Consideration
172There is no issue between the parties that the valuation to be conducted by the Independent Valuers under Condition 7.5.9(vi)(a) is to be of the market value, within the meaning of that term as it is used in the Deed, of an Oil Search share. There is no issue that if the RBC valuation is not of market value, it will not be a valuation in accordance with the Deed and will not bind the parties: see Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 701; Holt v Cox (1997) 23 ACSR 590. In that event, the RBC valuation would undoubtedly also be affected by "manifest or proven error". It is not necessary, in the present case, to determine where the boundaries lie between these two concepts.
173The RBC valuation entails the following four steps: an assessment of the NAV of an Oil Search share to enable the derivation of a P/NAV; a comparative study of the performance of Oil Search shares compared to its peers using P/NAVs; identification of circumstances explaining why, for a period straddling the VWAP Period, Oil Search shares underperformed their peers; and adjusting Oil Search's underperformance to eliminate the effect of the circumstances identified.
174Fraiberg considers that the RBC valuation is directed towards determining market value and he and RBC consider that the methodology adopted in it is appropriate. However, the RBC valuation is not a determination of market value. It is not a determination of what hypothetical willing and knowledgeable but not anxious purchasers would pay and what hypothetical willing and knowledgeable but not anxious vendors would take for an Oil Search share on the Valuation Date.
175Market price and true market value are not always the same. Markets can, and often do, operate imperfectly. However, when it comes to shares in a company which are being bought and sold on the stock exchange and there are no abnormalities affecting the market, the price at which the shares are changing hands in the ordinary course of business prima facie represents their value: see Perpetual Trustee Co Ltd v Federal Commissioner of Taxation (1942) 65 CLR 572 at 579, Ronnoc Finance v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 at 626, Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358 at 361, Airservices Australia v Canadian Airlines International Ltd (2000) 202 CLR 133 at [444], Elkington v Shell Australia Ltd (1993) 32 NSWLR 11
176According to Fraiberg, the coverage of Oil Search stock by analysts was generally good. The closeness of the analysts' consensus view to the RBC NAVPS assessment indicated to Fraiberg that the market understood Oil Search and its asset base.
177Far from it being suggested that there were abnormalities affecting the market on the Valuation Date, the RBC valuation ascribes the divergence and reconvergence of Oil Search's P/NAV with that of its peers to information the subject of public announcements which information first engendered concerns on the part of the market and then later allayed them. This establishes that the traded prices accurately reflected the market values of an Oil Search share.
178The RBC valuation, even though it says it is, is not directed to the juridical concept of market value (within the meaning of that term in Condition 7.5.9) as it relates to an Oil Search share. It is directed to some other notion of value, perhaps intrinsic value is the best description, to be attributed to an Oil Search share via a valuation of Oil Search as a company.
179The RBC valuation is directed to attributing a value to an Oil Search share based on a valuation of Oil Search's assets not on the value purchasers and vendors in an informed market were placing on an Oil Search share.
180It provides an explanation why, at particular points in time before 27 February 2014, willing and knowledgeable but not anxious parties were paying and accepting prices which when compared to the prices after 27 February 2014 might be considered to be cheap.
181The elision of market value and the value which the RBC valuation addresses is most clearly revealed in Fraiberg's explanation that RBC's analysis indicated that there was an impact on the Oil Search stock price due to the occurrence of certain extraordinary events unrelated to the value of the assets of the company, specifically the Liquidity Announcement and the Potential Acquisition Announcement, which he says meant that the 20 day VWAP Period was not reflective of market value as at the Valuation Date.
182Two symptoms of the error into which the RBC valuation falls are the use to which it puts P/NAV comparables and the use to which it puts subsequent information (or hindsight).
183It may be accepted that the use of comparables is an orthodox methodology in determining market value. This entails identifying a comparable transaction or thing with an established market value and using that value to draw a conclusion as to the value of the transaction or thing being valued, making allowance (where appropriate) for dissimilarities so as to bring the two transactions or things as closely as possible in to line.
184Fraiberg explains that even though there were differences between Oil Search and Woodside, the market viewed them as comparables and their respective average P/NAVs tracked very closely from 1 January 2013 to October 2013. A gap emerged around October 2013 and after the 27 February Announcement the gap began to converge.
185The divergence and reconvergence is explained by reference to events peculiar to Oil Search and known to the market, the effect of which is then sought to be eliminated. Instead of taking the respective differences in performance between Oil Search (attributable to identified events) and Woodside as revealing differences in market value of their shares, the RBC valuation assumes that there is a fixed relationship between the market value of both and proceeds to eliminate the effect of the difference to bring them in to line, concluding that the result discloses the true market value of Oil Search shares. In my view, the starting premise that the market value of Oil Search shares can be derived by a comparison with the trading price of shares in peer companies is manifestly unsustainable, as is the elimination of the difference where that difference is attributable to the sentiment of an informed market.
186The comparative analysis of the performance of Oil Search and its peers carried out by RBC, rather than displacing the efficacy of market prices as the primary measure of market value, confirms that the divergence was market driven. I consider the conclusion that the underperformance gap or part of it represents the difference between market price and market value to be fallacious.
187In determining, including for the purposes of assessing damages, the value of a thing at a particular point in time, subsequent events may be looked at insofar as they illuminate the value of it as at that time. Where facts are available, they are to be preferred to prophecies: Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at 291; National Provincial Bank Ltd v Bradberry [1943] 1 Ch 35 at 42; Willis v The Commonwealth (1946) 73 CLR 105 at 116. What may be examined are later events which may throw light on the real value of the thing at the relevant earlier date: Gould v Vaggelas (1985) 157 CLR 215 at 220. Such events do not include supervening events which have affected the value of the thing but which do not arise from the nature or use of the thing itself. In the context of valuing a business acquired as a consequence of fraudulent inducement or misrepresentation, supervening events such as ineptitude and unexpected competition are not admissible to prove the value of the business as at the valuation date: Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at 291.
188There would have been nothing exceptional had the RBC valuation relied on subsequent facts which could and should have been, but were not, known to the market as at the Valuation Date. Such facts may have displaced the presumption that the actual prices at which Oil Search shares were changing hands were not an accurate reflection of their true market value. But that is not this case. The market factored into its prices the matters of concern identified by RBC. The allaying of these concerns by subsequent events are not facts which, if accepted, could rationally affect (directly or indirectly) the assessment of the market value of an Oil Search share on 17 February 2014 other than to confirm that the traded price on that day was indeed market value.
189On RBC's approach if, after 17 February 2014, the investor concerns identified by it had been exacerbated rather than allayed leading to the price being depressed, or if Oil Search's announcements had been more positive than they in fact were leading to the price rising, the performance gap noticed by RBC would be different, and accordingly the market value on 17 February 2014 would likewise be different. As at 17 February 2014 neither scenario was a certainty. The RBC approach makes no allowance for an alternative version of future history at that point. Logically and rationally in an informed market the price on 17 February 2014 cannot depend on future history at that point.
190Ironically, the RBC valuation establishes that the amount which it assesses as the value of an Oil Search share on the Valuation Date was not its market value.
191Royle was an impressive witness and clearly knowledgeable in her field. But, as is the case with the RBC valuation, her evidence was not directed to the market value of an Oil Search share as required by Condition 7.5. In my opinion, her analysis, like the RBC valuation, is directed to assessing not market value but some other value and her analysis incorrectly equates the two.
192Nothing turns on Royle's evidence that she would have undertaken a different method of calculation.
193Royle points out that there is a large industry of analysts who focus exclusively on the detection of under and over valuations of stocks in order to identify investment opportunities and that this industry would be entirely superfluous if the equity market valuation was always representative of the market value of the stock. This approach discloses the same elision of market value and some other value, as does the RBC valuation. The problem is further revealed by her statement that it is common practice for investors and analysts to compare P/NAV ratios to identify divergence as one way of determining if a particular stock is overpriced or underpriced relative to its asset value. She says if the P/NAVs are tracking one another well this generally indicates that the price of the shares is being affected by market wide factors. If they diverge, she takes the view that one can conclude that one of the stocks is being affected by a specific factor that is not affecting the wider market. This, she says, is in effect what RBC did.
194As Royle points out, the market marked down the price of Oil Search shares because as a result of the Liquidity Announcement and the Potential Acquisition Announcement buyers typically held off allowing the stock to sag because they wanted to create a lower base from which the announced equity raising would be priced, at a discount to the prevailing stock price, and also an overhang was perceived with respect to the possibility that IPIC could gradually sell down, depressing the price over a period.
195This approach overlooks the fact that the marked down price of the stock affected by a specific factor known to the market is the market price. What her technique uncovers is the potential for a bargain based on the divergence between market value, represented by market price, and intrinsic value, which is expected to have upward pressure on the market price in due course. The underperformance gap is a measure of the potential bargain to be had (or not had if things had turned out differently) in due course.
196In my view the methodology adopted in the RBC valuation does not yield a determination of market value and therefore does not produce an Alternative Value within the meaning of Condition 7.5.
197It has not been necessary to rely on any of the expert evidence of Samuel and Ross in reaching this conclusion. However, as is apparent, my conclusion accords with the opinion of Samuel whose view I prefer to that of Ross. There is one particular respect in which I prefer the opinion of Samuel to that of Ross, which deserves mention. Samuel opines that RBC's methodology is not a recognised methodology for determining market value. Although he had never seen it before, Ross opined that the methodology adopted in the RBC report is appropriate and is consistent with basic principles of valuation with respect to determining market value. He made reference to RBC's use of comparables as reflecting orthodox methodology. I have dealt with RBC's use of comparables above. I have concluded that the RBC valuation is not directed to market value. It follows that I do not accept Ross' opinion that the methodology adopted by RBC is recognised or reasonable as one directed towards ascertaining that value.