12.6 Where a person is removed as a participant in the practice pursuant to a resolution for removal in accordance with this Agreement, he shall be required to transfer his interest to the remaining principals and/or their respective nominee companies on the terms set forth above and below where "notice date" and "retirement date" shall be the date nominated by the remaining participants, the discount to be applied to the valuation shall be 25% and payment shall be in accordance with paragraph 8 as if the effective retirement date were 6 months after the retirement date nominated by the remaining principals.
12.7 Where a principal dies then, if he is married or has a family, his estate, legal personal representative or next-of-kin as determined by the surviving principals, shall receive the full salary of the deceased principal for a period of up to 3 months after his death or until is interest in the practice is purchased by one or more of the remaining participants, whichever is the earlier. The purchase of the deceased principal's interest shall be by each of the surviving participants in proportion to their interests in the total remaining practice unless all the remaining principals otherwise mutually agree.
12.8 Where, having given the notice required by the preceding provisions, a principal wishes to retire with the effective retirement date being on any day after three (3) years from the commencement date, the retirement date shall be the effective retirement date and the purchase price in respect of the retiring principal's interest in the practice as determined in accordance with the preceding provisions of this clause (the "retiree's purchase price") will be payable by four (4) instalments as follows:
(i) a sum equivalent to not less than twenty five percent (25%) of the retiree's price payable on the effective retirement date;
(ii) a further sum equivalent to not less than twenty five percent (25%) of the retiree's purchase price payable on or before the day falling six (6) months after the effective retirement date;
(iii) a further sum equivalent to not less than twenty five (25%) of the retiree's purchase price payable on or before the day falling twelve (12) months after the effective retirement date; and
(iv) a further sum equivalent to the balance of the retiree's purchase price payable on or before the day falling eighteen (18) months after the effective retirement date.
12.10 Where a principal suicides he shall be deemed to have retired on less than 2 months notice, and the remaining participants shall purchase his interest in the practice from the legal personal representative or a next-in-kin of the deceased principal in accordance with the above provisions but only after the date probate or letters of administration of the deceased's estate have been granted except that the legal personal representative or next-of-kin of the deceased principal may, at the discretion of the remaining principals, be entitled to receive the deceased's salary payable in accordance with paragraph 7 of this clause, but only as an ex gratia payment which shall then be taken into account as a pre-payment of the then to be calculated purchase price for the deceased principal's interest.
11 Schedules 1 and 2 to the Shareholders' Agreement, referred to in clause 12, were as follows:
Schedule 1 - Method of determining the fair market value of the goodwill of the practice:
The goodwill of the practice shall be determined on the basis of whichever is the higher of Future Maintainable Benefit or Return on Investment calculated in accordance with the same principles as used in the attached copy Goodwill Valuation by Rob Knights & Co dated 28 September 1994.
Schedule 2 - Method of determining value of fixed assets (on a going concern basis):
The fixed assets of the practice shall be determined on a going concern basis by a certified auctioneer and valuer, conducted under the same principles as the attached copy Valuation of Plaint, Furniture and Fittings by Gray Eisdell Timms Pty Limited dated 3 April 1995.
12 Clause 18.2 provided that despite anything to the contrary contained in or implied by the Articles of Association of the Company or the Deed constituting the Trust, participants in the Practice may only sell or otherwise dispose of their equity entitlements in accordance with the procedures laid down in the Shareholders' Agreement. Clause 23.2 provided that no alteration or amendment to the agreement should be effective or enforceable unless made in writing under the seal of the parties to the agreement. Clause 25 provided that the agreement may not be varied except in writing signed by all parties.
Mr Forrest's Retirement
13 During 1998 and 1999, there were several conversations between Mr Appleyard and Mr Forrest, in which the former expressed a wish to be able to retire, and the prospect of Mr Forrest succeeding to his management responsibilities was discussed. Also during 1999, Mr Forrest was admitted to a clinic for depression.
14 On 4 August 1999, Mr Forrest sent to Mr Appleyard a memorandum entitled "Notice of Intention to Resign Directorship" which, however, other than in its caption, did not expressly state an intention to retire, and did not nominate any retirement date nor even any timeframe for it, but foreshadowed "further exploration of the issues". On 9 September 1999, Mr Forrest sent a memorandum to the defendants, captioned "John Forrest - Notice of Intention to Resign Directorship - Managing This Opportunity Together", which sought to explain his position, invited the other directors to investigate various possible scenarios, and proposed that the remaining directors and/or investors and new directors be invited to purchase his interest.
15 On 21 September 1999, Mr Appleyard, Mr Pryke and Mr Kenny met and considered the position. They discussed different scenarios by which they might acquire Mr Forrest's interest, one resulting in Mr Appleyard acquiring an additional 10%, and Mr Kenny and Mr Pryke each an additional 17.5%; another with each of Mr Kenny and Mr Pryke only an additional 15%, and Mr Forrest retaining a 15% shareholding; yet another with Mr Appleyard acquiring an additional 10%, Mr Pryke and Mr Kenny an additional 12.5%, and Mr Forrest retaining 10%. The minutes record:
- JF to resign or voted out.
16 On 28 September, the defendants wrote to Mr Forrest, inter alia as follows:
We are of the view that your resignation should be formalised as soon as possible. Not to do so leaves us with some obvious and real difficulties in planning the way ahead.
Some time was spent discussing the issues as to whether or not you might be able to retain your shareholding whilst resigning your directorship. We are also mindful of discussions with and advice by Norbert Schweizer in this regard. It is our view that this matter can be resolved independently of the specific terms of the partnership agreement. The agreement was caused to be created by all of us and we could similarly cause amendments to be made if so required.
... In brief, we now invite your formal resignation. This would be infinitely preferable to us and to our future relations rather than any other course of action. We leave the selection of an appropriate date to you, noting that a date no later than (say) 31 October 1999 would be of value to us in terms of planning.
17 On 8 October 1999, the defendants again wrote to Mr Forrest, relevantly as follows:
Accordingly, we reinvite your resignation, suggesting that in fact an operative date of Friday, 29 November 1999 would be convenient in terms of the company's financial reporting dates.
18 In a further letter to Mr Forrest, dated 13 October 1999, the defendants mentioned that the agreement in its present form was the agreed document which governed their actions in the present situation, and emphasised that their suggested resignation date of 29 October 1999 was of particular significance to the future strategic planning of the firm and should be adhered to.
19 Mr Forrest replied on 20 October 1999. Relevantly he wrote:
The real significance and urgency to formalise my resignation by the 29 October 1999 is of quite some intrigue to me. I understand that you wish to determine the "future strategic planning of the firm" beyond this date, but I cannot grasp the earnest significance of this in relation to my resignation. I trust this does not result in a further nexus issue.
20 Mr Forrest pointed out that as issues of primary significance were still outstanding and unlikely to be resolved within the suggested timeframe, he would not be able to comply with the invitation to formalise his resignation by 29 October, though it remained his very strong preference to formalise his resignation as soon as the various issues were resolved.
21 During October, November and early December 1999, the defendants discussed between themselves how Mr Forrest's interests might be acquired. It was clearly in the minds of each of them that his interest might be acquired at full value if he resigned, but at a discount of 25% if he were removed by resolution. It is also clear that various possibilities were contemplated as to the proportions in which each might acquire Mr Forrest's interest, and in this respect various scenarios were discussed. In a memorandum dated 24 October 1999 to Mr Kenny and Mr Pryke, Mr Appleyard wrote:
Unfortunately, by virtue of John's most recent reply (20 October 1999), I am now of the view that it is most unlikely that John will resign of his own accord on or prior to Friday 29 October as requested.
We are therefore faced with deciding whether or not to pass a resolution pursuant to clause 13(e) of the Shareholders' Agreement. This resolution will provide for removal of John as a director and provide also for compulsory acquisition of his shareholding.
It is important that we all understand, John included, that this is the only outcome of such an action. While we have discussed the possibility of varying the agreement, this has not been done and - until such time as it may be done - we are bound by, and we agreed to be bound by, the present terms of the agreement. For my part, I am quite content with this position. The mechanism by which John's shareholding may be acquired has only been discussed in general terms. In such general terms, the three of us would be required to contribute to buy John's shareholding at the value to be determined strictly in accordance with the agreement. …
22 Some time towards the end of October, Mr Appleyard and Mr Pryke had a telephone conversation, in the course of which Mr Appleyard said that Mr Forrest would be given two choices: to resign voluntarily and receive 100% of his share value, or to be removed and suffer a 25% discount. A file note made by Mr Pryke on 27 October 1999 records:
· LDA prepared to purchase shares if BK and GP not prepared to (reluctantly).
· JF given two choices
(i) resign voluntarily and gain 100% of residual share value
(ii) forced resignation by voting and receive 25% discount.
23 Mr Appleyard agreed, in cross-examination, that it was then (and remained thereafter, at least well into 2000) his belief that, unless Mr Forrest was removed by resolution, no discount would be applicable to the valuation of his interest for the purpose of calculating his retirement entitlement.
24 On 8 November 1999 Werry & Associates, solicitors, acting for Mr Forrest, wrote to the directors of the Company, for the attention of Mr Appleyard, relevantly as follows:
1. Proposal for Mr Forrest's resignation as a director of the company.
We act for your co-director, Mr John Forrest, and have been instructed to advise you that Mr Forrest is prepared to resign as a director of the company subject to the finalisation of acceptable terms and conditions. It is anticipated that Mr Forrest will have formulated a proposal for your consideration by 12 November 1999.
25 On 9 November 1999 Messrs Schweizer & Co, solicitors for the Company, responded, relevantly:
While our clients naturally hope that acceptable terms and conditions for Mr Forrest's resignation may be negotiated and agreed as soon as possible, in the event that they cannot be agreed by a time acceptable to our clients, then our clients will rely on the directors' shareholders' and unit holders' agreement (the "directors' agreement") in that regard.
26 Also on 9 November, the defendants wrote to Mr Forrest, relevantly as follows:
We are each bound by an agreement which we signed in good faith and which was prepared for the specific purpose of guiding our actions in situations such as the present one. Each of us is entitled to like treatment under the terms of this document.
… It will be our firm hope that this information and our discussions next Friday (on Friday week) will now enable you to offer a firm date for your resignation which will be acceptable to all parties. … Our view is that a firm resignation date may now be established in the near term, and most preferably by the end of calendar 1999.
27 Werry & Associates wrote again to the directors on 17 November 1999, submitting a proposal in relation to Mr Forrest's resignation, which included:
4. That the remaining directors purchase Mr Forrest's 45% interest in the company's business for an agreed price taking into account the value of the elements referred to in paragraphs 1-3 above. Mr Forrest is inviting the remaining directors to submit a price to him for his share of the business.
28 On 26 November, Werry & Associates wrote to Schweizer & Co, relevantly:
As more than seven days have elapsed since our letter was dispatched, we would appreciate a prompt reply especially if we are aiming to achieve agreement prior to 17 December 1999 being the date on which Mr Forrest proposes to resign if all commercial issues can be resolved by then.
29 On 30 November 1999, Mr Forrest forwarded to Mr Garry Leyshon, the accountant for the Practice, an agenda for a meeting to be held that day. The covering letter recorded "As all parties now appear to be in agreement in principle to my resignation on 17 December 1999, the 'quantification' of the numerous parameters will now require extremely alacritous resolution". The agenda included, at item 3.0 "Valuation of JJF's 45% shareholding entitlement".
30 On 8 December 1999, Mr Forrest forwarded a memorandum to the defendants, copied to Mr Leyshon and Mr Werry, in which he wrote:
As a result of discussions and correspondences since my initial notice of intention to resign directorship dated 4 August 1999, I have prepared the following summarised valuation of my entitlement as an outgoing director. This valuation has been prepared along broad guidelines as agreed with Garry Leyshon at our meeting of 30 November 1999.
The primary purpose of this document is to commence, at long last, some meaningful dialogue in respect to an appropriate and commercially viable buy-out scenario.
This analysis has been presented in good faith and without prejudice to future negotiations.
…
Some brief preliminary comments may assist:
· Where available, balance sheet figures have been extracted from draft 1998/1999 assessments.
· This analysis assumes full directorship, unit holding and shareholding "removal" in accordance with the conditions of resignation defined in Werry Associates letter dated 17 November 1999.
…
Based on the attached "summary resignation valuation schedule" the
Net Director's Asset Valuation is $407,990.
31 The attached "summary resignation valuation schedule" listed the Practice assets, including goodwill at a valuation of $2,412,795, and plant and equipment at $275,000. Of that, and included in the calculation which produced the final result of $407,990, there was attributed to Mr Forrest's or Balvale's component the sums of $1,085,757 and $123,750 respectively, which are exactly 45% of those valuations.
32 Also on 8 December, Mr Forrest forwarded to Mr Leyshon his "summary resignation valuation schedule", and mentioned a target resignation date of 17 December 1999. On 9 December 1999, Mr Appleyard sent to Mr Forrest a note, which foreshadowed a more detailed response, and added:
Essentially, you will be due a sum of money post 17 December 1999. The value of this sum cannot yet be determined but this will be attended to by the agreed process. Your memo to Garry yesterday may assist in this process. For the time being, the value of the final sum does not matter a great deal. We will put in place a mechanism whereby a weekly payment will be made of a magnitude similar to that which you have been receiving by way of salary. Garry will advise on the preferred method for this in order that both your and our interests from a taxation aspect will be addressed.
33 Mr Appleyard reviewed Mr Forrest's "summary resignation valuation schedule" and forwarded it to Mr Leyshon on or about 9 December, with some handwritten comments endorsed on it in his own handwriting. No issue was taken in those notes with the attribution to Mr Forrest's interests of an undiscounted 45% share of the goodwill and the plant and equipment valuations. On the same day, Mr Leyshon requested a copy of Mr Forrest's schedule of assumptions, explanations and calculations, which underlay his valuation schedule.
34 On 10 December, Mr Forrest sent to Mr Appleyard a memorandum in response to Mr Appleyard's note of 9 December, in which he recorded his understanding that Mr Appleyard was happy with the date of 17 December 1999, and continued:
For the purposes of practice valuation and director's resignation valuation, the date of 17 December 1999 will be necessary and of mutual benefit.
A copy of correspondence to Garry in respect to director's resignation valuation is attached.
35 Also on 10 December, Mr Forrest provided to Mr Leyshon, Mr Appleyard, Mr Pryke and Mr Kenny an amended "summary resignation valuation schedule", including an explanation of his valuation of the goodwill of the Practice "based on methodology of Rob Knights & Co valuation dated 28 September 1994" - which was what the Shareholders' Agreement required - of which 45% was attributed, undiscounted, to Mr Forrest's entitlement; similarly, it continued to attribute 45%, undiscounted, of the plant and equipment valuation to Mr Forrest. It included other components, more in the nature of employee entitlements or loan account liabilities, to reach a "net directors' asset valuation" of $340,128. In the covering letter to Mr Leyshon, Mr Forrest explained:
As the partnership agreement only allows for RKC to determine the "fair market value of the practice", numerous discussions and adjustments with you and my co-directors will be necessary to determine my director's resignation valuation.
36 On 16 December 1999, Mr Forrest, Mr Appleyard and Mr Leyshon met. Mr Forrest says that in the course of the conversation Mr Appleyard said:
Friday 17 December will be the official date of your resignation. John, you are to cease all involvement in the business as from that day. You will transfer all your shares in the company, and all your units in the trusts to ourselves at a price equal to 45% of the fair market value as at that date, which shall be the reference date for valuation purposes. Rob Knights has been given a general background briefing and he will be available from 17 January 2000 for the purpose of preparing the necessary valuation.
37 Mr Appleyard gives a different version, according to which, after saying that he was not formally resigning based on legal advice, Mr Forrest assented to Mr Appleyard's proposals that "we should adopt 17 December as the reference date at which and from which all necessary calculations and computations relating to the valuation of your unit holding will be based", that "we propose to pay certain amounts to Balvale as prepayments on account of any amount to which you are or will become entitled under the Shareholders' Agreement as a consequence of your retirement from the Practice", and that "based on the figures which you propose for plant and equipment, I consider that it is unnecessary to do a further valuation of plant and equipment". Mr Appleyard also said that he had instructed Rob Knights to undertake a valuation and that he would be ready to do the work in January. It will be necessary, in due course, to return to this conversation.
38 The following day, 17 December 1999, Mr Appleyard wrote to Mr Forrest, with copies to Messrs Kenny, Pryke and Leyshon, relevantly as follows:
I refer to our meeting yesterday afternoon at Sotherton's Sydney office.
Garry and I accept your position that your legal advice precludes you tendering your formal resignation today and as foreshadowed in previous correspondence.
I confirm your agreement that today is to be adopted as the reference date at which and from which all necessary computations relating to the valuation of your unit holding will be based.
As discussed, Rob Knights has been given a general background briefing and he will be available from 17 January 2000. Garry will prepare a briefing document for Knights during the week commencing Monday 10 January.
39 The letter went on to outline the proposed mechanism for ongoing payments "as prepayment on account of the amount due to you pending the final agreed value of your unit holding and as set out below", the first payment to be made on 24 December 1999, payments to be made to Balvale, and Mr & Mrs Forrest to cease to be employees of the company at close of business on 17 December 1999.
40 Mr Forrest responded by facsimile on 19 December, stating: "I am generally in agreement with the contents of the letter". However, the facsimile was captioned "Pre-resignation arrangements - transitional period", which prompted a reply from Mr Appleyard on 21 January 1999:
We note that you head the document 'pre-resignation arrangements - transitional period'. We hope that we can avoid future difficulties on this point. At our discussions on Thursday 16 December we made it quite clear that we regard Friday 17 December as being the date of your resignation. In deference to your legal advice which you say precludes your tendering your 'formal' resignation, we have agreed to refer to that date also as a reference date for valuation purposes. To all intents and purposes, this is a concession to facilitate matters. Clearly, there can only be one resignation date and we would regard this as being Friday 17 December.
The Knights Valuation
41 Mr Knights delivered his valuation dated 15 May 2000. He expressed opinions based on alternative scenarios, depending upon whether there was no doubt as to the continued management of the Practice, or whether and when there was to be a change in management through the departure of Mr Appleyard. He concluded:
Where the future operation is to be on the basis of continuation of the existing management, with development of succession management over the next three/five years, then I recommend the adoption of goodwill values of $1,328,573.
Where the existing management continues for two/three years then I recommend adoption of a goodwill value of $664,287.
Where agreement/commitment to the above continuations of management is not available, then subject to reasonable handover arrangements over say the next year, I recommend adoption of a goodwill value of $531,429.
42 Between December 1999 and 18 May 2000, the Practice paid to Balvale, on account of Mr Forrest's retirement entitlement, $55,300 by way of prepayments.
43 On 18 May 2000 Schweizer & Co wrote to Werry & Associates, and using the alternatives proffered in Mr Knights' valuation, treating Mr Forrest's share as 45%, and deducting his loan account and the prepayments, suggested that on Mr Knight's most favourable approach there would be a balance outstanding to Mr Forrest of $272,857, but that on the least favourable approach he had already been overpaid $26,071, and concluded:
In view of the fact that Mr Forrest may already have received payments in excess of his entitlement, we are instructed that our clients are not prepared to make any further payments to or on behalf of your client at this time.
After the Valuation
44 Mr Forrest rejected the Knights valuation.
45 On 22 November 2000, Mr Pryke wrote to Mr Forrest, notifying him that a meeting of the members of the Company and the unit holders of the Trust would be held on 19 December 2000, with the sole agenda item to be consideration of Mr Forrest's resignation or removal. The letter continued:
Accordingly, on behalf of all of the other directors for the company, I invite you to submit your resignation before the meeting so that it can be formally accepted at the meeting. Please note that if a resolution of your removal as a director of the company is passed, then the remaining participants in the practice intends to enforce clause 12.6 of the Shareholders' Agreement of 1 September 1995. As you will no doubt recall, this clause imposes a 25% discount on the value of your interest in the practice.
46 At a meeting on 19 December 2000, attended by Mr Forrest, the defendants purportedly removed him as a director, but no party suggests now that anything turns on that resolution.
47 Until April 2003, Mr Forrest made a number of requests for payment. On 24 April 2003, his then solicitors Forshaws Neill wrote to Mr Knights, requesting a valuation in final form, which took into account assets other than goodwill, specified a final figure, disregarded events after 17 December 1999, and corrected some apparent mathematical errors. Those solicitors also wrote to Schweizer Kobras, making the same points and seeking the defendants' cooperation in finalising the valuation process. On 12 May 2003, a similar request was made to Messrs Peedoms, solicitors, who by this time were acting for Mr Pryke. These requests did not produce any further valuation.
48 Mr Rob Knights, the valuer referred to in the Shareholders' Agreement, died on 26 April 2004, after these proceedings were instituted.
49 Meanwhile, on 22 February 2001, Mr Pryke had submitted his resignation to the Practice, in the following terms:
Further to my discussion with Leigh on 5th February 2001 I confirm that for personal reasons I am resigning as an employee and director, and therefore wish to transfer all of my interests in the practice as a shareholder and unit holder of the respective entities, Appleyard Forrest Consulting Engineers Pty Ltd and the AFCE Unit Trust.
… Whilst it is acknowledged that a formal process exists to resolve my resignation via the directors' shareholders' and unit holders' agreement (DSUA) I am confident we can settle this matter without the need for external valuations and in a timeframe suitable to both parties.
50 In fact, those issues have never been resolved, and Mr Pryke is himself in dispute with Mr Appleyard and Mr Kenny as to his entitlements upon retirement.
The Pleadings
51 No new valuation having been produced or even agreed to, Mr Forrest commenced these proceedings by statement of claim filed on 29 August 2003. He alleged that on or about 17 December 1999 the parties had agreed ("The Buyout Agreement") that he would cease his involvement in the Practice and transfer his interest to the defendants at 45% of its fair market value as at that date, determined in accordance with the Shareholders' Agreement. He alleged that the Knights valuation was not a valuation in accordance with the Shareholders' Agreement, and that the defendants had refused to instruct Mr Knights to prepare a valuation in accordance with the Shareholders' Agreement. He claimed specific performance of the agreement of the Buyout Agreement; a declaration that the Knights valuation was not a valuation in accordance with the Shareholders' Agreement; a reference to Mr Knights, or some other appropriate valuer, for inquiry and report, of the valuation of the Practice; and an order for payment to him of 45% of the value so determined plus interest, with a contemporaneous transfer of his shares and units to the defendants.
52 The first and third defendants filed defences, which were substantially identical, on 26 and 27 November 2003 respectively. They admitted that an agreement was made in December 1999 that Mr Forrest would retire or be treated or deemed to have retired with effect from 17 December 1999, which date was to be adopted for valuation of his interest in the Practice, and that Balvale would receive certain prepayments on account of his retirement entitlement. They asserted that such prepayments had been made, and that they thereby acted to their detriment on the basis of the 17 December 1999 agreement. They maintained that the Knights valuation was a valuation of the goodwill of the Practice. They asserted that Mr Forrest was validly removed as a director on 19 December 2000, but had ceased to participate in the Practice from 17 December 1999. They denied that Mr Forrest was entitled to any of the relief he claimed.
53 Mr Pryke filed a defence on 11 November 2003. He did not admit the alleged December 1999 agreement, and he did not admit that the Knights' valuation was not a valuation for the purposes of the Shareholders' Agreement.
54 On the pleadings as they then stood, therefore, there was no issue as to uncertainty or incompleteness of the Buyout Agreement; and there was no allegation that a discount was applicable to Mr Forrest's interest on account of his retirement. What the defendants were disputing was Mr Forrest's contention that there was no valid valuation according to the Shareholders' Agreement.
55 At the commencement of the hearing, each defendant obtained leave to file an amended defence, notice of which had been given to the plaintiff a few days before the hearing. Mr Young, who appeared for Mr Forrest, objected on the grounds that this was not conducive to the efficient conduct of litigation, but very reasonably and properly said that he was not prejudiced by the late amendments and was in a position to deal with them. Accordingly, I granted the defendants leave to file the amended defences.
56 By their amended defence, Mr Appleyard and Mr Kenny admitted that on 16 or 17 December Mr Forrest and the defendants agreed that the date for determination of the fair market value of the Practice pursuant to the Shareholders' Agreement would be 17 December 1999, but denied that the price payable to Mr Forrest would be 45% of the fair market price determined by valuation, asserting that a 40% discount was applicable. They admitted that the Knight's valuation was incomplete, but contended that the prospect of departure of any principal from the Practice was a proper matter for the valuer to be taken into account. As to relief, while denying that Mr Forrest was entitled to specific performance of the Buyout Agreement, they conceded that he was entitled to a declaration that the Knight's valuation was not a valuation of the fair market value of the Practice in accordance with the Shareholders' Agreement, and supported a reference to a suitably qualified valuer to determine the valuation.
57 By his amended defence, Mr Pryke did not admit the alleged agreement of 16 December and said that in any event it was void for uncertainty on the grounds that there was no concluded agreement, and/or no term in the alleged Buyout Agreement or at all, regarding which of the defendants, and/or in what proportions, had agreed to purchase Mr Forrest's interest. He did not admit that the Knight's valuation was not a valuation for the purposes of the Shareholders' Agreement, and contended that no order for specific performance of the Buyout Agreement should be made against him because he never agreed to purchase Mr Forrest's interest, and alternatively on the discretionary grounds that Mr Forrest had an adequate remedy at common law, and Mr Pryke had since changed his own position by resigning, so that specific performance would require the maintenance of a personal relationship and Mr Pryke was unable to transfer, sell or otherwise dispose of his interest without the agreement of the remaining participants, by reason of which it was said that specific performance would be harsh, unfair and unjust.
58 Accordingly, by the amended defences, there were raised, for the first time, the issue of uncertainty and incompleteness (by the second defendant), and the suggestion that a discount was applicable (by the first and third defendants).
59 Once the amended pleadings were filed, at the commencement of the hearing, the issues were identified. Some of the issues fell away in the course of the hearing, and it will be convenient to resolve those that remain in a somewhat different sequence. But, at the outset, no party demurred from the following identification of the issues:
· Was there a valid and effective Buyout Agreement, dehors the Shareholders' Agreement?
· If so, upon its proper construction and in the events which have happened, does any discount apply to the valuation process?
· If there was not a Buyout Agreement dehors the Shareholders' Agreement, was there a valid triggering of the retirement procedure under the Shareholders' Agreement?
· If so, what if any discount applies to Mr Forrest's interest?
· Who is the proper payee of Mr Forrest's retirement entitlements?
· What is the amount of the prepayments for which credit is to be given by Mr Forrest?
· Should specific performance, at least as against the second defendant, be declined on discretionary grounds?
What was agreed on 16 December?
60 For the reasons that follow, I am not persuaded that express reference was made, as Mr Forrest asserts, in the conversation of 16 December, to 45% of the Practice valuation as Mr Forrest's retirement entitlement. Even if it were referred to, I am not persuaded that it was intended or understood to be a contractual promise. Rather, the effect of the conversation was that the parties agreed, dehors the Shareholders' Agreement, that Mr Forrest would retire (without being required to give any notice) with effect from 17 December (though his formal resignation would be deferred), and that the provisions of the Shareholders' Agreement would operate to determine his entitlement on retirement as at 17 December insofar as the Buyout Agreement did not make provision.
61 First, in cross-examination, Mr Appleyard's version of the conversation was put to Mr Forrest, and Mr Forrest substantially agreed with it. Mr Forrest also agreed that there was no discussion about making amendments to the Shareholders' Agreement. It was put to him that Mr Appleyard never specified the price which Mr Forrest was to receive, to which his answer was (emphasis added): "Mr Appleyard indicated 45% of the fair market value". He was asked (emphasis added):
Q. And what I suggest to you is that Mr Appleyard did not go on to say anything like: "And your units in the trust will be transferred at a price equal to 45% of the fair market value". He did not go on to say those words - that is my suggestion to you?
A. My understanding is that my shares were valued at 45%. That was the agreement.
Q. I am asking you not what your understanding was. I am asking you, as best you can recall, what was said at this meeting. Do you appreciate the difference?
A. Mmm. …
Q. I am suggesting to you that you do not recall Mr Appleyard using words like that. He did not go so far as to say 45% at that meeting?
A. My recollection is that he did.
62 Subsequently he maintained that his affidavit version was an honest and truthful recollection of the discussion, but his oral evidence suggested that he was remembering an understanding or interpretation of the effect of the conversation rather than its words. There is no doubt that he believed that he would receive 45% of fair market value - as did Mr Appleyard. But his oral evidence conveyed the impression that he remembered that understanding or belief, rather than what was actually said.
63 Mr Forrest was asked whether he had a note of the meeting, and answered that he did have file notes of the meeting. None was annexed to or referred to in his affidavit. He said that those notes were in numerous arch files at his office. They were called for, but after an overnight adjournment were not produced. The significance of this is that, in the absence of such a note, Mr Forrest's recollection was almost six years old when he gave instructions for his affidavit, and I cannot accept that it was refreshed by any contemporaneous document.
64 Secondly, the best contemporaneous record is against Mr Forrest's version. Mr Appleyard's letter to Mr Forrest of 17 December did not refer to 45% of fair market value. Mr Forrest conceded that, had such a statement been made at the meeting and not recorded in Mr Appleyard's letter, he would not have regarded the letter as an accurate reflection of the points agreed to at the meeting the day before, by reason of the absence of the reference to 45% of valuation. Yet his reply to that letter recorded that he was generally in agreement with its contents, and did not raise any issue about absence of reference to the price.
65 Thirdly, while Mr Leyshon added little, and said no more than that his recollection did not extend beyond the circumstance that the letter of 17 December appeared to accurately record the discussion, his evidence weighs, albeit slightly, in favour of Mr Appleyard's version. Although it is obvious, as the discussion lasted over some 45 minutes, that much more must have been said than is recorded in the letter, Mr Leyshon's contemporaneous view that the letter was an accurate summary favours, at least a little, the view that there was no reference to price, or if there were any, that it did not form a significant part of the discussion.
66 Fourthly, Mr Appleyard's version is more consistent with the dynamics of the negotiations. He maintained that his recollection was that the 45% of valuation issue was not discussed. He said that there were three salient points discussed at the meeting: first, the reluctance of Mr Forrest to agree to a retirement date, which was the most crucial issue; secondly, that Mr Knights would be asked to prepare an up-to-date valuation; and thirdly, the putting in place of transitional arrangements for some payments to Mr Forrest to meet his day-to-day expenses in the short to medium term. He accepted that there could have been other things said that he has since forgotten, and that one of those things could have been that the price for the shares and units would be equal to 45% of the market value, but he did not accept that it was quite likely that reference was made to the price, as the essential outcome was an agreement to proceed in accordance with the framework which was then recorded in the letter of 17 December.
67 As has been mentioned, the notice of 4 August 1999 given by Mr Forrest did not specify a retirement date. It did not clearly state, other than in the caption, that he was retiring or would retire. It was not a "retirement notice" within clause 12 of the Shareholders' Agreement. After it was given, Mr Forrest showed no urgency about fixing a date for his retirement. It was the defendants who pressed to have the issues resolved. They wanted Mr Forrest to leave as soon as possible, but preferred that he leave voluntarily rather than be removed. No one regarded the 4 August notice as a formal notice of resignation, and no one treated the 4 August notice as a notice which triggered clause 12. It was for that reason that the parties continued to negotiate to fix a retirement date, and that the defendants were pressing for a "formal" retirement. It is also clear that all assumed that if the Shareholders' Agreement applied, Mr Forrest would be entitled to 45% of valuation.
68 Those assumptions of the parties and the negotiations between them are important context in which the conversation of 16 December is to be set. Because all assumed - rightly or wrongly - that under the Shareholders' Agreement, Mr Forrest would receive 45% of valuation - an assumption which was reflected in the absence of any dispute with so much of the proposals advanced by Mr Forrest as had indicated 45% of practice value as the basis for his pay out - price was simply not an issue which required agreement or discussion. That reduces the likelihood that it was addressed. The earlier correspondence - in particular, Mr Appleyard's note of 9 December 1999, which had said that the sum payable to Mr Forrest "cannot yet be determined but this will be attended to by the agreed process", and that "for the time being, the value of the final sum does not matter a great deal" - reinforces that view. The circumstance that the prior negotiations proceeded on that basis, and that all parties assumed that Mr Forrest would receive 45% of valuation, makes it quite improbable that on 16 December they specifically addressed the question of price, let alone that they did so in a way intended to produce a departure from the Shareholders' Agreement.
69 But although I am unpersuaded that specific reference was made on 16 December to price, it does not follow that price was left undetermined. The whole of the negotiations were conducted, quite consciously, on the common assumption that, except insofar as the parties otherwise agreed, their rights would be governed by the Shareholders' Agreement [see in particular the correspondence of 9 November, and 9 December, above]. Ultimately, there was separate agreement, at least in respect of retirement date and notice, but against the background that the parties would otherwise be governed by the Shareholders' Agreement.
70 Although, under clause 12 of the Shareholders' Agreement, retirement was triggered by a notice specifying a retirement date, no such notice was ever given. The agreement was structured to discourage short notice resignations: the discount, where it was applicable, put a premium on length of notice. Financially, Mr Forrest's interests would be served by giving the longest possible period of notice. But it is to be remembered that the defendants saw early retirement as being in their interests and for their benefit: the defendants wanted Mr Forrest's voluntary resignation rather than his compulsory removal, and as soon as possible, not so much for financial reasons as to enable them to plan for the future. They pressed for an early resignation. Eventually, they secured agreement to 17 December, though only on 16 December. Mr Forrest never gave any notice to that effect. Rather, the parties agreed, dehors the Shareholders' Agreement, that without any notice being required, Mr Forrest would retire, with effect 17 December. They intended the valuation mechanism contained in the Shareholders' Agreement to determine the retiree's price, but they dispensed with the provisions which required any notice to be given: this was not a retirement triggered by retirement notice, but one brought about by an agreement, though in the context that the Shareholders' Agreement would otherwise regulate the rights and objectives of the parties, and as if notice were not required.
71 When, in the course of the hearing, it appeared that one possibility was that the agreement that might be enforced was the Shareholders' Agreement, as distinct from a Buyout Agreement dehors the Shareholders' Agreement, Mr Cox, for Mr Pryke, objected that this was not the case pleaded. Mr M W Young, for Mr Forrest, responded that where a contract is pleaded, if the court finds that there is an agreement but one which differs in some respects from that pleaded, it does not simply dismiss the case, but gives effect to the agreement found so long as it supports the relief claimed. He added, not unreasonably in the circumstances, that parties who obtain the indulgence of a last minute amendment to raise a new defence ought not too readily be heard to complain if the consequences include their having to deal with issues not previously raised on the pleadings.
72 However, in my opinion Mr Forrest's case on the pleadings has always been one which combined the alleged oral agreement with elements of the Shareholders' Agreement. Mr Forrest pleaded that the parties entered into the Shareholders' Agreement "for the purpose of regulating the affairs" of the Company and the Trust, and that on or about 17 December 1999, they made the Buyout Agreement whereby Mr Forrest would cease involvement in the Practice and transfer his interest to the defendants "at a price equal to 45% of the fair market value of the Practice as at 17 December 1999, as determined in accordance with the Shareholders' Agreement". Until the amended defence was filed, the main issue on the pleadings was whether the Knights valuation was or was not a valuation in accordance with the Shareholders' Agreement. Originally, Mr Pryke did not admit the Shareholders' Agreement on the basis that he complained that he did not have proper particulars of it. Ultimately, he also contended that it was void for uncertainty. In asserting that the Buyout Agreement was void for uncertainty, he pleaded "there was no term in the alleged Buyout Agreement or at all" to the effect of who were the purchasers or in what proportions. Mr Cox's written submissions, delivered shortly before the hearing, address clause 12 of the Shareholders' Agreement.
73 The written submissions delivered on behalf of Mr Forrest before the hearing articulated his position as being that the Buyout Agreement was collateral to the Shareholders' Agreement, incorporating parts of it and superseding other parts. The position of the first and third defendants was that all that happened on 16 December was to fix a date for retirement, upon which the Shareholders' Agreement would otherwise operate. Accordingly, the interrelationship of the events of 16-17 December and the Shareholders' Agreement was always at the heart of the issues in the case.
74 Mr Forrest's case was always one that relied on the combination of an oral agreement made on 16 December with the terms of the Shareholders' Agreement. A conclusion that the oral part of the agreement was no more than that Mr Forrest would retire and would be permitted to retire without giving notice with effect from 17 December, and that otherwise the provisions of the Shareholders' Agreement would operate, is within the scope of the pleadings.
75 Accordingly, I conclude that the result of the conversation on 16 December was that Mr Forrest resigned, not pursuant to the Shareholders' Agreement but pursuant to an oral agreement - the Buyout Agreement - which stood outside the Shareholders' Agreement, but which incorporated the terms of the Shareholders' Agreement so far as applicable, to the extent that the Buyout Agreement did not make provision.