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[2004] FCAFC 153
Federal Court of Australia (Full Court)
2004-06-10
Carr J, Jacobson JJ
Original judgment source is linked above.
REASONS FOR JUDGMENT THE COURT Introduction 1 This is an appeal against orders made by a judge of the Court (Carr J) in an oppression suit brought under s 232 of the Corporations Act 2001 (Cth) ("the Act"). 2 The first appellant, Smith Martis Cork & Rajan Pty Ltd, ("the Company") was established in 1991 by four individuals ("the founding members") to carry on the business of financial planning and investment advice. The founding members were Mr GH Smith, Mr JRS Martis ("Mr Martis"), Mr PN Cork and Mr S Rajan. In about 1992 or 1993, the founding members transferred their shareholdings to their family trusts. The Company carried on business successfully for more than 10 years but in early 2002, Messrs Smith, Cork and Rajan excluded Mr Martis from management of the Company. 3 The learned primary judge found that there was an agreement or understanding between the founding members that the Company was to be conducted as a quasi-partnership: see the principles stated by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. 4 His Honour also held in accordance with the principles referred to by the High Court in Wayde v NSW Rugby League Ltd (1985) 180 CLR 459 ("Wayde"), that the exclusion of Mr Martis from management was commercially unfair and hence oppressive to the respondent, Benjamin Corporation Pty Ltd ("Benjamin Corporation"), the family trust through which Mr Martis held his shares in the Company. This was because Messrs Smith, Cork and Rajan, or their associated entities, had not offered to acquire the shares at fair value. 5 Accordingly, the learned primary judge ordered that the trustees of the family trusts of the remaining founding members purchase the shares held by Mr Martis' family trust at a price ($737,000) which his Honour determined to be the fair value of the shares. 6 The Company and the trustees of the family trusts of Messrs Smith and Rajan have appealed against his Honour's order. The trustee of Mr Cork's family trust has not joined in the appeal. 7 The appellants do not challenge his Honour's finding of oppression. The only issue in the appeal is whether the primary judge erred in principle in his approach to the determination of the fair value of the shares. The appellants accepted that the determination of the fair value was an exercise of his Honour's discretion and that it is necessary for them to establish that the discretion miscarried, within the well known principle stated in House v The King (1936) 55 CLR 499 at 504-505. 8 The essence of the appellants' argument is that his Honour erred in principle in his approach to the calculation of value because he accepted the opinion of an expert valuer that, in valuing the shares, it was appropriate to make an assumption that effected an adjustment to the way in which the Company actually distributed its income to the shareholders and certain senior employees. The adjustment had the effect of notionally reducing the Company's outgoings thereby increasing the sum attributable to the Company's earnings in the calculation of future maintainable earnings ("FME"). 9 The relevant adjustment was to the amounts payable to the Company's "authorised representatives". The Company was a licensed securities dealer and investment adviser under the Act. Each of the founding members held a proper authority from the Company and was appointed as an authorised representative under a written securities representative agreement. In addition, the Company entered into securities representative agreements with Mr Martis' brother, Mr VJ Martis ("Andrew") and three other employees ("the three employees"). 10 Andrew, through his family trust, became the holder of ordinary shares in the Company. The three employees did not hold ordinary shares in the Company. However, the founding members, Andrew and the three employees each held, through their family trusts, differential dividend shares in the Company. 11 As the name suggests, the differential dividend shares were used as a means to pay differential dividends to the holders of those shares. Throughout the relevant period payments were made by way of differential dividends to the holders of that class of shares as a reward for fees earned by the relevant securities representative in his or her capacity as an authorised representative for the Company. 12 The formula for remuneration of authorised representatives which was adopted for the whole of the period was that each authorised representative, or his or her family trust, was paid 80% of the gross fees earned by him or her from servicing his or her own clients, less a deduction for direct expenses. The balance of the Company's revenue was paid out to the shareholders by way of salaries or expenses. No dividend was ever declared or paid on the ordinary shares. 13 The evidence before the primary judge was that the payment of 80% of gross fees earned by authorised representatives exceeded the industry norm. Indeed, the evidence was that payments of this magnitude were virtually unknown in the industry. The unchallenged evidence was that the industry standard was for authorised representatives to receive payments in the order of 40% of gross fees earned, less direct expenses, with the balance appropriated to the owners' pool of profits for distribution to the benefit of the owners. 14 Mr Edwards of Price Waterhouse Coopers, who gave evidence for Benjamin Corporation based his calculation of FME on the assumption that it was appropriate, for that purpose, to reduce the remuneration payable to all of the authorised representatives to the industry norm of 40% in lieu of the 80% which was actually paid. This had the effect of increasing the amount which was attributable to the owners' pool thereby providing a corresponding increment in the value of the goodwill attributed to the ownership of the ordinary shares. 15 This adjustment, which was accepted by his Honour, formed the basis of the appellants' attack on the method of calculation of the price which his Honour determined as the fair value of the ordinary shares owned by Benjamin Corporation. 16 The approach which his Honour took was to determine the value of the shares in the Company in accordance with the well established principle in Spencer v The Commonwealth (1907) 5 CLR 418 ("Spencer's case"). That is to say, his Honour determined the price which a willing but not anxious buyer would pay to a willing but not anxious seller of Benjamin Corporation's ordinary shares in the Company calculated upon the basis of the Company's FME, an element of which was the adjustment of the payments made to the authorised representatives to 40% of fees earned. 17 The appellants attacked this determination in three different ways. First, it was said that this assumption departed from the long standing arrangements under which the founding members, Andrew and the three employees shared the costs of carrying on business but retained 80% of whatever he or she earned. It was said that his Honour's approach to valuation was not open to him because there was no prospect that the long standing arrangements would be altered. 18 It was said that a sale by one of the founding members to the others of his ordinary shares would be calculated on the basis of an 80% payment to authorised representatives. This would produce a lower payment to the owners' pool and, consequently, a lower valuation of the whole of the ordinary shares in the Company. 19 Second, it was said that the valuation method adopted by his Honour valued the Company upon the basis of a sale by all of the holders of ordinary shares, that is to say, of the whole of the Company, to a willing third party. This was said to be contrary to the understanding between the founding members that if one of them wished to depart from the Company his shares would be purchased by the continuing parties who would then carry on the business in his absence. 20 Thus, it was said that a sale by one of the founding members to the others of his ordinary shares must be calculated on the basis of the existing arrangements of an 80% payment to authorised representatives. This, it was said, would produce a lower valuation than a sale of the whole of the ordinary shares in the Company. 21 It was also said that the approach to valuation on the footing of a sale of the whole of the Company to a third party was contrary to Benjamin Corporation's case as pleaded in the statement of claim. 22 Third, it was submitted that his Honour erred by determining the value of Benjamin Corporation's shares by reference, in part, to the benefits derived by Mr Martis personally through the distribution to him of differential dividends calculated on the basis of an 80% share of his individual earnings. This benefit was said to arise not from Benjamin Corporation's ownership of the ordinary shares in the Company but from an agreement between the Company and Mr Martis as to how the differential dividends were to be distributed. 23 Counsel for Benjamin Corporation, apart from taking issue with each of the three grounds of attack, said that the second and third grounds were not open because they were contrary to the way in which the trial was conducted before the primary judge. 24 In particular, counsel submitted that no distinction was drawn at trial between the position of Mr Martis and Benjamin Corporation, the latter being treated for all relevant purposes as Mr Martis' alter ego. 25 Counsel for Benjamin Corporation also drew attention to the provisions of s 232(e) of the Act which empowers the Court to make an order where the affairs of a company are being conducted in a manner which is oppressive to or unfairly prejudicial to a member "whether in that capacity or in any other capacity". This is a wider test than was available under earlier legislation which provided that the relevant acts of oppression must be against the member in his, her or its capacity as a member of the Company. The Legislation 26 Section 232 of the Act relevantly provides: "The Court may make an order under section 233 if: (a) the conduct of a company's affairs; … … is either: (d) contrary to the interests of the members as a whole; or (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity. …" 27 The following provisions of s 233 are relevant:- "(1) The Court can make any order under this section that it considers appropriate in relation to the company, including an order:- … (d) for the purchase of any shares by any member or person to whom a share in the company has been transmitted by will or by operation of law;" 28 Section 234(a) provides that:- "An application for an order under section 233 in relation to a company may be made by: (a) a member of the company, even if the application relates to an act or omission that is against: (i) the member in a capacity other than as a member; or (ii) another member in their capacity as a member … " The background facts 29 These are set out at [2] to [46] of his Honour's judgment. We will summarise the facts for convenience of reading. 30 As his Honour observed at [3], although the parties to the proceedings were various corporations or individuals acting as trustees of family trusts, the proceedings were mainly concerned with the affairs of the founding members. 31 The Company was acquired by the founding members in November 1991 for the purchase by the Company of the investment advisory and securities dealing business of another company ("JCLD"). All of the founding members had been employees of JCLD until it went into receivership in mid-November 1991. 32 Initially, each of the founding members took 25% of the issued ordinary shares of the Company. In late 1992 or 1993 those shares were transferred to the respective trustees of the founding members' family trusts. 33 In late 1995, the trustees of the founding members' trusts each sold a small percentage of their shares to Andrew's family trust. From that time up to and including the hearing, Benjamin Corporation and the other trustees of the founding members' family trusts each owned 22.5% of the Company's ordinary shares. Andrew or his trust owned 10% of the ordinary shares. 34 There were 80 differential dividend shares. The family trusts of the founding members each owned 10 differential dividend shares. Andrew's trust owned 10 as did each of the three employees or his or her family trust. 35 The founding members, through their associated entities, also owned shares in a unit trust which provided office and administrative services to the Company. The primary judge assessed the value of the whole of Benjamin Corporation's interest in the business including the ordinary shares, the differential dividend shares and the units in the unit trust. No complaint was made about that course being taken. 36 The Company's business was very profitable. In each of the financial years ending 30 June 2000 to 30 June 2002 the Company derived income from commissions and fees of well in excess of $2m. Fee income was derived from one-off commissions for investment advice and there were also recurring commissions on clients' investment portfolios. 37 The primary judge said at [25], that the Company's income was divided by way of salary and differential dividends under a "profit sharing arrangement". The remuneration payable was, as his Honour said at [28], calculated and paid to each authorised representative at the rate of 80% of the revenue received by the Company from clients serviced by that particular authorised representative, less an amount representing the representative's cost base plus an amount for "notional superannuation". The residue was paid to "the owners' profit pool". 38 The primary judge observed at [30] that:- "The owners' profit pool was distributed among the four individuals and Mr Andrew Martis in proportion to their holdings of ordinary shares in the Company, but not as dividends payable in respect of those shares." 39 His Honour detailed, at [33] and following, the steps taken by Messrs Smith, Cork and Rajan to remove Mr Martis as a director of the Company. He found that matters came to a head between the parties in March 2002. There was a legally ineffective resolution to remove Mr Martis in late March. Messrs Smith, Cork and Rajan effectively exercised their voting rights to remove Mr Martis as a director at a meeting held on 10 May 2002. 40 On 6 August 2002, the Company gave notice to Mr Martis of the termination of his employment as an authorised representative with effect seven days later. 41 In September 2002, Mr Martis filed applications in the Industrial Relations Commission of Western Australia seeking, inter alia, compensation for the termination of his employment as an authorised representative. The primary judge's finding of oppression 42 His Honour referred at [49] to the claim made by Benjamin Corporation in its pleading that there was a common assumption among the founding members and their related entities that each of the founding members would remain as directors of the Company and would participate in the Company's management. His Honour concluded by referring to what was said in the pleading, namely the common assumption that:- "…if, as a result of a breakdown of the relationship between them, one of them was removed as a director of the Company, or was excluded from such management, the remaining directors would arrange the purchase of the shares held by that person's related entity at a fair value or on reasonable commercial terms" 43 His Honour found at [64] that there was an agreement between the founding members and their related entities as pleaded by Benjamin Corporation. He said at [81] that, alternatively, there was an understanding between them to the same effect. 44 His Honour then said at [82]:- "The facts of this matter give rise, in my view, to a strong inference (and I so find) that the Company was taken off the shelf by the four individuals as a means of forming and continuing an association on the basis of a personal relationship, involving mutual confidence. There was an agreement or understanding that all of them would participate in the conduct of the business and that there would be restrictions upon the transfer of their individual interest in the Company, so that if confidence were lost, or one member was removed from management, he could not take out his stake and go elsewhere. I am, of course, tracking the words of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379. As Lord Hoffman observed in O'Neill v Phillips (again at 1102): 'In such a case it will usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the management without giving him the opportunity to remove his capital upon reasonable terms.'" 45 At [84] and following the primary judge detailed the circumstances in which Mr Martis was removed from management and had his employment terminated. His Honour said at [85] that he searched in vain in the evidence for anything which disclosed dissatisfaction by the other founding members with Mr Martis' performance as a manager or as managing director, until shortly before March 2002. 46 The primary judge also referred at [126] to minutes of a meeting which recorded that there was no allegation of impropriety against Mr Martis. 47 The primary judge recounted, at [134] and following, that two offers were made by the other parties to purchase Benjamin Corporation's shares. These offers were made in "without prejudice" correspondence. 48 His Honour was of the view that the letters were inadmissible but, in case he was wrong, he examined the two offers which were made. One was for an amount in excess of $737,000. However, the offer was heavily conditional. His Honour found at [146] that Benjamin Corporation was justified in rejecting it. The other offer was for an amount of $100,000. 49 The primary judge referred to Wayde and other well known authorities on the law of oppression. He said at [158] that the exclusion of Mr Martis from management was unfair and gave rise to the exercise of the discretion conferred by ss 232 and 233 of the Act. 50 His Honour found at [284] - [287] that none of the thirteen separate matters put forward by the defendants to justify the removal of Mr Martis had been made out. The primary judge's finding of fair value 51 The primary judge determined the value of the shares at 10 May 2002, which was the date on which Mr Martis was excluded from management; see at [295] - [296]. 52 His Honour referred at [299] and following to the expert evidence called by the parties. The principal experts were Mr Edwards of Price Waterhouse Coopers for Benjamin Corporation and Mr Calder of KPMG who gave evidence for the defendants. 53 There was a large measure of agreement between Mr Edwards and Mr Calder. They agreed that the shares should be valued on the basis of FME. They also agreed on the figure of total revenue to 30 June 2002 that should be adopted for the purposes of calculating FME. They agreed that, if the assumption were made that authorised representatives would be paid at industry rates, the appropriate after tax multiple for the purpose of calculating the capital value of the shares was between 5.7 and 7.1. 54 His Honour referred to the two essential differences between Mr Edwards' calculation and Mr Calder's calculation at [304] - [305] as follows:- "Mr Edwards' calculation of FME was on the basis that each Authorised Representative would be paid at "industry rates". But Mr Calder prepared his calculation of FME on the basis that after the notional sale of the shares in the Company to a purchaser had taken place, each of the four individuals and the employed Authorised Representatives would continue to receive the 80% net margin, referred to earlier in these reasons. Another basic disagreement was that Mr Edwards valued the business on the basis of assuming a sale of the business as a going concern. Mr Calder's valuation was based on the future earnings from the owners' profit pool." 55 His Honour said at [317] that he preferred Mr Edwards' evidence to that of Mr Calder. This was because Mr Calder's valuation was based on assumptions which his Honour did not regard as valid. 56 One of those assumption was that the founding members were free to leave the Company and take their clients with them. 57 This led Mr Calder to value the shares not on the basis of adjusted FME but only on the basis of the owner's existing profit pool calculated on the assumption of 80% remuneration to authorised representatives. 58 His Honour pointed out at [319] that Mr Edwards adjusted the amounts payable to authorised representatives down to the industry standard of 40% in order:- "…to recognise the profit which the four individuals derived as owner operators, but which formed part of the payments to them as Authorised Representatives." 59 The reason why the primary judge rejected Mr Calder's assumption that the founding members were free to leave and take their clients with them was that they were precluded from soliciting the Company's clients under the terms of their employment agreements. The agreements contained restraints upon the authorised representatives from soliciting, canvassing or counselling clients to leave the Company. 60 His Honour referred to the principles stated in cases such as the decision of the NSW Court of Appeal in Mordecai v Mordecai (1988) 12 NSWLR 58 ("Mordecai"). He observed that the cases indicated that if the founding members attempted to take away the Company's clients, the Company could obtain injunctive relief and compensation for any loss. 61 There was a further reason why his Honour accepted the assumption that it was appropriate to adjust the remuneration of the authorised representatives down to the industry standard. As he said at [329], a fair valuation assumed a willing seller and, to obtain the best price, the sellers would enter into such agreements as were necessary to ensure that the full value of the goodwill passed to the purchaser. 62 The primary judge accepted the evidence that 40% remuneration was a reasonable commercial rate to apply as the industry norm for remuneration of authorised representatives. 63 The primary judge noted that one of the employee authorised representatives gave evidence that if his remuneration was changed from 80% to 40% he would leave the Company's employment. However, his Honour discounted the effect of this evidence because the employee's remuneration had in fact fallen to below 40% in 2003 but he had not left the Company. 64 His Honour accepted a multiple or capitalisation rate of 6.4 which was midway in the range agreed between Mr Edwards and Mr Calder. He did not discount the figure produced by the application of that capitalisation rate, notwithstanding that Benjamin Corporation held a minority interest in the Company. His Honour said that it was appropriate not to discount for the reasons referred to by a Full Court in Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 ("Dynasty"). No complaint was made about this on the appeal. 65 His Honour said at [350]:- "I think that the plaintiff should be compensated for being deprived of what would have been the benefits of continued ownership and participation in the management of the Company. In terms of s 233 of the Act, I think that it would be appropriate for an amount equivalent to interest to be awarded to the plaintiff on the above amount." 66 The rate of interest which his Honour fixed as the rate payable on the assessed value of Benjamin Corporation's 22.5% shareholding, that is to say $737,000, was 7% per annum calculated from 13 August 2002 to the date of settlement. The pleading point 67 In order to make good his submission that the valuation of the shares upon the basis of a sale of the whole of the business was contrary to the case as pleaded, senior counsel for the appellants directed us to the following paragraphs of the Amended Statement of Claim:- "10. There was a common assumption amongst each of Messrs Smith, Martis, Cork and Rajan and from 1993, each of the Directors' Related Entities that and/or each of them had the reasonable expectation that and/or there was a conventional understanding that: 10.1 Messrs Smith, Martis, Cork and Rajan would remain directors of SMCR; 10.2 each of Messrs Smith, Martis, Cork and Rajan would participate in SMCR's management; and 10.3 if, as a result of a breakdown of the relationship between Messrs Smith, Martis, Cork and Rajan, one of them was removed as a director of SMCR, or was excluded from the management of SMCR, or ceased to be an employee of SMCR, the remaining directors would arrange the purchase of the shares held by the Director's Related Entity which was related to the excluded director at a fair value or on reasonable commercial terms. 11. The common understanding and/or reasonable expectation and or conventional understanding arose from, or is to be inferred from the following facts:- 11.1 prior to the purchase of the shares in SMCR each of Messrs Smith, Martis, Cork and Rajan was a financial planner (client adviser) employed by JCLD; 11.2 each of Messrs Smith, Martis, Cork and Rajan had, established a business relationship with a number of JCLD's clients and together were in a position to take their clients from JCLD had they wished to do so; 11.3 in the premises, Messrs Smith, Martis, Cork and Rajan shared the goodwill of JCLD's investment advisory and securities dealing business; … 11.8 from 1993 to 2002, each of the Directors' Related Entities: (a) retained equal ordinary shareholdings in SMCR; (b) was paid differential dividends as a reward for the fees each director earned as authorised representatives of SMCR; (c) were paid equal dividends from an owner's profit pool: particulars of the owners' profit pool are provided at paragraph 13 of an affidavit of JRS Martis sworn 22nd August 2002. 12. The common assumption and/or reasonable expectation and/or the conventional understanding continued down to and including August 2002. 13. Contrary to the common assumption and/or Mr Martis' reasonable expectation and/or the conventional understanding, Messrs Smith, Cork and Rajan:- … 13.4 at no time have offered to purchase or arrange the purchase of the Benjamin Trust's ordinary shares or differential dividend shares in SMCR: (a) at a fair value; or (b) on reasonable commercial terms". The 'inconsistency' point 68 As stated earlier, counsel for Benjamin Corporation submitted that it was not open to the appellants to contend that the valuation should be other than upon the basis of a sale of all the shares in the Company to a third party because this was inconsistent with the way in which the case had been conducted at the trial. 69 To make good this proposition, counsel took us to the following paragraph of a document entitled "State of Agreement between the Experts" which was Exhibit A41 before his Honour:- "Edwards and Calder do not agree on the question whether it is appropriate to calculate FME on the basis that each of the authorised representatives is to be paid 'normal industry remuneration' [normal industry remuneration for a corporatised financial planning practice]. Edwards' calculation of FME is on the basis that each authorised representative is paid at 'industry rates' whereas Calder prepares his calculation of FME on the basis that each of the present proprietors, and the employed authorised representatives, will continue to receive 80% of 'net margin' (revenue net of direct costs less cash expenses) after sale of all the shares in SMCR to a purchaser. Edwards values all the ordinary shares in the Company assuming a sale on a going concern basis: Calder values the future earnings from the owners' profit pool." (emphasis added). Legal principles 70 The authorities make it clear that once the discretion conferred by s 233 of the Act has been enlivened by a finding of oppression under s 232, the Court has a wide discretion as to both the appropriate remedy and, if it orders compulsory purchase of shares, as to the mode of valuation of the shares. The authorities are set out in a recent decision of Campbell J in United Rural Enterprises Pty Ltd v Lopmand Pty Ltd (2003) 47 ACSR 514 ("United Rural Enterprises") at [34] - [38]. 71 If the Court considers it is appropriate to make an order that the other members purchase the shares of the oppressed shareholder, its task is to fix a price that represents a fair value in all the circumstances; see Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60 at 102 (von Doussa J) and on appeal Dynasty at 143 (Spender, O'Loughlin and Branson JJ). 72 As Davies JA observed in Shirim Pty Ltd v Fesena Pty Ltd [2002] NSWSC 10 ("Shirim")at [12], the purpose of an order that the oppressor purchase the shares at a fair price is to compensate the oppressed shareholder for the oppression which has taken place. His Honour noted that this principle has been regarded as established ever since the decision of the House of Lords in Scottish Co-operative Wholesale Ltd v Meyer [1959] AC 324.
73 Davies JA in Shirim at [13] and Campbell J in United Rural Enterprises at [35], both referred to a passage from the judgment of Oliver LJ inRe Bird Precision Bellows Ltd [1986] 1 Ch 658 at 669. There, his Lordship specifically rejected a submission that the determination of the price was to be arrived at only by ordinary valuation principles. 74 As the Full Court said in Dynasty at 146, it is not just a question of value; it is a matter of fixing a price that should be paid. 75 In United Rural Enterprises at [36] Campbell J observed that s 233(1)(d) of the Act does not specify the price for which the purchase of shares can be ordered and it says nothing about the basis on which the price is to be calculated. As his Honour noted, the only restriction on the way in which the price may be calculated is that it must be a proper exercise of judicial discretion. 76 Other authorities which refer to the width of the discretion include Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 at [3] - [5] (Spigelman CJ) and E S Gordon Pty Ltd v Idameneo (No 123) Pty Ltd (1994) 15 ACSR 536 at 540 (Young J). 77 Even if there is an agreement between the parties, as for example in the statutory contract contained in the constitution or articles of association, as to the way in which the shares are to be valued, the Court is free to override the agreement if it makes a finding of oppression; see Dynasty at [146]. 78 In Dynasty the Full Court referred with approval to a passage from the decision at first instance in Re Bird Precision Bellows Ltd [1984] Ch 419 at 430. There, Nourse J said that once a finding of oppression has been made, it would be unfair that the oppressed shareholder be bought out on the fictional basis applicable to a free election to sell the shares in accordance with the articles "or indeed on any other basis which involved a discounted price." Whether the Primary Judge's reasons disclose error 79 Although, as the authorities establish, his Honour was not confined by ordinary valuation principles, he approached the question of determining a fair price in accordance with the principle of valuation stated by the High Court in Spencer's case nearly a century ago. 80 No complaint is made about this. Rather, the appellants' complaint is that his Honour ought not to have accepted an assumption made by Mr Edwards which had the effect of increasing the true value of Benjamin Corporation's shares. 81 The central plank in the appellants' argument was that it was not open to his Honour to accept the assumption that the remuneration of the authorised representatives would be reduced from 80% to 40%, the primary reason being that the Company's business had never been conducted on that basis nor would it, according to the appellants, have been so conducted in the future. 82 However, it seems to us that, to confine his Honour's discretion in that way would be at odds with the legal principles mentioned above. An order based on a valuation that reflected only the Company's past practice would reward the oppressors for their acts of oppression. 83 The effect of determining a value on the basis of an assumption of 80% remuneration to the continuing authorised representatives would be to deprive Benjamin Corporation, without compensation, of its ability to earn remuneration at a rate that was double the industry standard while leaving the oppressors free to receive remuneration at that rate. 84 Not only would such a method of valuation fail to give effect to the underlying purpose of the legislation by denying Benjamin Corporation compensation for the oppression, it would not in our view be consistent with ordinary valuation principles. As the learned primary judge said at [319], Mr Edwards adjusted the remuneration of the authorised representatives down to the industry standard in order to recognise the profit which the founding members derived as owner operators. This element of their profit was paid to the founding members in a different form, that is to say, not as a dividend on their ordinary shares but as a part of their remuneration as authorised representatives. 85 To fail to recognise the loss of this advantage in the calculation of FME would be to deprive Benjamin Corporation of a substantial portion of the value of its "partnership" share. 86 Even if this is not correct, his Honour's discretion was not restricted to an acceptance of the mode of valuation put forward by Mr Calder. It is clear from the authorities to which we have referred that his Honour's discretion in fixing a fair price was fettered only by the consideration that it be a proper exercise of judicial discretion. There was nothing unjudicial in the adoption by his Honour of Mr Edwards' assumptions in preference to those of Mr Calder. Mr Edwards' approach assumed the sale to a single purchaser of all the shares in the Company. The ordinary rule in the case of a dissolution of a partnership is that, absent agreement to the contrary, the assets should be sold for cash unless the Court determines that a different mode of settlement is preferable; see Fexuto at [210]. Accordingly, there can be nothing unfair in a valuation of the shares in the Company upon the basis of what a purchaser would pay in a hypothetical sale of the whole business. 87 There was no reason why, in valuing the shares upon such a hypothesis, the valuation should assume the continued remuneration of the authorised representatives otherwise than in accordance with the industry standard. 88 We do not accept the submission that it was not open to Benjamin Corporation to depart from the long-standing arrangements between the parties as to the mode of calculating the remuneration of the authorised representatives when claiming compensation for acts of oppression. 89 The effect of the submission is that Benjamin Corporation was bound by an agreement as to how the Company would be run. But any such agreement could only enure for so long as Mr Martis was not excluded from management by acts of oppression. The submission is contrary to the principle to which the Full Court referred in Dynasty that, upon a finding of oppression, the Court is not confined to a method of valuation fixed by the articles or to any other basis which involves a discounted price. 90 In any event, in the present case the only agreement between the parties as to how the shares would be valued upon the departure of a shareholder was that the purchase should be 'at a fair value or on reasonable terms'. The agreement leaves open the question of what would constitute fair value or reasonable terms and how it would be calculated. 91 For that reason, we also reject the submission that the price which was determined was assessed upon a basis which conflicted with the pleading. The statement of claim says nothing about the basis upon which the price would be calculated. It merely says that the remaining directors would arrange the purchase of the excluded director's shares at fair value or on reasonable commercial terms. 92 Moreover, it seems to us that the contention that the shares should be valued upon the basis of a sale by Benjamin Corporation of its shares to the remaining founding members who would continue to run the business in the same manner as before, is not consistent with the way in which the case was conducted. The paragraph from the document reflecting the agreement between the experts which we set out at [69] indicates that Mr Calder approached the valuation exercise on the basis of a sale of all of the shares to a third party. The document states Mr Calder's assumption of continuing remuneration of 80% but this was to be "after sale of all the shares in SMCR (i.e. the Company) to a purchaser." 93 Nothing was put to us in oral argument to the effect that it was unrealistic to assume for the purposes of a valuation that the founding members and Andrew would not enter into agreements, or procure the three employees to enter into agreements, to reduce their remuneration to the industry standard. 94 In any event, the assumption is a perfectly reasonable one so far as the founding members and Andrew are concerned because it would enable them, in a hypothetical sale, to obtain the full value of their goodwill. Other than evidence from Mr Flavell, there was no evidence about the position of the three employees. However, his Honour placed no weight on Mr Flavell's evidence.
95 Senior counsel for the appellants submitted that the approach adopted by his Honour, namely the acceptance of the downward revision of remuneration, was contrary to the principles stated by Williams J in McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1. That case was concerned with the proper approach to valuation of shares in a company for the purposes of assessment of estate duty.
96 Williams J accepted that it was proper to adjust the company's profits by adding back excessive amounts paid to the directors by way of directors' fees. It was submitted by senior counsel in the present case that the approach taken by Williams J supported the proposition that where there was no improper diversion of funds, it was impermissible to make the adjustment put forward by Mr Edwards and accepted by his Honour.
97 That submission cannot be accepted. Williams J was dealing with the facts of a particular case. He did not purport to apply any general rule, still less a rule that related to different facts from those which he was considering. To the extent that McCathie has any relevance to the present proceedings, it supports the approach adopted by his Honour. That is because Williams J said, at 6, that the value is to be determined by the price which a willing vendor and a willing purchaser would agree to pay for the property in its actual condition at the time of expropriation "with all its existing advantages and with all its possibilities."
98 Senior counsel for the appellants also submitted that his Honour was in error insofar as he applied the decision of the NSW Court of Appeal in Mordecai. The effect of the submission seems to be that the goodwill of the business did not belong to the Company because the founding members were free to leave and take their clients with them. Counsel referred to the terms of Mr Martis' representative agreement which precluded him from soliciting, canvassing or counselling the Company's clients to follow him to his own business. He did not explain how a founding member could take a client with him without doing, at least, one of those things.
99 The decision of the NSW Court of Appeal in Barrett v Ecco Personnel Pty Ltd [1998] NSWSC 545 suggests that it is appropriate to take a wide approach to the construction of clauses such as the clause to which we have referred. The word "solicit" is not to be construed in a mechanical fashion but, rather, having regard to marketplace realities.
100 In any event, the question which arose before his Honour was the fair price which was to be paid for the oppressed shareholder's shares. We can see no error of principle in his Honour's rejection of Mr Calder's assumption that the goodwill was not owned by the Company in considering the question of what was a fair price for the shares.
101 We turn then to the submission made by senior counsel for the appellants that his Honour erred by determining the value of Benjamin Corporation's shares by reference to benefits derived by Mr Martis.
102 Counsel for Benjamin Corporation, who also appeared as counsel before the primary judge, stated that at the trial the various family trusts and corporations of the founding members were treated as the vehicles of the relevant individuals without any distinction being drawn between the position of the founding members and their respective entities.
103 The appellants' present solicitors and counsel did not appear at the trial. Senior counsel for the appellants did not dispute the statement made on behalf of Benjamin Corporation as to the way in which the trial was conducted. Accordingly, we accept that statement.
104 In any event, we do not think there is any force in the proposition that it was impermissible for the primary judge to value the shares held by Benjamin Corporation on the basis, in part, of benefits obtained by Mr Martis in his capacity as a director.
105 As the learned authors of Ford's Principles of Corporations Law, looseleaf edn, Butterworths Australia 2000 point out at [11.470], s 232(e) is wider than its predecessor, under which it was necessary to establish oppression of the member as a member and not in any other capacity. The authors state that it is clear that conduct which removes a member from a directorship can attract relief, but it is not every relationship of a member to a company which demands relief.
106 The question will, as the authors observe at [11.470], turn on the size and nature of the company and whether the particular relationship has significance independently of membership of the company. The text continues as follows:-
"… Whether the section is attracted would seem to depend on whether, in the circumstances, the employment relation was a way in which the member received a return for investment or whether the employment was independent of being a member. So, for example, where a small company is so organised that benefits are tied to being a director rather than a shareholder, a member-director who is unfairly prejudiced as director no longer has to resort to an application for winding up on the just and equitable ground …" 107 In the present case the Company was so organised that Benjamin Corporation received its remuneration by way of a reward for the services provided by Mr Martis through his directorship of the Company and, in particular, through the servicing by him of his clients under the authorised representative agreement. It seems to us that this is the sort of relationship which was contemplated by the widening of the language of the section. 108 There is English authority, referred to in Ford, that the oppression remedy is available where the member is affected in the capacity of a creditor even though the loan was not made by the member but through another company which the member controls; see R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280. It follows from this that there is no reason to exclude from the determination of the value of Benjamin Corporation's shares the benefits derived by or though the efforts of Mr Martis. 109 The appellants submitted that this result is in some way inconsistent with the fact that Mr Martis took separate proceedings in the Industrial Relations Commission for wrongful dismissal. However, those proceedings had not been disposed of at the time of his Honour's judgment and we were not informed that any separate amount of compensation was ordered to be paid to Mr Martis by the Commission. Accordingly, we see nothing which precludes the valuation approach adopted by the primary judge. Conclusion and Orders 110 In summary, in our view, there is no error of principle in his Honour's determination of the fair value of the shares held by Benjamin Corporation. The discretion did not miscarry. 111 It follows that the appeal will be dismissed with costs. I certify that the preceding one hundred and eleven (111) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Wilcox, Marshall & Jacobson.
Associate: Dated: 10 June 2004 Counsel for the Appellants: M Buss QC & PD Evans
Smith Martis Cork & Rajan Pty Ltd
Benjamin Corporation Pty Ltd
[1998] NSWSC 545
(1995) 59 FCR 122
(1936) 55 CLR 499
(1944) 69 CLR 1
(1988) 12 NSWLR 58
(1907) 5 CLR 418
(1985) 180 CLR 459