Southernwood v Brambles Limited

WILLIAM VINCENT KIDD AND MARY AGNES AS TRUSTEES FOR THE MAGNESS-BENNETT SUPERANNUATION FUND Second Applicant

MURPHY J: 1 This securities class action is in the fourth week of a five week trial. The applicants seek to rely upon the report of Tony Samuel, a forensic accountant and valuer, dated 2 March 2022. In the report Mr Samuel provides his opinion on the following questions: (a) Did the information available to Brambles Limited (Brambles) at the time it prepared its budget for the financial year ended 30 June (FY) FY2017 (FY2017 Budget) provide a reasonable basis for its projected increase in: (i) revenue; (ii) underlying profit (ULP); and/or (iii) return on capital invested (ROCI); in FY2017 compared with FY2016 for: (A) the North American Pooled Pallets Business; (B) the North American Whitewood Pallets Business; and (C) the North American Operations? (Question 1); and (b) Did the information available to Brambles provide a reasonable basis to support the: (i) August Sales Revenue Forecast; (ii) August ULP Forecast; (iii) August ROCI Forecast; and (iv) Medium-Term Targets, at each of the following dates; (A) 18 August 2016 (Question 2); (B) 20 October 2016 (Question 3); and (C) 16 November 2016 (Question 4)? 2 Brambles submits that Mr Samuel's opinions, as to whether the information available to Brambles provided a reasonable basis for its FY17 budget and forecasts are not wholly or substantially based on his specialised knowledge as a valuer, fall outside the exception in s 79 of the Evidence Act 1995 (Cth) (the Act), and the report is therefore inadmissible. Brambles also contends that, notwithstanding professing to give his opinion as a valuer, Mr Samuel's methodology did not in fact apply his specialised knowledge, and thus the report is inadmissible. 3 It is uncontentious that Mr Samuel provided his opinions as a valuer. Brambles accepts that Mr Samuel has specialised knowledge as a valuer, and describes him as a "highly credentialled forensic accountant and valuer". It accepts that he has specialised knowledge sufficient to permit him to provide an admissible opinion as to damages, valuation issues or accounting issues, but it argues that the opinions he provides in the present case are of an entirely different character. 4 On Brambles' argument, "valuation" is not a field of specialised knowledge that equips Mr Samuel to opine on the reasonableness of Brambles' budget or internal forecasts, less still to descend to the specifics of quantifying risks and opportunities and opining as to how such risks and opportunities ought be applied in near-term business forecasting. It argues that the disconnect or gap between Mr Samuel's specialised knowledge and the opinions he expresses is confirmed because: (a) at paragraphs 124 and 125 of the report, he admits that the Australian valuation standards do not address the reasonableness of budgets or forecasts; and (b) at paragraphs 127 and 137 of the report, he uses cash flow forecasts (which are relevant to valuation, as they provide a means of determining market value) as an analogy to devise a standard against which he can then assess the reasonableness of the respondent's budget and forecasts. 5 Brambles contends that the skill set of a valuer - determining a point in time value of a business or an asset - is inapposite to determining the reasonableness of the company's budgeting process and outcome. While accepting that the valuation process may involve a forward-looking aspect, such as performing a discounted cash flow analysis to calculate net present value, it submits that valuation is a fundamentally different exercise to the preparation of annual budgets and quarterly forecast by business. 6 It argues that in opining on the reasonableness of Brambles' budgets and forecasts, Mr Samuel strayed "outside his lane" by venturing an opinion outside of his specialised knowledge, which tended to invest his opinions with "a spurious appearance of authority", citing HG v The Queen (1999) 197 CLR 414 at [44] per Gaudron J. 7 Brambles further argues that, notwithstanding that he professed to give his opinion as a valuer, the methodology Mr Samuel used did not apply his specialised knowledge. For this argument it relies on Mr Samuel's statement at paragraph 27 where he said that: I have expressed my opinions: (a) as to a "reasonable basis" having regard to whether the information available to Brambles supported the FY2017 Guidance; and (b) on the basis of the information available to me. For the reasons set out in Section III, I have: (i) focused on key assumptions on which the FY2017 Budget and forecasts in the FY2017 Guidance were based, as evident from the materials available to me; (ii) sought to identify objective support for those assumptions; and (iii) quantified the consequences of objective analysis which would affect the budget and/or forecasts on which I have been asked to comment. It also relies on paragraph 31 where Mr Samuel said that he approached Question 1 by reviewing changes made between versions of the budget prepared by CHEP USA and CHEP Global and the final budget presented to the Board, to consider whether "objective support" existed for the increase in revenue, ULP and ROCI. 8 Brambles submits that such an approach does not require the application of valuation or forensic accounting expertise. It says that whether or not Brambles' documents support its assumptions in the proceeding is a matter for submissions and the application of specialised knowledge to found an admissible opinion requires something beyond the product of the observations of a "non-participating onlooker", citing Australian Cement Holdings Pty Ltd v Adelaide Brighton Ltd & Anor [2001] NSWSC 645 at [6] per Barrett J. It must involve a process of reasoning based in the expert's specialised knowledge, which it did not, citing Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at [85] per Heydon JA. 9 Brambles also relied upon: (a) AAPT Ltd v Cable & Wireless Optus Ltd (1999) 32 ACSR 63, in which Austin J refused to admit the evidence of an accountant skilled in company valuations and financial analysis when the evidence concerned the expected content of takeover documents. His Honour said (at [13]) that the valuer "purported to speak from a 'commercial perspective' rather than strictly from a financial perspective" and gave opinions about what he regarded as proper or standard or reasonably expected disclosures and practices for takeover documents when he had no recent experience in the field; and (b) Stuart v Rabobank Australia Ltd [2021] FCA 1388, in which Halley J considered the admissibility of an opinion of an economist who opined on whether Rabobank acted reasonably or unreasonably in varying the applicants' credit accounts and responding to their financial difficulty (at [120]). Halley J held the report to be inadmissible for reasons including that: (i) the questions the economist was asked to address were inherently fact specific and "the focus on reasonableness [in Questions 4 and 5] required the making of normative judgements. These are fundamentally matters for the Court." (at [123]); (ii) the expert's specialised knowledge as an economist was of limited, if any, relevance to the questions he was asked to address in his reports. Specifically, it was not established that he had any specialised knowledge based on his training, study and experience with respect to banking practice and procedure (at [124]); and (iii) it did not appear that the economist was applying specialised knowledge based on his training, study and experience. Rather, it appeared that he was expressing "general opinions" divorced from that training, study and experience (at [129]). Brambles submits that the same criticisms can be made of Mr Samuel's report in this proceeding.

DETERMINATION 10 I have no difficulty in accepting that the task of determining the appropriate annual budget of a business comprising its projected revenue, expenses and profit, including forecasting projected increases in revenue, underlying profit or ROCI, and the task of determining an appropriate medium-term target in relation to ROCI, is not the same as conducting a valuation. But that does not necessarily mean that an expert valuer such as Mr Samuel does not have specialised knowledge based on his training, study or experience such that he can provide opinions on the questions set out above that are wholly or substantially based on that knowledge. 11 For the purpose of the application, I consider Mr Samuel's report to be sufficient to show that he has the requisite specialised knowledge to provide the opinions that he has. I say that, first, Mr Samuel sets out how his specialised knowledge as a valuer equips him to provide opinions in relation to whether the information available to Brambles at the relevant times provided a reasonable basis for its budgets and forecasts. 12 At paragraph 122 of his report, under the heading "Methodology" Mr Samuel said the following: (a) "Value is a forward looking concept. That is, purchasers in a market, formulate their economic decisions based on what the business or asset is likely to generate under their ownership. The valuation of: (i) securities is therefore concerned with the cash flows that would be derived from dividends or the sale of the securities. Those cash flows are a function of the cash flows that will be generated by the underlying business; and (ii) a business is therefore concerned with the future cash flows it will generate; (b) Valuation necessarily requires expectations about future events to be assessed in order to establish the present value of the cash flows arising from those events; (c) As future events are uncertain, they are subject to risk. A present value for the business or asset is determined by applying a discount rate to future cash flows to reflect that risk; (d) It is axiomatic that a forecast that is: (i) optimistic - i.e. anticipates higher cash flows than those that are likely to eventuate - will result in an over-valuation; and (ii) pessimistic - i.e. anticipates lower cash flows than those that are likely to eventuate - will result in an under-valuation;" Brambles did not quarrel with those statements, and I broadly accept them. 13 Importantly, Mr Samuel then said the following at subparagraph (e): (e) As a valuer, when conducting valuations: (i) it is therefore necessary to consider whether a forecast is "reasonable". Although this is a fundamental step in any valuation based on forecasts, there is little guidance as to what constitutes a "reasonable" forecast; and (ii) I assess reasonableness by: • identifying the key assumptions on which a forecast is based; • determining the extent to which those assumptions can be verified objectively to supporting data; and • assessing whether assumptions which cannot be verified objectively to supporting data nevertheless are based on sound reasoning and/or judgment and are not unduly optimistic or pessimistic." 14 The upshot of the Mr Samuel's proposition at subparagraph (e) is that when undertaking a business valuation which involves an assessment of the business's forecast, it is fundamental to consider whether the forecast is reasonable. Brambles did not suggest that was incorrect. In my view, it accords with common sense. 15 As the applicants submit, the starting point is that "[v]alue is a forward-looking concept". Because current or prospective business owners are concerned with the future cash flows to be generated by the business, valuation "necessarily requires expectations about future events to be assessed in order to establish the present value of the cash flows arising from those events", with discounts applied to the value of future cash flows to account for their inherent uncertainty. As Mr Samuel said, optimistic forecasts about future cash flows will result in over-valuations and pessimistic forecasts will have the converse affect. Therefore, it is fundamental for a valuer to consider whether a forecast is "reasonable". 16 Second, the necessary specialised knowledge may derive from a combination of training, study and experience. In my view, Mr Samuel's report indicates that he has been trained or has learned by experience to assess whether a business's budget or forecast is reasonable. He states that he has experience that includes "the valuation of shares, businesses and intangible assets for approximately 30 years in the context of acquisition, sale, IPOs and disputes." It is appropriate to infer that he has assessed the reasonableness of business forecasts on numerous previous occasions. Whether that is in fact the case can be tested in cross-examination. 17 Third, while I accept that the task of determining the appropriate annual budget and forecast is not the same as undertaking a valuation, Brambles' submission that Mr Samuel's approach is "inapposite" does not rise much above a mere assertion. Brambles does not explain why Mr Samuel's methodology was inapposite, or what different field of expertise ought be applied, save that it accepts that an accountant or company officer with experience in setting business budgets and forecasts would have appropriate specialised knowledge. I accept that such a witness may have appropriate specialised knowledge, but that does not mean that a valuer experienced in testing the reasonableness of budgets and/or forecasts does not. It may be that such a person may be in a position to provide better evidence, but that does not render Mr Samuel's opinion inadmissible. 18 Brambles argues that Mr Samuel is not qualified to opine on the quantification of the risks and opportunities identified by Brambles' management for the purposes of its budgets and forecasts, but it does not explain how such a quantification exercise is so removed from evaluating discounts to a business's future cash flow from the perspective of a valuer, such that the valuer's opinion strays "outside the lane" of his or her specialised knowledge. On the present material it is inappropriate to take so narrow a view of the specialised knowledge of a valuer. 19 Importantly, it was open to Brambles to put on evidence from, for example, a retired Chief Financial Officer of a large corporation with experience in determining budgets and forecasts, to explain why Mr Samuel's analysis fell outside the specialised knowledge of an expert valuer,. Alternatively, Brambles could have adduced evidence from an expert valuer to explain why or how Mr Samuel's analysis does not involve the specialised knowledge of valuer. Brambles did not, however, do so. Brambles' contention that there is something unique about financial forecasting for the purpose of developing a company's budget or forecast, such that it is outside the specialised knowledge of a valuer to offer an opinion as to whether the information available to the company at the time provided a reasonable basis for the budget or forecast, is not supported by evidence. 20 Fourth, Mr Samuel accepted (paragraph 122(e)(i)) that there is little guidance in the valuation standards and literature as to what constitutes a "reasonable" forecast, but in that context he then turned to point to various ways in which he said the available Australian and international standards and valuation publications were consistent with the approach he had taken. 21 I accept Brambles' contention that Mr Samuel's reference to an example in the Australian APES GN 20 Scope and Extent of Work for Valuation Services valuation standard provides little or no support for the proposition he advanced. That example concerned valuation in a context well removed from business valuation and from the circumstances of the present case. Further, in my view there is little support to be drawn from the USA Business Valuation Update publication or from the text by W Lonergan, The Valuation of Businesses, Shares and other Equity, to which Mr Samuel referred. But Mr Samuel accepted that there is little guidance in the standards and literature as to what constitutes a reasonable forecast, and his limited reference to them must be understood in that context. 22 Having said that, I consider the 2022 International Valuation Standards (IVS) to which Mr Samuel referred (which he said are not mandatory in Australia but are widely adopted by valuers as guidance as to valuation principles within Australia) does provide some support for the proposition that a valuer's training and experience may equip him or her to evaluate whether the objective information available to a company supports its budgets and forecasts. The IVS standards recognise that in performing a valuation, a valuer must undertake an analysis to evaluate the projected income/inflows and expenditure/outflows, the assumptions underlying the projected income/inflows and expenditure/outflows and their appropriateness. That indicates that a valuer must have training in, or develop experience in, evaluating the reasonableness of budgets and forecasts by reference to the various matters said to underpin them. For many types of business valuations it will be fundamental to a valuer's task that he or she be able to assess the reasonableness of the projected income, costs and profit. 23 Fifth, I am not persuaded that Mr Samuel's approach does not actually apply his specialised knowledge, and that he did not in fact follow the methodology set out in his report. It is not appropriate to describe Mr Samuel's opinions as merely the product of the observations of a "non-participating onlooker", in the sense described in Australian Cement at [6]. This is not a case where Mr Samuel's asserted specialised knowledge is derived from "watching practitioners do what they do, or even discussing with them why they do what they do". 24 Nor do the other cases upon which Brambles relies provide much support for its argument. As the applicants submit: (a) Mr Samuel did not in terms or in substance purport to speak from a generalised "commercial perspective" like the accountant in AAPT. Having regard to his methodology, he provided opinions from the perspective of a valuer with specialised knowledge in evaluating the reasonableness of a business's financial budgets and forecasts for the purposes of valuing the business; (b) Mr Samuel was not asked to make normative judgements about the reasonableness of Brambles' conduct in a context unfamiliar to him, like the economist in Stuart. In Stuart, it was clear that the economist was not equipped with specialised knowledge in banking conduct and practice to be able to offer an admissible opinion as to whether Rabobank failed to act reasonably and/or work with the Stuarts' financial difficulty in various respects: see Stuart at [120]. That is nothing like the position in the present case. Here, a well credentialled valuer is tasked with evaluating whether the objective material available to Brambles at the relevant times provided a reasonable basis for the budgets and forecasts that it made, and/or whether the budgets and forecasts were otherwise supported by defensible business judgements. Mr Samuel asserts that he has experience in undertaking such evaluations, has set out what appears to be an appropriate methodology, and articulates the factual basis and reasoning process upon which his conclusions are drawn; and (c) it can be accepted that Mr Samuel's opinions sometimes stray close to the ultimate questions in the proceeding, but that does not render his opinion inadmissible: see s 80 of the Act. The Court well understands that it is its task to answer the ultimate questions in the proceeding, and that task will not be delegated to Mr Samuel. It will be answered by the Court weighing all the evidence, including deciding the weight, if any, to be given to Mr Samuel's opinions. 25 In my view, Brambles' objections boil down to issues of weight rather than admissibility, and I consider Mr Samuel's report to be admissible. 26 For completeness I note that, having decided the question of admissibility on the materials before me, I informed Brambles that it would have the opportunity to make a renewed application following cross-examination, if it wished to do so. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Murphy.