Fair value
48 If Ijack establishes that the terms set out in the compulsory acquisition notice relating to the income shares give a fair value for those shares, the Court must approve the acquisition: s 664F(3).
49 I will first outline the evidence of the fair value experts (Mr Parekh and Mr Hockley). I will then outline the evidence of the land valuation experts. I will then set out my conclusion and reasoning in relation to the fair value issue.
50 The fair value experts agree that:
(a) the relevant date for assessing the fair value of Vealls' income shares is 27 February 2018;
(b) the basis for determining fair value is the test in Spencer v Commonwealth (1907) 5 CLR 418;
(c) accounting standard APES 225 (entitled "Valuation Services") applies; and
(d) the Vealls' income shares were illiquid.
51 In the Deloitte Report, for the purposes of valuing Vealls as a whole, an asset based approach assuming orderly realisation was considered to be the most appropriate methodology. Three reasons were expressed for adopting this approach:
(a) this approach achieves the highest value for the company's net assets, as it assumes an orderly realisation of assets rather than realisation via a liquidation or forced sale approach, which typically results in lower prices being realised;
(b) net assets on a 'going concern' basis would require the recognition of ongoing operating costs without any offsetting income due to the unrelated nature of the assets and the passive nature of their holding; accordingly, "this would result in a lower value"; and
(c) the assets are unrelated and do not present an opportunity for value improvement through active management or integration into a business formation.
52 The Deloitte Report stated that the adopted method "estimates fair value by determining the amount that would be distributed to shareholders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the entity is wound up in an orderly manner".
53 On this basis, the value of 100% of the equity in Vealls was assessed to be in the order of $116.1 million to $118.9 million.
54 The next step in the Deloitte Report (reflecting the steps set out in s 667C) was to allocate the net realisable value for the company as a whole among the classes of shares. It was stated that, consistently with the valuation methodology that had been adopted (orderly realisation), the value of each share class was determined by allocating the assessed value of 100% of the equity of Vealls across each share class "in accordance with their wind-up entitlement under the Constitution". An amount was first allocated to preference shares. Next, an amount was allocated to income shares, namely $344,000 for paid up capital and an additional 40 cents per share (being an amount payable under the Constitution on a winding up). This produced a total amount of $1,454,000 for income shareholders, or $0.52 per share. Lastly, the balance of the net realisable value was allocated to capital shareholders.
55 On this basis, Deloitte expressed the opinion that "the terms proposed in the Compulsory Acquisition Notice give a fair value for each share class". In relation to the income shares, the Deloitte valuation was $0.52, while the offer price was $0.57.
56 It is convenient to note that in an independent expert report dated 6 November 2017, prepared in connection with the buy-back, PwC had valued the income shares at $0.52, adopting a substantially similar approach.
57 In the course of the Deloitte Report, reference was made to recent share trading (see page 7). In relation to the income shares there was only one trade in the six months prior to 27 February 2018, at a price of approximately $1.50 per share. Later in the report, under the heading "Cross check", it was stated that the income shares were illiquid, with only 0.9% of income shares traded in the last six months. It was also stated that "whilst the income shares appear to currently be priced on the basis of yield (circa. 7%), the recent shift in Vealls' asset base towards low yielding investments (i.e. cash) calls into question the sustainability of the historical dividend levels and therefore the share price".
58 The Supplementary Deloitte Report relates to the standing issue and can be put to one side for present purposes.
59 The Hockley Report contains Mr Hockley's responses to a series of questions. Mr Hockley stated that he did not consider the values ascribed in the Deloitte Report to be the fair value of Vealls as a whole or the income shares. In Mr Hockley's view:
(a) the company and the income shares should be valued on a going concern basis, consistent with the disclosures in the company financial reports;
(b) the Deloitte Report did not have regard to alternative valuation methodologies applicable to minority shareholders that receive regular and consistent dividends, such as a future maintainable dividends valuation methodology; and
(c) a review of other factors strongly supported the proposition that Deloitte's valuation of the income shares did not reflect fair value, including: lack of acceptance of the buy-back offer by income shareholders; implied dividend yield of the Deloitte value; and historical dividend payments.
60 Mr Hockley expressed the view that a capitalisation of future maintainable dividends valuation methodology, applying the Gordon Dividend Growth Model, was most appropriate in determining the fair market value of the income shares. He stated that this required estimation of three key factors: the future dividend expectations; the rate of return; and the future growth of dividends. Assuming that both dividend expectations and dividend growth were based on historical dividend levels, Mr Hockley concluded that the fair value of the income shares was in the range of $1.29 to $1.46.
61 In the Supplementary Hockley Report, Mr Hockley addressed a number of questions relating to the Opteon Report.
62 Mr Parekh and Mr Hockley provided additional reasons for their views in the joint report and in their oral evidence at the hearing. I have had regard to this evidence and refer to some of it below.
63 I turn now to the land valuation evidence. The land valuation experts (Mr Papworth and Mr Holland) agree as to the particulars of the subject land and the valuation date.
64 The CKC Report was based on an inspection and valuation as at 8 January 2018. It valued the Mount Martha Property at $18.5 million.
65 Under the heading "Planning Approvals", the report stated:
Discussions with Council indicate there are no active planning permits or planning permit applications relating to the subject property. Our discussions with the Planning Consultant for Vealls Ltd indicate discussions are occurring with Council in relation to rezoning the land for conventional residential development.
66 Through no fault of Mr Papworth, this statement was incorrect. Mr Papworth was not briefed with all relevant material by Ijack and its planning consultant, Tract Consultants Pty Ltd (Tract). In fact, on 24 October 2017, Tract, on behalf of V.L. Investments Pty Ltd, had submitted to the Mornington Peninsula Shire Council in relation to the Mount Martha Property, a combined: application to amend the Mornington Peninsula Planning Scheme; planning permit application for the subdivision of land and removal of native vegetation under the Planning and Environment Act 1987 (Vic); and application for 'land swap' pursuant to the Local Government Act 1989 (Vic). The proposal sought planning approval for the subdivision of the land to facilitate the development of the land for residential purposes. It was proposed to subdivide the land to create 200 residential allotments.
67 In the Supplementary CKC Report, Mr Papworth responded to a series of questions relating to this additional material. In response to a question whether the CKC Report had accounted for the rezoning proposal, Mr Papworth responded: "No. My valuation report dated 19 January 2018 was based on the highest and best use of the land as a low density residential development with potential for conventional residential development upon rezoning." In response to a question whether the rezoning proposal would have changed his opinion as to value, Mr Papworth responded that the combined request for rezoning and planning application may have changed his opinion of value. Mr Papworth explained that he was not provided with this information at the time of preparing the CKC Report. Mr Papworth was not asked to, and did not, provide a revised valuation of the property in the Supplementary CKC Report.
68 The Opteon Report was based on an inspection and valuation as at 26 July 2018. It provided valuations on a number of different scenarios, as follows:
(a) value with immediate potential for sale of existing allotments - $24,735,000;
(b) value with immediate potential for sale of allotments fronting existing roads - $23,550,000; and
(c) value with potential of obtaining a rezoning and a permit for a higher form of development such as that proposed by Tract - $26,400,000 and possibly as high as $30 million.
69 The Opteon report took into account the combined application to amend the planning scheme and planning permit application described above.
70 Mr Papworth and Mr Holland provided further evidence and reasoning in support of their views in their joint report and in their oral evidence during the hearing. I have had regard to this evidence.
71 In my view, for the reasons that follow, Ijack has established that the terms set out in the compulsory acquisition notice relating to the income shares give a fair value for the income shares for the purposes of ss 664F(3) and 667C.
72 First, the critical issue in considering fair value in the present case concerns the method by which Deloitte allocated the value of the company as a whole among the classes of shares (being the second step set out in s 667C(1)) rather than the method by which Deloitte valued the company as a whole (being the first step in s 667C(1)). This is because the method of allocating value among the classes, insofar as this related to the income shares, was to allocate an amount for paid up capital ($344,000) and an additional 40 cents per share (being an amount payable under the Constitution on a winding up). On this approach, whether the value of the company as a whole was in the order of $116.1 million to $118.9 million (as determined by Deloitte) or a higher figure would not affect the amount allocated to the income shareholders.
73 Secondly, although the value of the company as a whole is not, for the reasons given above, the critical issue, it is important to note the distinction drawn by Mr Parekh between the premise of his valuation of the company as a whole and the methodology of valuation he adopted. Although this may not have been clear from the Deloitte Report, Mr Parekh clarified in the joint report and in his oral evidence that he drew a distinction between these two aspects; the premise of his valuation approach was that the company would continue as a going concern, while the methodology was an asset based approach assuming orderly realisation. One of the reasons for adopting this methodology, Mr Parekh explained, was that alternative approaches would result in a lower value. I accept Mr Parekh's evidence as summarised in this paragraph, and generally.
74 It is also relevant to note, in relation to the value of the company as a whole, that the Hockley Report does not provide a value for the company as a whole. Accordingly, the only value for the company as a whole contained in the material before the Court is that presented in the Deloitte Report.
75 The defendants submit that, contrary to the impression sought to be created by Mr Veall in his affidavits, Vealls is plainly developing a share trading business in a Singapore hub. This may be accepted. But once the distinction outlined in [73] above is appreciated, this does not provide a basis for doubting Mr Parekh's valuation of the company as a whole.
76 The defendants also submit that, contrary to the impression sought to be created by Mr Veall (and adopted by Deloitte) as to the passive nature of the assets held by Vealls, including the land, the company has since at least 2015 commenced and continues to conduct the business of developing the land in the sense of attempting to achieve a rezoning and subdivision of the land and otherwise enhance its value before putting it out to tender. However, I accept the evidence of Mr Veall during cross-examination as follows: "We're not looking to being a property developer or developing the land. We're looking for a zone change and then sell to a developer". In light of this evidence, the company's activities in relation to the Mount Martha Property do not call into question the approach taken by Deloitte in valuing the company as a whole.
77 Thirdly, while I have some concerns about the reasoning in relation to allocation of value among classes contained in the Deloitte Report, these concerns are addressed in the further evidence of Mr Parekh in the joint report and in the evidence he gave during the hearing. In the Deloitte Report, the reason given for the adopted allocation methodology was that this was consistent with the basis upon which the company as a whole had been valued (orderly realisation). This reasoning did not directly address the matters referred to in s 667C(1)(b), namely the relative financial risk, and voting and distribution rights, of the classes. However, additional reasoning was provided by Mr Parekh in the joint report. (The joint report contains comments provided separately by Mr Parekh and Mr Hockley.) At [18] of the joint report, Mr Parekh detailed the rights and entitlements of the classes under the Constitution. In particular, he noted the following:
(a) In relation to the voting rights: income shareholders collectively as a class have 3.3% of the voting rights of the company; income shareholders cannot veto any decision by the other shareholders (being those holding preference shares or capital shares) to reorganise or recapitalise the company; and income shareholders cannot singularly or collectively elect or change the directors of the company and do not have a representative on the board of directors of the company.
(b) In relation to dividend entitlements: dividends to income shareholders are proposed by, and are at the discretion of, the directors of the company; the company is not obliged to pay dividends on the income shares; there is no minimum dividend that must be paid on the income shares each year and the rights are non-cumulative (in other words, the income shares do not have the entitlements often associated with preference shares); and while income shares must receive a dividend in priority to capital shares, there is no minimum dividend that must be paid to income shareholders before a dividend is declared to capital shareholders.
(c) In the event of a winding up of Vealls, preference shareholders are first entitled to their paid up capital plus accumulated preferred dividends. The income shareholders are then entitled to a repayment of their paid up capital and an additional 40 cents per share in priority to any repayment on the capital shares. The capital shares are entitled to the surplus capital of the company.
78 Mr Parekh also noted, at [18] of the joint report, that on 7 February 2018 Vealls announced that no dividend would be declared for the six months ended 31 December 2017; there has been no announcement since that date as to when dividends on the income shares will next be proposed.
79 In [22] of the joint report, Mr Parekh referred to s 667C(1)(b) and stated that the relative financial risk, and voting and distribution rights, of the classes were summarised in [18] of that report. Mr Parekh stated that he considered the value that he had attributed to income shareholders accorded with the rights of those shares under the company's constitution, complied with s 667C(1)(b), and represented the maximum value to which the income shareholders were entitled.
80 In his oral evidence during the hearing, Mr Parekh was asked why, at the stage of allocating value to the classes of shares, he looked at the rights of the different classes on a winding up. In the course of his response, he said that he "effectively formed the view that the value of income shares can only be maximised through … use of that approach".
81 In light of the above, I am satisfied that the method adopted in the Deloitte Report for allocating the value of the company as a whole among the classes of shares takes into account the financial risk, and voting and distribution rights, of the classes (as required by s 667C(1)(b)).
82 Fourthly, I do not consider the approach taken by Mr Hockley to provide an appropriate method of allocating the value of the company as a whole among the classes of shares for the purposes of s 667C(1)(b). Significant changes have occurred in recent years to the business operations of Vealls. In particular, in 2013 it sold a ski field located on the South Island of New Zealand and, in April 2017, it sold a forest in France. Following these asset sales, Vealls holds some shares, the Mount Martha Property and cash. It is true that Vealls has, until recently, continued to pay dividends on the income shares. It is also true that the company is likely to continue as a going concern. Nevertheless, in circumstances where there have been significant changes to the company's business operations, I do not consider the historical dividends paid by the company to provide a reliable guide to future dividends.
83 Further, the methodology set out in s 667C(1) would appear to be designed to avoid a premium or a discount being applied to a minority stake in a company. This is sought to be avoided by valuing the company as a whole and then allocating that value among the classes of shares, having regard to the matters set out in s 667C(1)(b). Mr Hockley's approach, which involved valuing the income shares directly (rather than commencing with the value of the company as a whole and then allocating that value among the classes of shares, having regard to the matters in s 667C(1)(b)), does not reflect the statutorily mandated methodology.
84 I note that Mr Hockley stated that the non-acceptance of the buy-back by income shareholders may have highlighted the need for Deloitte to reconsider their valuation opinion. However, this is only one factor to be considered in determining fair value. As noted by Mr Parekh in the joint report, it needs to be viewed in the context of the fact that there has been no trading in the income shares since the buy-back announcement and the lack of liquidity for the income shares.
85 Fifthly, it is necessary to take into account the consideration paid for income shares within the previous six months: s 667C(2). While the Deloitte Report does not address this matter in terms, it is effectively taken into account in the Deloitte Report and is also addressed by Mr Parekh in the joint report. In the Deloitte Report, reference was made to recent share trading (at page 7) and, later in the report, under the heading "Cross check", it was stated that the income shares were illiquid, with only 0.9% of income shares traded in the last six months. It was also stated that the recent shift in Vealls' asset base towards low yielding investments (ie, cash) called into question the sustainability of the historical dividend levels and therefore the share price. In 18 of the joint report, Mr Parekh stated that: the last trade in the income shares occurred on 7 November 2017; on that date, 6,000 income shares representing 0.2% of the income shares on issue were acquired by one of the objectors; and that was the only trade in the six months prior to 27 February 2018. Mr Parekh also stated (at [22]) that there was no liquidity in the trading of income shares from which income shareholders could realise the value of their income shares on-market. In light of this evidence, I am satisfied that the matter referred to in s 667C(2) has been taken into account by Mr Parekh in forming his view as to fair value.
86 Sixthly, while there is a difference of view between the land valuation experts as to the valuation of the Mount Martha Property, it is unnecessary to resolve this difference for the purposes of the fair value issue. While the valuation of the Mount Martha Property affects the value of the company as a whole, for the reasons discussed above the critical issue is the methodology adopted for allocating the value of the company as a whole among the classes of shares. In these circumstances, it is unnecessary to resolve the difference of view between the land valuation experts. Although I have concluded that it is unnecessary to determine this issue, the Court has been assisted by the defendants obtaining a copy of the combined application to amend the planning scheme and planning permit application in relation to the Mount Martha Property.
87 In light of the above, I accept the opinion of Mr Parekh that the terms proposed in the compulsory acquisition notice in relation to the income shares give a fair value for the income shares. Accordingly, Ijack has established that the terms set out in the compulsory acquisition notice in relation to the income shares give a fair value for the income shares.