataract surgery at CMS and that they expected that their other surgery and intravitreal injections would be performed for the foreseeable future at both the hospitals operated by the company and CMS.
The primary judge recorded that from that time Dr Saunders attempted to find new doctors to perform cataract surgery at the hospital. In that context he made the following finding:
"[88] From about this time, Dr Saunders started trying to find new doctors to perform cataract surgery at the hospital. He spoke to Drs David Tridgell, David Dickson and Kate Reid but they declined. He also spoke to Dr Maciek Kuzniarz who was working at the Calvary Clinic in the ACT. Ultimately, Dr Kuzniarz did operations at CMS. Dr Saunders spoke to Dr Kerrie Meades, but this went no further. He had conversations with Drs Okera, Lawin-Bruessel, Larkin and Essex, all of whom ultimately moved to CMS or Calvary hospital."
In June 2013, the majority procured the appointment of a Ms Tegen and Mr Chynoweth as directors of the company. The primary judge found that the motivation for Dr Dunlop selecting them was that "he anticipated they would favour the interests of the majority over the minority". He found that that was what in fact they did. It is not necessary to deal with their activities as directors save to say that the evidence recorded by his Honour amply justified his conclusion.
In August 2013, Drs Dunlop, Duncan and Khannah ceased cataract surgery at the hospital. At the same time Drs Okera, Lawin-Bruessel, Larkin and Essex also stopped surgery at the hospital and started doing it at CMS or Calvary Clinic.
The primary judge recorded that on about 29 November 2013, Dr Benjamin Burt, an ophthalmologist based in Bendigo, Victoria, specialising in ocular plastic surgery, applied to CEH for accreditation. Dr Burt who was identified by Dr Saunders, did have experience in cataract surgery but proposed to practice predominately in extraocular surgery at CEH. His appointment was confirmed in writing on 6 February 2014.
On about 21 February 2014, a Dr Angelo Tsirbas applied to the company for accreditation as a Visiting Medical Officer. The primary judge noted that he was not a cataract surgeon, his predominant interest being ocular plastic surgery.
On 1 February 2014, a Dr Kim Frumar submitted an application to the company for appointment as a Visiting Medical Officer. It is not disputed that Dr Frumar was a highly qualified and a highly regarded ophthalmic surgeon who had had over 30 years of experience in various aspects of eye surgery.
It is unnecessary to go through the detail, but the evidence established, as his Honour found, that Dr Dunlop with the assistance of Ms Tegen and Mr Chynoweth actively frustrated the accreditation of Dr Frumar.
On 18 August 2014, the majority doctors gave notice to the company of their intention to relocate their intravitreal injections procedures to CMS with effect from 20 October 2014.
Thereafter, without the knowledge of Dr Saunders or any other members of the minority, Ms Tegen and Mr Chynoweth and their solicitor discussed with Dr Dunlop and the other members of the majority options for the company including the transfer of the Head Lease from the company to CEHM and the appointment of an administrator to the company.
On 16 October 2014, the Medical Advisory Credential Committee of the hospital recommended delaying Dr Frumar's appointment because of current workplace shortages at the hospital. On 19 October 2014, Dr Frumar wrote to Ms Carruthers, the then hospital manager, and the majority requesting that his application be dealt with as a matter of urgency. On 21 October 2014, Dr Saunders called for an immediate meeting of the board to approve the credentialing of Dr Frumar and on 30 October 2014, Dr Frumar was informed that he had been appointed a Visiting Medical Officer to the hospital. However, he did not commence work at the hospital as the directors of the company, against the wishes of the minority, resolved to put the company into voluntary administration. The company was solvent at that particular point of time.
On 23 February 2015, the administrator published its report to creditors which revealed the company had an estimated surplus of $359,625. The administrator indicated that "he intended to sell the business as a going concern". Ultimately the minority entered into the Share Sale Agreement under which they sold their shares in CEH to the majority for $1,776,000 plus 43% of the value of the stock. The primary judge accepted the evidence of Dr Saunders that the minority were essentially forced into this action on the basis that they had received no clarification from either the administrator or the majority as to how the proceeds of the sale of the assets would be distributed to the shareholders of CEH, there was no certainty that the minority would receive any of the sale proceeds and the minority had an obligation to mitigate their loss.
Dr Frumar died on 10 April 2016.
In those circumstances, the primary judge reached the following conclusions on the oppression claim:
"[305] From no later than the time of the appointment of Ms Tegen and Mr Chynoweth as directors of CEH, its affairs were conducted in a sustained and deliberate way both contrary to the interests of the members as a whole and oppressive to, unfairly prejudicial to, and unfairly discriminatory against the minority.
[306] In the case of Dr Saunders, he was oppressed, prejudiced and discriminated against both as a member and in his capacity as a director.
[307] Throughout, Ms Tegen and Mr Chynoweth, in concert with the majority, acted so as to prefer the interests of the majority over those of the minority.
[308] The underlying grievance of the majority was the entitlement of the minority to share in the profits of CEH. For so long as this was the case, the majority had no intention of furthering the interests of CEH. Their primary intention was, as the objective material establishes, to achieve a restructure of the shareholding arrangements. As history reveals, if this could not be achieved, they had no intention that CEH should be kept alive. After all, CEH was CMS' competitor in the cataract surgery market. An entitlement on their part to a passive income from CEH was, in my opinion, a minor, if not irrelevant consideration. If it had been important, they would have acted entirely differently. They made no attempt to attract other surgeons. They frustrated Dr Frumar. They took CEH's valuable employees. They failed to provide funding for CEH. They sought to take CEH's Head Lease. After they purchased the minority's shares, CEH closed down. CEH was in fact worth more to them dead than alive.
[309] The majority's need and desire for a restructuring was understood by Ms Tegen and Mr Chynoweth from the start, as is revealed from their 24 September 2013 exchange. Changing the Shareholders' Agreement is, amongst others, referred to in Mr Della Marta's Executive Summary of 13 November 2013, Ms Tegen's letter to the majority and Mr Chynoweth on 11 December 2013, Mr Chynoweth's letter to Dr Dunlop on 14 December 2013, Mr Chynoweth's exchanges with Ms Tegen on 3 December 2013 and Ms Tegen's letter to the majority and Mr Chynoweth on 2 September 2014. It is clearly included in the plan referred to in Mr Chynoweth's letter to Ms Tegen on 26 September 2014.
[310] Voluntary administration as an alternative was under consideration from an early stage. As early as 17 October 2013 there was contact with Mr Louttit and discussion of voluntary administration. Documents for achieving this objective were prepared, without the knowledge or participation of Dr Saunders, as early as 26 August 2014. Mr Della Marta's fee note of 29 August 2014 reveals that such an appointment was intended but should not be made 'just yet.' Steps were taken, when there was no agreement from the minority, to transfer the Head Lease to CEHM. Mr Chynoweth described the process as part of a 'strategic negotiation'. The most probable explanation for the transfer is, I find, to protect the majority's tenure with respect to the consulting rooms at the hospital.
[311] On 31 October 2014, Ms Tegen and Mr Chynoweth spoke with Mr Della Marta concerning the appointment of a voluntary administrator to CEH. Mr Della Marta also spoke with Mr Louttit, who provided him with appointment documents.
[312] The proposal to appoint an administrator was kept from, and then sprung on, Dr Saunders, amongst others, to avoid giving the minority an opportunity to make an appropriate injunction application to the court, as foreshadowed in the Holding Redlich letter of 19 December 2014, and in a manner which precluded appropriate discussion on the subject and in the knowledge that Dr Saunders opposed it.
[313] The appointment was made after the accreditation of Dr Frumar and just before he intended to commence surgery at CEH, which would have significantly, improved its prospects. The appointment was made at a time when CEH was solvent and understood by Ms Tegen and Mr Chynoweth to be solvent.
…
[316] I find that the appointment of the administrator was in bad faith and for improper purposes.
…
[322] The conduct of the majority in the manner in which they dealt with Dr Frumar was not in the interests of the shareholders as a whole and oppressive and unfairly prejudicial to, and unfairly discriminatory against, the minority.
[323] By 17 April 2014, Dr Frumar had nominated Dr Saunders as his emergency back up and had provided the references from Dr Moshegov and Dr Cottee. On the assumption that the requirement for that nomination was a necessary prerequisite for his accreditation, from then, at the latest, there was no legitimate basis to deny or delay Dr Frumar's accreditation. In my view, it is probable that Dr Frumar could and would have started generating revenue for CEH by 1 March 2014."
So far as relief was concerned, the primary judge found that the exercise required was to ascertain, ignoring the oppressive conduct, the extent, if any, to which the value of the shares which the minority sold to the majority on 11 June 2015 under the Share Sale Agreement exceeded the amount of $1,776,000 paid for those shares. In that context, he described the oppressive conduct as "the unjustified delay in accrediting Dr Frumar and the appointment of the voluntary administrator". He stated that the minority shares were "to be valued on the footing that Dr Frumar had started when he could and would have, and the voluntary administrator had not been appointed".
His Honour noted that the experts called by each party agreed that the appropriate manner to value the shares was by the application of the capitalised maintainable earnings (CME) method. He described this correctly as entailing an assessment, as at the appropriate date, of what the maintainable annual earnings before interest and tax (EBIT) was and applying to the figure a capitalisation multiple to which was added the value of surplus net assets. He stated that the application of the method required "a determination of the annual maintainable earnings of CEH on the basis that Dr Frumar would have started when he could and would have, in other words, a determination of the profits that would have been earned directly and indirectly as a result of Dr Frumar's work at the hospital". However, the primary judge considered that the Court must take account of the fact that the direct benefit of Dr Frumar's exertions would not have extended past 10 April 2016. He said that was consistent with the approach in Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4 at 293 and HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 at [40]. He concluded that irrespective of those cases, it was an appropriate exercise of his discretion to take into account the death of Dr Frumar.
The primary judge also rejected the proposition that the Court should take into account the potential profit that might have emanated from other surgeons, in circumstances where proof of such hypothetical events was necessarily unattainable. He stated that "[t]his approach would entail taking the full amount of revenue which each notional additional surgeon would earn and discounting it to reflect the degree of probability" that the surgeon would have generated the income.
The primary judge rejected this approach. He stated that the Court was "not assessing damages or a lost opportunity, but the value of shares in CEH derived on a maintainable earnings basis". He stated that "[e]arnings were not earnings, let alone maintainable earnings, if on the probabilities they would not have been earned.
He stated that in any event he was not satisfied that the evidence extended to establishing any meaningful likelihood that Dr Frumar's presence would have attracted other surgeons who would have contributed to the revenue of the hospital. He pointed to the fact that efforts to attract other surgeons by Dr Saunders had very limited success. He stated that he was not satisfied that Dr Burt was likely to start doing any significant cataract work, or that there was any realistic possibility that the non-shareholder surgeons, who formerly operated at the company's hospital, would have returned. As a consequence he concluded that he was "not satisfied that any revenue equivalent to that which Dr Frumar (or some replacement doctor) would have generated would have continued, in effect, in perpetuity that is maintainable for the conventional application of the CME method".
In those circumstances he noted that the experts agreed that the business would become unprofitable after Dr Frumar's death and the appropriate valuation method was therefore, to assume that the business would operate for two years until Dr Frumar's death and then be liquidated and the proceeds distributed to shareholders. He noted that the experts agreed that given Dr Frumar's death, the proposed capitalisation rate should be adjusted from the multiple of 4x for an annuity in perpetuity to a multiple of 1.62x to take account of his death after a limited period.
The primary judge also expressed the view that he was satisfied that Dr Frumar would have been likely to have a list once a week in Canberra but that there was not a sound evidentiary basis for finding that he would have operated more than two lists per week. He stated that "[t]wo (perhaps a little generously)" is the number that he considered should be adopted.
His Honour concluded that the valuation which resulted from those findings was as follows:
Importantly, it was not suggested that the establishment of CMS, the decision of the respondent directors to carry on their practice at that hospital, or the decision of the non-shareholder doctors to move from the hospital to CMS or other hospitals, in any way constituted oppressive conduct.
In that context it was an important element of the appellants' case that one matter the Court should take into account in determining a fair price for the shares was the prospect of further surgeons, in particular cataract surgeons, being attracted to the hospital along with Dr Frumar. The appellants submitted that in considering that issue the Court should adopt what senior counsel for the appellant described as "a robust approach", citing Giles JA in McCartney v Orica Investments Pty Ltd [2011] NSWCA 337 at [159] (Macfarlan and Young JJA agreeing) referring to the principle derived from Armory v Delamirie (1722) 1 Stra 505; 93 ER 664. The principle was stated by Handley JA in Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 in the following terms (at 59), (Mason P and Beazley JA agreeing):
"At this stage the Court should only remit the matter to a master as a last resort, if no other course is fairly open. The defendants, having improved common property without lawful authority, and attempted to effect a fraud on the minority, are wrongdoers, and their failure to keep and produce proper accounts of their actual expenditure on the common property has made it difficult to assess the compensation due to the plaintiff; compare Armory v Delamirie (1722) 1 Stra 505; 93 ER 662. In my judgment the Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party 'whose actions have made an accurate determination so problematic': see LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508."
That passage was cited with approval by the High Court in Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; [2004] HCA 3 at [74]; see also LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) (1990) 24 NSWLR 499 at 508.
An analogous approach has been taken in oppression cases. Thus, in ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536, Young J stated at 540, that "[t]he flavour of the judgments in the company oppression cases is that in looking to the fair value one must look at all the circumstances of the case and seek to put the oppressed in the same position as nearly as can be as if there had been no oppressive conduct, erring, if there is to be any erring, on the side of the oppressed".
Whilst the principle is well established, it cannot be taken too far. It does not permit findings to be made which are contrary to the evidence before the court. Nor does it, in my view, entitle the court to engage in speculation. What it can do is to enable the court, where there is a doubt as to what can be concluded from the evidence before it, and where that doubt is a consequence of the conduct of the defaulting party, to be robust in resolving the doubt in favour of the non-defaulting party. I do not think that the principle extends any further.
The minority's principal complaint as to the use of this methodology was not that the methodology was wrong or inappropriate but rather that, in factoring in the earnings that it was assumed that Dr Frumar would have earned for the business from 1 March 2014 when it was assumed he would have started conducting cataract surgery at the hospital, the primary judge erred in taking into account that Dr Frumar died unexpectedly in April 2016. The judge had held that:
"331 I consider that the Court must take account of the fact, now known, that the direct benefit of Dr Frumar's exertions would not have extended past 10 April 2016: Kizbeau Pty Ltd v WG&B Pty Ltd (1995) 184 CLR 281 at 293; HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at [40].
332 Relief is discretionary and I would approach the matter in this way as a matter of discretion in any event. It accords with fairness in this case. Had the oppressive conduct not occurred, the minority would not have sold. Their attitude was always that they wanted to hold their shares and earn revenue from them. It would not be fair to compensate them on the footing that they would not have sold their shares, but Dr Frumar would have survived beyond the date of his passing." (Emphasis added)
I agree both with the primary judge's analysis and the Chief Justice's reasons for rejecting this aspect of the attack on the primary judge's approach. The relevant discretion is a wide one, both as to the appropriate remedy and, if a compulsory acquisition of shares is ordered, as to the mode of valuation of those shares: Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd [2004] FCAFC 153; 207 ALR 136 at [7]. In the present case, of course, there was no need to order a compulsory acquisition of shares as they had already been acquired as a consequence of the SSA. The primary judge applied the CME method as a means of assessing whether or not the minority was entitled to any compensation additional to that which they had secured for the sale of their shares pursuant to the SSA.
Dr Frumar's death was an important integer in "all of the circumstances" of the case, which authorities in this area of discourse insist must be taken into account: see, for example, Sanford v Sanford Courier Service Pty Ltd (1986) 10 ACLR 549 at 562; Rankine v Rankine (1995) 124 FLR 340 at 345; ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 at 540.
The fact that it would, on the authorities identified below, have been open to the primary judge to make an assessment of the value of the minority's shareholding as at the date of the hearing, which was well after Dr Frumar's death (and which would necessarily have taken his death into account) also lends support to the approach taken by the primary judge.
In this context, there is no hard rule as to when valuation of shares in an oppression case must occur: see Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 144 where the Full Court of the Federal Court said that "[t]he date at which shares are to be valued in oppression cases varies having regard to all the relevant circumstances." The court has a "wide and absolute" discretion, subject to the requirement that the valuation date chosen effect "fairness and justice to both parties in all the relevant circumstances of the case": Foody v Horewood [2007] VSCA 130 at [35] and [37].
In Mopeke Pty Ltd v Airport Fine Foods Pty Ltd [2007] NSWSC 153, the relevant company had lost a significant profit outlet as at the date of the order. This loss was beyond the control of the company, and would have occurred regardless of the oppressive conduct. As a result, Brereton J (as his Honour then was) rejected the minority shareholders' submission that the shares should be valued at the date on which the oppressive conduct occurred. His Honour noted that, just as the minority shareholders should be no worse off by reason of the oppressive conduct, they also should be no better off: at [96]. In the circumstances of the case it was held that justice was best achieved by adopting a valuation "as close to the present as possible": at [96].
A similar concern not to undertake an assessment of the value of a shareholding on a basis that did not accord with the facts as they had emerged also underpinned the reasoning of the primary judge in the present case, as illustrated by [332] of his Honour's reasons which I have reproduced in [119] above.
In any event, as the primary judge recorded (at [358]):
"Even if one were to adopt the assumption that Dr Frumar's earnings would have lasted in perpetuity (derived from another practitioner after his passing), the value of CEH based on the CME method, plus the value of surplus net assets, is $3,093,816 of which the minority share would be $1,330,341, still below the amount they were paid [pursuant to the SSA]."
This figure of $1,330,341 was based upon a joint calculation by both forensic experts based upon the Court's instructed assumptions. That particular figure involved assumptions highly favourable to the minority including no minority discount, and an assumption that, even though he had no prior presence in Canberra, Dr Frumar would have conducted two days of surgery per week for 40 weeks of the year with each surgical list comprising 10 surgeries, from the very first day of his association with the business which was taken, for the purposes of the case, as 1 March 2014.
For the reasons advanced in support of the majority's Notice of Contention to which the Chief Justice refers at [57] of his reasons, those assumptions were extremely favourable to the minority and the evidence, carefully analysed in the course of oral submissions by senior counsel for the majority, demonstrated that, in all likelihood, Dr Frumar would have conducted far fewer operations and, moreover, would only have been able to build up a practice over time as opposed to starting with a sufficient complement of patients (and referrals) to allow the business to produce an income figure of $3,093,816. All of this points to a capitalised maintainable earnings figure of significantly less than that figure, and a lower pro rata figure than $1,330,341 as the minority share of that amount.
The key point for present purposes is that, even on the assumptions most favourable to the minority and even assuming that Dr Frumar's death should not have been taken into account, the pro-rated agreed value of the shares in the business which the figure of $1,330,341 represents was considerably less than that which the minority in fact received pursuant to the SSA.
I also agree with the Chief Justice's reasons at [93]-[101] for rejecting the attack on the primary judge's finding (at [339]) that:
"In any event, I am not satisfied that the evidence extends to establishing any meaningful likelihood that Dr Frumar's presence would have attracted any other surgeons who would have contributed to the revenue of the hospital. Efforts to attract other surgeons by Dr Saunders had very limited success. Realistically, the majority were never going to help in this quest. I am not satisfied that Dr Burt, who was an oculoplastic sub-specialist, was likely to start doing any significant cataract work. Even if the oppressive conduct had not occurred, the majority and the minority would still most probably have remained at loggerheads. Drs Burt and Tsirbas were not willing to commit to hospital lists of any type whilst the dispute between shareholders remained. Even if I were to adopt the loss of opportunity analysis, the percentage reduction would be so great as to make the lost benefit of no real value."
No doubt in partial anticipation of the weakness of the arguments in relation to the primary judge's assessment of the value of the minority's shares, senior counsel for the minority advanced an alternative argument based upon what he described as a "simple method" of assessment. As the Chief Justice has noted at [58] of his reasons, this involved taking the price paid to the minority by the majority for the minority's shares, namely $1,776,000, assuming that that figure was what those shares were worth in the company's oppressed state, and then submitting that that amount represented a valuation "floor" to which needed to be added a series of figures for the actual costs of the company's administration, the fact that Dr Frumar had been prevented from commencing work from 1 March 2014 until the time at which the company went into administration, and that other doctors may have commenced working at the hospital in that period and thus earned revenue for the business.
There were a number of difficulties with the "simple method" approach, as has been pointed out in the Chief Justice's reasons. The starting point, namely that the price paid for the minority shares was a true or reliable indication of their value, is highly debatable in my view (and was not the subject of any debate or consideration by the experts or the primary judge). Given the prolonged and fraught relationship between the minority and majority, which had manifested itself in the commencement of the litigation in this Court and which followed earlier Federal Court proceedings between the parties, I do not consider that either the minority or the majority could be described as willing but not anxious vendors and purchasers. Indeed, at various points in his argument, senior counsel for the minority said that the sale was "induced by" the oppressive conduct, and implied, if not expressly stating, that the majority's intention was to "kill the company at all costs". In other words, the "floor" or platform on which the "simple method" calculation rested could not, in my opinion, be treated as a valid or reliable base for a larger valuation exercise.
More fundamental than this, however, was that this method of assessing compensation had simply not been advanced at first instance in any meaningful way. Senior counsel for the minority (who had not appeared at the trial) sought to identify what at best could be described as germs of such an argument in his predecessor's oral submissions in reply on the 11th and final day of the trial. In that portion of the transcript to which he referred, this argument was said to constitute an "alternative approach" which "wouldn't require your Honour to go into the intricacies of valuing the business as a whole or dealing with all of the other hypotheses that we put forward".
No submission was made at the time that this alternative approach was superior to or should be preferred to the CME method or that it would be erroneous to follow the CME method which had, after all, been the focal point of the experts' various reports and joint reports, and cross-examination by the parties and questioning by the primary judge.
Senior counsel for the majority protested at the time the so-called "alternative approach" was first raised in the Court below that it was neither in reply nor the subject of written submissions nor of any pleading. These complaints were entirely justified and could not be gainsaid. That senior counsel for the majority sought to deal with the "alternative approach" in the Court below on the run and briefly in the context of his opposition to it being raised at all did not, in my opinion, carry the consequence that the argument should be treated as having been squarely before the Court at first instance.
It seems to me to be extremely difficult, not to say most unfair (both to the primary judge and the majority), to criticise the primary judge's decision not to assess the compensation on the basis of an alternative approach that had been sought to be introduced at the heel of the hunt, over the protest of the majority and which was not pressed as either the correct or a superior way of assessing damages or compensation.
It is equally problematic and unfair to seek to mount an appeal by reference to such an argument which, at its highest, was raised for the first time in oral reply submissions, and had not been explored either in the evidence nor considered by the experts when it is quite clear that it would have been, had it featured in any meaningful way in the minority's case at first instance. From an appellate court's perspective, there is little if any difference in my opinion between such an argument sought to be raised so belatedly at trial and one not raised at all, at least in circumstances where a protest has been properly made in response to its attempted introduction.
From the broader perspective of the administration of justice, this course is also most unsatisfactory and should be deprecated in emphatic terms. Subject to the well-known and narrow qualifications associated with cases such as Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12 at 497 (Water Board v Moustakas) and Coulton v Holcombe (1986) 162 CLR 1; [1986] HCA 33 (Coulton v Holcombe) involving pure questions of law, or the construction of a document, or where all the facts have been established beyond controversy, an appeal is not the occasion to mount for the first time an argument that either did not form or had not formed any meaningful part of the case presented at trial.
Seeking to advance such an argument would almost inevitably be bound to fail on procedural fairness grounds but also entails a waste of valuable court time and of clients' resources. The value of finality of litigation upon which cases such as Water Board v Moustakas and Coulton v Holcombe are ultimately predicated has both public and private interests underpinning it, as Chief Justice Gleeson observed in his 2013 Sir Maurice Byers Lecture on the topic of finality: see "Finality" Bar News (2013, Winter Edition) 33 at 35.
Nor is it an appropriate course to suggest, as was done in the present case, that the matter could, if necessary, be remitted to the primary judge for an assessment of damages or compensation or value on a basis that had not been advanced or explored in any meaningful way at trial. Trials at first instance do not constitute a "preliminary skirmish": Coulton v Holcombe at 7.
Nothing I have said in the previous paragraphs has the least bit of novelty to it. Appellate and intermediate appellate courts have been making the same point with great clarity for many years, nowhere perhaps more eloquently than in the majority judgment of the High Court in Whisprun Pty Ltd v Dixon [2003] HCA 48; 200 ALR 447 at [51] (Whisprun) in which it was observed that:
"It would be inimical to the due administration of justice if, on appeal, a party could raise a point that was not taken at the trial unless it could not possibly have been met by further evidence at the trial. Nothing is more likely to give rise to a sense of injustice in a litigant than to have a verdict taken away on a point that was not taken at the trial and could or might possibly have been met by rebutting evidence or cross-examination. Even when no question of further evidence is admissible, it may not be in the interests of justice to allow a new point to be raised on appeal, particularly if it will require a further trial of the action. Not only is the successful party put to expense that may not be recoverable on a party and party taxation but a new trial inevitably inflicts on the parties worry, inconvenience and an interference with their personal and business affairs." (Footnotes omitted)
The course which this appeal took with its principal focus on the so-called "simple method" of assessment illustrates that clear statements such as that made in Whisprun bear repeating, and it is to be expected that practitioners advising and appearing in appeals not only be acutely aware of these statements but abide by them when settling grounds of appeal and formulating and making appeal submissions.