The Methodology of Valuation
62 The first criticism that the Appellants advanced of his Honour's determination of fair market value was that his Honour failed to accept Mr Lonergan's methodology. Both the experts indicated that, normally, the appropriate method of valuation of a company in the situation of Rentals was the capitalization of future maintainable earnings. However, the Appellant submitted Mr Lonergan was correct to conclude that, in the absence of any likely dividend stream, the appropriate method in this case was to value Rentals on a net assets basis. It was submitted that his Honour erred in determining that there was some other methodology of valuation called the "realistic basis" or the "realistic value rule".
63 This terminology was derived by his Honour from cases in which the valuation of property had been carried out for family law purposes: In the Marriage of K D and P A Reynolds (1984) 10 FamLR 388; In the Marriage of Dah and J E Hull (1983) 9 FamLR 241 and Sapir v Sapir (No 2) (1989) 13 FamLR 362. In Reynolds the Full Court of the Family Court of Australia doubted whether valuation methods appropriate for commercial purposes were also appropriate for the purposes of family law. In Hull the issue arose in a context in which shares in a family company had to be valued where restrictions in the Articles could result in the shares of the family member not having any effective control over the company. A commercial approach would lead to a nil valuation. It was in such a context that Nygh J said in Hull supra at 246 that the Court had to approach valuation "on a realistic basis". It is sometimes unrealistic to assume that formal restrictions should be regarded as binding in situations where parties have a broader relationship.
64 However, it could not be said that this "realistic basis" constituted an alternative form of valuation methodology. If, by adopting this terminology Young CJ at Eq intended to suggest that it did, then in my opinion his Honour erred.
65 A close reading of his Honour's reasons does not suggest that his Honour was putting forward an alternative methodology. Indeed his Honour said:
"[213] Normally, the result of applying the realistic value rule is that one applies the net assets backing rule with an allowance for the notional cost of a winding-up rather than the hypothetical purchaser rule. However, that will not always be the case."
66 It was at this point that his Honour went on to compute, on a theoretical basis, the possible value that could accrue to a liquidator who was selling the goodwill associated with the Thrifty business. His Honour noted that he had no reliable information on which to assess the value of the rights associated with that business particularly the right to access to airports and the value of the Thrifty licence. Nevertheless, after such a process his Honour identified a figure which could constitute Mr Bruning's indirect interest so computed.
67 The Appellant submitted that any such computation was inappropriate because if there were a liquidation then, pursuant to the terms of the Licence Agreement between Thrifty US and Kingmill, all such rights would be surrendered to Thrifty US. Nevertheless what his Honour was undertaking at this stage of his reasons was an entirely theoretical computation, setting aside the strict provisions of the legal arrangements in the same manner as the particular restrictions in the Memorandum and Articles of the companies involved in the family law cases had been set aside. Where, as here, the party with legal rights can be seen to be unlikely to enforce them, a liquidation being against its apparent interests, it is appropriate to set such rights aside in a valuation based on a hypothetical scenario.
68 In this regard, it appears to me that his Honour in fact applied a net assets value methodology with respect to the calculation of one of the "signposts" his Honour adopted. This, of course, was the methodology that Mr Lonergan adopted, with the difference that Young CJ in Eq thought it appropriate to take into account the value of goodwill of the business on a hypothetical liquidation, setting aside the fact that an actual liquidation could trigger certain rights in Thrifty US. His Honour's reference to a "realistic basis" was no more than the adoption of an approach, for the limited purpose that his Honour adopted it, i.e. as one of a number of "signposts", on analogous grounds to that found in the family law cases to which he referred.
69 It is easy to see why in a close relationship, such as that involved in a co-operative business venture and even more so in a family context, it may be appropriate, when determining what a "fair value" is between two co-venturers, to set aside as immaterial the restrictions that arise from particular provisions of the Memorandum and Articles of Association or, specific rights of third parties such as financiers or licensees of intellectual property that may arise on an actual liquidation. Where a "fair market value" is the test, it may be more unusual to do so. However, a net assets value approach to valuation is appropriate for an actual liquidation. When that methodology is adopted for purposes of a hypothetical liquidation, it may be appropriate to set aside as immaterial the legal consequences of an actual liquidation.
70 If the valuation exercise required the determination of the value of the business as a whole, then inherent in the market value would be the price which rival car manufacturers would be prepared to pay to acquire the full range of commercial advantages, including those which can accrue only to a car manufacturer. However, cl 11.2.3 is concerned with the valuation of the Sale Shares which extends only to Mr Bruning's minority shareholding. The property to be valued is a 18.5 percent Holding in Rentals.
71 The minority interest which must be valued in the present case was held by a person with direct involvement in a majority controlled business requiring mutual co-operation and a level of trust. (I avoid the often misleading terminology of quasi partnership.) The sale is triggered, and triggered only, by the termination of that involvement. The majority shareholder has an interest in ensuring that the minority holding is not acquired by someone who has no relationship with the majority holder of mutual co-operation or trust. The ability of the majority holder to get the full advantage from its controlling interest can be considerably attenuated by activities sometimes derogatively referred to as greenmail. In order to avoid the nuisance of such an investor, the majority holder will be prepared to pay more for the minority than another person.
72 The Appellants submitted that the formulation "fair market value" does not permit consideration of any special value to Mitsubishi. They submitted that in any market sale, the nature of the property had to be the focus of attention. This was a minority parcel of shares in a holding company with restrictive articles. Furthermore, the major asset, being a partly owned subsidiary, had substantial accumulated losses and substantial debt owed to the controlling shareholder so that, even if the business were to become profitable, dividends were a very remote prospect. All of that can be accepted without detracting from the proposition that a majority shareholder who has no intention of winding up the business and, therefore, for whom it has real commercial value, will be willing to pay more than net asset value to ensure 100 percent ownership.
73 In such a situation, valuation is not done on the basis of an estimate of what a third party would pay and then allowing the majority holder one more bid. This is because a vendor in a market, including a "fair market", would know that the majority holder was prepared to pay more and is well placed to bargain for a higher price by refusing to sell. The minority holder would not part with the property unless the majority holder offered a price that was substantially closer to the price the latter would be willing to go up to. The "one more bid" approach does not describe a situation of a "willing but not anxious vendor" in the exchange bargain test. (See Inland Revenue Commission v Clay [1914] 1 KB 339 esp at 349; Inland Revenue Commission v Clay [1914] 3 KB 466 at 472; Raja Vyricherla Narayana Gajapatiraju v Revenue Divisional Officer [1939] AC 302 at 314-317; Geita Sebea v Territory of Papua (1941) 67 CLR 544 at 557; Mordecai v Mordecai (1988) 12 NSWLR 58 at 69-70; Melcann Ltd v Super John Pty Ltd (1994) 13 ACLC 92 at [94]; Pauls Ltd v Dwyer [2002] QCA 545, (2002) 43 ACSR 413 at [30].)
74 As Cozens-Hardy MR said in Clay supra (1914) 3 KB at 472:
"To say that a small farm in the middle of a wealthy landowner's estate is to be valued without reference to the fact that he will probably be willing to pay a large price, but solely with reference to its ordinary agricultural value, seems to me absurd. If the landowner does not at the moment buy, landbrokers or speculators will give more than its price agricultural value with a view to reselling at a profit to the landowner."
75 This represents the operation of a market and does so even if called greenmail. This is not an exception to the exchange bargain test established by Spencer's case. It is an application of the test involving the determination of how a willing vendor of a minority interest would behave.
76 A similar approach was adopted in Mordecai v Mordecai supra. The issue was whether or not any value at all should be placed on the goodwill of the business in circumstances where the persons who conducted the business were not restrained by contract from departing with all the customers. The proposition that the goodwill was therefore valueless was dismissed by Hope JA, with whom Samuels and Priestley JJA agreed. His Honour said at 68: "This appears to me to be so unjust a result as to make it unlikely that it is a correct way to approach the question". Referring to the defaulting directors/trustees, his Honour concluded:
"It does not lie in their mouths to say that they did not want to acquire the business, for that is precisely what they did. If, as the appellants assert, the goodwill would have been unsaleable to anyone else, it was certainly saleable, at its proper value to them, and as the position stood when they took the business …, the business had the potentiality, valuable only to them when it was in their hands, to free them from the restraints which the law otherwise would impose on them.
It is well-established that if property has some special potentiality which only one person would buy, it is to be valued on the basis of a notional sale to that person. The property is not valueless or diminished in value because there would be no other buyers: Vyricheria Narayana Gajapatiraju Bahadur Garut (Sri Raja) v Revenue Divisional Officer, Vixagapatam [1939] AC 302 at 316, 317 and Geita Sebea v Territory of Papua (1941) 67 CLR 544 at 557. On this basis, the value of [the] goodwill is to be determined upon the basis of a hypothetical sale to the only person to whom, on the appellants' submissions, it could be sold, and to whom the matters which they submit would render the goodwill valueless in any other purchaser's hand would be irrelevant."
77 A similar approach was also adopted by McLelland CJ in Eq in Melcann Limited v Super John Pty Limited (1995) 13 ACLC 92. The Court was concerned with the fair value of shares in a context of an application for court approval for reduction of capital pursuant to ss191 and 195 of the Corporations Law. His Honour dismissed the application on the basis that the proposed reduction of capital would not be fair to minority shareholders because the valuation had not taken into account the value to the majority shareholder of the benefits it would receive from merging elements of the company's activities with its own activities. If the reduction of capital were to proceed, that shareholder would attain 100 percent ownership of the company. These special benefits to the majority shareholder should have been taken into account when computing the value of the minority shares.
78 In the present case a "fair market value" must take into account the "special potentiality" or "special value" to Mitsubishi of acquiring 100 percent of Rentals, thereby ensuring that it does not have to deal with a third party investor, with whom it has no relationship relating to the conduct of the business affairs of its partly owned subsidiary Kingmill. This element is not taken into account if Kingmill is valued only on net asset value basis or on a future maintainable earnings basis.
79 Although Young CJ in Eq did not approach the matter in precisely the same manner as I have done, his conclusion was expressed in analogous terms. Substituting the figure which his Honour ultimately determined to be appropriate, he concluded:
"[218] This $675,000 is the figure that an arm's length MMAL would pay for Mr Bruning's shares rather than lose them or be forced to wind up Kingmill and suffer the possibility of losing the Thrifty business.
[219] Thus, if an order for specific performance were to be made, it would be for $675,000 plus interest.
[220] I am conscious that the figure of $675,000 is rather artificial in that there is no clear set of factors which establish it. It may well be that MMAL would prefer to have the company wound up rather than pay that sum, though the Quinn 1996 offer tends in the other direction."
80 There was no suggestion on the appeal that Mitsubishi was prepared to contemplate an actual winding up of Rentals and Kingmill. His Honour's test of what Mitsubishi would pay for the Sale Shares "rather than lose them or be forced to wind up business" is sufficiently close to the approach I have set out above for this Court to accept his Honour's judgment of what the value should be.