[2004] NSWCA 451
Spencer v The Commonwealth of Australia (1907) 5 CLR 418
[1907] HCA 82
State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503
Source
Original judgment source is linked above.
Catchwords
[2004] NSWCA 451
Spencer v The Commonwealth of Australia (1907) 5 CLR 418[1907] HCA 82
State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503
Judgment (12 paragraphs)
[1]
Background to the PwC Report
As I have mentioned, on 13 July 2017 TXA instructed PwC to "determine the price of Ten's relevant shareholding pursuant to the Shareholders Agreement.
On 31 July 2017 PwC provided a draft engagement letter (dated 28 July 2017) which said:
"Scope and purpose of valuation
You have asked us to prepare an assessment of the Fair Value, as defined below, of a 33.3% shareholding in the Company as at 30 June 2017 (the Valuation Date) and a report thereon (together, the Services).
…
Fair Value reflects the intention to determine a value that is equitable to both parties. This is not an open market value. To determine this it is necessary to consider the circumstances of the transaction and the situation of each party before and after the transaction." (Emphasis added.)
On 1 August 2017 TXA replied:
"We are unsure as to why you refer to instructions said to have been received from us in respect of concepts of "Fair Value" and "open market value." For clarity, your task is confined to a determination of price as set out in the Agreement - nothing more.
We have no view, and have not instructed you, one way or the other, as to what methodology ought to be applied and at what date the shareholding ought to be valued.
If concepts of Fair Value and open market value are relevant to your task then you should provide comment, however, how you determine the price of the shareholding and the date on which the shareholding is to be valued ultimately is a matter for you." (Emphasis added.)
On 7 August PwC wrote to TXA:
"As discussed our ability to undertake this work would depend upon the following:
1. Receiving legal advice on the appropriate interpretation to be placed upon the term 'price' in clause 10.2 of the Shareholders Agreement. As you know we are not parties to that agreement and the concept of 'price' could have many different interpretations in a valuation context, depending on the parties' intention. We would then undertake any valuation adopting a methodology that was consistent with the legal advice that was provided to us.
2. The receipt of information from TXA relevant to the application of the methodology upon which we would rely for the purpose of the valuation (the methodology having been determined based on legal advice). For instance, it may be the case that information as to the cost of any ongoing broadcasting services that would be provided to Ten on an arm's length basis will be relevant. Any setting of price for services would be a matter for management. It would not be a matter for the firm.
As discussed, we will be unable to undertake the engagement should these two conditions not be met." (Emphasis added.)
On 21 August 2017 TXA replied:
"With respect to the first point made in your letter, you are requested to assume that 'price', as used in clause 10.2 of the Shareholders Agreement, refers to market value - namely, the amount which a willing and knowledgeable, but not anxious, purchaser would pay a willing and knowledgeable, but not anxious, vendor for the asset in question, in accordance with the principles in Spencer v The Commonwealth (1907) 5 CLR 418. In determining the market value of the 'defaulting Shareholders' Relevant Proportion', you are otherwise to exercise your professional expertise.
With respect to the second point made in your letter, TXA will endeavour to provide you with any information in its possession which you reasonably require in order to carry out your engagement. We invite you to identify that information without delay." (Emphasis added.)
On 28 August 2017 TXA wrote to PwC:
It is a matter for PwC, in the course of undertaking its expert determination of the price of Ten's shares, to decide upon the methodology, together with any other processes that PwC is of the view ought to be adopted. Our letter dated 21 August 2017 sought to assist you in respect of the determination of 'price'. If you are of the view that any different methodology ought to apply, then you should adopt that methodology, with appropriate reasoning." (Emphasis added.)
On 30 August 2017 PwC sent TXA the Engagement Letter, which stated:
"Scope and purpose of valuation
You have asked us to prepare an determination of the price, as defined below, of a 33.3% shareholding in [TXA] as at 30 June 2017 (the Valuation Date) and a report thereon (together, the Services).
The purpose of the determination is to address various exit provisions in the shareholder's agreement relating to an alleged default of one of the parties. PwC expresses no opinion on the legal aspects of this default allegation.
We understand the shareholders agreement refers to 'the price of a proportionate share' which is not a recognised valuation term. In the absence of this recognition, we have sought to rely on your instructions as to the appropriate basis of value to apply. You have informed us that Market Value is the basis we should apply.
We will utilise the following commonly used definition of Market Value:
'the price that would be negotiated at the Valuation Date in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing, but not anxious seller acting at arm's length.'
The concept of Market Value does not take into account the particular circumstances of any specific purchaser or seller. It therefore excludes any special strategic value that may be placed on the business by one particular purchaser. Accordingly, the actual market price achieved in a transaction may be higher or lower than our Market Value depending upon the circumstances of the transaction, the relative negotiating position of each party and the level of synergies the purchaser may be able to realise.
By its very nature, valuation work cannot be regarded as an exact science and the conclusions arrived at in many cases will, of necessity, be subjective and dependent on the exercise of individual judgment. There is, therefore, no indisputable single value and we normally express our conclusion as falling within a likely range. However, to comply with the requirements of this engagement, we will provide you with a single point estimate, being a figure within that likely range." (Emphasis added.)
On 20 November 2017 TXA wrote to PwC:
"We are disappointed that you have advised you are unable to determine a price for TEN's shares in TXA as a single point figure despite your agreement to do so in your engagement letter dated 30th August 2017.
At our meeting, we discussed the share price and the ongoing commercial arrangement with TEN being intrinsically linked. We both agreed to try to find a way forward, however, you maintained that this was impossible without knowing the most likely ongoing commercial arrangement with TEN to use as an input to the valuation.
Therefore, in order to enable you to provide the agreed deliverable of a single point figure, TXA has calculated the most likely annual fee using a variation of the building block methodology (currently used in Australia in the regulation of infrastructure services) to account for the fact that this is not an arms' length transaction, based on the following assumptions:
[TXA set out a number of assumptions].
…
Based on this approach, a national (5 metro markets) managed service fee of $3.2m + GST p.a. indexing annually at CPI + power costs to be recharged separately, is the most likely commercial arrangement. A 20-year contract term would be appropriate to reflect the expected future life of terrestrial transmission as the distribution method for free to air television." (Emphasis added.)
[2]
The PwC Report - covering letter
PwC submitted its report to TXA under cover of a letter of 19 January 2018. I will refer to it as the Covering Letter.
In that letter PwC stated:
"Some matters relevant to the engagement
Prior to entry into the engagement we identified two conditions to be met (our letter of 7 August 2017). Those conditions were:
1. Receipt of legal advice obtained by TXA on the appropriate interpretation to be placed upon the term 'price' in clause 10.2 of the Shareholders Agreement, which we would then use to undertake the valuation adopting a methodology that was consistent with that legal advice.
2. Receipt of information from you relevant to the application of the methodology, upon which we could rely for the purpose of the valuation. We mentioned at the time and subsequently that information as to the cost of any ongoing broadcasting services that would be provided to Ten on an arm's length basis would be relevant.
As to the matters in 1 above, you advised us on 21 August 2017 that for the purpose of the valuation 'the price of a proportionate share' was to be determined by us applying Market Value (namely the amount which a willing and knowledgeable but not anxious purchaser would pay and a willing and knowledgeable but not anxious vendor would sell in accordance with the principles in the decision Spencer v The Commonwealth (1907) 5 CLR 418). We had understood this to reflect legal advice you had obtained. Only recently (your email of 30 November 2017) you have advised us that this was an assumption you wanted us to adopt, rather than being a reflection of any legal advice TXA may have received.
As to the matters in 2 above, and as we have discussed, the nature of the future arrangements between Ten and TXA is a crucial element in any valuation. The current circumstances existing between TXA and Ten appear to be such that agreement as to those arrangements has not been reached as yet. As a result, by letter dated 20 November 2017 you instructed us to proceed on a particular basis as to ongoing arrangements. We queried whether this basis would reflect arm's length arrangements, following which you told us you were unable to confirm whether that would be the case. As a result, we have used the quote provided to ABC [to Australian Broadcasting Corporation] by TXA, because it represented the only available evidence of which we were aware of an arm's length arrangement involving TXA. We have also provided details of an outcome using your proxy as part of our sensitivity analysis.
Engagement variation
As a result of the two points above, we have not been able to provide a valuation which, in our view, satisfies the purpose of our original engagement letter. The valuation work we have been able to do, its outcomes and our approach is set out in this deliverable." (Emphasis added.)
[3]
The PwC Report
The PwC Report adopts an orthodox definition of market value. PwC assessed such value on a discounted cash flow basis after considering a range of alternative valuation methodologies. There is no dispute that PwC was correct to adopt this methodology. Nor would any such dispute be relevant: see [58] and [59] above.
Under the heading "[a]t a glance - our view" PwC stated:
"Our valuation of Ten's share is based on a number of assumptions and represents one of what may be a number of possibilities".
…
"Valuation summary
● Given the unique nature of TXA's business we analysed the potential buyer pool and considered the various valuation outcomes. We considered that the main potential purchasers are a combined Seven and Nine consortium under the shareholding agreement or Ten or the holder of Ten's TV licence (potentially CBS). Discussion of our work on this aspect is set out in the Approach section.
● We considered what each potential purchaser would consider paying and possible outcomes, which we have summarised below.
Seven and Nine:
● In the event Seven and Nine purchase the Shareholding we consider that there are two likely operating scenarios:
i. Ten ceases to be a customer of TXA and therefore Seven and Nine will bear all the excess operating costs and capital expenditure.
ii. Seven and Nine negotiate a long term commercial contract with Ten.
● Under the first scenario, given a current negative equity position of TXA no additional value would be received by Seven and Nine in holding additional shares in TXA.
● If a commercial contract was put in place with Ten as a customer, it is likely that Seven and Nine would be willing to pay for the incremental net present value (NPV) of this additional contract. Based on the fee proposal provided to ABC which is the only evidence provided of an arm's length arrangement for similar services ($7.3m for a period of 20 years) this would result in a value of $42.9m.
● On 20 November 2017 you advised us of an alternative arrangement of $3.2m per annum plus power costs recharged separately however you were not able to confirm that this reflected your estimate of an arm's length transaction. If an alternative arrangement was in fact agreed which more closely aligned with $3.2 per annum, it would result in a value of $15m.
● Note, as Ten's share of power costs has not been provided it has also not been included in the calculation and annual inflation has not been included. This is consistent with the ABC proposal.
Ten or the holder of Ten's TV Licence:
● In the event Ten or the holder of Ten's TV licence had the opportunity to purchase the Shareholding, we consider that they would pay up to the amount it would cost them to procure the same service at an arm's length rate adjusted for any net negative equity positions. They would do this only in the circumstances that the current shareholders agreement remained in place.
● Based on the fee proposal provided to ABC, this would result in a value of $42.9m.
● Again, if the commercial arrangement was in line with the alternative arrangement you provided on 20 November 2017 of $3.2m per annum, it would result in a value outcome of $15m.
● We consider the most likely outcome to be that Ten or the holder of Ten's TV Licence would purchase the Shareholding or no transaction at all would occur.
● This report assumes that the commercial rate that would be charged to Ten would be in line with the ABC fee proposal.
● If the holder of Ten's TV licence acquires the share the current fee arrangements would be expected to remain intact.
● To the extent the commercial contract that is put in place is different, this would impact our valuation. We have performed a sensitivity analysis on the commercial contract arrangements to demonstrate the sensitivity of our value on this key assumption. This sensitivity addresses a range of values including values encompassed by the fee arrangement advised to us by you on 20 November 2017.
Sensitivity analysis (AUD'000s)
Contracted annual fee ($'000) Equity Value
994 (0)
2,000 6,838
4,000 20,433
6,000 34,028
7,313 42,953
8,000 47,624
10,000 61,219
12,000 74,814
[4]
Note: all values above assume no inflation for first 20 years consistent with ABC proposal". (Emphasis added.)
Later in the Report, under the heading "[p]otential scenarios and valuation outcomes" PwC expressed various "value outcomes" depending on a range of "[p]otential ownership structures" and "operating scenarios".
Relevantly, that part of the report reads as follows:
"Seven 50%/Nine 50% (Seven and Nine purchase the holding)
Seven/Nine only major users: Ten ceases to be a customer. Seven and Nine continue to be on a cost recovery basis This would occur if Ten was forced out and agreement was not reached on a fee that was considered acceptable to Ten. Seven and Nine would be required to cover costs and capex.
Value outcome: $0"
[5]
(Emphasis in original.)
Later in the Report PwC stated:
"Valuation of business 'as is'
● In order to initially assess the value of the business 'as is' we have utilised management's cash flow forecast and applied a discounted cash flow methodology.
● As there are third-party minority shareholders in Gold Coast Translators Pty Ltd (GCT) and Combined Translator Facilities Pty Ltd (CTF) we have separately assessed the MV implied by the income approach for each of the businesses (TXA, GCT and CTF of which TXA has a 75% shareholding) (refer to Appendix 3 for detailed calculations) in order to assess the enterprise value of TXA.
● We have then deducted net debt of $14.1m to determine the Equity Value of TXA. This consists of $15.5m of interest bearing debt housed entirely in TXA and $1.3m of cash, which excludes 25% of the cash held by GCT and CTF.
● The following pages set out the key valuation assumptions.
● Based on our analysis, there is currently a negative equity value due to the large proportions of debt. We estimate the value for the Shareholding to be negative $3.4m. We consider that there would be no value in the equity under this scenario."
Immediately following, PwC stated:
"Valuation of business for Financial Purchaser
● As per our analysis we consider a financial purchaser would seek to buy the Shareholding in the event a long term contract was put in place with Ten at a commercial rate.
…
● We consider this as an unlikely scenario as it would not be in the best interests of Seven and Nine for commercial arrangements to be changed and therefore they would likely purchase the shareholding to prevent this event occurring."
In appendix 3 to the Report, PwC prepared a "discounted cash flow analysis".
In that part of the Report PwC expressed the opinion that the market value of Ten's shareholding in TXA "as is (Ten retains its shareholding)" and if "Ten exists and does not use the services [of TXA]" as nil, in each case.
PwC continued:
"Valuation of business for Seven and Nine
● As per our analysis we consider Seven and Nine would be willing to pay up to the value they would receive for the services on commercial terms from Ten providing the agreement was long term in nature.
● We have again estimated the commercial fee based on the ABC proposal reduced for the current estimated contributions by Ten and have assumed that amount paid would be reduced by the negative equity position under the 'as is' scenario.
● We did not include discounts for lack of marketability or control as it represents the cash flow uplift that Seven and Nine would receive.
● Under this scenario we estimate the value received by Seven and Nine by purchasing the Shareholding to be $42.9m."
I turn now to Ten's four points (see [85] above).
[6]
Did PwC specify two preconditions which have not been met?
Ten submits that PwC had specified two preconditions to their ability to make a determination as to a "price" for Ten's shares as at 30 June 2017, that neither precondition had been met, and that therefore PwC had not made any determination of price.
Ten points to the statement in PwC's letter of 7 August 2017 (see [90] above) that their ability to "undertake this work" would depend upon, first, "receiving legal advice on the appropriate interpretation to be placed upon the term 'price'" in cl 10.2 of the Shareholders Agreement, and second, receipt of information from TXA "relevant to the application of the methodology upon which [PwC] would rely" including information "as to the cost of any ongoing broadcasting services that would be provided to Ten on an arm's length basis".
As to the obtaining of legal advice, on 21 August 2017 TXA requested PwC to assume that "price" meant market value: see [91] above. The Engagement Letter and the PwC Report itself show that PwC did make this assumption for the purposes of the PwC Report.
In the Covering Letter, PwC said that it had understood that TXA had obtained legal advice about that matter. That may have been a reasonable assumption for PwC to make. But TXA did not say it had received such legal advice. In any event, as PwC stated in the Covering Letter, on 30 November 2017 TXA "advised [PwC] that this was an assumption [TXA] wanted [PwC] to adopt, rather than being a reflection of any legal advice TXA may have received".
I will deal later with the significance of PwC's adoption of the assumption. But I do not see PwC's 7 August 2017 statement that its ability to undertake this work was dependent upon legal advice being received, as amounting to an unfulfilled condition precedent to PwC making the determination requested.
Until 30 November 2017 PwC (wrongly it seems) assumed that TXA had received legal advice about that question. Once the true position emerged, PwC proceeded to produce the PwC Report.
I see no unfulfilled condition precedent.
As to PwC's second request concerning the cost of any ongoing broadcasting services to be provided to Ten, PwC reiterated in the Covering Letter that "the nature of the future arrangements between Ten and TXA is a crucial element in any evaluation".
PwC's point was that, assuming Ten was no longer a shareholder of TXA, the amount (if any) it agreed to pay TXA for the provision of the transmission services would affect the value of its shares in TXA as at 30 June 2017.
It is common ground that there was no long term commercial contract in place between TXA and Ten at 30 June 2017.
PwC recorded that fact in the Covering Letter when it stated:
"The current circumstances existing between TXA and Ten appear to be such that agreement as to those arrangements has not been reached as yet".
Indeed, on 24 November 2017 Ten's solicitors wrote to TXA:
"No agreement for broadcasting services has been discussed by Ten and TXA, let alone agreed".
For that reason, on 20 November 2017 TXA wrote to PwC with an estimate of "the most likely annual fee" that Ten might pay TXA for the transmission services should Ten seek, and TXA agree to provide, them. The estimate was $3.2 million per year plus GST.
As PwC records in the Covering Letter, it did not use that figure in its calculation because TXA was not able to confirm that that figure "reflect[ed] arm's-length arrangements". Instead, PwC used a quotation that TXA had evidently given the Australian Broadcasting Corporation for the provision of transmission services "because it represented the only available evidence of which [PwC was] aware of an arm's length arrangement involving TXA".
I discuss the significance of this below. The point for present purposes is that PwC was not specifying a condition precedent to its ability to express an opinion as to the price of Ten shares. It was explaining why, and on what basis, it ultimately expressed a range of opinions rather than the "single point estimate" that it had foreshadowed in the Engagement Letter; see [123] to [130] below.
For these reasons, my conclusion is that there were no unfulfilled conditions precedent.
[7]
Did PwC put its report forward as a "determination"?
Ten submits that PwC did not put forward the PwC Report "as a determination".
In that regard, Ten relies upon the statement made by PwC at the conclusion of the Covering Letter that:
"Engagement variation
As a result of the two points above, we have not been able to provide a valuation which, in our view, satisfies the purpose of our original engagement letter. The valuation work we have been able to do, its outcomes and our approach is set out in this deliverable."
PwC did not there state that it had been unable to "provide a valuation" of the kind called for by cl 10.2(b)(ii) of the Shareholders Agreement.
What it said was that it had not been able to provide a valuation which "satisfies the purpose of our original engagement letter".
As I have mentioned, PwC had stated in the Engagement Letter that there is "no indisputable single value and we normally express our conclusions as falling within a likely range" but that:
"…to comply with the requirements of this engagement, we will provide you with a single point estimate, being a figure within that likely range".
I read PwC's statement at [124] above to mean that, notwithstanding what it had said in the Engagement Letter, PwC did not feel able to provide a "single point estimate".
Hence, PwC concluded the Covering Letter:
"The valuation we have been able to do, its outcomes and our approach, is set out in this [Report]."
I do not read that statement as signifying that PwC had not made a determination in the PwC Report itself.
Analysis of the PwC Report makes clear that it did.
[8]
Did PwC "determine" a price for Ten's shares?
Clause 10.2(b)(ii) of the Shareholders Agreement requires PwC to determine "a price" for Ten's shares.
Ten submits that a determination of "a price" should be construed to mean "a single price for those shares". Further, that "from reading the PwC Report, however, there is no objective indication of any single figure which PwC has decided as the price of Ten's shares".
It is true that PwC expressed a number of outcomes as to the market value of Ten's shares depending on what it described as various "scenarios".
The first scenario is on the basis of TXA "as is". That is, if "Ten ceases to be a customer of TXA and therefore Seven and Nine will bear all the excess operating costs and capital expenditures" of TXA. PwC opined that in that circumstance "given a current negative equity position of TXA no additional value would be received by Seven and Nine in holding the additional shares in TXA" (see [98] above at the fourth bullet point) and that Ten's shares would have no value (for example see [100] above).
PwC did consider an alternative "scenario"; namely "if a commercial contract was put in place with Ten as a customer". In that event PwC opined that Ten's shares would have a market value of $42.9 million (assuming it paid $7.3 million per annum for 20 years; the ABC figure see [98] above) or $15 million (assuming it paid $3.2 million per annum for 20 years; TXA's estimate of "the most likely annual fee", see [94] above).
I do not think it follows from the fact that PwC put forward a range of "scenarios" that it failed to reach a "determination".
The relevant determination will, as it were, self-select depending on the facts.
It is common ground that the first scenario reflects the facts; namely, the "as is" position.
On my reading of the PwC Report, that is the relevant "determination" that PwC made.
[9]
Did PwC wrongly accept instructions from TXA to determine price by reference to market value?
As I have described, PwC sought guidance from TXA as to the meaning of "price" in the Shareholders Agreement. Initially it requested that legal advice be obtained as to the meaning of "price" in the Shareholders Agreement. In response, TXA requested PwC to assume that price meant market value (see [91] above).
Shortly thereafter, TXA emphasised that that request was meant to "assist" PwC but that if PwC was "of the view that any different methodology ought to apply, PwC should adopt that methodology with appropriate reasoning". PwC made clear in the Engagement Letter that "[TXA] have informed us that Market Value is the basis we should apply" (see [92] and [93] above).
Consistently with the Engagement Letter, PwC stated in the Covering Letter that it had proceeded upon that basis.
It was for PwC to select the methodology it would apply in determining "a price". It sought guidance from TXA about that matter. It was not bound to accept that advice. Any error PwC made in adopting TXA's suggestion cannot provide a basis to impugn its determination: see [58] and [59] above.
In any event, in my opinion PwC adopted the correct methodology.
[10]
Fourth issue - is cl 10.2(b)(ii) void for uncertainty?
Ten submits, although without great enthusiasm in oral address, that because cl 10.2(b)(ii) contains no formula and specifies no criteria to enable PwC to carry out the task of determining "a price", PwC was left to determine "price" in a "contractual vacuum" and that because an "essential machinery provision" was lacking the clause was uncertain; State of New South Wales v Banabelle Electrical Pty Ltd (2002) 54 NSWLR 503; [2002] NSWSC 178 at [70] (Einstein J).
But here there is no "contractual vacuum". The parties have left it to PwC to determine the methodology to be adopted.
In any event, as Nine submits, the mere fact that there is a dispute about the meaning of "price" in cl 10.2(b)(ii) does not render the clause void for uncertainty. The clause is not completely devoid of meaning.
For the reasons I have outlined, my opinion is that "price" should, in the context in which it appears, be construed as meaning "market value". So read there can be no suggestion that cl 10.2(b)(ii) is void for uncertainty.
[11]
Conclusion
For those reasons I propose to make a declaration to the effect sought by TXA; namely that TXA is required by cll 9 and 10 of the Shareholders Agreement to register the transfer of the shares of Ten in TXA to the Seven and Nine in their relevant proportions.
I will hear the parties as to costs.
[12]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 01 May 2018
The Shareholders Agreement speaks of "the price for the defaulting Shareholder's" shareholding in TXA.
TXA, Seven and Nine contend that, in this context, "price" means the "market value" of the shares. Ten contends that "price" means the "fair and reasonable price" of the shares.
In a sense, the point is moot.
That is because, by cl 10.2(b)(ii) of the Shareholders Agreement, the parties agreed that "price" would be determined by TXA's auditor, PwC, who would "act as an expert" and "whose decision would be final and binding". The parties made no provision in the Shareholders Agreement as to the standard or methodology by which "price" was to be determined. They left that task to PwC.
PwC expressed its conclusions by reference to "market value" rather than a "fair and reasonable" price. I explain below how that came about. TXA, Seven and Nine contend that, on the proper construction of the Shareholders Agreement, PwC was correct to do so. Ten contends it was not.
But Ten does not suggest the course PwC adopted was one that was unavailable, let alone irrational. And, provided PwC carried out the task entrusted to it - to "determine" a "price" - the fact that it may have erred or taken irrelevant matters into account does not alone "render the determination challengeable" (Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (2015) 90 NSWLR 367; [2015] NSWCA 275 at [74] (Bathurst CJ, with whom Beazley P and McColl JA agreed).
Further, as Cole J said in Triarno Pty Ltd v Triden Contractors Ltd (1992) 10 BCL 305 at p 5, in these circumstances "it is a matter for either agreement between the parties, or determination by the independent experts as to the procedures to be followed" and, "if the parties have not by their deed agreed the procedures to be followed upon an expert determination, that is not a void the court can fill".
Where the parties have not directed an expert to adopt a particular methodology, it is not for the Court to interfere in an expert's decision as to the methodology to be adopted.
For those reasons, it matters not for practical purposes whether, on the proper construction of the Shareholders Agreement, "price" should be construed as meaning "market value" or "fair and reasonable price".
However, in deference to the detailed submissions of the parties directed to this question, I will deal with it. My opinion is that on the proper construction of the Shareholders Agreement, "price" means "market value". It follows, for what it is worth, that my opinion is that PwC was correct to adopt this construction.
Ten did not direct attention to any cases dealing with the meaning of "fair and reasonable price". Indeed, it made no positive case for construing "price" as meaning "fair and reasonable price". Rather, it advanced the negative proposition that unless the Shareholders Agreement be so construed, cl 10.2(b)(ii) would be void for uncertainty.
Determination of a "fair and reasonable price" on any given date involves consideration of what price is "fair" or "reasonable" in light of the individual circumstances of the vendor and purchaser.
Indeed, in its submissions, Ten accepts that in circumstances where cl 10.2 is engaged "it may well be appropriate to consider the value of the shares to the seller as an input (albeit not a determinative input) in to what is fair and reasonable in the circumstances" (emphasis added).
But what is "fair" and "reasonable" might also involve consideration of the value of the shares to the purchaser.
In circumstances where the purchasers are the other shareholders in TXA, those circumstances may not be the same for each purchaser.
If neither of the "non-defaulting Shareholders" wishes to purchase the shares, the "defaulting Shareholder" may sell their shares to a third party. In that instance, the defaulting shareholder must sell those shares "at the same price as that offered to the purchasing Shareholders" (cl 9(f), see [27] above).
In that event, the circumstances of that third party shareholder would, or at least might, have to be considered.
This could give rise to a very wide ranging enquiry and lead to a circumstance where the "price" to be paid to the defaulting Shareholder might, on any given day, vary depending upon the individual circumstances of the defaulting shareholder, the non-defaulting shareholders, or the third parties in question.
It appears to me unlikely that the parties would have intended this result.
It also appears to me that it would be unlikely that, had the parties intended that "price" have this meaning, they would have chosen TXA's auditor to make a final and binding expert determination about the matter.
TXA's auditor is well suited to determine independently the market value of a defaulting shareholder's shares in TXA because it would have detailed understanding of the financial position of TXA.
In contrast, TXA's auditor is less suited to conducting the more wide-ranging task of determining the "fair and reasonable price" of the shares which, as I have mentioned, would involve having regard to the particular circumstances of the shareholders, and possibly that of a third party; in respect of whom TXA's auditor may well have no knowledge at all.
In MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167; [2004] NSWCA 451 (Spigelman CJ, with whom Mason P and Hodgson JA agreed) made a similar point in respect of an expert determination by an auditor and chartered accountant of the "fair market value" of the shares in question.
Spigelman CJ said (at [59]):
"In the present contractual context, the intrusion of the word 'market' between 'fair' and 'value' points away from a process of determining what is just or equitable between the parties, towards an objective standard. That that is so in the present case is strongly suggested by the decision-maker nominated in cl 11.2.3. The decision is to be made jointly by the company's auditor and a chartered accounted nominated by the vendor and, failing agreement, by a nominee of the President of the Institute of Chartered Accountants. Persons with such a background are not generally suited to determining what is just or equitable in all the circumstances. Their expertise is appropriate for determining exchange value."
The Chief Justice was dealing with a different expression ("fair market value") than that under consideration here ("fair and reasonable price"). However the Chief Justice's point carries even greater weight in the circumstance before me.
It is far more likely the parties intended TXA's auditor would apply an objective standard of valuation. The "market value" is such a standard.
This construction of "price" is consistent with the use made of the word "price" in other clauses of the Shareholders Agreement.
For example, cl 10.3(b) provides that if any of the events specified in cll 10.1(b) to (e) occurs (being events concerning TXA itself, such as the passage of resolution for its winding up), then cl 10.4 shall apply. In that event, the shareholders must appoint a liquidator to TXA and cause the liquidator to sell TXA's business "at a price and on terms acceptable to the Shareholders". What must there be contemplated is that the shareholders cause the liquidator to sell the business. This would occur at whatever price acceptable to the shareholders that could be achieved in the market. This would not necessarily be at a "fair and reasonable price".
Further the reference to "price" in cl 9, especially in cl 9(f) which deals with the possible sale to a third party, could only be a reference to an objectively ascertained market price.
For those reasons, my opinion is that the auditor was correct to determine "the price for the defaulting Shareholder's Relevant Proportion" on the basis of market value, and not the "fair and reasonable" price that could be attributed to those shares.