Ubertini v Saeco International Group SpA

2 The parties have now made submissions on the appropriate steps to be taken in order to ascertain the price at which the Shares should be purchased by Saeco International.

3 The main areas of dispute between the parties are whether or not, before the court determines the price to be paid for the Shares, there should be a valuation of the Shares, and if so the basis of that valuation.

4 The principles to be applied by the court in relation to the discretion under s 233 of the Corporations Act 2001 (Cth) were not in controversy. They may be briefly stated.[2]

(1) Once the discretion under s 233 has been enlivened, the court has a wide discretion as to the appropriate remedy and, in relation to a compulsory purchase of shares, as to the mode of valuation of the shares.

(2) The task of the court is to fix the price that represents a fair value in all the circumstances.

(3) The purpose of such an order is to compensate the oppressed shareholder(s) and the method of determining the price is not confined to ordinary valuation principles.

(4) The only restriction on the way in which the price for the shares to be purchased may be ascertained is that the proper exercise of the court's discretion requires the discretion to be exercised judicially.

5 In Wain v Drapac,[3] Ferguson J referred to the above matters, amongst other things, and then continued:[4]

At the heart of these principles is that the price to be paid is compensatory in nature and is aimed at redressing the wrong done (the oppressive conduct). Consequently, the price to be paid will not always reflect the actual or real worth of the shares that might be obtained on the open market. Whilst the valuation might be conducted on the basis of one of the traditional methods (including net tangible assets or capitalisation of maintainable earnings) the valuation will invariably take into account various adjustments that should be made to remove the effect of the oppression.

C. Background concerning the Previous Valuation

6 The parties have already engaged in a valuation process in relation to the Shares. This was the result of orders by the court. Some background of the circumstances is relevant to the issues at hand.

7 On 28 August 2013, I made a ruling in relation to an issue raised by the Plaintiffs at the commencement of the trial.[5] In so doing, I set out some history in relation to the early stages of this proceeding. I refer to but will not repeat what I said there.[6] In summary, for present purposes, the following background is relevant:

(1) The proceeding was commenced on 26 October 2006.

(2) At the first directions hearing on 10 November 2006, counsel for Saeco International stated that Saeco International was willing to buy the Shares and to have a determination of the fair market value by an independent expert.

(3) On 10 November 2006, Dodds-Streeton J ordered that an independent valuer be appointed to express an opinion as to the value of the assets, including goodwill, of Saeco Australia.

(4) The Plaintiffs and Saeco International were entitled to, and did, make submissions to the valuer duly appointed, John Selak ("the Previous Valuer").

(5) The Previous Valuer was entitled to inspect all or any of the books of Saeco Australia for the purposes of the valuation.

(6) The parties agreed as to the appropriate date of the valuation, namely 31 October 2006.

(7) The Previous Valuer prepared his final valuation on 6 September 2007, valuing the Shares as at 31 October 2006, and based on a number of assumptions, between $85,000 and $1.885 million ("the Previous Valuation").

8 The Previous Valuation has not formed part of the court's deliberations until now. [7] After the Previous Valuation was provided to the parties in September 2007, the proceeding was referred to mediation but it did not settle.

9 The Plaintiffs contended that a further valuation of the Shares was unnecessary and that, in light of the court's existing findings, the price should be fixed based on what the parties had previously agreed.

10 In the Principal Judgment, by way of background and before considering the issues raised on the pleadings, various matters were referred to, including "Events leading up to this proceeding".[8] One of the matters referred to in this section of the Principal Judgment concerned discussions in mid 2005 between Ubertini, on behalf of the Plaintiffs, and the managing director of Saeco International, Nicholas De Gregorio ("De Gregorio") about the price at which Saeco International would agree to purchase the Shares. A meeting was held between Ubertini and De Gregorio, which was also attended by Ubertini's accountant, Dr Pier Marcucci ("Marcucci").[9]

11 The issue between the parties was whether or not an agreement struck on 30 June 2005, to the effect that Saeco International would purchase the Shares by applying a multiplier of 5 to 36% of the EBITDA of Saeco Australia for the 12 months ended 31 March 2005, was subject to a condition. Saeco International contended it had the ability to reduce the purchase price otherwise arrived at pursuant to what was agreed.

12 The proceeding is governed by the Supreme Court (Corporations) Rules 2003 (Vic). Accordingly, the proceeding was commenced by an originating process supported by an affidavit. Ubertini filed an affidavit sworn 26 October 2006 which referred specifically to the meeting on 30 June 2005. That affidavit stated that a multiplication of 5 times EBITDA was agreed as the basis of valuation. The affidavit further stated that Ubertini and De Gregorio agreed to meet again as soon as the audited accounts for the period ended 31 March 2005 were received. It was not stated in the affidavit that a binding agreement had been entered into. The affidavit further stated that the audited figures were received in about October 2005 and that a further meeting took place in November 2005.

13 On 3 August 2007, the court ordered that the proceeding be conducted by way of pleadings. The Plaintiffs filed and served particulars of claim on 31 August 2007, and the proceeding was conducted on the pleadings from this time onwards.

14 The pleaded allegation in relation to the negotiations which occurred in June 2005 in the Plaintiffs' 2nd further amended particulars of claim ("the Particulars of Claim") reads as follows:[10]

In, about and between April 2005 and November 2005, pursuant to clauses 8 and 10 of the Shareholders' Agreement and the share sale agreement, Ubertini, on behalf of the Plaintiffs, held discussions with officers and representatives of [Saeco International] with a view to negotiating a sale of the Plaintiffs' shares in [Saeco Australia] to [Saeco International].

The particulars to this allegation included a reference to a discussion between Ubertini, De Gregorio and Marcucci in Rome, Italy, on or about 30 June 2005. It was not alleged in the Particulars of Claim that any binding agreement was struck on 30 June 2005.

15 As noted in the Principal Judgment,[11] in addition to the pleadings, the parties each prepared a list of issues in relation to what was contended to be the elements of oppression. The list of issues was cross-referenced to the pleadings. The Plaintiffs did not refer to paragraph 25 as a paragraph in the Particulars of Claim relied upon to establish oppression.

16 Accordingly, on the issues as pleaded, and also pursuant to the list of issues of the Plaintiffs, there was no allegation of an enforceable and binding agreement in June 2005, nor was there any allegation of any oppression in relation to the relevant events.

17 As a matter of evidence, however, it was hotly contested at trial as to whether or not the discussions in June 2005 resulted in any binding agreement between the parties, and also as to the essential terms of any agreement. In the closing submissions, both orally and in writing, [12] the issue was specifically addressed. What was discussed in June 2005, and the related events that followed those discussions, was important in understanding how it was that the relationship between the parties ultimately fell apart.

18 It is in this context, that the court made the findings that it did in relation to the nature of the discussions in June 2005.

19 As referred to in the Principal Judgment, after the position of Saeco International changed in November 2005, the parties continued to negotiate.[13] Those negotiations continued to approximately the end of October 2006. In August 2006, further offers were made by the parties in relation to the purchase price of the Shares.[14] These offers were less than the amount that was to be derived using the formula previously agreed on 30 June 2005. Accordingly, not only Saeco International, but also the Plaintiffs, prior to the commencement of the proceeding, were willing to have the Shares transferred for a sum which was substantially reduced from what was the product of the discussions in June 2005.

20 In opening, senior counsel for the Plaintiffs said that the Plaintiffs did not contend that an agreement was ever reached about the price of the Shares, but that there were "lots of discussions about it". Senior counsel then referred to the audit of accounts being available in mid2005. The opening did not reflect the evidence.

21 In closing, junior counsel for the Plaintiffs submitted that there was an agreement reached in June 2005. This, in fact, did reflect the evidence. However, it was also stated in closing that the Plaintiffs did not press "the contract" and that the evidence showed that the parties moved on.

22 In summary, it was not suggested by the Plaintiffs in any pleaded allegation, or in any submission at trial, that they would seek to establish a lawfully binding agreement by reason of what occurred in June 2005.[15]

23 In the circumstances referred to above, it would be entirely unfair to now hold Saeco International to what the court has found occurred in June 2005 as if the agreement referred to were a binding agreement that the Plaintiffs were entitled to enforce. I do not believe that date, or the mechanism for ascertaining the price of the Shares, would be appropriate when the agreement was struck long before there was any suggestion of oppressive conduct on the part of Saeco International, and the parties moved on from the agreement in any event. Further, had Saeco International been on notice of any intention of the Plaintiffs to enforce the agreement, it may have called further evidence. It also may have conducted its case differently and made further submissions on the issue. In short, Saeco International did not come to court to meet the case of a legally binding and enforceable agreement struck in June 2005.

24 Accordingly, notwithstanding the obvious straightforwardness of the approach, I reject the Plaintiffs' principal submission that the agreement in June 2005 ought to form the basis of calculating the price of the Shares.

E. Alternative contentions on a valuation process

25 On the basis that the court rejected their principal contention, the Plaintiffs submitted that the price for the Shares should be determined by the court and not by a valuer. To this end, it was submitted there should be no appointment of an expert to make any determination of the value of the Shares. Whilst Saeco International accepted the fixing of the price was a matter for the court, it submitted the Previous Valuer should be reappointed to value the Shares substantially by reference to the Previous Valuation. Saeco International submitted the parties should then return to the court for the determination of the price of the Shares.

26 In short, there was a fundamental difference between the parties as to the approach that ought to be taken in any valuation process.

27 The Plaintiffs submitted that the process should only be conducted by the court, with each party appointing their respective experts to consider the matter, form their opinions and then provide a joint report to the court identifying areas of agreement and disagreement.

28 In contrast, Saeco International submitted that the Previous Valuer should be reappointed to allow the parties to take the benefit of work previously done. Saeco International submitted that if the Previous Valuation was the starting point from which any further valuation ought to be conducted it would save the parties considerable time and expense. In substance, Saeco International contended that a suitably qualified valuer had already considered the issue and there was no good reason not to use the Previous Valuation. Alternatively, Saeco International submitted that an independent valuer ought to be appointed to perform the valuation, again using the Previous Valuation as the starting point, with the parties being able to make submissions to that valuer.

29 In response, the Plaintiffs rejected any suggestion that the Previous Valuation should form a substantive basis for determining the price of the Shares. They also submitted that it would be inappropriate to appoint the Previous Valuer to conduct any valuation. However, the Plaintiffs accepted that the Previous Valuation could be used as a template for the purpose of the parties preparing respective expert reports on the issue of valuation and price.

30 The Plaintiffs also contended that the proposal put forward by Saeco International meant there would be 3 valuers involved in the process which would involve further expense that ought not be incurred.

31 Although there may be further expense in having an expert independent valuer involved in the process,[16] it is my view that having such an expert valuer, independent of the parties, would greatly assist the court in relation to the many issues which may arise in determining what the fair price ought to be for the Shares. Although it is ultimately a matter for the court, a report from an expert entirely independent of the parties may be able to express instructive opinions on matters where the respective experts of the parties are unable to agree.

32 That leaves the question of whether or not the Previous Valuer ought to be reappointed, or whether an entirely new valuer should perform the further role of valuing the Shares. If there were not a better course, there would be no particular reason why it would be inappropriate to reappoint the Previous Valuer. However, the better approach is to appoint a new valuer who is entirely independent of the parties and the previous process. The appointment of such a valuer is more likely to produce a valuation that is free from any predetermination of the issues which now arise on the question of the value of the Shares. In the circumstances, it is procedurally a fairer process to adopt.

E.2 Date for determining the price of the Shares

33 It is a matter for the court to determine the date to be used in order to fix the price for the Shares. As noted above, by agreement between the parties, the date of 31 October 2006 was used in relation to the Previous Valuation.

34 There is no general rule as to the date at which any valuation of shares should be fixed for the purpose of determining the price for a purchase under s 233(1)(d) of the Act.[17] One of the possibilities which is regularly used as the appropriate date is the date of the commencement of the proceeding.[18]

35 The Plaintiffs submitted that they do not contend for a date earlier than 31 October 2006 provided that the Previous Valuation was used as a template and that appropriate adjustments are made to the Previous Valuation. In my view, it is not appropriate to attach any condition to the fixing of this date (especially in circumstances where the date was the subject of an earlier agreement and, for the reasons stated below, is an appropriate date in any event). It is a separate question as to whether or not adjustments need to be made to any valuation of the Shares as at this date to reflect a fair price.

36 There are also practical reasons why the date of 31 October 2006 ought to be adopted. First, the parties have already spent considerable sums of money, not to mention a substantial amount of time, making submissions in relation to the value of the Shares as at 31 October 2006. By using the same date as previously used, it would be likely that a great deal of expense will be saved by reason of the pre-existing work.

37 Secondly, the date of 31 October 2006 is only 5 days after the proceeding commenced.

38 Thirdly, the date is a point in time that the parties previously agreed was entirely appropriate for a valuation. As at 31 October 2006, Saeco Australia was a going concern, and may be properly valued as such. Any adjustments that might need to be made to take into account any oppressive conduct of Saeco International may be properly accounted for.

39 For the reasons stated, I have formed the same opinion that the parties have previously formed, namely, 31 October 2006 is the date at which the Shares should be valued. The court will order accordingly.

E.3 Whether any direction should be given in relation to any valuation of the Shares

40 The Plaintiffs submitted that the court should give directions now as to the adjustments that need to be made to any valuation as at 31 October 2006. The adjustments the subject of the directions sought related to:

(1) The gross profit margin to be used in estimating the EBITDA for Saeco Australia on earnings budgeted for 2008.

(2) The capitalisation rate to be used for the EBITDA as found.

(3) The reinstatement of the brand management fee "agreement". [19]

(4) Extending the terms for payment of debts owed to Saeco International to 150 days.

(5) Directing that there should be no provision for doubtful or bad debts.

(6) Adjusting the stock value of the stock held by Saeco Australia at the relevant time.

(7) Making an adjustment for the Returned Stock.[20]

41 Consistent with the finding in the Principal Judgment,[21] Saeco International accepted there ought to be a direction in relation to the payment terms of Saeco International's invoices to Saeco Australia.[22] However, with the exception of the terms of payment of debts owed to Saeco International by Saeco Australia being specified as agreed at 150 days, Saeco International submitted that the court should not make any such direction concerning necessary adjustments.

42 In my opinion, there are a number of difficulties with the Plaintiffs' suggestion.

43 First, with respect, I have some concern as to the appropriateness of the basis upon which each of the directions are sought. Save for the agreed direction, there is a real risk that if the directions were made now it might foreclose proper argument and disposition in relation to the subject matter of the proposed directions. In particular, it was apparent during oral argument that there were a number of assumptions made by the Plaintiffs in putting forward the proposed adjustments which were not soundly based. In short, based on what has been presented to date, the court could not be satisfied that all relevant material evidence was before the court.

44 Secondly, the directions are sought to be imposed without the court having the benefit of any expert opinion on matters as they presently stand. It may be, with the benefit of expert opinion, the court would form a different view to the views it might now form if it considered and determined the appropriateness or otherwise of the directions.

45 Thirdly, if the court were to make any direction now which was based on what was later disclosed to be an incorrect assumption on incomplete evidence, it would be likely to undermine the valuation process the parties are about to undertake.

46 Fourthly, if the directions are not made presently, appropriate submissions may be made by the parties on these issues, both to the expert valuer appointed and, ultimately, to the court, before any price for the Shares is fixed. In other words, by the court refraining from making the directions sought now, this does not in any way shut out the Plaintiffs or Saeco International from making submissions based on any or all of the adjustments sought, if they continue to be appropriate, both during and after the valuation process has taken place.

47 Fifthly, if there are any further findings of fact that need to be made by the court before fixing the price of the Shares, the subject matter of such questions is likely to be more specifically identified and refined after the valuation process. The court will direct the valuer to specifically address any further issues that need the court's determination and, if appropriate, to express her or his opinion based on any competing assumptions that require further engagement of the court process.

48 Accordingly, the court will make a direction in relation to the payment terms of Saeco International's invoices to Saeco Australia, but will not otherwise make any direction.

49 The Plaintiffs initially submitted that the court should now award penalty interest to compensate the Plaintiffs in relation to an alleged use by Saeco International of the Plaintiffs' money. However, at a brief directions hearing held before the hearing on these issues, it was accepted that the issue of interest should be deferred until after the price for the Shares has been determined.

50 For the reasons stated, the court will direct that the parties agree within 7 days upon an expert valuer to express an opinion as to the value of the Shares, such opinion to include the value of the assets, including goodwill, of Saeco Australia. In the event the parties are unable to agree within 7 days, an expert will be appointed by the court.

51 Further, in preparing and completing a fresh valuation, the appointed expert is entitled to take into account any findings in the Principal Judgment, together with any other matters the subject of submissions by the Plaintiffs or Saeco International, which she or he considers relevant. That said, a matter the valuer must take into account is that the debts the subject of invoices remitted by Saeco International to Saeco Australia were payable, at all relevant times, 150 days from the date of such invoices.

52 I will invite the parties to prepare minutes of order to reflect the reasons set out above. I also will make directions for the conduct of the proposed valuation and for further hearing by the court.

[1] Ubertini v Saeco International Group SpA (No 4) (2014) 98 ACSR 138.

[2] See, for example Wain v Drapac [2013] VSC 381, [37]-[38] (Ferguson J), referring to Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304, 360-361 [178] (Gummow, Hayne, Heydon and Kiefel JJ) and Smith Martis Corp & Rajan Pty Ltd v Benjamin Corporation Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136, 145-146 [70]-[78] (Wilcox, Marshall and Jacobson JJ).

[3] Wain v Drapac [2013] VSC 381, [38].

[5] [2013] VSC 468.

[7] The Previous Valuation was not in evidence before the court at trial. It has now been tendered on the limited basis that it may be used in making submissions to the court as to the appropriate course to take going forward: Evidence Act 2008 (Vic), s 136.

[9] Principal Judgment, 146-147 [34]-[43].

[12] The Plaintiffs' closing submissions, pars 45-48; Saeco International's closing submissions, pars 81-83.

[13] Principal Judgment, 148 [44]-[48].

[14] Principal Judgment, 204 [370]. Also, by letter dated 9 August 2006, the Plaintiffs made a counter offer of $4.5 million.

[15] In the Plaintiffs' opening, senior counsel also stated that there were discussions about 5 times EBITDA and a price based on a multiple of earnings.

[16] There was no evidence about this, and it is possible that costs might ultimately be saved by having such a person in the process. Subject to any directions from the court, it will be a matter for the expert valuer as to the process that ought to be adopted.

[17] Foody v Horewood (2007) 62 ACSR 576, 590 [37] (Chernov JA, with whom Ashley and Neave JJA relevantly agreed).

[18] See, for example, Joint v Stephens [2008] VSCA 210; (2008) 26 ACLC 1467, 1500 [155] (Nettle, Ashley and Neave JJA), referring with approval to Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, 364.6 (Lord Keith of Avonholm); In re Jermyn Street Turkish Baths Ltd [1970] 1 WLR 1194, 1208.4 (Pennycuick J), reversed on other grounds, [1971] 1 WLR 1042; In re A Company (No. 002567 of 1982) [1983] 1 WLR 927, 938A; cf In re London School of Electronics Ltd [1986] Ch 211, 224A (Nourse J); Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882, 907 (Wheeler J); Foody v Horewood (2007) 62 ACSR 576, 588-590 [34]-[37] (Chernov JA), [93] (Ashley JA).

[19] See Principal Judgment, 143 [17], 146 [35], 160 [122], 221-222 [463]-[467].

[20] See Principal Judgment, section D.1.4, 171-179 [192]-[235].

[21] At 180 [240]-[241], 224 [480], 224-225 [483]-[485].

[22] The concession by Saeco International related to debts owed by Saeco Australia. It did not extend to subsidiaries of Saeco Australia.