32 It is appropriate here to record that in respect to any asserted oppression there has never been any suggestion on the part of the Plaintiffs that property or funds have been diverted from either of Fesena or ESPH or from the Netherleigh Unit Trust.
33 It will be observed that order 2(b) and (c) do not refer to any date. They merely require the Court to inquire as to "the value of Shirim's shares [and units]...at which the purchaser [or purchasers under these orders] shall acquire the same".
34 What is intended by the terms of the foregoing orders is clearly the price which the purchaser shall be required to pay to the First Plaintiff for its shares and units.
35 As will be appreciated from the numerous relevant authorities in this regard, references to value or valuation of shares in cases of compulsory purchase by one shareholder of the shareholding of another shareholder can attract different meanings.
36 The value of an item may vary depending on the purpose for which the valuation is required, and there is no standard definition of value for all purposes and in all circumstances. Indeed, one author of considerable experience and expertise in this field has identified at least nine different kinds of value (including book value, depreciated value, going concern value, liquidation or break-up value, firesale value, intrinsic value, market value, replacement value and special value: Wayne Lonegan, The Valuation of Businesses, Shares and Other Equity, 2 ed. (1994), 4-6; see also M. S. Adamson, The Valuation of Company Shares and Businesses, 7 ed. (1986), Ch 2; Steven Sirianos, "Problems of Share Valuation Under Section 260 of the Corporations Law", Company and Securities Law Journal, Volume 13, March 1995, 88.)
37 In considering the nature and scope of the present inquiry, the Court should not disregard the fact that the purpose of the inquiry is to give effect to an order for the compulsory acquisition of shares held by the First Plaintiff, and that the order for that compulsory acquisition was made pursuant to the relief in that regard sought in prayer 10 in the Amended Summons, prayer 10.1 seeking an order that the shareholders of the First and Second Defendants respectively purchase the shares of the First Plaintiff in each such company at fair market value [emphasis inserted].
38 It follows, therefore, that the "value" of the shares in each of the First and Second Defendants which are to be acquired pursuant to the orders of 14 March 1996 is the "fair market value" sought in prayer 10 of the Amended Summons (prayer 10.2 referring the matter to a Master for an assessment of the appropriate fair market values pursuant to prayer 10.1). I recognise that the wording of prayer 10 in the Amended Summons is not in identical terms replicated in Orders 1 (a) and (b) and 2 (b) and (c) (Order 1 (a) referring to the purchase of units as well as of shares, and Orders 2 (b) and (c) speaking only of the value of such shares and units).
39 I also recognise that Order 1 (a) refers to the purchase not only of the shares of the First Plaintiff in ESPH but also of the units of the First Plaintiff in the Netherleigh Unit Trust, whilst prayer 10 in the Amended Summons speaks only of the purchase of shares; and, further, that the relevant relief of which the parties have availed themselves under the provisions of Section 260 (2) of the Corporations Law does not in any way address itself to the purchase (whether made compulsorily or voluntarily) of units in a unit trust. Nevertheless, as will become apparent, the purchase of the shares and the purchase of the units are so interconnected that it would be inappropriate in the instant case to approach the exercise of inquiring as to the value of the shares and inquiring as to the value of the units other than by the application of identical principles.
40 I have also referred to the fact that neither the relief sought in the Amended Summons nor the terms of the Order itself refers to any date upon which the values of the shares and units which are the subjects of the present inquiry are to be calculated. Nevertheless, it seems to me implicit, both in the terms of the relief sought in prayer 10 of the Amended Summons ("fair market value") and in the wording of the Order of 14 March 1996, that the subject matter of the inquiry is the fair market value of the shares and units at the date of the order, that is, at 14 March 1996.
41 There has been placed before the Court a very considerable quantity of evidence, which comes within one or more of the following categories.
42 Firstly, there is evidence from Dr. Smith, the Second Plaintiff, concerning his involvement in the Netherleigh Private Hospital, and concerning the various instances of what is characterised by the Plaintiffs as oppression.
43 Secondly there is evidence from a number of persons who participated in aspects of the administration and activities of the Netherleigh Private Hospital throughout the relevant period. That evidence has essentially been directed to supporting, or to disputing, the areas of evidence of Dr. Smith relating to what he has characterised as instances of oppression.
44 Thirdly, there has been placed before the Court opinion evidence by persons who are presented as experts in their respective fields, concerning the value of the hospital enterprise, and, in consequence, the value to be attributed to the shares and units which are the subject of the present inquiry.
45 It is appropriate that I should refer, at least in summary, to significant parts of the foregoing evidence.
46 Netherleigh Private Hospital is a private hospital located in Dutruc Street Randwick, in the Eastern Suburbs of Sydney. There has been a hospital of that name and at that location for many years, long before the present parties became in any way associated with Netherleigh. Each of the principal protagonists to the present proceedings, Dr. Smith, the Second Plaintiff, and Dr. Wenkart, who is the principal of the Defendants, was at all relevant times a registered medical practitioner. The evidence discloses that Dr. Wenkart has interests in other private hospitals in the Sydney metropolitan area, which are compendiously referred to as the Macquarie Health Group.
47 In 1976 Dr. Smith became involved in a venture with Dr. Wenkart to purchase both the land and the business of Netherleigh Private Hospital. The land was acquired in 1976 by Fesena, and the business was acquired in 1979 by the company which is now Eastern Suburbs Private Hospital Pty Limited. ESPH held its interest in the hospital business on trust for the Netherleigh Unit Trust. Dr. Smith, through Shirim, presently holds 24 per cent of the units in that unit trust. The other 76 per cent of the units are held by Dr. Wenkart, through Macquarie Hospital Services Pty Limited. Dr. Smith also held, and holds, 24 per cent of the shares in ESPH. The other 76 per cent of the shares are controlled by Dr. Wenkart.
48 In 1979 Dr. Smith was appointed to manage the hospital. From then until mid-1987 he received a management fee of $20,000 a year. He was physically present at the hospital each day.
49 At that time Netherleigh was both a medical and a surgical hospital. It had provision for a maximum of 77 beds. Patients were referred to Netherleigh by medical practitioners in the Eastern Suburbs.
50 It would appear that the relationship between Dr. Smith on the one hand and Dr. Wenkart on the other hand was a harmonious one at least until about 1984. From that time onwards it is the assertion of Dr. Smith that he was largely excluded from the management of the hospital, and that Dr. Wenkart commenced making major decisions affecting the hospital without consulting Dr. Smith. From that time onwards Dr. Wenkart also became involved in the day to day management of the hospital.
51 It was the assertion of the Plaintiffs that as at December 1986 the hospital was trading profitably as a 77 bed hospital, achieving between 12,000 and 16,000 bed-days a year, that being (upon the calculation of the Plaintiffs) an occupancy rate of between 43 per cent and 54 per cent. It was asserted that the hospital earned a net trading profit of $704,818 in the 1986 financial year from revenue of $2,747,754, that being (upon the calculation of the Plaintiffs) a return of 25.6 per cent on gross revenue. It was asserted that the value of the hospital as a going concern (being the totality of the assets of both Fesena and the Netherleigh Unit Trust), including land and buildings, was $7,000,000. Fesena also owned additional land, adjoining that upon which the hospital was conducted, which has been valued on behalf of the Plaintiffs at $1.2 million.
52 It was asserted on behalf of the Plaintiffs that between 1984 and 1987 Dr. Wenkart made major decisions relating to the hospital enterprise without consulting Dr. Smith. Those decisions included (so the Plaintiffs asserted) the appointment of architects to prepare plans costing about $250,000 for a major re-development of the hospital; the purchase in 1986 of a telephone system costing about $170,000; and the building, between late 1986 and early 1987, of new operating theatres costing between $1,000,000 and $2,000,000.
53 It was the assertion of the Plaintiffs that throughout that period, from 1984 to 1987, Dr. Smith protested against his exclusion from the management of the hospital, the way in which the building work was being organised, and what was described as Dr. Wenkart's management style; but that Dr. Wenkart ignored Dr. Smith's views on these matters, and refused Dr. Smith's request to hold directors' meetings.
54 It was the case for the Plaintiffs that, whilst there had been oppressive conduct on the part of Dr. Wenkart and the companies controlled by him before 1987, however, from 26 May 1987 Dr. Smith had been frozen out of the management of the hospital at all levels. The management fee of $20,000 a year which he had been paid from 1979 ceased on 26 May 1987, and thereafter the management of Netherleigh was carried out under the control of the Macquarie Health Corporation Pty Limited, that being a company controlled by Dr. Wenkart. (It should, however, in this regard be noted that no management fee was paid to that company.)
55 On 26 May 1987 Dr. Smith sought to dispose of his interests in the hospital in accordance with the terms of the Netherleigh Unit Trust Deed. The price at which Dr. Smith offered his interest was $876,000 for the units, plus $46,800 a share for each of his 24 shares in Fesena (that shareholding being offered for a total price of $1,123,200). Thus the offer which Dr. Smith made to sell his interests in the hospital was for a total sale price of $1,999,200. That offer was not accepted by Dr. Wenkart.
56 In mid-1987 there was a proposal, which did not proceed, that there would be a public float in respect to the hospital. At that time Dr. Wenkart offered to purchase Dr. Smith's interests for a little over $1.6 million. Dr. Smith rejected that proposal. Subsequently, later in 1987, Dr. Smith made a further offer to sell his interests in the hospital to Dr. Wenkart for a somewhat lower price, being $1,800,000. A further attempt, in March 1989, by Dr. Smith to sell his interests to Dr. Wenkart was also rejected. Dr. Smith was also unsuccessful in his attempt in that year to limit his exposure to personal guarantees given be him to the Commonwealth Bank in respect to the indebtedness of the hospital.
57 It was submitted on behalf of the Plaintiffs that in the period since Dr. Smith was, in the words of the Plaintiffs, frozen out of the business in, at the latest, 1987, the fortunes of the hospital have greatly suffered. The bank debt of the hospital has risen from a little over $2 million in 1986 to $2.727 million in 1987, and then to almost $5.2 million in 1990, at which level it remained until 1996. The occupancy levels fell sharply to between 7,000 a year and (in 1991) 9,556 a year. The hospital has made a substantial trading loss each year from and including 1987.
58 Although from the commencement of his involvement in the hospital until 1986 Dr. Smith each year received dividends in respect to his shareholding and units, he has received no dividends since 1987.
59 It was asserted by the Plaintiffs that between late 1986 and 1987 ESPH engaged in costly and poorly planned building development works, which contributed substantially to both the blow-out in debt and the reduced occupancy levels. Further, that those works were embarked upon at the instance of Dr. Wenkart without any consultation with Dr. Smith, and, indeed, in the face of Dr. Smith's protests as to the manner in which they were managed.
60 Until 1986 a substantial part of the profits from the hospital business were channelled into a superannuation fund of which Dr. Smith, Dr. Wenkart and some employees of the hospital were members. No such profits went into that fund after 1986, and, indeed, in the next four years the hospital returned to itself the bulk of those funds. (That conduct on the part of the hospital has been the subject of separate legal proceedings.)
61 At the outset of the present inquiry it was submitted on behalf of the Plaintiffs that on a fair assessment of the proper purchase price of Dr. Smith's shares the Court ought to take account of the fact that from 1987 the hospital was run as Dr. Wenkart's business, with Dr. Smith being locked out of management and unable to extricate his financial interests (being both his investment in the hospital and his exposure as a guarantor) from the fortunes of the hospital.
62 In support of the foregoing submission the Plaintiffs relied upon the decision of von Doussa J in the Federal Court of Australia in Coombs v Dynasty Pty Limited (1994) 12 ACLC. His Honour there held that it was appropriate that the applicant's shares be valued, for the purpose of purchase by reason of oppression, as at the date that the applicant was excluded from the company's affairs. His Honour awarded to the applicant simple interest on the value of the shares from that date until the date of judgment. On appeal that decision was upheld by the Full Court of the Federal Court: Dynasty Pty Limited v Coombs (1995) 138 ALR 64.
63 The Plaintiffs also relied upon the decision of Thomas J in Rankine v Rankine (1996) 14 ACLC 116. His Honour (with whom Macrossan CJ and McPherson JA agreed), in delivering the leading judgment in the Court of Appeal of Queensland, concerning a compulsory purchase of shares pursuant to Section 260 (2) (e) of the Corporations Law, said, at 120,
To speak of the "date of valuation" of shares in oppression proceedings is apt to confuse unless one clarifies what is meant by "valuation". What needs to be assessed is the value of the shares at a selected date had it not been for the effect of the oppressing conduct . ( Scottish Co-operative Wholesale Society Limited v Meyer [1959] AC 324 at 364; Re Golden Bread Pty Limited; The Queensland Co-operative Milling Association v Hutchison (1976) 2 ACLR 188). The underlined words show that the price is not the amount of a valuation at a particular time, but rather a finding of hypothetical fact. The figures attributable to each will commonly be different. The valuation of the shares at the given date will not necessarily provide the answer that the parties need. It may however take the parties some distance towards the goal if it can be used as a figure from which deductions or to which additions may be made in the light of subsequent findings as to the effects of earlier acts of oppression.
64 It seems to me, however, that reliance by the Plaintiffs upon the foregoing passage from the judgement of Thomas J is, in the circumstances of the instant case, misconceived.
65 The present parties have, through their own choice, and by their own voluntary decision, in consenting to the terms of the Orders made on 14 March 1996, delimited the nature of the inquiry to be conducted. As I have already observed, the values which are the subject of the present inquiry, are the fair market values at which shares and units of the First Plaintiff must be purchased by some of the Defendants.
66 I reject the submission that in order to ascertain a fair market value one looks to the hypothetical situation considered by the Court of Appeal of Queensland in Rankine v Rankine. That was an approach which, I would respectfully observe, appears to have been entirely appropriate to the circumstances of the relief granted in that case. That relief, which was granted in the course of contested proceedings, should be contrasted with the nature of the inquiry in the instant case, the precise terms of that inquiry being set forth in an Order which resulted from the consent of the parties.
67 Unless the phrase "fair market value" is to be deprived of all meaning, and unless the use of that phrase in prayer 10 of the Amended Summons is to be disregarded in its entirety, it seems to me that it is totally inappropriate to have regard to circumstances of a hypothetical nature when inquiring as to a value to be attributed when dealing with a real purchaser upon an open market. Lonegan, op.cit. 5, defines "market value" (I appreciate that he does not purport to define "fair market value") as follows,
Market value is the price at which an asset can be realised and is based on the assumption that an asset can be realised to an arm's length purchaser as and when desired. Implied in this definition is that there are always ready and willing buyers and sellers of the asset being valued and that there is sufficient time to properly market the asset being sold. Market value is then defined as the price that would be negotiated in an open and unrestricted market between a knowledgable, willing but not anxious buyer and a knowledgable, willing but not anxious seller acting at arm's length.
68 (It will be recognised that the references in the foregoing definition to a "willing but not anxious buyer" and a "willing but not anxious seller" echo the judgments in the seminal decision of the High Court of Australia in Spencer v The Commonwealth (1907) 5 CLR 418, per Griffith CJ at 432; Barton J at 436; Isaacs J at 441 ("...by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration").)
69 It follows from my foregoing observations that a hypothetical value for the shares and units which, so it is submitted on behalf of the Plaintiffs, those shares and units would have had, had it not been for the alleged instances of oppression is not the value for which in my conclusion the shares and units of the Second Plaintiff must be purchased by the purchasing Defendants. Further, that, in consequence, instances of alleged oppression cannot, as the Plaintiffs would have it, be taken into account in establishing the value for such puchases.
70 But even if (contrary to my foregoing conclusion) instances of alleged oppression are relevant to a valuation of the shares and units, and even if (contrary to my foregoing conclusion) in proceeding to a calculation of the shares and units, not upon the basis of actual happenings and events, but upon the basis of hypothetical facts as they would have existed, had it not been for the asserted instances of oppression, it is necessary to consider the effect of those asserted instances of oppression. This I shall now proceed to do.
71 I am in agreement with the submission of the Defendants that the essence of the complaint of the Plaintiffs is that the business of the trust and the investment of Fesena were not well managed. However, poor management or mismanagement do not constitute oppression: Fexuto Pty Limited v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 740 (Young J).
72 Further, it should not be overlooked that at the time when Dr. Wenkart had in contemplation a public float in respect to the entirety of his hospital, pathology and computer interests, he made an offer, by letter dated 3 June 1987 (Exhibit 'H' to the affidavit of Dr. Smith, 21 April 1995) to purchase Dr. Smith's shares and units for $1,607,429, that being the valuation performed by the Hooker Corporation, apparently on 16 April 1987. Dr. Smith refused that offer. The Defendants submit that the making of that offer to purchase on the part of Dr. Wenkart (which they describe as a fair offer) had the effect of vitiating any oppression which may have occurred before the date of that offer (and in that regard they rely upon Fexuto Pty Limited v Bosnjak Holdings Pty Limited, supra, at 743, and O'Neill v Phillips (House of Lords, 20 May 1999, reported in The Times, 21 May 1999)).
73 I have already recorded that the Plaintiffs expressly disclaim any suggestion that property has been diverted from the trust or from either company. Further, all parties and their respective experts agree that the statutory accounts of the companies and of the trust are accurate. ( In this latter regard it is relevant to note that, although the date for the calculation of the fair market value of the shares and units is, as I have concluded, 14 March 1996, the parties were content to adopt the various figures and accounts for 30 June 1996 as having application to 14 March 1996.)
74 In any event, the central allegation of oppression asserted on behalf of the Plaintiffs is that from 26 May 1987 Dr. Smith was excluded from management of the hospital at all levels. I am in agreement with the submissions of the Defendants that that allegation is clearly and objectively contrary to the true facts, as confirmed by Dr. Smith's own evidence about his involvement in decision making and his receipt and monitoring of management committee reports, minutes and financial statements.
75 In substance, Dr. Smith's complaint resolves itself into an assertion that the hospital was mismanaged, in the sense that business decisions that were made did not result in profitable returns to him on a continuing basis.
76 It should not be overlooked, however, that any loss which may have been suffered by the Plaintiffs in the conducts of the operations of the companies and of the unit trust is not more than the loss borne by the majority shareholder/unit holder, being Dr. Wenkart (either personally or through the vehicle of companies) in a greater proportion than that suffered by the Plaintiffs. It should also be emphasised that the Plaintiffs do not suggest that in consequence of the instances of alleged oppression, there were financial benefits which flowed to Dr. Wenkart, but which were denied to Dr. Smith. The only financial consequence of the matters complained of by Dr. Smith was a loss suffered by both himself and Dr. Wenkart, the loss suffered by Dr. Wenkart being far greater than that suffered by Dr. Smith.
77 I am in agreement with the submission of the Defendants that in those circumstances there is no oppression in fact, or, that there is no oppression that could justify adoption of a price payable for the shares and units held by Shirim other than a price equal to the respective market values at 14 March 1996. Mismanagement or the exercise of majority control do not, of themselves, constitute oppression (Fexuto Pty Limited v Bosnjak Holdings Pty Ltd, supra, at 740).
78 In the Defendants' Written Submissions dated 20 August 1999 there are listed at paragraph 31 (pages 7-9) items of evidence which are fundamentally inconsistent with the following contentions of the Plaintiffs: that Dr. Smith was excluded from management of the hospital at all levels after 26 May 1987; that between 1984 and 1987 Dr. Wenkart made major decisions relating to the hospital without consulting Dr. Smith; and that the date 1 December 1986 should be selected as the date upon which shares and units of Shirim should be valued for the purposes of the Orders of 14 March 1996.
79 Those items of evidence upon which the Defendants in this regard rely include the fact that Dr. Smith personally signed financial statements and directors' reports, and minutes of directors' meetings in respect of Fesena Pty Limited; that he personally signed financial statements of the trust and minutes of directors' meetings in respect of ESPH as trustee of the Netherleigh Unit Trust; throughout the period between 1984 and 1996 Dr. Smith regularly received and analysed management committee reports, minutes and financial statements and freely chose whether or not to attend management committee meetings; Dr. Smith actively participated in deliberations of the management committee in relation to the appointment of architects to prepare plans for a proposed re-development of the hospital, the purchase of a telephone system, the building of the operating theatres; Dr. Smith was the licensee of the hospital until 1993, and in 1986 and 1987 he signed Department of Health building application forms; in December 1986 Dr. Smith agreed with his co-directors that the proposed building works should be undertaken (despite suggestions that he disapproved of the building works, his evidence was that he agreed with the work being performed, but thought that the associated programme for acquisitions of medical equipment was too costly); Dr. Smith was personally involved in dealing with Department of Health and Fire Board requisitions; Dr. Smith personally attended the hospital premises on a daily basis until about March 1995, when his health compelled his retirement from professional medical practice; Dr. Smith agreed with the purchase of land adjoining the main hospital site; when he signed financial statements and reports of the trust Dr. Smith did so on the basis that he accepted that they represented a true and fair record.
80 I am in agreement that each of the foregoing items of evidence is inconsistent with the particulars of oppression asserted by the Plaintiffs.
81 It has been submitted on behalf of the Defendants that the proper approach to the valuation is to value the assets of each entity in which shares or units are to be purchased, assess the liabilities of that entity, and then calculate the net value.
82 I am in agreement with that approach, which appears to me to be consistent with the definition of market value given by Lonegan, op.cit, 5 (which I have earlier quoted herein).
83 The Court was offered three distinct approaches to asset valuation, by evidence from expert witnesses. They were that of Mr Nelson, who valued the hospital as at 1 December 1986 by comparing it to other hospitals sold in the 1980's, and added a value for the additional land taken from another valuer's report.
84 That of Mr Aitken and Mr Humphreys. Mr Aitken valued the hospital as a hypothetical going concern as at 30 June 1996, and added a value for the land he considered to be additional. Mr Humphreys then took Mr Aitken's values and calculated another hypothetical cash flow, in order to produce a "pro forma balance sheet" value.
85 That of Mr Martin and Mr Vella, who valued the actual assets and undertakings of the hospital as at 30 June 1996.
86 For the reasons which I have already expressed concerning the inappropriateness of adopting a hypothetical approach, and the inappropriateness of adopting any date for the valuation other than the date of the making of the Order, I consider that the basis of the valuations of Mr Nelson and of Mr Aitken and Mr Humphreys should be rejected.
87 Further, I am in general agreement with the criticisms of the details of those valuations which are set forth in the foregoing Defendants' Written Submissions (pages 10-14).
88 Not only do I consider that the basic approach of Mr Martin and Mr Vella (who valued the actual assets and undertakings of the hospital as at 30 June 1996) is consistent with the nature of the inquiry being conducted by the Court, but, further, it should be observed that Mr Martin, alone of the valuers, attempted independently to verify the information which he was given. He "put himself in the shoes of a prospective purchaser" and telephoned officials of the Department of Health and the Fire Board in order to check the licence conditions of the hospital and the capital improvements required to the fabric of the buildings. It should also be recorded that his valuation of the vacant land held by Fesena ($1.8 million) was not challenged in cross-examination.
89 Mr Vella's report was constructed upon that of Mr Martin, and calculated the values for the shares and units in the three separate entities. There was no challenge to his propositions that: