Toll (FHL) Pty Ltd v Prixcar Services Pty Ltd & Ors [2007] VSCA 285

Court of Appeal (Vic)|2007-12-10|Before: MAXWELL P, NETTLE and ASHLEY JJA

CONTRACT - Shares - Valuation - Shareholders' Agreement - Requirement that shareholding be sold at 'Fair Value' as determined by expert - Whether expert's determination of 'Fair Value' in accordance with agreement

**1 The first respondent ('PrixCar') is a joint venture vehicle. The business of the joint venture is storing, preparing and distributing imported cars. There have only ever been four shareholders in the company. Of the founding shareholders, two remain: the second respondent ('Kawasaki') which - then as now - holds 33.33 per cent of the issued capital of PrixCar; and the fourth respondent ('Strang') which - then as now - holds 16.67 per cent of the share capital. The third respondent ('P&O') holds 16.67 per cent, having acquired Conaust Limited, itself a founding shareholder.

2 The appellant ('Toll') holds 33.33 per cent, having acquired Finemore Holdings Limited, the fourth founding shareholder, and there having been a capital restructure in 1996. This appeal concerns the valuation of Toll's shareholding. Toll is required to divest itself of its shareholding in PrixCar, because of undertakings which were given to the Australian Competition and Consumer Commission as part of the Toll Group's takeover of Patrick Corporation Limited.

3 The shareholders agreement dated 31 March 1995 sets out the rights and obligations of the shareholders, including in relation to the disposal of shares. A valuation by Deloitte fixed the value of the Toll shares at $18 million. Toll contends that the valuation was not done in accordance with the agreement and that this question constitutes, or has given rise to, an arbitrable dispute under the dispute resolution clauses of the agreement. Toll appeals against the trial judge's finding that there was no such dispute.**

**4 Clause 5 of the agreement contains a specific procedure for the transfer of shares. It relevantly provides:

5.1 It is acknowledged and agreed between the Shareholders that:

(a) A person desiring to transfer any shares in the Company shall give a Transfer Notice to the Directors and the Directors and the proposing transferor shall proceed to establish the Fair Value of the shares within 28 days after the Transfer Notice is given;

(b) If the proposing transferor does not wish to transfer the shares at the Fair Value, it may withdraw the Transfer Notice within 7 days after the Fair Value of the shares is determined and notified in writing to the proposing transferor;

(c) If the proposing transferor does not withdraw its Transfer Notice the Directors shall proceed to offer the shares to the other Shareholders in the same proportion, as nearly the circumstances admit, as the shares held by them at the time of the offer bear to the total number of shares held by all Shareholders, excluding the shares held by the proposing transferor;

(d) Offers made pursuant to clause 5.1(c) shall remain open for acceptance wholly or partially for a period of 30 days and the proposing transferor shall, upon being notified of any acceptances, execute transfers of any shares accepted in favour of the person accepting;

(ii) "Fair Value" means the amount per share which is the fair selling value of the share as between a willing purchaser and a willing vendor as agreed between the Directors and the proposing transferor or failing agreement within 30 days after the Transfer Notice is given to the Directors, to be fixed by the Company's auditors upon the application of either the Directors or the proposing transferor. In determining the Fair Value pursuant to this clause, the Company's auditors will act as an expert and not as an arbitrator ...

(iii) any reference to Directors shall be to the Directors other than the Directors appointed by the proposing transferor;

(vi) if a proposing transferor fails to execute any document or do any act to give effect to the provisions of this clause, the Chairman of the Board of Directors ... will be deemed to be the duly appointed attorney of the proposing transferor with full power to execute any document or do any act in the name of and on behalf of the proposing transferor and to receive and give a good discharge of any purchase money received on behalf of the proposing transferor in order to give effect to the provisions of this clause.

(a) if the other shareholders do not take up the offer of the proposing transferor's shares within 30 days from the date of offer, those shares not accepted must be offered to each of the shareholders who accepted the whole of their entitlement, inferentially on a pro rata basis;[1]

(b) if purchasers have not been found for all the shares after this process within 60 days from the date of offer, the directors may offer the shares (at the Fair Value) to anyone else they consider appropriate;[2]

(c) if shares remain unsold after a further 30 days, the proposing transferor may sell the shares (at a price not less than the Fair Value) to any person, provided that the directors are entitled to veto the prospective purchaser if the sale is not bona fide or the prospective purchaser is a competitor of PrixCar;[3] and

(d) if any shares remain unsold 30 days after the last step, then the proposing transferor must withdraw its transfer notice and transfer the shares at a price not less than the Fair Value to a person nominated by the directors.[4]

6 The agreed procedure for dispute resolution is set out in clauses 13 and 14, as follows:

Any substantial dispute or difference of opinion arising between Shareholders relating to the interpretation or operation of this Agreement shall first be referred for settlement to the appropriate professional advisers to the Company as nominated by the Directors and in the event that the Shareholders are still unable to agree upon the settlement of such dispute or difference of opinion, the same shall, be referred to arbitration in accordance with clause 14.

The validity interpretation and performance of this Agreement shall be governed by the law of the State of Victoria and any dispute that may arise under or in relation to this Agreement, including its validity interpretation and performance which is not resolved in accordance with the procedure set out in clause 13 shall be determined by arbitration in Melbourne under the provisions of the Commercial Arbitration Act (as amended) for the State of Victoria.

7 The issues in the appeal may now be identified. According to Toll, its contention that the Deloitte valuation did not comply with the contractual requirement has given rise to**

[a] substantial dispute or difference of opinion ... between shareholders relating to the interpretation or operation of [the] agreement

within the meaning of clause 13. The second, third and fourth respondents ('the opposing shareholders') argue that the clause is not engaged because -

(a) if there is a dispute, it is not a dispute 'between shareholders' within the meaning of clause 13; and

(b) if there is a dispute, it is not a 'substantial' dispute because Toll's contention that the valuation did not comply with the agreement is not seriously arguable.

**8 Certain other issues which were debated at the trial are no longer live. Contrary to its position at trial, Toll now accepts that it is clause 13 alone which defines the scope of the disputes to which the dispute resolution procedures apply. Although the language of clause 14 appears to contemplate a wider range of disputes than does clause 13, Toll accepts that there was no intention to broaden the scope beyond that for which clause 13 provides.

9 Secondly, and contrary to the position stated in its grounds of appeal, Toll no longer takes issue with the conclusion of the trial judge that the parties to the agreement intended the valuation to be final and binding. The latter concession was made only at the commencement of argument on the appeal. The concession was, in our view, properly made. The learned judge's conclusion to that effect was, with respect, clearly correct, for the reasons which her Honour gave.

10 Before addressing the remaining issues, it is necessary to give a brief description of what occurred before and after the giving of the valuation. We gratefully adopt the following summary from the reasons of the trial judge.[5]**

The events surrounding the Deloitte valuation

**11 On 9 June 2006, Toll gave PrixCar a transfer notice in respect of its total shareholding of 725,283 shares.[6] On 6 July 2006, PrixCar informed Toll that the non-Toll directors had determined the Fair Value of Toll's shares to be $11,665,000. Toll advised PrixCar that it considered that valuation to be about one half of the true value.[7]

12 Toll requested that the matter be referred to PrixCar's auditor, KPMG, for determination of the Fair Value under clause 5.1(j)(ii). KPMG considered it had a potential conflict of interest, as it also acted as auditor for the Toll Group, and declined to participate in the valuation process. Accordingly, PrixCar and the shareholders agreed upon the appointment of Deloitte, in substitution for KPMG, to undertake the valuation. Deloitte confirmed its appointment in a detailed engagement letter, dated 18 September 2006. Each of the four shareholders signed the engagement letter.

13 Deloitte invited and received submissions from all shareholders, and circulated a draft determination (without figures) for comment as to factual matters. On 25 October 2006, Deloitte provided the final determination, stating its opinion that Toll's shares in PrixCar were worth between $17.2 million and $18.8 million. Deloitte nominated the 'most likely value' of the shares as being (the mid-point) $18 million, as it considered 'there is no evidence that the most likely value is towards the high or low end of the range'. In arriving at its conclusion, Deloitte applied two different valuation methodologies: discounted cash flow, and capitalisation of future maintainable earnings.

14 Toll informed PrixCar on 1 November 2006 that, in Toll's view, the Deloitte valuation did not comply with the agreement. Toll asked PrixCar to instruct Deloitte to prepare a valuation which did comply. Toll also asserted that, because Fair Value had not been assessed under the shareholder agreement, the seven-day period during which it was entitled to withdraw its transfer notice under clause 5.1(b) had not started to run. PrixCar refused Toll's request for a new valuation.

15 The directors of PrixCar (other than those appointed by Toll)[8] maintained that the valuation complied with the agreement, and offered the Toll shares to the other shareholders on a pro-rata basis, in accordance with clause 5.1(c). Each of the other shareholders accepted that offer within the time limit imposed by clause 5.1(d).

16 On 5 December 2006, PrixCar delivered share transfers in favour of the other shareholders to Toll for execution. Toll refused to execute the transfers. The chair of PrixCar, Mr Miles, indicated that if the transfers were not executed by Toll by close of business on 20 December 2006, he would execute them as Toll's attorney using the power granted by clause 5.1(j)(vi) of the agreement.

17 Toll commenced this proceeding on 18 December 2006 and on 20 December 2006 obtained an interim injunction restraining Mr Miles and PrixCar from executing the transfers. That injunction was subsequently extended until trial or further order. At trial, however, the learned judge held that Toll had not established its case. She dismissed the proceeding. The injunction accordingly ceased to have operation.**

**18 It is clear, in our view, that there exists a dispute 'between shareholders' concerning the Deloitte valuation. Put simply, Toll contends, and the opposing shareholders deny, that the Deloitte valuation was not in accordance with the agreement. Toll clearly stated that, on its view of the Deloitte valuation, the machinery of clause 5.1 had not yet been set in motion; Toll was not required to decide whether to withdraw its transfer notice; and, accordingly, it was not open to the non-Toll directors to offer Toll's shares to the other shareholders at the price fixed by the Deloitte valuation. In direct defiance of these contentions, the non-Toll directors proceeded to offer the shares to the other shareholders, each of which purported to accept the offer. The other shareholders were thus asserting an entitlement to accept the offers on the basis that the value of the shares had been duly determined. A dispute in these terms was clearly identified by Toll in a letter of 6 December 2006 to the other shareholders.

19 The counter argument advanced on behalf of the opposing shareholders was that the dispute about the validity of the valuation was, in truth, a dispute between Toll and PrixCar. The foundation for this argument was the provision in clause 5.1(a) that it was for 'the Directors and the proposing transferor' to establish a Fair Value of the shares. This submission must be rejected. PrixCar itself has no role to play under clause 5.1. The responsibility to obtain a valuation is imposed on the non-Toll directors, respectively representing the three other shareholders. In any case, their role in that regard is purely mechanical. The fact that the proposing transferor disputes the valuation does not make those directors a party to that dispute.

20 We should add this for the sake of completeness. Having initially contended that the only dispute which existed was between Toll and PrixCar, counsel for the opposing shareholders ultimately took the position that there were two disputes: one between Toll and Prixcar, and one between Toll and the other shareholders. He submitted, in effect, that clause 13 would not be engaged except if the only pertinent dispute was one between Toll and the shareholders. We reject that submission. Even if (contrary to our view) there were a dispute between Toll and PrixCar separately from the dispute between the shareholders, that could not affect the applicability of clause 13 to the shareholders' dispute.**

each of the shareholders was contractually entitled to insist upon the valuation of shares for the purposes of clause 5.1 being carried out in accordance with the agreement;
a dispute about whether the valuation did comply with the agreement would be a dispute 'relating to the interpretation or operation' of the agreement, within the meaning of clause 13.

**22 Accordingly, the sole issue for determination is whether the dispute which exists concerning the Deloitte valuation is a 'substantial dispute'. Senior counsel for Toll argued that the grounds on which Toll seeks to impugn the valuation are seriously arguable and that this is sufficient to constitute a 'substantial dispute'. Senior counsel for the opposing shareholders accepted that test, but denied that any part of Toll's attack on the valuation was seriously arguable. For the reasons which follow, we would uphold Toll's submission.

23 The judge below accurately summarised Toll's attack on the valuation as being that it was not a determination of 'Fair Value' in accordance with clause 5.1(j)(ii) of the agreement, for two reasons:**

first, because in performing a discounted cash flow analysis, Deloitte applied a discount rate to reflect Toll's minority shareholding ('the minority discount'), when Toll says it should not have; and
secondly, that Deloitte failed to apply a control premium to reflect the fact that the other shareholders (in particular, Kawasaki) may be prepared to pay an amount in excess of market value for Toll's shares in order to increase their shareholding in and ability to control PrixCar, and/or to reflect the 'special value' to the other shareholders in ensuring Toll's shares remained in the hands of existing shareholders.[9]

**24 Her Honour also noted, correctly, that, in order for Toll to succeed, it had to establish a real dispute and that the question of reality depended 'not on views which the court might hold as to the merits of the dispute, but on whether the divergent views of the parties are in reality entertained by them'.[10]

25 The judge, however, concluded that Toll failed to establish the existence of an arbitrable dispute as to whether the valuation accorded with the agreement. Her Honour considered that:**

The shareholder agreement does not fetter the expert's discretion in choosing the valuation methodology to be employed, nor does it require the expert to take into account particular factors when determining Fair Value. It is clear that Deloitte did in fact consider the appropriate valuation treatment of Toll's minority shareholding, and expressly turned its mind to the possible application of both a minority discount and a control premium. Deloitte explained why it chose to apply the former and reject the latter. These appear to be matters falling fairly and squarely within its discretion and involving value judgments about which different minds may reasonably differ. Given that Deloitte considered how Toll's minority shareholding should be valued, it is difficult to see how Toll's criticisms can be characterised in a way which might lead to impeachment (in accordance with the principles set out in the cases discussed earlier). They appear to be essentially criticisms as to the weight to be given to various facts and the correctness of Deloitte's conclusions.[11]

**26 Counsel for Toll submitted that the notion of 'fair value' of shares in a joint venture company or closely held corporation necessarily imports the special value of the shares in the hands of another shareholder and that discounting for a minority shareholding is not 'fair'. He relied in support of that proposition on the judgments of Santow J at first instance and of the New South Wales Court of Appeal in Holt v Cox,[12] and the judgment of Spigelman CJ on appeal in MMAL Rentals Pty Ltd v Bruning.[13]

27 In our view there is force in that submission. In Holt v Cox Santow J was concerned with the valuation of shares pursuant to articles of association which provided that, upon termination of Cox's employment with the company, the shares must be offered by Cox to the plaintiffs at a 'fair price' determined by the auditor of the company. The articles further provided that the auditor's valuation would be final and binding. The question was whether the auditor had acted in accordance with the articles.[14] His Honour held that the auditor had not done so: because the auditor had treated fair price as being the same thing as market price, which it was held it was not; and because the auditor had failed to take into account the right on winding up together with the other rights set out in the articles, and had discounted as for a minority holding rather than giving it a liberal estimate having regard to the element of expropriation that was involved. As Santow J explained:**

...[I]t would be a mistake automatically to equate "market value", as distinct from fair market value, with the "real value" which this test is designed to ascertain. As Adamson[15] points out, in more than one of his High Court judgments, Williams J has criticised the tendency of witnesses to over-emphasise market value and thus to assume that what a willing purchaser of shares, with a choice of alternative investments, would have paid, was necessarily synonymous with what a willing vendor could reasonably expect to obtain...

Thus while preference shares with limited dividend and no voting rights may be unattractive to outsiders, or indeed not available for purchase at all, ordinary shareholders would have a strong interest in acquiring them to exclude strangers from an ultimate substantial share in the company's assets; see Dixon CJ in Jekyll v Commissioner of Stamp Duties (Qld)[16]. [17]

28 And later with respect to the second point, his Honour observed that:

The present case is analogous to a compensation case of compulsory acquisition, particularly the compulsory acquisition of a minority interest.

In the present circumstances, there is a compulsory purchase and fairness of price is the explicit contractual criterion. It is thus appropriate to look at matters first from the vendor's point of view, in considering the rights of the shares and what, to the vendor, they may be expected to yield him in the future by way of benefits, for loss of which a fair sale price is compensation. This is particularly when, as here, the vendor has no choice but to sell. It is necessary to ask what a willing, but not anxious vendor would consider "a fair price" for being deprived of the shares "with all [their] existing advantages and with all [their] possibilities",[18] not what the purchasers with their greater bargaining power might in reality be able to exact on a compulsory sale. In giving content to fairness, the shared expectations of Mr Cox and the controllers of F P Leonard, the Holt interests, are certainly not irrelevant. This is as they relate to future sale of the business and the intention that the benefit of that sale was to have been shared 80/20, whether through winding up or by equivalent means ... A liberal estimate of the shares is the approach to be taken.

Furthermore their value to the purchaser, ignoring the purchaser's expropriatory power (except as justifying a liberal estimate) must reciprocally be taken into account in determining a fair price. This is precisely as Mr Cox's continued shareholding rights do detract from the value of the remaining shares, giving him a directorship when no longer employed and the continued capacity to frustrate a sale or bargain with some leverage for a share in it.

...It is legitimate in that context to give content to the term "fair" by taking into account the clear purpose of the share issue, here as an incentive scheme, and then determining a fair price for the shares by reference to the matters noted ... above, going to their value to the purchaser.[19]

**29 On appeal, the decision was upheld on the basis that the auditor had ignored entirely the possibility that sale might occur and that in such event the appellants would use their voting power (contrary to their financial interests) to bring about a winding up of the company and the consequential realisation by the respondent of 20% of the liquidated value of the company. It was said that, if any regard had been given to that consideration, the fair price must have been higher.[20] The majority found it unnecessary to consider the other basis of the decision below. Importantly, however, Mason P observed that the fair price which the auditor was to determine was one that had the historical context of the particular corporators of this particular company.[21]

30 In MMAL the New South Wales Court of Appeal was concerned with an option, in favour of a company holding 81.25 per cent of the shares in a car rental company, to acquire the remaining 18.75 per cent interest for a 'fair market value' upon termination of the managing director's management agreement. In holding that the valuer had erred in preparation of the 'fair market value', the court observed that the assessment of 'fair market value' may diverge from 'a market value' for numerous reasons, for example, where property is thinly traded, or the parcel is small, or there exist market distortions. As was observed, therefore, it was not possible to set out in abstract terms how a fair market value should be computed. Rather, it required one to focus on the particular issues which arise in the particular case.

31 In that case, however, the purchaser had an interest in ensuring that the minority holding was not acquired by someone who did not have a relationship of mutual cooperation or trust with the majority holder. There was also a concern that the ability of the purchaser to get the full advantage from its controlling interest could be considerably attenuated by 'greenmail'. So, in order to avoid the nuisance of such an investor, it was considered that a majority holder would be prepared to pay more for the minority than another person. It followed that the 'fair market value' had to take into account the 'special potentiality' or 'special value' to the purchaser of acquiring 100 per cent of the company and thereby ensuring that it did not have to deal with a third party investor. It followed that a valuation based simply on the capitalisation of future maintainable earnings or a valuation of net assets was inadequate, and it was not appropriate to apply a minority discount.[22]

32 In our view, the principles considered in Holt v Cox and MMAL could well be relevant to the calculation of 'fair value' of the shares within the meaning of clause 5.1(j)(ii) of the agreement. As counsel for Toll submitted, PrixCar is a joint venture company the shareholdings in which are tightly controlled, directly through clauses 3 and 5 of the agreement and, indirectly, by means of the funding mechanisms provided for in clause 4 of the agreement. Those clauses imply a preference for the parties to deal only between themselves and not with third party shareholders.

33 There is also clause 7 of the agreement, which provides that any decision to liquidate the company; sell the whole or a substantial part of its undertaking; merge with another company; increase or decrease the authorised capital of the company; or amend the memorandum and articles of association, requires a special resolution of shareholders. Moreover, clause 9 of the agreement (as amended by a deed of 26 June 1996), entitles each of Kawasaki and Toll to appoint two directors, but for each of the other shareholders to appoint only one director. The quorum for a meeting of directors is three, each of whom must be appointed by a different shareholder, two of whom must be Kawasaki and Toll, and the directors appointed by Kawasaki and Toll are entitled to a total of two votes while each of the directors appointed by the other shareholders is entitled to only one.

34 In light of those provisions, we think that it is at least arguable that Toll's 33 per cent holding may be of special strategic significance in terms of the votes required to pass special resolutions, and because the ability to control Toll's shareholding in the company carries with it the ability substantially to influence decisions of the board and, if aggregated with an existing shareholding, could lead to control.

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

36 It is evident that the Deloitte valuation does equate 'fair value' with market value. In the executive summary of the valuation it is stated that:**

For the purposes of our opinion, fair market value is to be defined in accordance with the provisions of the Shareholders Agreement. Specifically, Clause 5.1(j) of the Shareholders Agreement relevantly provides that '''Fair Value" means the amount per share which is the fair selling value of the share as between a willing purchase and a willing vendor.' This is consistent with our usual definition of current fair market value.[23]

37 It is also apparent that the Deloitte valuation does not take account of any special potentiality or special value to the purchaser of acquiring Toll's holding of 33 per cent. Again in the executive summary of the valuation, it is stated that:

We have not considered special value in forming our opinion. Special value is defined as the amount a special purchaser is willing to pay in excess of market value. Such special purchasers may be willing to pay a premium over market value as a result of potential economies of scale, reduction in competition or other synergies they may enjoy arising from the acquisition of the asset.

We have estimated the fair market value of the Sale Shares under the following two methodologies.[24]

38 It is apparent too that the valuation is based on the capitalisation of future maintainable earnings or a net assets basis. Once more in the executive summary, it is stated that:

the capitalisation of maintainable earnings method, which estimates the value of PrixCar by capitalising its maintainable earnings with an appropriate earnings multiple
the discounted cash flow method, which estimates the value of PrixCar by discounting its estimated future case flows to their present value.[25]

**39 The valuation also incorporates a minority discount:

(a) At page 31 of the opinion, under the heading 'Capitalisation of future maintainable earnings', it is stated that:**

The share market valuation of listed companies provides evidence of an appropriate earnings multiple for PrixCar. The share price of a listed company represents the market value of a liquid minority interest in that company.[26]

The price achieved in mergers or acquisitions of comparable companies provides evidence of an appropriate earnings multiple for PrixCar.

The acquisition price of a company represents the market value of a controlling interest in that company. The difference between the market value of a controlling interest and a minority interest is referred to as the discount for minority interest.[27]

Based on these considerations, we believe it is appropriate to reflect a discount for minority interest in the range of 15% to 20% at the enterprise value level to the multiples set out in Table 16 when selecting an appropriate EBIT multiple to capitalise the selected earnings (this is equivalent to a discount for minority interest of approximately 20% to 30% at the equity level, if a commercial level of debt of, say, 30% of enterprise value was assumed).[28]

**(d) At page 38 of the opinion, under the heading 'Discounted cash flow analysis' it is stated (without reasons) that the analysis includes a 'Discount for minority interest (15 per cent to 20 per cent)'.

40 In the result, we think that there is a case to be made that the valuation prepared by Deloitte does not accord with the contractual requirement to determine the fair value of the shares.

41 Counsel for the opposing shareholders submitted that it was not so, for several reasons. First, he contended that the terms under which Deloitte were engaged gave Deloitte a very wide area of discretion and that the choice of a capitalised earnings or discounted cash flow market value, and the application of a minority discount, were well within the ambit of that discretion. He relied in particular on the following provisions of Deloitte's engagement letter of 18 September 2006, which were signed by all shareholders as well as by the company:**

consideration of the financial position and past and projected operating results of PrixCar
each of the Remaining Shareholders and Toll having an opportunity to make a submission in writing to Deloitte on their view as to how the fair market value for the Sale Shares ought to be determined (a copy of which shall be made available to the other parties). It will be a matter solely for Deloitte to determine the merit (or otherwise) of any such submissions received.
...
...
consideration and selection of the appropriate valuation methodology.[29]

**42 Counsel argued on the basis of the emphasised passages that, even if the methodology adopted by Deloitte did not accord with the agreement, the engagement letter constituted a fresh agreement which left the selection of methodology to the exercise of Deloitte's discretion.

43 We doubt that that is so. While it is not for this court to reach a final view on the matter, we incline to the view that the emphasised passages of the letter mean no more than that Deloitte is to be left alone to determine the fair value in accordance with the agreement and, to that extent, is not bound to heed the arguments of any of the shareholders. That does not mean that Deloitte is free to depart from the contractual requirement to prepare an assessment of fair value in accordance with clause 5.1(j)(ii). To the contrary, as is stated in another part of the letter of 18 September 2006:**

We understand that this valuation report and our determination of fair market value of the Sale Shares is required to satisfy the requirements of the Shareholders Agreement.

**44 Secondly, counsel for the opposing shareholders observed that, on 13 October 2006, Deloitte circulated a draft valuation to the shareholders for comment and that, although Toll then criticised some aspects of the draft, it said nothing at the time in opposition to the application of a minority discount. As we understood the argument, it was that, because of the absence of earlier complaint, one should doubt that there is any basis for Toll's present complaint.

45 We question the logic of that proposition. Whatever the reason for Toll's failure to take the point at the time, it is difficult to see how it could detract from the force of the authorities, or the contentions based on them, which were advanced before the judge below and before us on appeal.

46 Thirdly, counsel for the opposing shareholders argued that Holt v Cox and MMAL are distinguishable on the basis that they were cases in which shares were being compulsorily acquired, as opposed to this case where - as between the shareholders - Toll's sale of shares is voluntary.

47 That does not strike us as a particularly compelling argument either. Once again we stress that it is not for us to reach a concluded view on the subject. If the matter proceeds to arbitration in accordance with clause 14 of the agreement, it will be for the arbitrator to decide. But our preliminary view is that, although Holt v Cox and MMAL were compulsory acquisition cases, the bulk of the propositions enunciated by Santow J and Spigelman CJ were intended to be of general application. We add that, while the sale in this case is voluntary as between shareholders, it is in effect compulsory for Toll because of its undertaking to the ACCC to dispose of its stake in PrixCar. It may not be significant, because the need for Toll to dispose of its shares was not known to the parties at the time of the agreement. But on the other hand we do not exclude an argument advanced by counsel for Toll that the verbiage of the agreement is sufficiently broad to allow for possibilities of the kind which have occurred.

48 Fourthly, counsel for the opposing shareholders submitted that the decisions of the Full Court in Karenlee Nominess Pty Ltd v Gollin & Co Ltd[30] and Email Ltd v Robert Bray (Langwarrin) Pty Ltd[31] establish that, while the court may reject a valuation produced for use in accordance with a contractual arrangement if it is vitiated by fraud or collusion or by mistake or wrong principle, it will not intervene on the basis of too much or too little weight being attributed to matters which bear upon the ultimate valuation.

49 That is so of course, but it does not seem to us to take the matter much further. The principle is clear and it is important, but equally clearly the court will intervene where a valuation fails to answer the contractual description of what the valuer was required to determine.[32]

50 Finally, counsel for the opposing shareholders contended that clauses 13 and 14 of the agreement did not apply unless there was a 'substantial dispute' between the parties as to whether the Deloitte valuation complied with the agreement, and that, in order to demonstrate a substantial dispute, it was incumbent on Toll to establish at least a prima facie case that the valuation does not accord with the agreement. In counsel's submission, whatever the strength of Toll's arguments, they do not rise to that level.

51 We do not accept that contention. It is based on authorities concerning the winding up of companies on the ground of deemed insolvency. They establish that in order to resist an order for winding up, a company must bring forward a prima facie case which satisfies the court that there is something which ought to be tried or, in other words, that the debt is disputed on some substantial ground.[33] For that purpose, mere assertion of the existence of a dispute is not enough.[34] It requires an objective assessment of the putative defence and the burden of persuasion is somewhat heavier than for leave to defend an action.[35] But in our view, that is not an appropriate test for this sort of case.

52 In Reservoir Hotel Pty Ltd v E S Clementson (Victoria) Pty Ltd,[36] the arbitration clause provided that '[i]n case any dispute or difference shall arise between the proprietor and master builder, either during the progress of the works or after the determination, abandonment or breach of the contract, as to the construction of the contract', the matter could be submitted to arbitration. Adam J held that a dispute ought be taken to have arisen within the meaning of the clause unless it were found to be merely a specious pretext - a sham not a bona fide contention - and that its reality should depend 'not on views which a court might hold as to the merits of the dispute, but on whether the divergent views of the parties are in reality entertained by them.'[37] In our view, that is the correct test to be applied in a case of this kind.

53 It is true that clause 13 of the agreement refers to 'a substantial dispute' and that the arbitration clause in Reservoir Hotel referred to 'any dispute'. But we doubt that it makes any difference. Adam J's reasoning was based on the principle that, where disputes concerning the construction of a contract are expressly left to the determination of an arbitrator, the court will only interfere with the award if on the face of the award the arbitrator has proceeded on wrong principles. Consequently, when his Honour referred to the question of whether there was a dispute as something which did not depend on the views of the court as to the merits of the dispute, he may be taken to have meant it in that context. That does not mean that the test depends solely upon the subjective perceptions of the parties. But it does mean that the court may take the view that the point of contention may fail and yet still be satisfied that it is sufficiently arguable to constitute a real dispute. As we see it, that amounts to a substantial dispute.

54 Lest there be any doubt, however, we add that, even if the test were the same as applies in the company cases to which we have referred, we think that the points raised by Toll would meet the test. For the reasons we have given, we are satisfied that Toll has established a prima facie case that the Deloitte valuation does not accord with the agreement.

[5] Toll (FHL) Pty Ltd v PrixCar Services Pty Ltd [2007] VSC 187.

[6] Under clause 5.1(a) of the shareholder agreement.

[7] Toll's letter of 14 July 2006 advised that it believed the shares to be worth not less than $23,000,000, or not less than $23,915,750 if a particular compensation payment was taken into account. In its submission to Deloitte dated 29 September 2006, Toll proposed a value of $25,939,232.

[10] Above n 5 [69], citing Reservoir Hotel Pty Ltd v E S Clementson (Victoria) Pty Ltd [1961] VicRp 111; [1961] VR 721, 725 (Adam J).

[11] Above n 5, [70].

[13] [2004] NSWCA 451; (2004) 63 NSWLR 167 ('MMAL'), 177[60], 179-181 (Spigelman CJ).

[14] Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314.

[15] M S Adamson, The Valuation of Company Shares and Businesses (7th ed , 1986).

[17] (1994) 15ACSR 313, 334 (emphasis in original).

[18] McCathie v Federal Commissioner of Taxation [1944] HCA 9; (1944) 69 CLR 1, 6.

[19] 15 ACSR, 337-338 (emphases in original).

[20] Holt v Cox [1997] NSWSC 144; (1997) 23 ACSR 590, 603 (Mason P).

[22] MMAL Rentals above n 13 177-178 [58]-[61], 179-180 [69]-[73], 181 [78] (Spigelman CJ, with whom Mason P and Hodgson JA agreed).

[32] Karanlee Nominees Pty Ltd v Gollin & Co Ltd [1983] VicRp 61; [1983] 1 VR 657, 670_; Legal & General Life of Australia Ltd v A Hudson Pty Ltd_ (1985) 1 NSWLR 314, 335-6 (McHugh JA); Holt v Cox (1994) 15 ACSR 313, 333 (Santow J)[1997] NSWSC 144; , (1997) 23 ACSR 590, 597 (Mason P).

[33] Re KL Tractors Ltd [1954] VicLawRp 70; [1954] VLR 505, 509-510.

[34] Ocean City Limited (rec and mgr apptd) v Southern Ocean Hotels Pty Ltd [1993] FCA 86; (1993) 10 ACSR 483, 485 (French J).

[35] _Re Welsh Brick Industries Lt_d [1946] 2 All ER 197, 198; Derby Motorplus Pty Ltd v Swan Building Society (1990) 2 ACSR 239, 244.

At a glance

Court

Decision date

Before

Source

Judgment (117 paragraphs)

Parties

Cases Cited (4)