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Court of Appeal of New Zealand |
Last Updated: 4 June 2015
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IN THE COURT OF APPEAL OF NEW ZEALAND
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BETWEEN
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Appellant |
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AND
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First Respondent |
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Second Respondent |
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Hearing: |
31 March 2015 |
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Court: |
Harrison, Stevens and French JJ |
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Counsel: |
G M Brodie and M A Bond for Appellant
G K Riach and M K Crimp for Respondents |
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Judgment: |
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by French J)
[1] Section 149 of the Companies Act 1993 provides that a company director who buys shares in the company without disclosing price sensitive information to the vendor must pay fair value for the shares.
[2] The main issue in the present case is whether the trial judge, Gendall J, erred in his assessment of fair value. In particular whether the Judge was correct to apply a 50 per cent discount on account of various contingencies.[1]
Factual background
[3] Ms Cooper, her sister and brother-in-law (Mr Davies and Ms Cooper-Davies), and their respective interests worked together on numerous property development projects in Christchurch. The projects were undertaken through the auspices of various companies in which the two family branches held equal shareholding.
[4] One of those companies was Madras Street 323 Limited (Madras Street). Ms Cooper and Mr Davies were the sole directors of Madras Street. The shareholding was held in equal shares by two entities, one controlled by Ms Cooper and the other by Mr Davies and Ms Cooper-Davies. The two shareholding entities, Cooper Trustees Number 11 Ltd (Cooper Trustees) and Cooper-Davies Trustees Number 6 Ltd (Cooper-Davies), are the formal parties to this litigation, along with Ms Cooper in her personal capacity.
[5] Unfortunately, relations between Ms Cooper and the Cooper-Davies soured. In early 2011, the disharmony culminated in Mr Davies advising Ms Cooper that he and his wife wanted to sell their shares in Madras Street.
[6] The major asset of Madras Street was a commercial building. The building had been damaged in the Christchurch earthquakes of September 2010 and February 2011. It was insured with Zurich New Zealand (Zurich).
[7] Negotiations for the sale of the shares were undertaken on the basis that the building was repairable and would be repaired in terms of the insurance policy. That was what Ms Cooper had indicated to Mr Davies was her intention.
[8] On 3 May 2011 the parties verbally agreed on a sale price of $150,000 for the shares calculated on the basis of the most recent valuation of the land and building less Madras Street’s debts. Subsequently, on 9 May 2011 a written contract for the sale of the shares was signed by Cooper-Davies as vendor and Cooper Trustees as purchaser. The contract was subject to the parents of Ms Cooper and Ms CooperDavies giving their consent to the sale. The parents’ family trust had loaned money to Madras Street.
[9] On 18 May 2011 the contract became unconditional with settlement taking place on 26 May 2011.
[10] In October 2011 the insurer, Zurich, settled with Madras Street not on the basis that the building was repairable but on the basis that it had been damaged by the February 2011 earthquake beyond economic repair and that the cost of rebuilding would be more than the sum insured. Zurich made a payment of $6,360,497.99. That figure represented the full replacement sum assured under the policy for material damage less a deductible together with a payment for loss of income under a business interruption policy. The cash payout significantly increased the value of the shares which by that time were held solely by Ms Cooper’s interests.
[11] Subsequently, the bare land was sold by Ms Cooper for $900,000 in February 2013.
[12] It transpired that prior to the shares changing hands, Ms Cooper knew of the likelihood the building would be earmarked for demolition rather than repaired but this was never disclosed to the Cooper-Davies. The latter’s unchallenged evidence was that had they known this information they would never have gone ahead with the sale in May 2011 at a figure of $150,000.
[13] Cooper-Davies considered that Ms Cooper had unfairly made a windfall at its expense and issued proceedings in the High Court against Cooper Trustees and Ms Cooper. The statement of claim pleaded six causes of action but for present purposes only two of those are relevant, namely a claim under s 149 of the Companies Act and a claim for breach of fiduciary duty.
The decision of the High Court
[14] The Judge held that the information obtained by Ms Cooper regarding the likelihood of demolition was information that was material to an assessment of the value of the shares. The Judge further held that in light of the information, Cooper Trustees’ acquisition of the shares for $150,000 had not been at fair value.
[15] Having made those findings — which have not been challenged on appeal — Gendall J then undertook a detailed assessment of what would have been fair value and concluded that it was a figure of $463,582.
[16] The Judge accordingly ordered under s 149 of the Companies Act that Ms Cooper and the Cooper Trustees pay Cooper-Davies the sum of $313,582 being the difference between $463,582 and what was actually paid.[2]
[17] In light of his findings under the s 149 claim, the Judge considered it was unnecessary for him to reach any final determination of the claim for breach of fiduciary duty.[3]
[18] Dissatisfied with the outcome of the High Court decision, all parties have appealed to this Court.
[19] We now turn to a more detailed consideration of the claims, the Judge’s analysis of the evidence and the issues on appeal.
Issues on appeal
[20] As explained by this Court in Thexton v Thexton, s 149 was designed to address the problem of insider trading arising where directors buy or sell shares with information that might affect the value of the shares.[4]
[21] Section 149 relevantly provides:
149 Restrictions on share dealing by directors
(1) If a director of a company has information in his or her capacity as a director or employee of the company or a related company, being information that would not otherwise be available to him or her, but which is information material to an assessment of the value of shares or other financial products issued by the company or a related company, the director may acquire or dispose of those shares or financial products only if,—
(a) in the case of an acquisition, the consideration given for the acquisition is not less than the fair value of the shares or financial products; or
(b) ...
(2) For the purposes of subsection (1), the fair value of shares or financial products is to be determined on the basis of all information known to the director or publicly available at the time.
(3) ...
(4) Where a director acquires shares or financial products in contravention of subsection (1)(a), the director is liable to the person from whom the shares or financial products were acquired for the amount by which the fair value of the shares or financial products exceeds the amount paid by the director.
...
[22] As noted in Thexton, the section does not require the director to disclose the confidential information.[5] Rather, it requires the director to abstain from dealing with the shares unless at fair value.
[23] On appeal, there was no dispute over the meaning of “fair value”. Fair value is what is fair as between vendor and purchaser in the circumstances, taking into account all material information known to the director or publicly available at the relevant time.
[24] It was also common ground that s 149 applied to this case even though strictly speaking it was not Ms Cooper who acquired legal ownership of the shares but Cooper Trustees.
[25] What was in dispute on the appeal was whether:
- a discount of 50 per cent was warranted; and whether
- the Judge was wrong to fail to consider the fiduciary claim which if successful would have entitled Cooper-Davies to a more significant remedy than that afforded under s 149.
[26] On the cross-appeal, the issue was whether the Judge applied the correct valuation date under s 149.
[27] We address the discounting point first before considering the arguments about the operative date and the fiduciary duty claim.
Discounting for risk factors
The Judge’s approach
[28] In its statement of claim, Cooper-Davies sought recovery of the sum of $728,000, representing what it said was fair value of the shares less the $150,000 already paid. The figure of $728,000 was based on a pre-trial valuation obtained from its expert witness, Mr Hadlee.[6]
[29] Justice Gendall, however, rejected Mr Hadlee’s valuation on the grounds that it had been done on a pure hindsight valuation basis.[7] The Judge considered that on the facts before him such an approach was inappropriate. He considered there were a number of risk elements in existence in May 2011 that meant there was no absolute certainty the final insurance payout in fact later received would eventuate. In the Judge’s assessment, these risk factors needed to be factored into any valuation.
[30] The Judge identified the relevant risk factors as being:[8]
- (a) The possibility that Zurich might have faced financial difficulty and been unable to pay out under Madras Street’s building insurance policy.[9]
- (b) The possibility that Zurich for any other reason would have refused a payout or endeavoured to negotiate a lower payout in terms of the insurance policy, so that Madras Street would be required to sue to enforce its rights with the attendant cost that would involve.
- (c) The possibility that Zurich would simply have delayed all policy payout negotiations, again resulting in the need for Madras Street to sue.
- (d) In both previous situations at (b) and (c), the possibility that the delay in receiving any insurance company payout for a demolition and rebuild would have caused difficulty for Madras Street in funding its mortgage payments (once the loss of rental insurance cover had run out) and paying other company debts in the meantime. In addition, the payment delay, legal and other costs to pursue litigation against Zurich to enforce Madras Street’s rights under the insurance policy could be onerous and affect the company’s value.
- (e) The possibility that structural engineering or other advice might have changed, such that any final payout to Madras Street could be affected.
- (f) The sale value of the land was quite unknown at the time and could have been detrimentally affected by re-zoning, new building requirements and indeed Christchurch CBD red zone issues imposed by the local authority or the Crown.
- (g) Possible future risks might also have arisen generally for the property and its value simply because it was situated in the Christchurch CBD red zone area alone.
- (h) There might have been some issue over the original completion of the insurance policy proposal or the like, such that a question over the validity of the policy and the payout to the company might arise.
[31] It was not entirely clear to us whether the Judge took risk factors into account other than those specified above. The judgment describes the list as inclusive. However, no other factors are mentioned. We have therefore proceeded on the basis the list was for all intents and purposes exhaustive.
[32] Having identified these risk factors, the Judge concluded that they warranted a 50 per cent discount:[10]
Taking a fair approach to the situation prevailing between these parties on 18 May 2011 [the date the contract for the sale of the shares became unconditional], I am of the view that the real chance of this being a demolition and rebuild here was 50%.
[33] The Judge then found that on the basis of this 50 per cent chance the gross value of Madras Street as at 18 May 2011 was $5.1 million. After deducting company debts of $4,172,835, the net value representing total shareholding of all the company shares as at 18 May 2011 was said to be $927,165. That in turn meant the fair value of the 50 per cent shareholding held by Cooper-Davies was $463,582.[11]
Analysis on appeal
[34] On appeal, Mr Brodie, counsel for Cooper-Davies, submitted that as a matter of general valuation principles it was wrong to apply any discount.
[35] In advancing that submission, Mr Brodie relied on several decisions where it has been held that post-valuation date events may be taken into account when undertaking a share valuation.[12] However, significantly none of the authorities cited concern “fair value” valuations under s 149. Fair value considerations involve an assessment intended to be equitable to the parties in all the circumstances. If there are any risk factors prevailing at the operative date that are known to the director or publicly available that might materially affect the value of the shares, then in principle these should be taken into account.
[36] Where we consider Mr Brodie is on stronger ground is in relation to his further argument that if there was to be discounting then it should have been significantly less than 50 per cent.
[37] In our view, only two of the eight factors relied upon by the Judge should have been taken into account, namely the fact that the sale value of the bare land was unknown and the fact of possible future risks for the property as a whole because it was situated in the Christchurch red zone. Those were risks that were material and that had a strong evidential foundation. They were more than purely speculative. In contrast, as Mr Riach for the respondents acknowledged, there was no evidential foundation for the suggestion that Zurich might be in financial difficulty or that it was going to prove obstructive. Similarly, there was no evidential foundation for the possibility that engineering advice might change. By 9 May 2011 there had already been two written reports issued to Ms Cooper detailing significant structural damage and one verbal report to the effect that yet more structural damage had been discovered.
[38] We accept there was always a possibility that the cost of repairs which had not yet been finalised might be much less than the figures being mentioned to Ms Cooper in early May 2011, and that this contingency should be taken into account. We discuss the relevant evidence in more detail in the context of the crossappeal but for present purposes it is sufficient to record our assessment that there was only a relatively small degree of uncertainty.
[39] Having regard to the risk factors which were material, we consider that the appropriate discount for the purposes of determining fair value was in the order of 15 per cent. A discount as large as 50 per cent was not justified.
[40] The question then arises as to what figure is to be discounted. The Judge derived his figure of $5.1 million as representing a 50 per cent chance of demolition from the oral evidence of Ms Cooper’s expert, Mr Munn. However, Mr Munn’s figure of $5.1 million was only given by way of an example in the course of explaining the rather elaborate methodology he had espoused in his written brief of evidence. The figure was derived from different factors and considerations to those relied upon by the Judge.
[41] Our preference would be to adopt a more straightforward approach based on the effect the payout and the sale of the bare land had on Madras Street’s net equity. The prospective proceeds of the insurance claim and the sale of the land were the company’s only real assets. This was fundamentally the approach adopted by Mr Hadlee and is in accord with the methodology followed by the parties themselves when agreeing a price for the shares in May 2011.
[42] Unlike Mr Hadlee, we do however consider for the reasons identified at [35] that there must be a discount for the uncertainties existing at the time of the sale of the shares. Our calculation therefore is as follows:
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Equity after insurance payout
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$1,162,000
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Plus sale of land
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$1,713,000
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Less expenses of $8000 (legal and accounting fees for sale of land,
preparation of 2013 accounts and tax returns, and incidental expenses)
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$1,705,000
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Less 15 per cent discount on account of contingencies
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$1,449,250
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Less 50 per cent to reflect shareholding worth
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$724,625
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Less $150,000 of monies already paid
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$574,625
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TOTAL
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$574,625
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The operative date under s 149
Argument on cross-appeal
[43] As mentioned, Gendall J took the date the sale contract became unconditional (18 May 2011) as the operative date of valuation for the purposes of assessing fair value under s 149.[13]
[44] By way of cross-appeal, Cooper Trustees and Ms Cooper contend that the correct date was 9 May 2011, being the date the written contract for the sale of the shares was signed.
[45] The evidence established that as the month of May 2011 progressed, Ms Cooper came into more information regarding the likely fate of the building. Accordingly, Mr Riach submitted that had the judge selected the earlier date — when Ms Cooper had less information — his assessment of the probability of the building being abolished would have been different and more favourable to Ms Cooper.
Our analysis
[46] We do not accept that submission.
[47] Under s 149 the date is expressly stated to be the date the shares are “acquired” by the director. As at 9 May 2011, the sale contract was still conditional. In our view, the word “acquire” is not apt to describe a conditional contract. Indeed, our provisional view without hearing argument on it is that shares are only acquired for the purpose of s 149 at the time the shares are actually transferred to the director.[14] If that is correct, it would mean in this case the operative date was the date of settlement, namely 26 May 2011, which is a later date than the one nominated by the Judge.
[48] In any event, although the Judge took 18 May as his operative date, it is clear from reading the judgment as a whole that it would have made no difference to the outcome whichever date he selected. There are passages in the judgment where all three dates are mentioned interchangeably.[15]
[49] The evidence established that in April 2011 Ms Cooper received two reports detailing extensive structural damage to the building. Then on 9 May, prior to signing the share contract, she attended a meeting with engineers, project managers and a representative of Zurich. By that time it had become common knowledge among the business community in Christchurch that if repair costs appeared to be in the order of 80 per cent to 90 per cent of the maximum sum insured, insurance companies preferred to opt for demolition rather than repair. The maximum sum insured under the Madras Street policy with Zurich was $5.685 million and loss of rents insurance of $780,000.
[50] At the meeting on 9 May 2011, the experts advised Ms Cooper that the structural damage was even more extensive than previously thought. There was a lengthy discussion about the costs involved in trying to repair the building and she was given some ball park figures. These were in the vicinity of $4 million to $5 million at which rate the building could not be economically repaired. Notes taken by one of the engineers record the meeting being told what the total sum insured was under the insurance policy and also contains a calculation of what 80 per cent of that figure would be.
[51] After the meeting, the project manager retained by Madras Street emailed Zurich’s loss adjuster saying in light of the newly discovered damage and associated costs “this will mean the building will probably be demolished”. The email was copied to Ms Cooper.
[52] In short, when Ms Cooper came to sign the contract to buy the Cooper-Davies shares she had information that in all likelihood the building would be demolished, not repaired.
[53] Further information received after 9 May 2011 certainly confirmed this. But having regard to the totality of the evidence, we are not persuaded that any discount greater than 15 per cent would be warranted even if 9 May 2011 were the operative date. The flavour of the evidence is that the writing was on the wall as at 9 May 2011.
[54] The cross-appeal is accordingly dismissed.
Claim for breach of fiduciary duty
The High Court decision
[55] In the statement of claim, the claim for breach of fiduciary duty is identical in remedy to the claim under s 149, namely “$728,000 being one-half of the fair value of the company less the consideration of $150,000 already paid”.
[56] As mentioned, Gendall J found it unnecessary to reach any concluded views on the fiduciary claim because of his findings in relation to the claim under s 149. The Judge did, however, express “a preliminary view” that a fiduciary duty might be made out having regard to the close family relationships and the fact the parties’ business affairs were conducted in a way analogous to a partnership. Justice Gendall also stated that if a fiduciary duty was owed by Ms Cooper it was “possible” she had breached that duty by not disclosing material information to Mr Davies.[16]
[57] On receipt of Gendall J’s decision, Mr Brodie applied for the judgment to be recalled, contending (amongst other things) that the Judge should have made formal determinations relating to the cause of action for breach of fiduciary duty and the relief that would follow. It was submitted that the relief available where a fiduciary has breached their obligation of disclosure is different to that under s 149. In particular, it was submitted that in equity there would be no discounting for contingencies and that Ms Cooper and/or Cooper Trustees would be required to disgorge any profits.
[58] Justice Gendall declined to grant the recall application.[17] He did so essentially on two grounds: first, that an appeal to this Court having already been filed, this Court was the proper forum to consider the matter; and secondly, he considered he was entitled to deal with the matter in the way he had because of the way the claim for breach of fiduciary duty had been pleaded.
Our analysis
[59] This Court is always reluctant to decide cases on pleading points. However, in this case we agree with the Judge. It was incumbent on Cooper-Davies to specifically plead that it was seeking an account of profits or equitable compensation as part of its claim for breach of fiduciary duty. Its failure to do that has prejudiced Ms Cooper and her interests in the way they conducted the trial and the evidence they called. There was, for example, no analysis done on what was profit and no evidence as to the value of the work done by Ms Cooper. The statement of claim effectively defined “fair value” as the sum of $878,000 and used that term throughout the pleading. It was too late for Mr Brodie to raise these issues in closing submissions at trial, as he says he did, and it is too late now to amend the statement of claim. It would be unjust to do so.
[60] In light of this, it is not necessary for us to address whether Ms Cooper did owe Cooper-Davies a fiduciary duty. The Judge’s views on the existence or otherwise of a fiduciary duty were the subject of a cross-appeal. However, the views were expressed as “preliminary” only and we are satisfied that the Judge made no finding such as would provide grounds for a cross-appeal.
Claim for pre-judgment interest
[61] The statement of claim did not include a claim for pre-judgment interest and the Judge accordingly made no award. This omission formed part of the application for recall of the judgment. In his decision declining the recall application, Gendall J took the view that the issue of interest was more appropriately dealt with in this Court.
[62] The interest sought is Judicature Act 1908 interest. The absence of any express claim for interest has not prejudiced Ms Cooper. She and Cooper Trustees have had the use of the money and accordingly we consider it to be in the interests of justice for interest to be awarded.
Result
[63] The appeal is allowed. The judgment of the High Court awarding the appellant the sum of $313,582 is quashed and substituted with a judgment for $574,625 together with interest thereon at the prevailing rate under s 87 of the Judicature Act 1908 from 26 May 2011 to the date of the High Court judgment.
[64] The cross-appeal is dismissed.
[65] As regards costs, it was agreed that these should follow the event. The respondents must accordingly pay the appellant costs for a standard appeal on a band A basis with usual disbursements. We certify for two counsel.
[66] We do not make any award in relation to the unsuccessful cross-appeal because the issues were effectively subsumed within the appeal.
[67] Costs in the High Court were reserved. We leave those to be dealt with by the High Court in light of this judgment.
Solicitors:
Saunders Robinson
Brown, Christchurch for Appellant
Harmans Lawyers, Christchurch for
Respondents
[1] Cooper-Davies Trustees Number 6 Ltd v Cooper Trustees Number 11 Ltd [2013] NZHC 3526.
[2] No issue was taken on appeal with the fact that judgment was entered against both Ms Cooper and the purchaser of the shares, Cooper Trustees.
[3] At [151].
[4] Thexton v Thexton [2002] 1 NZLR 780 (CA) at [12].
[5] At [19].
[6] At trial, Mr Hadlee revised this figure to $702,500.
[7] At [130]. The Judge also rejected Mr Hadlee’s evidence that there should be an adjustment to the sale price on account of tax losses. However the Judge’s finding on that issue has not been challenged.
[8] At [130].
[9] Justice Gendall noted this had occurred in respect of insurance payouts from AMI Insurance.
[10] At [135].
[11] This accords with the decision of this Court in Holmes v Kiriwai Consultants Ltd [2015] NZCA 149.
[12] Worldwide NZ LLC v QPAM Ltd HC Auckland CIV-2006-404-1827, 29 August 2008; Worldwide NZ LLC v QPAM Ltd HC Auckland CIV-2006-404-1827, 15 May 2009; Daandine Pastoral Co Pty Ltd v Commissioner of Land Tax unreported, HCA, 26 August 1943; Trustees Executors & Agency Co Ltd v Commissioner of Taxes (Vic) [1941] HCA 18; (1941) 65 CLR 33, [1941] ALR 177; Cannane & Wisbeck Pty Ltd v Official Trustee in Bankruptcy as Trustee of the Bankrupt Estate of Cannane (1996) 65 FCR 453, (1996) 136 ALR 406 (FCA); Clark v Clark [1987] NZCA 140; [1987] 2 NZLR 385 (CA); Shepherd v Spencer HC Timaru CIV-2009-476-242, 16 November 2009; Wood v Wood (1985) 1 FRNZ 576 (HC); McCathie v Federal Commissioner of Taxation [1944] HCA 9; (1944) 69 CLR 1, (1944) 18 ALJR 21.
[13] At [135].
[14] This was the agreed approach taken by the parties in Holmes v Kiriwai Consultants Ltd, above n 11.
[15] See, for example, at [100].
[16] At [151].
[17] Cooper-Davies Trustees Number 6 Ltd v Cooper Trustees Number 11 Ltd [2014] NZHC 335.
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URL: http://www.nzlii.org/nz/cases/NZCA/2015/197.html