Company Law and Partnerships Valuation Dates and Considerations in Wind Up Proceedings
In oppression or wind up proceeding, there is usually dispute as to what date the business should be valued at.
The differing values could be significant sometime hundreds of thousands of dollars or even millions depending on the size of the company. If the business has gained in value since the commencement of those proceedings, it will usually be argued by the exiting party that the effective date is the later date. An opposing party is likely to argue the earlier date on the basis that the existing party has contributed little to the business. In this newsletter we offer some guidance on what the courts take into considering in deciding the effective date of valuation. Some broad statements were madeShort v Crawley : • the overriding requirement is that the valuation, and the time at which the valuation is to be carried out, be fair. • Fairness depends upon the facts of the particular case. • The valuation must exclude the depreciating effect on the value of the applicant’s shares brought about by the oppressive conduct. • The starting point is the date that the order is made. • Where a company has been deprived of its business, an early valuation date (and compensating adjustments) may be required in fairness to the claimant. • Where a company has been reconstructed or its business has changed significantly, so that it has a new economic identity, an early valuation date may be required in fairness to one or both parties. • Where a minority shareholder has a petition on foot and there is a general fall in the market, the court may in fairness to the claimant have the shares valued at an early date, especially if it strongly disapproves of the majority shareholders prejudicial conduct. • A claimant is not entitled to a “one-way bet” and the court will not direct an early valuation date simply to give the claimant the most advantageous exit from the company, especially where severe prejudice has not been made out. In the matter of Rankine Bros Pty Ltd the shares had declined in value after the commencement of proceedings. The judge valued the shares at the later date because amongst other things: • the applicant did not establish subsequent oppression relevantly bearing on the shares, and • Government factors (such as World Heritage Listing of Rainforest area) caused the decrease in the value of the shares and to value them at the early date would allow the applicant a windfall. In Vadori v AAV Plumbing the court discussed the above cases stated that there is no prima facie principle that the starting point of the valuation is the date the proceedings are commenced. The court said: “There is some support for the approach of valuing an applicant’s shares in a company which has lost business opportunities due to breaches by the directors (where this conduct also constitutes the oppression) by treating the new company, which took the business opportunity, as if it were a wholly-owned subsidiary of the subject company (Re Bright Pine Mills, at 1013 – 1014; Dwyer v Lippiatt; Dwyer v Backpackers R Us, at 355; Drinkwater v Caddyrack Pty Ltd  NSWSC 431).” In Vadori, the applicant argued: • there should be no discount to the price payable for the share notwithstanding that it is a minority interest (the expert evidence was that ordinarily a 14% – 40% discount would be payable where a third party is acquiring a minority share in the plumbing company); • but for the oppressive conduct they would have remained in business together. In response the judge: • said the evidence did not establish any real likelihood that, but for the oppressive conduct, the three directors would have remained working together in the company; • did not include any component for goodwill but instead included a component referable to the value of the company’s claim against the directors for breach of fiduciary and other duties (akin to an account of profits); and • did not apply a discount. Conclusions The following conclusions can be drawn from the above cases: • There is no set rule on the date the valuation is to be performed; • the overriding requirement is that the valuation be fair having regard to all the circumstances; • whether goodwill is taken into account will be dependent upon the expert evidence; • the oppressive conduct of the respondents will be taken into account if the oppressive conduct causes the reduction in value; • there may be a discounting of the share value in minority shareholder cases (but this will depend on the evidence and the findings of the judge); and • if outside factors have caused a reduction in the purchase price than this will also be taken into account. For more information please contact Evan Sarinas of Sarinas Legal. This release is not intended as legal advice and all liability is disclaimed for reliance on it.