ES Gordon Pty Ltd v Idomeneo

Background

1. The three protagonists had previously worked together as employees of another computer company, and they decided to establish their own business, to develop and license software known as Revolution DMS, a 'dealer management solution' for motor, motorcycle and marine dealerships. Mr Liddle and Mr Nadalini developed the software, and Mr Cameron marketed it. OTS licenses the DMS to various motor vehicle, motor cycle and marine dealerships. More than 100 systems were sold, generating 2,200 individual licences. The most significant of these was to Toyota Australia, which led to that company recommending the system to its dealers, about 90 of whom have purchased it in Australia; others have also acquired it in New Zealand.
2. From about 2007, the relationship between Mr Cameron on the one hand, and Mr Liddle and Mr Nadalini on the other, deteriorated. Mr Cameron was progressively excluded from management. There was an unsuccessful attempt to replace him as salesperson for motor dealerships, though he did resume that role after his replacement had failed to secure any new sales. From about 2009, Mr Liddle and Mr Nadalini negotiated with Mr Cameron for the acquisition of Cameron Marketing's shareholding in OTS.
3. On or about 12 March 2010, Mr Cameron was formally removed as a director; and his employment (and that of his wife) was terminated. Since then, he has not received notice of, nor attended, company meetings; he has received no dividends; he has not attended the company offices; he has been directed not to contact OTS staff; and he has seen no management reports. He has been effectively denied any influence over or even knowledge of the company's affairs. Only after commencing these proceedings and seeking interlocutory relief did he obtain access to the company's books and records.
4. OTS has continued to trade in Australia, and Mr Nadalini and Mr Liddle have commenced a new business in New Zealand, of which they are the sole owners, to sell Revolution DMS (and its Toyota-specific variant, TUNE) in that market. OTS has supported the establishment of that business by providing access to Revolution DMS at no cost, and other services on an at-cost basis. [1]
5. Following the institution of these proceedings, the issue of Mr Cameron's access to books and records was resolved by consent, with orders being made permitting his accountant to inspect the books. Further negotiations followed, which resulted in an agreement that there be a valuation of the shares, and on 23 August 2016 the Court ordered, on the defendants' motion, that a single valuer be appointed for the purpose of determining the value of the Cameron shareholding. On 7 September 2016, the Court, with the consent of the parties, declared that the conduct of the affairs of OTS was oppressive to Cameron Marketing in its capacity as a shareholder of OTS. On 11 October 2016, Mr Rundell accepted appointment as valuer of the Shares in accordance with the Valuation Order. On 13 October 2016, the Court varied the Valuation Order, so as to require the valuer to determine the value of the shares on two alternative bases, namely (1) that the software methodology and framework known as MLAN SYS (MLANSYS) is owned by MLAN; and (2) that MLANSYS is owned by OTS.
6. Mr Rundell delivered his valuation report on 24 November 2016. On 6 December 2016, the Court granted the defendants leave under UCPR r 31.44 to adduce expert evidence in response to the Rundell Valuation, and as a result, on 9 January 2017, Julie Margaret Wolstenholme delivered a valuation report.

Issues

1. The issues remaining for resolution are: 1. whether a compulsory purchase order is appropriate; and 2. the value of the Cameron shareholding for the purposes of such an order.
2. The plaintiff's position is that the court should determine the value of the Cameron shareholding and make an order for the purchase of that shareholding at the price so determined. The defendants' position is that the Court, having determined the value of the shareholding, should first give the defendants the opportunity to purchase the Cameron shareholding; then, if they do not elect to do so, the plaintiff should be given the opportunity to buy the MLAN shareholding; and then, in the event that the plaintiff does not do so, that OTS be wound up. They say that if the Court were to accept the Rundell valuation, then they would wish to adduce evidence to demonstrate the hardship which would be suffered by them if they were compelled to purchase the Shares. Consequently, the defendants invite the Court to first to determine the value of the Cameron shareholding, and then adjourn the proceedings to consider what should follow as a consequence of that determination.
3. All parties are inclined to the position that winding up would be a last resort, and that the preferable outcome is for MLAN to acquire the Cameron shareholding. Although this is not without qualification (because the defendants would prefer winding up if the value determined is more than they are prepared to pay, while the plaintiff may prefer winding-up up to a low valuation), those qualifications are themselves contingent on the outcome of the valuation. Accordingly, the first issue for resolution is that of valuation.

Valuation

1. In his valuation, Mr Rundell used three methodologies: 1. a discounted cashflow (DCF) analysis, which resulted in a valuation of OTS on a "base case" basis, between $4.2 million and $4.9 million; and on an "adjusted case" basis, between $4.5 million and $5.2 million; [2] 2. an enterprise value/EBITDA (EV/EBITDA) analysis, which resulted in a valuation of OTS on the "base case" basis, between $3.8 million and $4.2 million; and on the "adjusted case" basis, between $4.5 million and $5.1 million; and 3. an enterprise value/revenue (EV/Rev) analysis, which produced a valuation of OTS between $6.5 million and $7.3 million.
2. He preferred the EV/Rev approach, and thus valued OTS at between $6.5 million and $7.3 million, and the Cameron shareholding at between $2,166,667 and $2,433,333.
3. In her valuation, Ms Wolstenholme: [3] 1. utilised an EV/EBITDA analysis which produced a valuation of OTS at between approximately $2.31 million and $2.87 million, with a mid- point value of approximately $2.6 million; and 2. cross-checked that valuation using a discounted cashflow analysis, which indicated a value of between $2.56 million to $2.77 million, with a midpoint value of approximately $2.67 million.
4. As directed by the Court, the experts conferred and prepared a joint report setting out the matters on which they agreed, and those on which they disagreed and the reasons for their disagreement. Relevantly, the valuers agreed that: 1. An adjustment to EBITDA for FY15 of $424,000 was appropriate for excessive/uncommercial remuneration and benefits paid to the directors and their spouses. One consequence of this is that the relevant assumptions differentiating Mr Rundell's "adjusted case" from his "base case" are resolved in favour of his adjusted case; 2. A control premium of 25% should be applied to market capitalisation of quoted companies in calculating the trading multiples considered in the valuation; 3. Franking credits should be attributed no value; and 4. A Research and Development tax rebate for FY15 may positively impact the value of OTS by $113,587 and provide additional funds for ongoing operations, but receipt of this was not assured.
5. However, they disagreed on the fundamental matters which explain the differences between their valuations, namely: 1. Whether cash held by OTS of $1,076,000 should be treated as "surplus cash" and added to the enterprise value. Ms Wolstenholme was of the view that it was not "surplus" and should not be added, while Mr Rundell was of the contrary view; 2. What was the appropriate EDITDA and EBITDA multiple for the EV/EBITDA approach: Ms Wolstenholme used an adjusted FY15 EDITDA of $563,400 to which she applied a multiple of 4.0x to 5.0x, while Mr Rundell adopted a longer-term projected EBITDA of $336,000 to $350,000 and a multiple of 7.5x to 8.5x; 3. Whether the EV/Rev methodology (favoured by Mr Rundell) or the EV/EBITDA methodology (favoured by Ms Wolstenholme) was the more appropriate.
6. The plaintiff submitted that the Court should have regard to the status of Mr Rundell's report as that of an independent valuer. It was submitted that he was appointed at the defendants' insistence; that the settled letter of instructions, to the extent that it was not agreed, accorded with the position contended for by the defendants; that he does not owe his appointment to either party but only to the Court; that all of his communications were open and shared by both parties, and both parties had access to every document he relied upon; and that he had and took the opportunity to question management and to accept or reject their statements and forecasts as seemed to him necessary; while on the other hand Ms Wolstenholme had unspecified discussions with OTS management, and was instructed to proceed and did proceed by assuming the correctness of everything she was told. The plaintiff's submission was that where there was disagreement between the experts, Mr Rundell has the presumptive advantage of the additional degree of independence derived from his status as an independent single expert.
7. I do not agree that the opinion of a parties' single expert is entitled to any particular or presumed additional weight or significance, once leave to adduce other expert evidence is granted. While this is so even of a court expert (appointed under UCPR r 31.46), it is even more so of a parties' single expert (appointed under UCPR r 31.37), as Mr Rundell was. While I accept that the manner of appointment of a parties' single expert means that he or she owes allegiance to neither party, that of itself does not enhance the quality and reliability of the opinion, although it deprives its critics of one potential criticism. But the opinion of the single expert, when it is challenged or contradicted, must be scrutinised and evaluated just as is the opinion of an expert instructed by only one party.
8. Ultimately, neither valuer preferred the DCF approach. While Mr Rundell employed DCF methodology as one of his methods, it was not ultimately his preferred approach. When first asked to comment on Mr Rundell's valuation, Ms Wolstenholme said that DCF methodology was the preferred methodology for valuing this company; but she was then under the apprehension that management forecasts were available (and had been used by Mr Rundell), and when it transpired that that was not so, and that Mr Rundell had modelled his own forecasts, she reverted to an EV/EBITDA approach, although she employed DCF methodology as a check method. However, the court does not have a reliable basis for estimating future cashflows. Mr Rundell's forecasts involve a significant amount of subjective judgment. There is a substantial dispute as to what is the appropriate discount rate, which also involves subjective judgment. In those circumstances, I do not further consider it.
9. It is convenient then to consider, first, each valuer's EV/EBITDA valuation, before turning to Mr Rundell's EV/Rev valuation, and addressing which methodology is to be preferred. However, in considering the valuations it is to be borne in mind that the valuation of shares for the purpose of a buy-out order is usually undertaken on the basis of what they would have been worth had the oppressive conduct not occurred. As was said by Lord Denning in Scottish Co-operative Wholesale Society Ltd v Meyer: [4] One of the most useful orders mentioned in the section - which will enable the court to do justice to the injured shareholders - is to order the oppressor to buy their shares at a fair price: and a fair price would be, I think, the value which the shares would have had… if there had been no oppression. … It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is in effect money compensation for the injury done to them: but I see no objection to this.

The EV/EBITDA valuations

1. In his EBITDA-based valuation, [5] Mr Rundell used (1) maintainable earnings of $336,000 to $350,000 (say $343,000), which he derived by eliminating from the 2015 results various revenues and expenses which were considered not sustainable to obtain a hypothetical 2016 result, then projecting revenues and expenses for the years 2017 through 2020 and discounting (by the weighted average cost of capital, or WACC) the projected revenue for each of those years to obtain a 2015 present value, and averaging those five present values to obtain net maintainable EBITDA as at 2015; and (2) an EBITDA multiple of 7.5x to 8.5x (say 8.0x), having derived an average of 8.01 from analysis of a number of listed companies for which data was available, resulting in an "enterprise value" of $2,744,000; then (3) added the "surplus cash" of $1,076,000; and (4) applied a control premium of 25% to take into account that in the subject company the remaining directors would control the cashflows, whereas the transactions which underpinned the derivation of the EBITDA multiple were not control transactions.
2. In her EBITDA valuation, Ms Wolstenholme used (1) maintainable EBITDA of $563,400, derived from the actual results for 2015, adjusted by adding $424,100 for uncommercial directors' benefits, and $563,400 to reflect an appropriate profit margin on supplies to the NZ business; (2) a multiple of 4.0x to 5.0x (say 4.5x), derived from analysis of transactions in shares of companies in the software services sector, being a mix of public and private companies, resulting in an enterprise value of $2,535,100; and (3) added accumulated tax losses at 30%, being $54,800, to produce a valuation of $2,589,900. She did not consider the $1,076,000 cash to be "surplus", and did not apply a control premium.

Maintainable EBITDA

1. The differences between Mr Rundell's maintainable EBITDA of $343,000 and Ms Wolstenholme's of $563,400 comprise differences in adjustments, and in approach.
2. As to adjustments, Ms Wolstenholme added to the FY15 actual results $424,100 for uncommercial directors' benefits, and $563,400 to reflect an appropriate profit margin on supplies to the NZ business, which were provided at cost. It was common ground that the first of those adjustments was appropriate, and there was no dispute about the second. Although Mr Rundell applied the first adjustment to his projections for 2017 and 2018, he did not do so in other years; it is not clear why that adjustment should be made only for 2017 and 2018. Mr Rundell made no adjustment on account of the NZ factor, although he suggested in the joint report that this was a form of "sandbagging" which he said was addressed by his adoption of a revenue-based valuation. However, it was not addressed by his approach, because his revenues used only the sales to NZ (at cost), and not the sales by NZ; and in any event that would not address the issue for the purposes of the EBITDA approach. Mr Rundell's failure to make the first adjustment consistently, and the second at all, results in his assessment being understated.
3. Secondly, Mr Rundell made a number of other adjustments to the 2015 results by eliminating receipts which he did not consider maintainable. In cross-examination (by plaintiff's counsel) he acknowledged that at least some of those revenues might be sustainable. Ms Wolstenholme saw no need to make any such adjustments.
4. As to methodology, Ms Wolstenholme used the adjusted FY15 results, while Mr Rundell has made projections of future results and discounted them to present value using the WACC. In an earnings-based valuation, value is ascertained by first establishing a level of maintainable earnings, and then applying to it a multiplier which reflects the return that would be required by an investor. Typically, the level of maintainable earnings is derived from examination and adjustment of historical results, with greatest weight being given to the most recent; but regard is also had to forecasts and projections of future results. However, the result (and the relevant integer) is the assessed level of maintainable earnings - not the present value of future earnings. The time value of money is reflected in the expected rate of return and thus in the multiplier, not in the level of maintainable earnings. The discounting of EBITDAs for future years to present value introduces a second subjective element, being the WACC.
5. While Mr Rundell's approach has been conservative, with the result that his assessed maintainable earnings are significantly lower than Ms Wolstenholme's, it is the result of an erroneous approach. It double discounts for the time value of money and the risk factors. This is illustrated by the circumstance that although he forecasts a "turnaround" leading to increased profitability, his model produced decreasing revenues and earnings in present day values - his maintainable earnings are significantly below FY15 (adjusted) earnings. It is also illustrated by the fact that the EBITDA multiples derived from the analysis of comparable transactions are of necessity calculated on their last year earnings - not from a discounted present value of their projected future earnings.
6. For those reasons, I prefer to rely on an approach which has less subjective elements. Despite Mr Rundell's conservatism in this respect, I see no reason to adopt a figure lower than Ms Wolstenholme's $563,400.
7. Indeed the plaintiff submitted that Ms Wolstenholme's assessment of maintainable EBITDA was itself unduly conservative, in that she used only the FY2015 results, which were the lowest of the preceding four years, whereas an average of the two years FY2014 and 2015 would have yielded $796,800, an average of the three years FT2013, 2014 and 2015 would have been $623,700, and an average of the four-years FY2012, 2013, 2014 and 2015 would have produced $661,400. Moreover, forecasts (which the plaintiff obtained on subpoena and tendered, and which had been made available to Ms Wolstenholme and were referred to in her report, though she struggled to explain the reference in cross-examination) implied a growth in revenue for FY2016 of in excess of 15% over FY2015. Further, the plaintiff submitted that the adjustments made by Ms Wolstenholme were themselves very conservative, and in particular that there was no satisfactory explanation as to why a margin of 44% should apply in 2014 but only 24% in 2015.
8. As to the third point, while it is true that no explanation beyond instructions from management was provided, the adjustment in the first place is effectively a concession in favour of the plaintiff, and there is no evidentiary basis for going beyond what was conceded in that respect. Nor is there sufficient evidence to support the conclusion that the adjustments failed adequately to reflect emoluments (such as motor vehicles) received by the directors and their spouses in addition to remuneration. However, the first and second points have considerable force. In the light of the forecast growth in FY2016, it is inappropriate to adopt as maintainable EBITDA the results for the most recent but worst year. While I am inclined to think that a two-year average would give excessive weight to the company's best year (FY2014), a four-year average (over FY2012 to FY2015) tends to moderate the impact of the outliers, and accords with the projected growth of in excess of about 15% in FY2016. Accordingly, I adopt maintainable EBITDA of $661,400.

EBITDA multiple

1. Mr Rundell derived an EBITDA multiple of 8.01x by averaging those of six listed companies, using their stock exchange prices to determine market capitalisation, and their reported earnings to derive an EV/EBITDA multiple. All the comparables he used (two outliers were excluded) were substantially larger enterprises than OTS: their enterprise values ranged from $38.53m to $416.04m, their revenues from $75.5m to $686.43m, and their EBITDAs from $7.51m to $42.3m. Moreover, in effect, Mr Rundell's approach - which included application of a control premium of 25%, because the transactions on which his analysis ultimately depended were not control transactions - used a multiple of 10x (that is, 8x increased by a control premium of 25%).
2. Ms Wolstenholme derived her multiplier of 4.0x to 5.0x from examination of 21 transactions in shares of companies in the software services sector, being a mix of public and private companies, 14 involving controlling stakes (for which the average multiple was 11.6), and the balance minority stakes (for which the average was 8.5). She identified as of particular relevance (1) the acquisition of 87% of Finzsoft at an implied EBITDA multiple of 6.0x, noting that Finzsoft is larger than OTS with an enterprise value of $25m; (2) the acquisition of 100% of AMEE for $3.2 million, at an implied multiple of 4.6x; (3) the acquisition of Revera at a multiple of 7.4x (noting that it had revenue of $80m) and (4) the acquisition of Ideas International at a multiple of 6.0x, noting that it had revenue of $13m. Having regard to the relatively smaller size and diversification of OTS, its exposure to Toyota as its key customer, and other relevant considerations, she settled on a range of 4.0x to 5.0x for OTS.
3. In my view, Ms Wolstenholme's analysis is more logical and persuasive than Mr Rundell's. The transactions on which she focuses - particularly AMEE - are significantly more comparable to OTS than those used by Mr Rundell. The reasons she expresses for selecting her range, and the factors she takes into account, are logical and appropriate. Mr Rundell's effective multiple of 10% for control transactions is only slightly lower than the average (11.6x) derived by Ms Wolstenholme from companies which generally were many times larger than OTS, and well out of line with those she considered most comparable.
4. At first sight, AMEE (4.6x) seems most closely comparable to OTS, but the data available concerning the AMEE transaction is limited, and in those circumstances too much weight should not be given to a single comparable. However, the other three (with multiples of 7.4x, 6.0x and 6.0x) are all larger and more robust enterprises (in terms of size and revenue) than OTS. I therefore adopt the upper end of Ms Wolstenholme's range, namely 5.0x.
5. Accordingly, an EV/EBITDA valuation of OTS produces an enterprise value of $661,400 x 5.0 = $3,307,000.

Surplus assets

1. An earnings-based valuation produces the value of the business enterprise. When valuing the entity which conducts the business - in this case OTS - it is necessary to add to the enterprise value any assets which are surplus to the business (and to deduct any corresponding debt).
2. The company held $1,076,000 in cash at the valuation date, and cash reserves have been rising through the period when dividends have not been paid. Mr Rundell says that this cash was surplus and should be added to the enterprise value.
3. It is true, as Mr Rundell points out, that the company has routinely enjoyed a significant cash asset at balance dates. However, when the balance sheet is scrutinised, it appears that there were equally routinely current liabilities, which broadly matched its current assets, including the cash. Thus OTS's accounts for 30 June 2015 record that it had "accounts payable" of $1.938 million, which could only be met from the cash held of $1,076,500, and the "accounts receivable" of $810,000. In other words, the cash was required to meet current liabilities, and had it not been held, the company would have had a "current ratio" of less than 1, implying that it would not have been in a position to pay its current liabilities as and when they fell due. Thus I do not accept that the $1,076,000 cash held by OTS at the valuation date was a surplus asset. Mr Rundell repeatedly pointed out that over the preceding years the directors had helped themselves to available cash by way of additional (uncommercial) emoluments. But while that may indicate that the cash so extracted was "surplus", it does not indicate that such cash as was not extracted was "surplus"; it is at least equally consistent with the directors taking what was surplus, but leaving in the company what was required to provide working capital.
4. However, what the directors did take in excess of commercial remuneration would otherwise have been available to fund dividend for all the shareholders. The adjustments proposed by Ms Wolstenholme to reverse excessive benefits paid to the directors, and also for margin on sales to NZ, would increase EBITDA by a total of $2,640,700, [6] at no additional cost. Assuming the whole would have been taxed at 30%, [7] that would have resulted in an additional $1,8480,490 available for distribution to all the shareholders by way of dividend, instead of for the benefit of only MLAN (and its officers).
5. In my view, that amount must be added back, and treated as surplus, in order to value the company. This reflects that, but for the oppression, the plaintiff would have received one-third of it.

Tax losses

1. Ms Wolstenholme added $54,800 for tax losses. The company had accumulated tax losses of some $182,000. Although the proposed adjustments to EBITDA would have eliminated the losses, the losses would have reduced the tax obligation by $54,800 (being 30% of the tax losses). Ms Wolstenholme's adjustment for tax losses, which the plaintiff embraced, thus appropriately acknowledges the value of the tax losses.

Control premium

1. As Ms Wolstenholme's comparables, which I have adopted, are derived from "control" transactions, there is no occasion to add a control premium.
2. Moreover, the "control premium" is applied because of the manner in which the multiple is derived. Because Mr Rundell's multiple is ultimately derived from share market transactions - which are not control transactions - his multiple is appropriately increased (by 25%) to reflect the control factor. But that is an adjustment of the multiple, not of the enterprise value. Mr Rundell applies it at the end of the process, and thus incorrectly also inflates the "surplus cash", whereas it should be applied to the multiple, and have no impact on the surplus cash. Thus even if a control premium were appropriate, it should not be applied (as Mr Rundell applied it) to the surplus cash, as distinct from the capitalised earnings.

Motor vehicles

1. The plaintiff submitted that the book value ($287,000) of motor vehicles provided to the directors and their spouses should be added back. This was said to be consistent with the principle that all remuneration paid to spouses, and remuneration to directors in excess of $200,000 per annum, should be treated as excess. However, this appears to confuse expenditure with assets. This issue was not touched on in the experts' reports and arose late in the hearing. There has not been any detailed examination of the arrangements concerning the motor vehicles. It is not apparent that any agreement about what is excess remuneration extends to the use of motor vehicles. What if any financing arrangements are in place in respect of the motor vehicles is unknown. In those circumstances I do not accept that the motor vehicles can be treated as surplus assets.

Conclusion

1. I therefore conclude that an EV/EBITDA approach, properly applied, results in an enterprise value of $3,307,000, and that, in the context of this oppression suit, $1,848,490 should be added back on account of the excess payments to directors and the NZ pricing, and $54,800 for tax losses. This results in a valuation of $5,210,290.

Revenue-based valuation

1. For his revenue-based valuation, Mr Rundell (1) used the projected revenues for 2016 to 2020 from his model, and discounted them using the WACC (9.5% to 10.5%) for present value to obtain an estimated maintainable revenue as at 30 June 2015 of $5,482,275 to $5,626,638; (2) applied an EV/Rev multiple of 0.75 to 0.85 to produce an EV of $4,111,706 to $4,782,642; (3) added the "surplus cash" of $1,076,468; and (4) applied a control premium of 25%, as his multiple was derived from share market transactions, not control transactions.

Maintainable revenues

1. Based on Ms Wolstenholme's adjusted profit and loss statements, adjusted revenues for FY14 were $8,496.7m, and for FY15, $7,926.9m. Mr Rundell made a number of other adjustments to the 2015 results by eliminating receipts which he did not consider maintainable, to arrive at adjusted revenue for 2016 of $7,000,838. However, he did not add any adjustment for uncommercial director's remuneration, nor for the NZ sales. The agreed adjustment for excessive remuneration was $424,000, and for NZ margin $335,000. Once allowance is made for those adjustments, and for Mr Rundell's concession that some of the revenue he eliminated might in fact be maintainable, it may comfortably be concluded that maintainable revenue as at 2015 was in the order of $8,000,000. As that is an assessment of maintainable revenue as at the valuation date, I do not understand why that amount has to be discounted for present value, as Mr Rundell did.

EV/Rev multiple

1. Mr Rundell derived his EV/Rev multiple of 0.81 from the comparable listed companies to which I have referred. For reasons similar to those applicable in connection with the EV/EBITDA multiple, this gives too strong a result for a smaller company. Weight should be given to the smaller comparables, and it must then be factored in that OTS is smaller still. This is consistent with the approach I have taken in respect of the EBITDA-based valuation.
2. Ms Wolstenholme, for check valuation purposes, looked at a more extensive list of comparable listed companies. Their EV/Rev multiples ranged from 0.1x to 6.5x, with an average of 2.3x and median of 1.5x; the first quartile was 0.8x. The four which she considered perhaps the best comparables to OTS averaged 0.625x. Moreover, given that a "turnaround" would be required to achieve profitability, significant risk is associated with any such investment.
3. Ms Wolstenholme also examined transaction multiples, which were less chaotic than the listed company results. EV/Rev multiples ranged from 0.4x to 3.7x, with an average of 1.5x and median of 1.4x, but many smaller enterprises (though generally larger than OTS) clustered around 0.6x. These (unlike the listed transactions) were predominantly control transactions.
4. In my view, having regard to the size and scale of OTS relative to the comparables, a revenue multiple of 0.5x (including control premium) is indicated.

Surplus cash

1. The "surplus cash" adjustment is made to deduce the market value of the company, on the basis that "Enterprise Value" = market capitalisation plus (long-term) debt less cash. The theory is that enterprise value is represented by equity and debt, and that equity is measured by the value the market places on the shares. Cash is deducted because it is available to retire debt. In my view, where it is not available to retire long-term debt but is required for working capital, it would be inappropriate to deduct (or where, as here, reverse engineering market value from enterprise value, to add) the so-called surplus cash.
2. However, for reasons already explained, there should be surplus cash available in the company of $1,848,490, which should be added to the enterprise value. Likewise, $54,800 should be added for tax losses

Control premium

1. As already explained, the "control premium" is applied because of the manner in which the multiple is derived. Although Mr Rundell applies it at the end of the process, its true function is to adjust the multiple. In my view it is incorrect to apply it to the "surplus cash"; it should be applied only to the "market capitalisation" integer.

Conclusion

1. Applying a multiplier of 0.5x produces an enterprise value of $4,000,000. Addition of surplus cash available in the company of $1,848,490 and tax losses of $54,800 results in a valuation of $5,903,290.

Selection of methodology

1. Accordingly, guided by the expert evidence but not entirely adopting the evidence of either, indicative values for OTS are: 1. According to an EV/EBITDA approach, $5,210,290; and 2. According to an EV/Revenue approach, $5,903,290.
2. Generally, revenue-based valuations are less refined and more broad-brush than earnings-based valuations, because they ignore the particular cost structures of the individual business, and assume that it can and will be operated as efficiently as its peers. For that reason, ordinarily, an EV/EBITDA approach would be preferable to an EV/Rev approach. As Ms Wolstenholme points out, revenue-based methods are not generally used as a primary method of valuation (as distinct from as a check).
3. Mr Rundell contends that a revenue-based approach - which produced the highest result - is to be preferred. Such an approach determines the value of a business on the assumption that it is managed as efficiently as comparable peers in the market in which it operates. He considers OTS to have been underperforming. He suspected that the company was underperforming on account of "sandbagging" [8] by the defendants, and adoption of a revenue as distinct from an earnings-based valuation avoided the need to identify and adjust specific items of excessive expenditure. Use of an earnings as distinct from a revenue-based approach would require adjustment for excessive expenditure by OTS - for example on wages or on development of the New Zealand company, while a revenue-based approach avoids the need to determine the reasons for the underperformance and to identify the requisite adjustments. However, in this case, the major items requiring adjustment have been identified (excess payments to directors, and NZ margin), and agreed adjustments to EBITDA can be made for them. This weakens the case for adoption of a revenue-based approach.
4. Nonetheless, there is some force in Mr Rundell's observation that an earnings-based methodology is less reliable than otherwise in circumstances where the company is currently not profitable and in a state of change. Thus while I would regard the earnings-based approach as the primary approach, I consider that a revenue-based approach has value as a check on the result derived from an earning-based approach.
5. It is important to bear in mind that valuation is not a precise science, and that all these methods are but guides to determining value. Both methodologies under consideration are sensitive to the somewhat subjective assessment of the appropriate multiple. In the case of the EV/Rev valuation; substitution of a multiple of 0.45x for the 0.5x to which I have referred would result in a valuation of $5,503,290. In the case of the EV/EBITDA valuation, substitution of 5.5x for the 5.0x that I have adopted would result in a valuation of $5,540,990.
6. Thus while I regard the EV/EBITDA methodology as in-principle more reliable, reference to the EV/Rev method demonstrates, at the least, that the EV/EBITDA methodology produces a conservative result. Having regard to the results produced by both methodologies, giving weight to my primary reliance of the EBITDA approach, but taking into account that the Revenue approach indicates that it is understated, I am satisfied that OTS is worth not less than $5.4 million, and accordingly that the Cameron shareholding being one-third of that, is worth $1.8 million. In practical and approximate terms, $1.2 million of that represents one-third of the enterprise value of $3.6 million, while $600,000 represents one-third, after tax, of the excess benefits taken by the other shareholders, via the directors, their spouses and the NZ company, since FY12.

relief

1. The Court having already declared, by consent, that the conduct of the affairs of OTS was oppressive to Cameron Marketing in its capacity as a shareholder, the discretion conferred by (CTH) Corporations Act, s 233, is enlivened. Sub-sections 233(1)(d) and (e) empower the Court to make orders for the purchase of the Cameron shareholding, for fair value, by MLAN, while sub-section 233(1)(a) empowers the Court to order that OTS be wound up.
2. As I have observed, although not without qualification, all parties are inclined to the position that winding up would be a last resort, and the preferable outcome is that MLAN acquire the Cameron shareholding. The company plainly remains viable and has significant value. Purchase by the defendants of the Cameron shareholding at fair value is the approach which the parties have contemplated from the outset.
3. The chief qualification is that the defendants contend that if the Court were to adopt the Rundell Valuation (or presumably a value close to it), they may not have the funds to comply with it, and they would wish to adduce evidence to demonstrate the hardship which would be suffered by them if they were compelled to purchase the Cameron shareholding at such a valuation. [9] Consequently, the defendants invite the Court first to determine the valuation issue, and then adjourn the proceedings to consider what should follow as a consequence of that determination. Alternatively, the defendants propose that that the Court give them the first opportunity to buy the Shares; then in the event that the defendants do not choose to do so, the plaintiff be given the opportunity to buy the MLAN shareholding; and then in the event that the plaintiff does not do so, OTS be placed into liquidation with the remaining assets being distributed to the shareholders. This is said to reflect the suggestion made in some cases that the shareholding majority should ordinarily be given the first opportunity to buy out the shareholding minority, and that in the event that the majority does not choose to acquire those shares, then the minority should then be given the opportunity to buy out the majority's shares; and where such a buy-out order is made but is "unduly delayed or proves to be impractical", orders should then be made for the relevant company to be wound up. [10] However, I do not understand there to be any such "ordinary" approach, as a matter of practice let alone as a matter of law. It is simply one of a number of courses open to a court.
4. In circumstances where the issues can be determined now, where an adjournment would incur substantial additional costs and delay, and where the defendants could, had they wished to do so, have adduced evidence on the question of hardship prior to and at this hearing, so as to demonstrate that a buy-out order would not be a viable option - thereby exposing themselves to cross-examination on other issues in the case - there is no reason why they should be afforded a further opportunity to oppose, on discretionary grounds, the compulsory purchase order for which they have hitherto pressed. Moreover, where the proper adjustment to account for the impact of the oppression depends in part not on assets held in the company but on distributions already in the hands of the defendants, a winding-up order would not be an adequate remedy.
5. The proper order is that the second defendant purchase the plaintiff's shares for $1,800,000.

Conclusion and orders

1. My reasons may be summarised as follows:
2. Guided by the expert evidence, but not entirely adopting the evidence of either expert, indicative values for OTS are, according to an EV/EBITDA approach, $5,210,290; and, according to an EV/Revenue approach, $5,903,290.
3. Having regard to the results produced by both methodologies, giving weight to my primary reliance on the EBITDA approach, but taking into account that the Revenue approach indicates that the EBITDA-based valuation is understated, I am satisfied that OTS is worth not less than $5.4 million, and accordingly that the Cameron shareholding, being one-third of that, is worth $1.8 million. In practical and approximate terms, $1.2 million of that represents one-third of the enterprise value of $3.6 million, while $600,000 represents one-third, after tax, of the excess benefits taken by the other shareholder - via the directors, their spouses and the NZ company - since FY2012.
4. There is no reason why the defendants should have a further opportunity to oppose, on discretionary grounds, the compulsory purchase order they have hitherto sought. In any event a winding-up order would not be an adequate remedy in circumstances where the proper adjustment to account for the impact of the oppression depends in part not on assets held in the company but on distributions already in the hands of the defendants.
5. The Court therefore orders that: 1. the second defendant purchase the plaintiff's shareholding in the first defendant at a price of $1,800,000; and 2. there be liberty to apply for further directions in respect of the implementation of this order.
6. The parties wish to be heard on the question of costs.

Endnotes

1. The plaintiff suggested that the entire NZ enterprise constituted the misuse of a corporate opportunity which in equity belonged to OTS. However, this was not raised as an issue when the instructions to the single expert were settled. It did not appear in Mr Rundell's report. The plaintiff sought leave to adduce some oral evidence at the hearing in support of it, which was refused on the basis that this was a major and discrete issue not previously raised, which the defendants would be denied a reasonable opportunity to address.
2. The "adjusted case" scenario involved the adding back of an amount which had been expended by way of remuneration and benefits for Mr Liddle, Mr Nadalini and their spouses which was considered to be excessive and uncommercial.
3. In conformity with the directions to the single expert, Ms Wolstenholme provided valuations alternatively on the basis that the MLAN SYS software was owned by OTS, and that it was owned by MLAN. The latter approach involved provision for a notional royalty for use of that software. Mr Rundell's valuations did not differentiate between the two scenarios, as he took the view that in the circumstances it made no difference. Ultimately, however, the defendants - without abandoning their position that the MLAN SYS software was owned by MLAN - waived reliance on any such contention for the purposes of the valuation in this proceeding. Accordingly, it is unnecessary to resolve the question of entitlement to the MLAN SYS software, and Ms Wolstenholme's alternative valuation which included provision for a notional royalty can be disregarded.
4. [1959] AC 324 at 369; quoted with approval by Vincent J in Re Bodaibo Pty Limited (1992) 6 ACSR 509 at 513. See also ES Gordon Pty Ltd v Idomeneo (No 123) Pty Ltd (1994) 15 ACSR 536 at 540; Re Bird Precision Bellows Ltd [1985] 3 All ER 523; [1986] Ch 658; [1986] 2 WLR 158; [1985] BCLC 493; Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd (2004) 207 ALR 136; [2004] FCAFC 153 at [72].
5. Because it became common ground that adjustment to reflect uncommercial expenditure on directors' remuneration and benefits was appropriate, I refer only to his "adjusted case" scenario.
6. Adjustment for excess payments to directors: $245,300 (FY12) + $606,300 (FY13) + $568,500 (FY14) + $424,100 (FY15) = $1,844,200. Adjustment for NZ retail pricing: $461,500 (FY14) + $335,000 (FY15) = $796,500.
7. In fact because of losses in FY13 and FY15 it would not all have been taxed: this is reflected under "tax losses", below.
8. A term which he used to describe the deliberate underperforming of a business, having the effect of masking its true potential.
9. Nassar v Innovative Precasters Group [2009] NSWSC 342; (2009) 71 ACSR 343 at [122] to [124] (Barrett J).
10. See, for example, Territory Realty v Garraway [2009] FCA 292 at [321] to [324]; Patterson v Humfrey [2014] WASC 446 at [201] to [204]; Tomanovic v Global Mortgage Equity Corp [2011] NSWCA 104; (2011) 84 ACSR 121 at [337]. 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: 03 March 2017