Plaintiff v First Defendant

2 Wingara is a substantial wine producer. It owns large vineyards, wineries and associated infrastructure in the Coonawarra and Murray Valley wine growing regions and has other assets.

3 Candoora and Freixenet accept that their relationship as shareholders in Wingara is governed by a draft shareholders deed prepared in 2007 ("the shareholders deed"). The shareholders deed annexes a draft put option deed, which is also accepted as binding Candoora and Freixenet ("the put option deed").

4 Candoora has exercised its option under the put option deed, thus requiring Freixenet to purchase its 25% shareholding in Wingara. In its put option notice, Candoora specified a put option price of $10m. This was rejected by Freixenet. Pursuant to the terms of the put option deed, Candoora and Freixenet endeavoured to agree upon a put option price. No agreement was reached. In these circumstances, the put option deed provided for the appointment of a valuer to determine the put option price and for such determination to be final and binding upon Candoora and Freixenet.

5 Candoora and Freixenet appointed Ernst & Young Transaction Advisory Services Limited to act as the valuer ("the valuer").

6 The valuer was requested to carry out the valuation in accordance with the terms of the put option deed. The relevant terms of the put option deed require the valuer to determine the "fair value" of Candoora's shares in Wingara and contain certain specific directions to the valuer as to the basis of the valuation. In summary the valuer was required, in reaching a determination of fair value, to value Wingara as an undivided whole on a going concern basis and without giving any regard to whether Candoora's shares constitute a controlling interest or a minority interest.

7 Candoora and Freixenet each engaged their own expert valuers to make submissions to the valuer. Although the submissions and reports prepared by these experts contain the language of belief and opinion, each expert was clearly acting as an advocate for its client's position. Freixenet's expert submitted that the valuer should value Candoora's shareholding by the method of capitalising the future maintainable earnings of Wingara. Candoora's expert submitted that the valuer should use the method of valuing the net assets of Wingara. The valuer adopted a discounted cash flow methodology.

8 The expert engaged on behalf of Freixenet stated "we believe the value of the shares in question to be $nil". The expert retained by Candoora concluded that "the value of all the shares of Wingara is $38.6m and the value of Candoora's 25% shareholding is $9.65m." The valuer concluded that the value of Candoora's shareholding in Wingara was $962,500.

9 Candoora claims a declaration that the valuation report and valuation certificate are invalid because they are not in accordance with the put option deed, and seeks an order that the report and certificate be set aside. Freixenet denies that the valuation was not in accordance with the put option deed. Freixenet seeks an order that Candoora sell its shares in Wingara to it for the amount determined by the valuer.

10 As I have said, the put option deed is a schedule to the shareholders deed. There is no dispute that, in interpreting the terms of the put option deed, the Court is entitled to have regard to the terms of the shareholders deed as a relevant surrounding circumstance.

11 It was submitted on behalf of Freixenet that the shareholders deed was of limited significance because clause 9.1 of the shareholders deed provides that the put option deed is to prevail over the shareholders deed in the case of any inconsistency.

12 It was submitted on behalf of Candoora that the shareholders deed has significance because the shareholders deed, together with the constitution of Wingara, constitutes the agreement between Candoora and Freixenet as "the corporators" of Wingara and that case law demonstrates that, in assessing the fair value of a company and its shares, the existence of an agreement between the corporators may be a relevant factor to be taken into account. Further, it was submitted on behalf of Candoora that the provisions upon which it relies in this regard are not inconsistent with the provisions of the put option deed.

13 Clauses 10 and 11 of the shareholders deed contain rights of pre-emption. The two shareholders are prohibited from assigning (including by mortgage, charge or other encumbrance) their shares except in accordance with the shareholders deed or the put option deed. In certain specified events (including a change in the control of the shareholder) an option to acquire the other shareholder's shares arises. For the purposes of that option, the sale price is, in the absence of agreement, to be the "fair value" of the shares. That value is to be determined in accordance with the same formula as is specified in the put option deed.

14 Clause 14 of the shareholders deed provides for a "drag along option". Under this provision, Freixenet has the right to sell all of its shares on an arms-length basis to a third party and, if it does so, Freixenet has the option of requiring Candoora to transfer all of its shares in Wingara to the third party for the equivalent consideration per share that Freixenet receives for its shares. It is accepted that, in exercising its rights under the drag along option, Freixenet is required to act bona fide and only sell its shares in Wingara for full value. It was accepted that if Freixenet was to act in any other manner, it would either be acting oppressively or in breach of an obligation to ensure that it does not receive any material additional benefit not offered to Candoora.

15 Further, clause 14 gives Freixenet the power to compel Candoora to co-operate in a sale of all or substantially all of Wingara's assets, and to then participate in a distribution of the net sale proceeds to shareholders in accordance with their respective shareholding entitlements.

16 By clause 2.1 of the put option deed, Freixenet irrevocably granted to Candoora a non-transferable option to sell its shares in Wingara to Freixenet for the "put option price".

17 By clause 2.2 of the put option deed, the put option granted by clause 2.1 is suspended and Candoora is not entitled to exercise it during the period of operation of a transfer notice served by Freixenet under clause 10.2 of the shareholders deed or a drag along notice served by Freixenet under clause 14 of the shareholders deed.

18 The put option price is to be determined under schedule 1 to the put option deed. That schedule provides for three stages in which the put option price may be determined. Stage 1 is the specification of a price in a put option notice served by Candoora. Stage 2 is an opportunity for Candoora and Freixenet to agree on the put option price if the nominated price is rejected. Stage 3 is a valuation process. It is that process which was undertaken in this case.

19 Clause 3 of schedule 1 to the put option deed provides as follows:

(a) If Candoora and Freixenet fail to agree the Put Option Price by the Agreed Date then:

(i) they shall agree who shall be appointed the Valuer and failing agreement within 7 days of the Agreed Date, Wingara must immediately request the President for the time being of the Institute of Chartered Accountants (Victorian Branch) to appoint the Valuer; and

(ii) the Put Option Price shall be that which the Valuer certifies in writing to be in the Valuer's opinion the fair value of each Put Option Share the subject of the Exercise Notice, based on the fair value of Wingara as a going concern.

(b) The qualifications of the Valuer must be a person who:

(i) is independent of Wingara, Candoora and Freixenet; and

(ii) has not less than ten years experience in business valuations.

(c) The Valuer must value Wingara as an undivided whole and then calculate the value of each Put Option Share the subject of the Exercise Notice as that proportion of the value of Wingara which the number of those Put Option Shares bears to the total number of issued Wingara Shares, and must not have regard to whether those Put Option Shares to be valued constitute a controlling interest or a minority interest.

(d) The Valuer must determine a single value and not a range of values and must carry out the valuation with proper care and professional responsibility.

(e) The Valuer, in certifying the value of each Put Option Share the subject of the Exercise Notice, shall act as an expert and not as an arbitrator and no arbitration legislation applies.

(f) The Valuer's certificate of the value of each Put Option Share the subject of the Exercise Notice shall be obtained within four Months of the Start Date and shall be provided by Wingara to both Candoora and Freixenet.

(g) The Valuer's determination shall be final and finding on Candoora and Freixenet.

(h) The fees of the Valuer shall be paid to Wingara in equal shares and proportions by Candoora and Freixenet and in default of payment shall be a debt due to Wingara.

20 The issue for determination in this proceeding is whether the valuation is in accordance with clause 3.

21 Clause 3 requires the valuer to do more than simply value Candoora's shares in Wingara. In order for a valuation to be in accordance with clause 3 of the put option deed, the valuer was required to undertake the task assigned by clause 3. That task involved reaching and certifying an opinion as to the fair value of Candoora's shares in Wingara, based on a fair valuation of Wingara as a going concern, as an undivided whole and without having regard to whether Candoora's shares constitute a majority or minority interest in Wingara.

22 The valuation certificate is dated 2 May 2008. In that certificate, the valuer relevantly stated:

Pursuant to the Schedule 1 of a Put Option Deed between Freixenet, Candoora (together referred to as the "Shareholders") and Wingara, the Shareholders have sought an independent valuation of Wingara as at 31 December 2007. The valuation was required as part of a decision by Candoora to exercise the put option over its interest in Wingara. The valuation was carried out under the terms of "Stage 3 - Put Option Price by Valuer" which is considered in Schedule 1 of the abovementioned Put Option Deed. The abovementioned Put Option Deed also requested a "Valuation Certificate".

We hereby certify that the value of a 25% interest in the issued shares of Wingara as at 31 December 2007, without regard to an adjustment for a controlling interest or a minority interest, is between $750,000 and $1,175,000 and, recognising the requirements in Schedule 1 of the Put Option Deed for The Valuer to provide a single value, we recommend the adoption of the mid-point of the value range, which is consistent with generally accepted valuation practice, of $962,500.

This "Valuation Certificate" should be read in conjunction with our letter dated 2 May 2008 and our detailed report dated May 2008, both of which are attached.[1]

23 In their accompanying letter dated 2 May 2008, the valuer relevantly stated:

The proposal was to value all of the issued shares in the Company as at 31 December 2007, and then a 25% interest in these shares without regard to an adjustment for a controlling interest or a minority interest.

► the value of 100% of the issued shares of Wingara as at 31 December 2007 is between $3.0 million and $4.7 million;

► the value of a 25% interest in the issued shares of Wingara as at 31 December 2007, without regard to an adjustment for a controlling interest or a minority interest, is between $750,000 and $1,175,000; and

► recognising the requirements in Schedule 1 of the Put Option Deed for The Valuer to provide a single value, we recommend the adoption of the mid-point of the value range, which is consistent with generally accepted valuation practice, of $962,500.

This letter should be read in conjunction with our detailed report dated 2 May 2008, which is attached.[2]

24 In their detailed valuation report dated 2 May 2008, the valuers set out their reasons for reaching the opinion expressed in the valuation certificate.

25 In section 5 of the valuation report, the valuer describes the method adopted to reach the value of Candoora's shares in Wingara set out in the valuation certificate. In the course of doing so, the valuer makes no reference at all to the fact that the contractual task assigned to it is to express an opinion as to the "fair value" of Candoora's shares in Wingara. Instead, the valuer refers to the task of determining "the fair market value" of Candoora's shares in Wingara. The reference to "market" is unexplained.

26 In determining which method of valuation to utilise, the valuer made reference to the principal valuation methodologies adopted in valuing a business or the shares in a company. The valuer noted that the choice of valuation methodology depends upon the circumstances of each case and the availability of appropriate information. The valuer concluded that the most appropriate valuation methodology to adopt was the discounted cash flow methodology. The reasons for this were expressed in the following terms:

When considering an appropriate valuation methodology to value the issued shares in Wingara, Ernst & Young Transaction Advisory Services has had regard to:

► The methodologies available for market valuations (refer to Appendix 2); and

► The information made available for the purpose of the valuation.

Recognising the requirements of the Put Option Deed to value Wingara on a going concern basis and based on the foregoing, we consider the most appropriate methodology to value Wingara is the discounted cash flow methodology.

27 In appendix 1 to the valuation report, the valuer described the discounted cash flow methodology in the following terms:

The discounted cash flow methodology ("DCF") is based on the net present value ("NPV") of cash flows that are expected to be derived from future activities. The forecast cash flows are discounted by a discount rate that reflects the time value of money and the risk inherent in the cash flows. This methodology is appropriate in valuing businesses that are in a start up phase and are expecting considerable volatility and/or growth in earnings during the growth phase, as well as businesses with a finite life (such as mines).

28 In determining to adopt a discounted cash flow method of valuation, the valuer necessarily rejected other principal methods of valuation. In particular, the valuer necessarily rejected the net realisable value of assets valuation method. This method was described in appendix 1 to the valuation report in the following terms:

This methodology involves the determination of the net realisable value of the assets of a business or company, assuming an orderly realisation of those assets. This value includes a discount to allow for the time value of money and for reasonable costs of undertaking the realisation. It is not a valuation on the basis of a forced sale, where assets may be sold at values materially different to their fair market value.

This methodology is appropriate where a business or company is not making an adequate return on its assets or where there are surplus non-operating assets.

29 However, in determining the projected cash flows of Wingara, the valuer gave some consideration to Wingara's assets and their value.

30 First, the valuer noted that the values ascribed to the property, plant and equipment in the accounts of Wingara were stated at the lower of cost (less any applicable accumulated depreciation or amortisation) and their net realisable value. In particular, the valuer noted that the three principal assets of Wingara (Katnook Estate, Deakin Estate and the Sunnycliff vineyard and orchards) had been the subject of recent valuations and that none of these valuations had been reflected in the carrying value of the property, plant and equipment in the Wingara accounts. In this regard, the evidence before me established that the Katnook Estate vineyard and winery was valued at $3.8m, the Deakin Estate vineyard and winery was valued at $12.35m and the Sunnycliff vineyard and orchards were valued at $9m, a total of $25.15m.

31 Second, the valuer considered that the Sunnycliff assets could be sold and the grapes could continue to be sourced by Wingara leasing back the vineyard. Accordingly, the valuer assumed a notional sale of the Sunnycliff assets for the full value of $9m, added that value to the valuation reached by the discounted cash flow method and deducted net debt to reach a valuation of Wingara as an undivided whole on a going concern basis. In calculating Wingara's projected cash flows, the valuer assumed notional rental payments under a lease-back arrangement from the purchase of the Sunnycliff assets. However, in determining Wingara's value, the valuer made no adjustment for the values of the Katnook Estate or Deakin Estate assets, as they were considered to be "core to the ongoing business activities at Wingara".

32 Third, the valuer identified a surplus asset (a block of land in Coonawarra known as "Shepherds Hut" which does not generate any income to Wingara) and assumed that this asset would be sold. The full value of this asset ($420,000) was included in the value arrived at.

33 According to the most recent audited and management accounts of Wingara, as at 30 June and 31 December 2007 respectively, the net realisable assets of Wingara were approximately $28m. If the amount of the recent valuations of the Katnook Estate, Deakin Estate and Sunnycliff assets, and the full value of Shepherds Hut, are included in Wingara's accounts, the net realisable value of its assets would exceed $38m. This was known to the valuer.

34 Although the valuation report refers expressly to clause 3 of schedule 1 to the put option deed, and thus acknowledges the requirements of that clause, there is no occasion within the valuation report where the valuer pauses to consider whether the chosen valuation methodology is likely to lead to a fair value, or whether the valuation reached as a result of applying that methodology constitutes the fair value of Candoora's shares in Wingara in all the circumstances.

35 Freixenet sought to rely upon an expert report prepared by Owain Stone, a partner of KordaMentha. In his report, Mr Stone gave his opinion in respect of a question put to him by the solicitors for Freixenet, as follows:

1. I have been asked to answer the following question:

● Does the expression "the fair value of a company as a going concern"

have a special or technical meaning in accounting practice, and if

1. In my opinion, because the elements of the expression "the fair value of a company as a going concern" have a special or technical meaning in accounting practice, the expression as a whole also has a special or technical meaning in accounting practice.
2. In an accounting sense, Fair Value means "the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction."
3. There is essentially no difference between the terms Fair Value, Fair Market Value and Market Value in an accounting sense.
4. Fair Value of a company therefore means the amount for which the entire share capital of a company could be exchanged between knowledgeable, willing parties in an arm's length transaction.
5. Fair Value of a company as a going concern is Fair Value derived on the assumption that the company will continue operating for the foreseeable future.[3]

36 Counsel for Candoora objected to the admission of Mr Stone's evidence on two grounds. First, that Mr Stone was not independent, because he was a partner of Ernst & Young at the time the valuation report was prepared and, accordingly, was vulnerable to a negligence claim by Candoora. Second, it was submitted that Mr Stone's evidence was not relevant, as the task of the Court is to construe the put option deed and not to determine the way in which, in practice, accountants understand the critical words in the put option deed.

37 Counsel for both parties agreed that I should receive Mr Stone's expert report subject to objection, and resolve the objection in the course of giving reasons for judgment in the proceeding.

38 Senior Counsel for Candoora stated that he did not wish to cross-examine Mr Stone in the event that his report was admitted into evidence.

39 I do not accept that Mr Stone's evidence is inadmissible because of a lack of independence. That objection goes only to the weight of the evidence.[4] In circumstances where no application was made to cross-examine Mr Stone in the event that his report was admitted into evidence, the weight to be attached to Mr Stone's evidence, if admitted, would be undiminished by reason of his possible interest in the outcome of the case.

40 For the reasons given below, I do not accept that Mr Stone's evidence is of any assistance in determining the outcome of this proceeding. This is because the put option deed, on its proper interpretation, requires the valuer to give the words "fair value" their ordinary meaning and not the more limited technical meaning as understood by accountants.

VI APPLICABLE LAW: SETTING ASIDE EXPERT DETERMINATIONS

41 A court will only set aside an otherwise binding determination by an expert appointed under a contract in circumstances of fraud, collusion or mistake. There is no issue of fraud or collusion in this case.

42 In the case of mistake, the Court will only intervene where the expert's determination is not made in accordance with the contract. In particular, subject to limited exceptions which are not relevant to this case,[5] a court will not intervene where the expert has made a mistake in the process of reaching his or her determination.

43 In Legal & General Life of Australia Ltd v A Hudson Pty Ltd the lease provided that the decision of the valuer was final and binding on the parties.[6] The lessee sought a declaration that the valuation prepared pursuant to the rent review clause in the lease did not validly determine the rental value of the demised premises. The lessee succeeded at first instance. The New South Wales Court of Appeal allowed the lessor's appeal.

44 McHugh JA found that the valuer had erred in principle in determining the rent of the demised premises.[7] However, that finding was not determinative of the proceeding. McHugh JA stated:

In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into consideration matters which he should not have taken into account or has failed to take into account matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.[8]

45 I accept this statement by McHugh JA as correct and I will apply it.

46 There are a number of cases where the courts have considered the proper approach to the determination of the "fair value" of shares in a company which conducts a business. The relevant principle arising from the cases is that the valuer must give separate consideration to the word "fair". This involves the valuer considering the circumstances of the particular case and, where those circumstances reveal one or more factors which may affect the fairness of a valuation arising from a particular valuation method, determining whether that method should be modified or abandoned in favour of another method (or combination of methods) which is more likely to result in a fair valuation. There are a broad range of factors which have been identified in the cases as informing the criterion of fairness in the circumstances of those cases. Of course, each case must depend on its own facts. However, the cases do provide guidance as to the kinds of factors which may inform fairness in any case. The fact that a particular factor is of relevance to the criterion of fairness in one case does not mean that it will be relevant in all cases. This is especially so where the terms of the applicable legislation or contract require certain matters to be disregarded in the valuation process.

47 The issue of fairness in valuing shares in a company has arisen in a variety of contexts. In some cases, the criterion of fairness is not expressed in the governing legislation, company constitution or contract but is implied in the circumstances of the case. The cases which have considered the role of fairness as a separate criterion include cases involving compulsory expropriation of shares, selective reductions of capital, pre-emptive rights arising in a number of different circumstances, compulsory sale or purchase arising from orders made in oppression cases and the power to compulsorily acquire units in a unit trust.

48 In Gambotto v W.C.P. Ltd the High Court considered the power to amend articles of association to confer a right of compulsory acquisition upon a shareholder holding 90% or more of the issued shares.[9] The High Court held that the power to amend articles of association is subject to limits. The power must be exercised for a proper purpose and must also be fair in the circumstances.[10] In this regard, Mason CJ, Brennan, Deane and Dawson JJ stated:

Fairness in this context has both procedural and substantive elements. The first element, that the process used to expropriate must be fair, requires ...

The second element, that the terms of the expropriation itself must be fair, is largely concerned with the price offered for the shares. Thus, an expropriation at less than market value is prima facie unfair, and it would be unusual for a court to be satisfied that a price substantially above market value was not a fair value. That said, it is important to emphasize that a shareholder's interest cannot be valued solely by the current market value of the shares. Whether the price offered is fair depends on a variety of factors, including assets, market value, dividends, and the nature of the corporation and its likely future.[11]

49 On the subject of fairness, McHugh J stated, with reference to an American case, that:

A price sufficiently high to prevent an expropriation being characterized as oppressive will need to take into account numerous factors. In Weinberger, the Supreme Court of Delaware said that a fair price included 'all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock'. Consideration of these factors may lead to the conclusion that the market price or a higher price is not the fair price of the shares.[12]

50 In Holt v Cox the articles of association of a company provided that Mr Cox's shares must, upon termination of his employment with the company, be offered by him to the plaintiffs, who held all of the remaining shares, at a "fair price" determined by the auditor of the company.[13] The articles provided that the auditor's determination would be final and binding. Mr Cox sought to set aside the auditor's determination on the ground that it did not comply with the terms of the articles. Santow J held that the auditor's determination was not made in accordance with the articles. This was principally because the auditor disregarded the right of Mr Cox on a winding up of the company to receive 20% of any distribution of capital. In the circumstances of the case, it was unfair to disregard the prospect of a sale of the company's business and its winding up.[14]

51 In the course of his judgment, Santow J set out a number of relevant principles concerning the meaning which should be given to the word "fair" when it is an express contractual criterion, as it is here.

52 First, Santow J drew a distinction between market value and fair market value, thus emphasising the significance of the word "fair" when used in conjunction with words such as price, value or market value.[15] Santow J explained why this was so in the following passage from his judgment:

...[I]t would be a mistake automatically to equate "market value", as distinct from fair market value, with the "real value" which this test is designed to ascertain. As Adamson points out, in more than one of his High Court judgments, Williams J has criticised the tendency of witnesses to over-emphasise market value and thus to assume that what a willing purchaser of shares, with a choice of alternative investments, would have paid, was necessarily synonymous with what a willing vendor could reasonably expect to obtain...

Thus while preference shares with limited dividend and no voting rights may be unattractive to outsiders, or indeed not available for purchase at all, ordinary shareholders would have a strong interest in acquiring them to exclude strangers from an ultimate substantial share in the company's assets; see Dixon CJ in Jekyll v Commissioner of Stamp Duties (Qld).

Indeed that same approach has been correctly taken in the Family Law context, in valuing a spouse's assets in a family company. There is no real external purchaser that can be hypothesised without resorting to fiction, but only the shareholders themselves. So that it is the value to them that is relevant, rather than some external, objective, market value; there is otherwise no market. [16]

53 Second, Santow J stated that, when the criterion of fairness appears in connection with price or value, the price or value arrived at must be "fair, just and equitable in the circumstances".[17]

54 Third, at least where the valuation is required in circumstances of compulsory acquisition or expropriation, the requirement of fairness means that a "liberal" estimate of value should be given.[18] It was submitted on behalf of Candoora that the requirement to reach a "liberal estimate" arises wherever fair price or value is stipulated, and that the requirement is not limited to expropriation cases. It is unnecessary to determine this in the context of this case. However, I favour the view that the additional requirement of liberality is one which applies only in cases involving an element of expropriation.

55 The New South Wales Court of Appeal upheld the decision of Santow J.[19] Mason P, (Priestley JA agreeing) held that the auditor was wrong to have "ignored entirely" the possibility that the business of the company might be sold and the company wound up, thus giving Mr Cox an entitlement to 20% of its surplus assets.[20] The failure of the auditor to give any consideration to this possibility, which was a real possibility on the facts of the case, meant that the auditor had failed to have regard to "the historical context of the particular corporators of [the] particular company".[21] Accordingly, the auditor's valuation was not in accordance with the requirement in the articles to determine a fair price.

56 In ES Gordon Pty Ltd v Idameneo (No 123) Pty Ltd,[22] Young J considered the fair value of units which were to be compulsorily acquired under a unit trust deed. A referee had determined the fair value and an application was made for the Court to adopt, vary or reject the report. Young J rejected a statement in an earlier case to the effect that there was no difference between fair market value and value simpliciter.[23] Young J considered that such an approach "gives little semantic significance to the word 'fair'", and was inconsistent with the approach of the courts to the concept of "fair price" in oppression and reduction of capital cases.[24] Young J stated that considerable assistance was to be gained from the oppression and reduction of capital cases, where the courts take into account a wide variety of factors in determining whether a price or value is fair.[25]

57 Young J referred with approval to a New Zealand case, in the following terms:

In Re An Arbitration, Fletcher Humphreys & Co Ltd and Middleton, an auditor had to fix the fair value of shares the subject of pre-emption rights ... Northcroft J rejected the idea that a fair value was '... what a man desiring to buy the shares would have had to pay for them ... to a vendor willing to sell at a fair price but not desiring to sell' (these words come from the judgment in Tremaine v Commissioner of Stamp Duties. His Honour said that for the private company (a) a valuer would first consider the resources of the company, its assets reserves and goodwill; (b) the valuer would consider the past earnings of the company and make an estimate of its future earnings; (c) the valuer would give consideration to the power of the governing director to restrict dividends etc but assume that this power would be used fairly; (d) the valuer would consider the effect of restrictions upon transfer and the power of the governing director to compel even an unwilling shareholder to sell; (e) the valuer must see that an enforced transfer does not result in an unfair price being paid. To get the fair value one must have regard to the constitution of the company and all the circumstances of the case.[26]

58 Young J decided to adopt the referee's report. He did so because the referee gave express consideration to the criterion of fairness, in considering what was equitable in the circumstances of the case.[27]

59 In MMAL Rentals Pty Ltd v Bruning,[28] Mr Bruning, who had previously been the managing director of the operating company which conducted a car rental business, held 18.75% of the shares in the holding company. The remaining 81.25% of the shares were held by Mitsubishi Motors Australia Ltd. When Mr Bruning ceased to be the managing director of the operating company, Mitsubishi exercised a contractual option granted to it by Mr Bruning to purchase his minority shareholding for the "fair market value" of that shareholding, as agreed or as determined by an expert.

60 In the circumstances, the parties did not engage an expert to value Mr Bruning's shares. They submitted the task to the Court for determination. Mitsubishi appealed against the trail judge's determination of the fair market value of Mr Bruning's shares. The leading judgment was delivered by Spigelman CJ.

61 Spigelman CJ considered that the first task of the Court was to determine the proper construction of the words "fair market value" in the contract.[29] In this context, Spigelman CJ stated:

There are a number of contractual, statutory and accounting standards contexts in which the administration of justice must determine the "fair value" of property. The meaning of that formulation will vary with the context. In some contexts the formulation refers to what is just or equitable in all the circumstances. In such a case the scope of the relevant considerations which may be taken into account by the requisite decision-maker, whether an arbitrator or a judge, is wide.[30]

62 In considering the concept of "fair value" in contrast to "market value" or "fair market value", Spigelman CJ stated that the determination of "market value" or "fair market value" necessarily entails a more limited enquiry, involving a narrower range of relevant circumstances to be taken into account because, in a market valuation, "regard is not to be had to the particular history of the commercial or personal relationships between the prospective vendor and purchaser of the property to be valued".[31] In the view of Spigelman CJ, the intrusion of the word "market" into the contractual standard of fair value "points away from a process of determining what is just or equitable between the parties, towards an objective standard".[32]

63 In the particular circumstances of the case, Spigelman CJ considered that the trial judge was right to have regard to the "special value" to Mitsubishi of acquiring the benefits of 100% ownership of the holding company, so that it could deal with the company without having regard to the interests of a minority shareholder.[33]

64 In the course of his reasons, Spigelman CJ noted that the contract required the valuation of Mr Bruning's minority shareholding only. It did not require a valuation of the business as a whole. Nevertheless, Spigelman CJ made the following statement concerning a relevant factor to be considered in the circumstances of such a valuation:

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.[34]

65 This aspect of special value was not taken into account in that case, because the contract required only a valuation of the minority interest and not, as here, a valuation of Wingara as an undivided whole.

66 Spigelman CJ concluded his review of the meaning of "fair market value" with the following statement: "It is not possible to set out in abstract terms how a fair market value should be computed. It is necessary to focus on the particular issues which arise in order to determine what the formulation requires in a particular case".[35]

67 The Court of Appeal in this state gave some consideration to the meaning of "fair value" in the context of an expert determination of a minority shareholding in Toll (FHL) Pty Ltd v PrixCar Services Pty Ltd.[36] In that case Toll was required to divest itself of its minority shareholding in PrixCar because of undertakings given by it to the Australian Competition and Consumer Commission as part of a takeover of Patrick Corporation Limited by Toll's parent company. In order to divest itself of its minority shareholding, Toll activated the pre-emptive rights provisions contained in a shareholders agreement between it and the other shareholders in PrixCar. In the absence of agreement as to a transfer price, the shareholders agreement provided that the price payable to Toll would be the "fair value" of its minority shareholding as determined by an expert. Toll was dissatisfied with the expert determination of the fair value of its shareholding, and sought to challenge that determination on the ground that the determination was not made in accordance with the terms of the shareholders agreement. The sole issue for determination in the case was whether the dispute between Toll and the other shareholders was a "substantial dispute" within the meaning of the shareholders agreement. If it was, the agreement provided for that dispute to be determined by arbitration.

68 The valuer applied a discount to the value of Toll's shareholding, on the ground that it was a minority shareholding. It was submitted on behalf of Toll that:

the notion of 'fair value' of shares in a joint venture company or closely held corporation necessarily imports the special value of the shares in the hands of another shareholder and that discounting for a minority shareholding is not 'fair'. He relied in support of that proposition on the judgments of Santow J at first instance and of the New South Wales Court of Appeal in Holt v Cox, and the judgment of Spigelman CJ on appeal in MMAL Rentals Pty Ltd v Bruning.[37]

69 The Court of Appeal held that there was "force in that submission"[38] and that, in all the circumstances of the case, it was "at least arguable that Toll's 33 per cent holding may be of special strategic significance".[39] In these circumstances, the Court of Appeal held that:

If so, 'fair value' for the purposes of clause 5.1(j)(ii) of the agreement may not be the same thing as market value. Arguably, it should take account of the 'special potentiality' or 'special value' to the purchaser of acquiring Toll's strategically significant stake of 33 per cent, just as in Holt v Cox and MMAL. In that event, a valuation based simply on the capitalisation of future maintainable earnings or a valuation of net assets would be inadequate. It would be inappropriate to apply a minority discount.[40]

70 The meaning of "fair value" of shares in a company has also been considered in the context of the statutory definition of "fair value" contained in s 667C(1) of the Corporations Act 2001 (Cth). The Corporations Act permits the compulsory acquisition of minority interests in listed companies and unit trusts by a 90% interest holder. If the minority holders object to the terms of the proposed compulsory acquisition, the compulsory acquisition requires court approval. The Court is obliged to give that approval if the 90% shareholder establishes that the terms of the proposed compulsory acquisition give "a fair value for the securities".

71 Section 667C(1) contains a statutory direction as to how the Court is to determine "fair value for securities" in this context. Section 667C(1) provides:

To determine what is fair value for securities for the purposes of this Chapter:

(a) first, assess the value of the company as a whole; and

(b) then allocate that value among the classes of issued securities in the company (taking into account the relative financial risk, and voting and distribution rights, of the classes); and

(c) then allocate the value of each class pro rata among the securities in that class (without allowing a premium or applying a discount for particular securities in that class).

72 In Winpar Holdings Ltd v Austrim Nylex Ltd the Court of Appeal in this state held,[41] following the decision of Warren J (as she then was) in Capricorn Diamonds Investments Pty Ltd v Catto & Ors,[42] that, in interpreting s 667C, the value of "special benefits" to the acquiring majority shareholder are not to be taken into account, and no allowance is to be made to the minority shareholders in the form of a "premium for forcible taking".[43]

73 In my view, the principles expounded in Capricorn Diamonds and Winpar Holdings have no relevance to the issues arising for determination in this case. This case does not concern the particular statutory context addressed in those cases. It concerns the proper interpretation of a shareholders agreement between shareholders of a closely held private company.

VIII DOES THE VALUATION ACCORD WITH THE PUT OPTION DEED?

74 It is necessary to construe the relevant provisions of the put option deed in accordance with general principles of contractual interpretation. This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the deed, the surrounding circumstances known to the parties and the purpose or object of the transaction.[44] In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the deed a commercially sensible construction.[45] The Court should have regard to all of the words used in the deed "so as to render them all harmonious with one another"[46] and to ensure the "congruent operation of the various components as a whole."[47]

75 In this case, the relevant surrounding circumstances include the shareholders deed. The provisions of that deed are material to the interpretation, and consequent application by a valuer, of the valuation requirements contained in clause 3 of schedule 1 to the put option deed. The pre-emptive rights provisions of the shareholders deed provide for compulsory acquisition of the shares of a defaulting or insolvent shareholder, or where there is a change in control of a shareholder, at the option of the other shareholder. Where this option is exercised, the price payable is an agreed price or the "fair value" determined in the same manner as provided for in clause 3 of schedule 1 to the put option deed.

76 Further, the drag along provisions of the shareholders deed give a shareholder with a 60% majority the right to sell all of its shares, or to cause Wingara to sell all or substantially all of its assets, to a third party on an arms-length basis.[48] If it exercises its right to sell all of its shares, the majority shareholder can force the minority shareholder to sell its shares to the third party, provided that the minority shareholder receives the same price that the majority shareholder receives and the majority shareholder receives no additional benefits in respect of its shareholding which are not also provided to the minority shareholder. In the event that there is a sale of all or substantially all of the assets of Wingara under the drag along provisions, the shareholders are, if any of them so requires, obliged to co-operate to wind-up Wingara and to distribute the net sale proceeds in accordance with their respective shareholding entitlements.

77 An arms-length sale to a third party under the drag along provisions may well include a premium above ordinary market value. For example, to take account of special value to the purchaser arising from circumstances such as the ownership of vineyard or winery assets near those of Wingara, or the position of the purchaser as a substantial competitor of Wingara in the wine industry. In each case, the potential for synergistic benefits to the purchaser are obvious. If such a special value is payable, the minority shareholder is entitled to share in it pro rata with the majority shareholder.

78 The obligation upon the majority shareholder under the drag along provisions, to ensure that it does not receive any additional benefit to that received by the minority shareholder,[49] and the obligation of the acquiring shareholder to pay "fair value" under the pre-emptive rights provisions, each demonstrate that the parties intended that any compulsory expropriation of a shareholder's interest in the company would be at a fair value. There is nothing contained in the put option deed to indicate that the parties intended any different result in the event that Freixenet was obliged to purchase Candoora's shares under the put option. The parties have chosen to provide in the put option deed for the option price to be determined in the same manner as obtained under the pre-emptive rights provisions contained in the shareholders deed.

79 The intention to ensure that a fair value is paid whenever a shareholder is entitled to, or obliged to, acquire the shares of another shareholder pervades the shareholders deed and the put option deed.

80 It was submitted on behalf of Freixenet that the words "fair value" should be read as synonymous with "market value" or "fair market value". Reliance was placed upon the evidence of Mr Stone.

81 I do not accept that the parties intended that the valuer appointed to determine "fair value", or "the fair value of Wingara as a going concern", should perform the valuation in accordance with the special or technical meaning of those words in accounting practice, as described by Mr Stone. The words "fair value" are, as the above consideration of the decided cases demonstrates, well known to the law. In determining fair value, the valuer is to take account of a wider range of circumstances than those which are relevant to "market" valuations.[50] The parties have not used the word "market" in specifying the criteria for the determination of the put option price. The put option deed and the shareholders deed comprise arrangements between the only two shareholders in a closely held private company. In the absence of the parties specifying that the words they have used are to be given a special or technical meaning, which is more limited than the ordinary meaning of the words as understood in the law, the parties should be taken to have intended that their words should have their ordinary meaning. The fact that any valuer is to be appointed by the president for the time being of the Institute of Chartered Accountants, does not dictate any different result.

82 In order to provide a valuation which was in accordance with the terms of the put option deed, the valuer was required to certify in writing an opinion as to "the fair value of Wingara as a going concern". In accordance with the judicial statements as to the ordinary meaning of "fair value" discussed above, the valuer was required to consider whether the value of Wingara as a going concern which was determined was, in all the relevant circumstances, a fair value. The criterion of fairness governs the other valuation criteria specified in the put option deed. The valuer was required by the terms of the put option deed to give it separate consideration. The valuer did not do this. The valuation report discloses that, in choosing the valuation method, the valuer gave separate consideration to the contractual criteria of "value" and "going concern". Further, the valuer has allowed the criterion of "market", which is not specified in the put option deed, to intrude into the required contractual standard. A reading of the valuation as a whole demonstrates that it contains no reference to the need for the valuer to ensure that the value which was determined was fair, just or equitable.

83 It was submitted on behalf of Freixenet that the valuer gave consideration to the criterion of fairness by making adjustments to the discounted cash flow valuation to take account of a notional sale and lease-back of the Sunnycliff assets and a notional sale of Shepherds Hut. I do not accept this submission. There is no mention in the valuation report of these adjustments being made to ensure that the resulting valuation is fair. The valuation report contains no discussion as to whether the decision to make no adjustment for the value of the Katnook Estate and Deakin Estate assets was fair in all the circumstances of the case. A simple comparison between the valuation reached as a result of the chosen valuation method and a valuation reached by the net realisable assets method put forward on behalf of Candoora discloses a substantial difference in value. In these circumstances, the valuer should have at least considered whether fairness had a role to play and, if so, how the valuation methodology could be adapted to take account of any unfairness. The fact that, as a general rule, a valuation by reference to net realisable assets is inappropriate when valuing a company as a going concern did not excuse the valuer from the obligation to consider fairness. If fairness had been considered in this context, the valuer may have considered that a combination of valuation approaches was, in the particular circumstances of the case, the appropriate way to proceed.

84 Nor did the valuer consider any other factors which the cases discussed above indicate may be relevant to the determination of fair value. For example, the valuer did not consider the relationship between Candoora and Freixenet under the shareholders deed and, in particular, the possibility of a sale of Wingara, or its business and assets, as a going concern to a third party who may be willing to pay a special value attaching to that party. The failure of a valuer to consider any other factors reinforces the conclusion that the valuer did not give any separate consideration in the course of the valuation process to the governing criterion of fairness.

85 For the above reasons, I conclude that the valuation was not made in accordance with the put option deed and should be set aside.

86 Candoora has established a right to a declaration that the valuation certificate is invalid because it was not given in accordance with the terms of the put option deed and to an order that the valuation certificate be set aside. The counterclaim will be dismissed. I will hear the parties as to the precise form of the declaration and orders, as to any consequential orders and as to costs.

[3] Citations omitted. Emphasis in original format.

[4] FGT Custodians Pty Ltd v Fagenblat [2003] VSCA 33 at [4]- [12], [26] and [39].

[5] For example, AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173.

[6] (1985) 1 NSWLR 314.

[9] [1995] HCA 12; (1995) 182 CLR 432.

[13] (1994) 15 ACSR 313.

[16] Ibid, 334 (emphasis in original; citations omitted).

[19] Holt v Cox [1997] NSWSC 144; (1997) 23 ACSR 590.

[22] (1994) 15 ACSR 536.

[28] [2004] NSWCA 451; (2004) 63 NSWLR 167.

[36] [2007] VSCA 285.

[41] [2005] VSCA 211; (2005) 54 ACSR 562.

[42] [2002] VSC 105; (2002) 5 VR 61.

[44] Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, [40].

[45] Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; [1932] All ER 494, 499, 503-4; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429, 437; Di Dio Nominees Pty Ltd, v Brian Mark Real Estate Pty Ltd [1992] VicRp 99; [1992] 2 VR 732, 740; MLW Technology Pty Ltd v May [2005] VSCA 29, [76]-[81]; Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749, 770-1.

[46] ABC v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109.

[47] Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, [16].

[48] At all relevant times, Freixenet held at least 60% of the issued shares in Wingara.

[49] Other than because it holds more shares.

[50] MMAL Rentals Pty Ltd v Bruning [2004] NSWCA 451; (2004) 63 NSWLR 167, [52], [57], [59].