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High Court of New Zealand Decisions |
Last Updated: 1 February 2012
THIS JUDGMENT HAS BEEN REDACTED IN ACCORDANCE WITH CONFIDENTIALITY ORDERS MADE ON 24 NOVEMBER 2011.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2006-404-1827
BETWEEN WORLDWIDE NZ LLC First Plaintiff
AND J J GOSNEY Second Plaintiff
AND QPAM LIMITED First Defendant
AND JACOBSEN VENUE MANAGEMENT NEW ZEALAND LIMITED
Second Defendant
AND JACOBSEN F.T. PTY LIMITED (ACN
108 254 440) Third Defendant
AND JACOBSEN VENUE MANAGEMENT PTY LIMITED
Fourth Defendant
Hearing: 19-23 July 2010
2-6 August 2010
12-13 August 2010
Counsel: M J Fisher and K S Muston for Plaintiffs
A C Sorrell and S L Robertson for First Defendant
C P Browne and K J Sparrow for Second, Third and Fourth
Defendants
Judgment: 24 November 2011 at 11:30 AM
JUDGMENT OF POTTER J
WORLDWIDE V QPAM LIMITED HC AK CIV-2006-404-1827 [24 November 2011].
In accordance with r 11.5 High Court Rules
I direct the Registrar to endorse this judgment
with a delivery time of 11.30 a.m. on 24 November 2011.
Solicitors: Brookfields, P O Box 240, Shortland Street, Auckland 1140
S Germann Law Office, P O Box 1542, Shortland Street, Auckland 1140
Wilson Harle, P O Box 4539, Shortland Street, Auckland1140
Copy to: M J Fisher, P O Box 3236, Shortland Street, Auckland 1140
A C Sorrell, P O Box 3810, Shortland Street, Auckland 1140
S L Robertson, P O Box 854, Shortland Street, Auckland 1140
K S Muston, P O Box 3236, Shortland Street, Auckland 1140
Table of Contents
Introduction [1] Background [4] Undertakings [9] The arena [16] Ownership and development structure [20]
Development Agreement [21] Design and construction contract [24] Other operational contracts [30]
Approach to valuation [31] Hindsight [43] Areas of difference between the experts [54] The Lucas approach to valuation [58] (a) Revenue assumptions [64] (b) Rental cost (reflecting land value increase) [99] (c) Small Company Risk Premium (―SCRP‖) [127] (d) ―Untested‖ cash flows discount [141] (e) Derivative proceeding value [148] (f) Minority and marketability discounts [190] (g) Pre-operational risks discount [217] Summary of determinations on valuation issue [241] Valuation of the ―B‖ units and shares of WWNZ [242] Other issues [245] Time for payment [247] Interest [258]] Rights of WWNZ pending payment for the ―B‖ units and shares [280] Summary of conclusions [324] Costs [327] Confidentiality orders [329] Appendix E
Appendix E1
Appendix E2
Appendix E3
Glossary of Terms
ACC Auckland City Council arena the Vector Arena
Bovis Bovis Lend Lease, project manager for the arena
CBD Auckland central business district
Court of Appeal 2006 judgment Worldwide NZ LLC v QPAM Ltd CA122/06, 10
November 2006
Court of Appeal 2008 judgment Jacobsen Venue Management New Zealand Ltd v Worldwide NZ LLC [2008] NZCA 105
DCF discounted cash flow valuation methodology derivative proceeding the proceeding issued in 2005 by WWNZ and
(also referred to as ―the 2005 Mr John Utsick against the Jacobsen directors
proceedings‖) of QPAM under s 165 of the Companies Act
1993
design and construction contract the contract dated 25 May 2004 between
QPAM and Mainzeal relating to the arena
development agreement the agreement dated 21 May 2004 between QPAM and ACC for the development of the arena
DPL Decision Programming Language – a financial modelling tool utilised by Mr Lucas
guaranteed maximum price the guaranteed maximum price under the design and construction contract
JVMNZ Jacobsen Venue Management New Zealand
Limited, the second defendant
JVM Pty Ltd Jacobsen Venue Management Ltd, the fourth defendant
Mainzeal the building contractor for the arena
PwC PricewaterhouseCoopers (the firm of which Mr
Lucas is a partner)
QPAM QPAM Limited, the first defendant
QPAM trust the Quay Park Arena Management Trust, the unit trust established by the unit trust deed dated 9 March 2004
QPAM trust deed/ the unit trust deed for the Quay Park Arena
unit trust deed Management Trust (QPAM trust) dated 9
March 2004
SCRP small company risk premium
the Jacobsens the second, third and fourth defendants
the term the term of the development agreement – 40 years
Ticketmaster Ticketmaster7 Pty Ltd – party to a ticketing services agreement with QPAM
valuation date 26 April 2006
WACC weighted average cost of capital W T Partnership the project auditor for the arena WWNZ Worldwide NZ LLC, the first plaintiff
Introduction
[1] This judgment principally concerns the assessment and determination of the fair market value of the 25 per cent interest of Worldwide NZ LLC (―WWNZ‖) in the ―B‖ units in the Quay Park Arena Management Trust (―QPAM trust‖) and the
―B‖ shares in QPAM Limited (―QPAM‖) as at 26 April 2006 (―the valuation date‖).
It follows upon a declaration by the Court of Appeal in a judgment dated 16 April
2008 (―Court of Appeal 2008 judgment‖):1
... that the consideration to be paid for WWNZ’s units and shares is to be
their fair market value to be assessed if necessary by the court.
[2] The parties have not been able to agree the fair market value and therefore seek assessment and determination by the Court. WWNZ’s fourth amended statement of claim also refers to an option to be included in the fair market value but the parties agree the option has no value.
[3] This judgment also concerns the interim rights of WWNZ in the ―B‖ units and shares. In its fourth amended statement of claim WWNZ seeks further orders and declarations which I consider under the heading, ―Other issues‖, later in this judgment.
Background
[4] The background is usefully summarised in the Court of Appeal 2008 judgment2 and I adopt that summary.
[1] [QPAM] as trustee for the [QPAM trust] has developed the Vector Arena at Quay Park, Auckland, as a multi-use indoor sports and entertainment area. The QPAM trust was originally a joint venture between [WWNZ] as to a 25% interest and entities associated with the Jacobsen family of Australia (―the Jacobsens‖) as to 75 per cent. As might be expected in such a venture, the QPAM trust deed provides for rights of pre- emption which are triggered by, inter alia, a change in control of WWNZ. QPAM’s constitution provides that WWNZ’s shareholding in QPAM and units in the QPAM trust are ―stapled‖. The same is true of the interests held
1 Jacobsen Venue Management New Zealand Ltd v Worldwide NZ LLC [2008] NZCA 105 at [57].
2 At [1] to [5].
by the Jacobsens in both entitles. WWNZ is a subsidiary of The Worldwide Entertainment Group, a corporation based in Florida. Mr John Utsick was the WWNZ appointed director on the board of QPAM. The Jacobsens had three directors.
[2] In 2005, disharmony between the joint venturers led to WWNZ and Mr Utsick issuing proceedings (―the 2005 proceedings‖) under s 165 of the Companies Act 1993 alleging that the Jacobsen directors had preferred their own interests in concluding a ticket sales agreement for the Vector Arena.
[3] The Federal Court in Florida placed Worldwide Entertainment Group in receivership on 18 January 2006 and Mr Michael Goldberg of Florida was appointed as receiver. In early April 2006, Mr Goldberg purported to remove Mr Utsick as a director of QPAM and replaced him with Mr John Gosney of Auckland. There followed disputes between QPAM (and the Jacobsens) with Messrs Goldberg and Gosney about the process of appointing Mr Gosney, access by Mr Gosney to QPAM’s financial records and the adequacy of the records provided to him.
[4] In late April 2006, the Jacobsens’ solicitors emailed Mr Goldberg invoking their pre-emptive rights as holder of the ―A‖ units in the QPAM trust. This was on the basis that the receivership of The Worldwide Entertainment Group amounted to a change in control of WWNZ. They said that the Jacobsens were prepared to pay a ―fair price‖ for the ―B‖ units owned by WWNZ. They also maintained that WWNZ no longer had any rights in respect of the QPAM trust and QPAM. Mr Gosney’s appointment as director was thus said to be invalid. The Jacobsens have subsequently excluded WWNZ and Mr Goldberg from any participation in the affairs of QPAM or the QPAM trust. As well, they maintain that under the QPAM trust deed, the purchase price for the shares and units held by WWNZ in QPAM and the QPAM trust is to be fixed by QPAM.
[5] WWNZ and Mr Gosney issued a further set of proceedings (―the 2006 proceedings‖) in which they challenge the entitlement of QPAM and the Jacobsens to exclude them from participation in, and information about, QPAM and the QPAM trust and also the entitlement of QPAM to fix the purchase price for the shares and units of WWNZ. ...
[5] The Court of Appeal summarised the relevant provisions of the constitution of QPAM and the trust deed for the QPAM trust:3
QPAM’s constitution provides for ―A‖ and ―B‖ shares. WWNZ’s shares in QPAM (amounting to a 25 per cent interest) are ―B‖ shares. The ―A‖ shares, which constitute the remaining 75 per cent, are held by the Jacobsens. The constitution contains no express rights of pre-emption. It does, however, provide that the ―A‖ shares ―correspond to and are stapled to‖ the corresponding ―A‖ units held by the ―A‖ unit holder in the QPAM trust. Similarly the constitution provides that ―B‖ shares in QPAM are stapled to the corresponding ―B‖ units held by the ―B‖ unit holder in the QPAM trust.
3 At [10].
[6] After considering the rights of pre-emption in the QPAM trust deed, which
the Court said were ―very badly drafted‖,4 the Court recorded:5
All parties agree that the Jacobsens may acquire the interests of WWNZ in QPAM and the QPAM trust and the consideration to be paid is their fair market value.
[7] Having considered the competing claims of the parties as to how the fair market value was to be established, the Court concluded that a more sensible approach was to construe cl 10 of the QPAM trust deed as requiring the ―B‖ unit holder to give the ―A‖ unit holder the opportunity to buy the shares and units at their fair market value, which could if necessary be fixed by the court.6
[8] The declaration that followed brings the issue of the fair market value before this Court. The Court of Appeal did not enter upon consideration of the interim rights of WWNZ, given that the appeal by the Jacobsens was against a refusal of summary judgment and dismissal of an associated strike out application.
Undertakings
[9] Certain undertakings relate to WWNZ’s claimed interim rights. It is
convenient to refer to them here.
[10] The Jacobsens gave an undertaking referred to by the Court of Appeal in its judgment dated 10 November 2006 (―Court of Appeal 2006 judgment‖)7 that the ―B‖ shares were not subject to any existing security interest created by the Jacobsens and that the Jacobsens undertook not to dispose of or charge the ―B‖ shares until:
(a) Jacobsen has paid for the shares in an amount fixed by QPAM as trustee, determined by the Court or determined as a result of a process either fixed by the Court or QPAM; or
4 At [18].
5 At [20].
6 At [40].
7 Worldwide NZ LLC v QPAM Ltd CA122/06, 10 November 2006.
(b) Jacobsen had paid $4.125m8 into a trust account to be held as security for its obligations to pay for the shares; or
(c) Further order of the Court.
[11] The Jacobsens gave the undertaking in the light of the following intentions:
(a) Once Jacobsen has paid the fixed amount it will be free to deal with the B shares even if Worldwide challenges either the amount paid or the process for fixing the amount; and
(b) If there is delay in determining the consideration to be paid and it becomes commercially necessary for Jacobsen to sell or charge the B shares Jacobsen will deposit money, equal to the cost of Worldwide’s acquisition of its interest, for retention of the shares.
[12] The Court said that while the undertaking refers to shares rather than shares and units, it was satisfied that it covered both. The Court noted that the ―B‖ shares and the ―B‖ units are ―stapled‖ which means that any restriction on disposal or charging of one must apply equally to the other. 9
[13] The Court considered that the undertakings provided reasonable protection for the position of WWNZ pending resolution of the disputes between the parties and completion of the pre-emptive rights process.10
[14] On 6 August 2010, during the hearing before me, QPAM filed an undertaking to the Court not to dispose of its rights to control the arena except on notice to the plaintiffs, in the following terms:
QPAM LIMITED undertakes to this Court that it will not dispose of the greater of 25% or $4.5m of the proceeds of any sale of its rights to control the Vector Arena. This undertaking shall remain in force until the expiry of
8 working days from written notice of the receipt by QPAM of any such sale proceeds to the Plaintiff care of its solicitors Brookfields, Attention David Neutze. Such undertaking is given without any acknowledgment that there is any actual or intended sale process by QPAM Limited of its interest in the Vector Arena.
8 $4.125m was the consideration provided in the Unit Subscription Agreement dated 4 March
2004 as varied by the Deed of Termination & Variation (undated but completed in or about November 2005) for the 15 ―B‖ units in the QPAM trust subscribed for by WWNZ. The consideration was $1.375m for the ―A‖ units subscribed for by JVMNZ. Debt funding was to be provided up to $4.125m by JVMNZ and $1.375m by WWNZ with JVMNZ paying $2.5m, and thereafter each party paying dollar for dollar up to the maximum amounts.
9 At [36]-[38].
10 At [39].
[15] The above undertaking by QPAM is referred to in my judgment of 6 August
2010 in this proceeding on WWNZ’s application for a freezing order. The application was declined on the basis that the above undertaking would be given by QPAM.
The arena
[16] Mr Lucas, the plaintiffs’ expert, provided relevant information in respect of the Vector Arena (―the arena‖). Mr Hussey, the expert for the Jacobsens, did not attempt to repeat the background in any detail but in evidence referred to certain aspects with which he took issue.
[17] QPAM as trustee for the QPAM trust developed the arena to provide Auckland with a world class multi-use indoor sports and entertainment arena. The arena was designed to provide up to 12,000 covered seats for national and international popular entertainment events; major indoor sporting events; and other concerts, dances, conventions, exhibitions, product launches, seminars and meetings.
[18] The arena was the first venue of its type in New Zealand. It was seen as a major drawcard for northern hemisphere acts which tour in Australasia and as a venue creating a ―golden triangle‖ between Sydney, Melbourne and Auckland, having advantages for acts coming from the United States.
[19] The arena project encountered some difficulties prior to the valuation date, including the termination of its initial architect and an extension of the Practical Completion Date from December 2005 to 31 August 2006. Mr Lucas identified a number of key issues as at the valuation date which are considered under the heading
―Pre-operational risks discount‖.
Ownership and development structure
[20] QPAM as trustee for the QPAM trust entered into a development agreement with Auckland City Council (―ACC‖) in relation to the arena on 21 May 2004. QPAM was willing to contribute financially to the project in return for exclusive
rights to operate and obtain revenues from the arena for the term (40 years) of the development agreement. The building contract was awarded to Mainzeal. Bovis Lend Lease (―Bovis‖) was appointed project manager.
Development Agreement
[21] The development agreement between ACC and QPAM is a BOOT agreement (―Build, Own, Operate and Transfer‖). It provides QPAM with the right to own and operate the arena for the term of the agreement (40 years), after which ownership would transfer to ACC.
[22] Key aspects of the development agreement identified by Mr Lucas are:
...
[23] Appendix 22 of the development agreement is an unsigned design and construction bond held by Great Lakes Reinsurance (UK) plc. The bond provides for payment of up to 10 per cent of the construction contract value payable in the event of default by Mainzeal. Mr Lucas said he has seen two signed bonds, each for five per cent of Mainzeal’s original contract price, which he treated as being applicable.
Design and construction contract
[24] The design and construction contract is made between QPAM and Mainzeal and is dated 25 May 2004. It provides for a guaranteed maximum price of ... . Mainzeal accepts full responsibility and liability for the final design and its compliance with all law, and that completion of all design documentation and contract works as required by the deed will not give rise to any entitlement for an increase in the guaranteed maximum price. Thus QPAM, through the guaranteed maximum price negotiated with Mainzeal, has passed on to Mainzeal a significant portion of the risk and responsibility arising out of its contractual arrangements with ACC.
[25] Cost savings are to benefit QPAM up to $2m and to be shared 80 per cent by QPAM and 20 per cent by Mainzeal above $2m, but there is provision for certain construction cost savings to be passed back to ACC.
[26] Through its parent company Richina Pacific Limited, Mainzeal was required to provide a parent guarantee, guaranteeing Mainzeal’s ―punctual and proper observance of, and performance by Mainzeal of all Guaranteed Obligations‖. Mainzeal was also to provide a warranty for 12 months following completion for any defects in its work.
[27] All sub-contractors are required to hold professional indemnity insurance cover to a minimum level of $5m or Mainzeal is required to assume this liability. Other parties involved in the design and construction are also required to hold minimum professional indemnity insurance as provided in an annexure to the design and construction contract.
[28] The due date for practical completion of the arena was agreed to be 8
December 2005.
[29] If the arena was not completed by the practical completion date, liquidated damages were to be paid by Mainzeal to QPAM at the rate of ... per calendar day for the first four weeks following the agreed practical completion date. Thereafter liquidated damages were payable at the rate of ... per calendar day. (At the valuation date the practical completion date had been extended to 31 August 2006 and QPAM was charging Mainzeal liquidated damages at the rate of ... per calendar day in accordance with this provision).
Other operational contracts
[30] Mr Lucas referred to other key operational contracts entered into by QPAM
before the valuation date:
(a) Ticketing Services Agreement with Ticketmaster7 Pty Limited
(―Ticketmaster‖) for a term of ..., and a Box Office Agreement ...;
(b) Arena Naming Rights Agreement with Vector Limited for a term of
...with certain provisions for renegotiation after the...;
(c) Catering Agreement with Delaware North Companies New Zealand for a term of... .
Approach to valuation
[31] There is common ground as to the definition of fair market value to be adopted:
The price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller, both acting at arm’s length.
(Mr Lucas gave this definition as an ―independent business valuation‖ in the manner prescribed by the New Zealand Institute of Chartered Accountant’s Advisory Engagement Standard No 2 (AES-2)).
[32] WWNZ and the Jacobsens each instructed an expert to assess the fair market value of the ―B‖ units and shares. Both valuers are well qualified for the task and both gave constructive and helpful evidence.
[33] Mr Lucas, the plaintiffs’ expert, is a Corporate Finance Partner with PricewaterhouseCooper (―PwC‖) specialising in valuations and dispute analysis, a role he has fulfilled for over 14 years. He has a degree of BA (Hons) from the University of Lancaster, England and is a Fellow of the Institute of Chartered Accountants in England and Wales and is also a member of the NZICA.
[34] Mr Hussey, the Jacobsens’ expert, is a chartered accountant and sole director and principal in the chartered accounting practice of Hussey & Associates Limited, trading as Hussey & Co. Mr Hussey said that for the past 16 years the majority of his professional time has been involved in the areas of expert financial investigation and other dispute resolution work. He and his team specialise in providing advice in relation to the assessment of losses, valuation of businesses and commercial matters
generally. He has been a member of the NZICA since 1989 and has been in public practice since 1997.
[35] For the Jacobsens, Mr Gary Cheyne also gave expert evidence in relation to land valuation.
[36] Mr Lucas and Mr Hussey met and conferred. They filed a joint memorandum of experts dated 17 July 2010. Attached to the joint memorandum is a table headed
―Comparison of Enterprise Values‖. It is attached to this judgment as appendix E, the designation adopted at the hearing. Amended versions of appendix E were filed during the hearing but appendix E provides the appropriate starting point.
[37] The experts were agreed that the approach to valuation of the ―B‖ units and shares adopted by Mr Lucas of applying a base case discounted cash flow (―DCF‖) to ascertain enterprise value, is appropriate. Mr Lucas described the DCF methodology as indicating the market value of a business enterprise based on the present value of the cash flows that the business can be expected to generate in the future. He said the DCF method comprises estimating future cash flows and discounting those cash flows to present value at a rate of return that considered the relative risk of achieving the cash flows and the time value of money, to indicate enterprise value. Any debt is then deducted from the enterprise value in order to estimate the value of the equity.
[38] Mr Lucas said he adopted a DCF methodology as his primary valuation approach for the following reasons:
(a) QPAM’s right to operate the arena is subject to the term (40 years)
and hence the cash flows in QPAM have a finite life; (b) Cash flow forecasts are available for the term;
(c) DCF is generally the theoretically preferred method of valuation, subject to the availability of required data; and
(d) The arena had no trading history which he typically required for application of a capitalisation of earnings approach, the most common approach otherwise applied.
[39] The valuers agreed the mid-point base case DCF at $21.47m. Following discussion they agreed certain adjustments to the base case DCF to reach an agreed adjusted base case DCF of $19.19m.
[40] Appendix E shows further adjustments to the agreed adjusted base case DCF that one or other of the valuers considers appropriate but with which the other does not agree. With these variations factored in, the total operational enterprise value (base case) shown in appendix E is: Mr Lucas $18.86m and Mr Hussey $13.76m.
[41] The valuers then made adjustments to those figures to derive their respective assessments of the fair market value for WWNZ’s 25 per cent interest in QPAM. The valuers have differing views as to the adjustments that should be made at this stage of the calculation, as reflected in appendix E. Mr Lucas’s resultant mid-point valuation of a 25 per cent interest is $3.52m and Mr Hussey’s is $1.3m. (Mr Hussey’s valuation was subsequently revised to take into account evidence of land value growth and other adjustments).
[42] Mr Lucas undertook and presented to the Court his own full valuation. Mr Hussey considered and critiqued Mr Lucas’s valuation identifying aspects where he disagreed with Mr Lucas’s valuation. Mr Lucas and the plaintiffs were critical of Mr Hussey’s approach, identifying that it ran the risk of merely being a criticism of certain areas rather than providing an overall objective and independent valuation perspective. The plaintiffs noted that Mr Hussey made only one minor positive adjustment (to Ticketing Commissions – included in Agreed Adjustments, and by an immaterial amount) while all others of his adjustments were negative. The plaintiffs suggested this evidenced a ―cherry-picking‖ approach.
Hindsight
[43] The ―B‖ shares and units are to be valued as at 26 April 2006, the date upon which the Jacobsens gave notice of their exercise of the pre-emptive rights under the unit trust deed. The extent to which the use of information which has become available only after the valuation date may be used in valuing the ―B‖ units and shares was considered by Associate Judge Doogue in a judgment in this proceeding on 29 August 2008. He concluded:11
... In general, the subsequent performance of a company cannot be relevant because that is not a matter that would be known to prospective purchasers as at the date of the valuation. However, if an inference can be drawn from an occurrence, particularly one soon after the date of valuation, which throws light on the understanding or expectations of the theoretical purchasers before the valuation date, then it may be admissible.
[44] Associate Judge Doogue referred to the relevant principles derived from authorities.
[45] In Wood v Wood,12 Hardie Boys J had to establish the value of matrimonial property including shares in a family company at a specific date some years earlier than the case. He adopted the general valuation principles formulated by the Court of Appeal in Hatrick v Commissioner of Inland Revenue.13 He said that although Hatrick was a revenue case, the valuation principles were now regarded as having general application.
[46] The principles assume as a starting point the hypothetical sale by a willing but not anxious seller to a willing but not anxious buyer. However the Court must look carefully at all the relevant facts and circumstances of a given situation in order to establish a fair value that does justice to the parties in the case at hand.
[47] When it comes to establishing the theoretical value of property such as company shares at a certain date in the past, an attempt must be made to ascertain the
value based on information and expectations that would have applied at the time.
11 Worldwide NZ LLC v QPAM Ltd HC Auckland CIV-2006-404-1827, 29 August 2008 at [34].
12 Wood v Wood (1985) 1 FRNZ 576 (HC).
13 Hatrick v Commissioner of Inland Revenue [1963] NZLR 641 (CA).
The Court must be careful to avoid substituting with hindsight what has subsequently become known. The value of hindsight is simply to use the knowledge of subsequent events to confirm the true worth of the property at the specific date. In Wood, Hardie Boys J said:14
In this case, whatever valuation date were chosen, the application of hindsight would mean no more than treating assets at their true worth, as established by subsequent events. The alternative would be to take them at their book values, which are likely to be unrealistic, and that would also be unjust. However it is not necessary to resort to the policy of the Act in order to adopt this view. For, first, the theoretical willing but not anxious vendor would not sell at a price that reflected inadequate asset values, and the like- minded theoretical purchaser would not expect to buy at such a price. And secondly, the law is clear that a valuer is required to take into account events that have occurred since the date at which the value is to be assessed; in order to determine the proper weight to attach to the circumstances pertaining at the material date.
[48] Hardie Boys J referred (inter alia) to McCathie v Federal Commissioner of Taxation.15 The Court was tasked with ascertaining the real value of shares at a specific date in the past, and said that market value is not always the same as real value. The High Court of Australia said that the ―market value‖ test should not be used ―so as to depress the value of the property by exaggerating temporary disadvantages to which it is subject at the date of valuation and failing to give proper weight to its more permanent advantages‖. Shortly before the valuation date, the company had considerably invested in remodelling the department store, which had a temporarily adverse affect on the company’s profitability, but it was expected that in the long-term this would have led to improved business. The Court was willing to consider evidence from the period following the date of valuation, because it would fill out the picture of the longer term trends and therefore avoid the possibility that the one-off event of renovations may have been anomalous and exceptional. The Court said, ―... these were matters existing and to be taken into account at the date of death, and the court should not be forced to speculate as to their future when the
facts are known and can speak for themselves.‖
14 At 584.
15 McCathie v Federal Commissioner of Taxation [1944] HCA 9; (1944) 69 CLR 1 (HCA).
[49] More recently, Riddle v Riddle16 involved valuation of shares in a private company. The company had been incorporated to carry on the business of stock foods supplier. At the date when the parties separated, the business was only just getting underway. Subsequently it began to become profitable but then in the financial year 2003 it suffered a major setback from three causes. First, a major customer discontinued buying food from the company. Second, because of a mistake made in the factory toxic food was produced which killed a number of calves. Finally, there was a downturn in the dairy industry from which many of the customers of the business came. Fogarty J made the following comment about the use of post-valuation events in reaching valuations:17
I am satisfied that the use of hindsight by Mr Hadlee in Wood v Wood was orthodox. Events post valuation are commonly employed by valuers as a cross-check on judgments as to what were foreseeable or what the market demand was at the time of valuation. This is particularly so when the hindsight event occurs close to the valuation date.
[50] In essence the Court decided that an investor interested in acquiring the business would not have anticipated the loss of the customer or that a lethal dosage in the food mix would kill the calves. Nor did the experts apparently take the view that a downturn in the industry was something that was foreseeable by potential buyers at the date of valuation. Therefore, these post-event occurrences were not available as evidence confirming the likely suppositions that theoretical purchasers would have made about the business at the valuation date.
[51] Associate Judge Doogue said of the various authorities, and in particular Riddle v Riddle,18 that they make clear the limited basis upon which evidence of subsequent events can be admitted.
[52] Applying the principles from the above authorities in the present case requires, I consider, consideration of the relationship between the parties, including what they expected to gain from their joint venture in the development of the arena. At valuation date the arena had not been completed and there was no performance
history or any certainty about its future earning capacity. Thus, there may be an
16 Riddle v Riddle HC Christchurch CIV-2005-409-335, 17 August 2005.
17 At [26].
18 At [34].
appropriate basis for looking at subsequent events as the venture has in fact taken shape, in order to assist in assessing the fair market value of the units and shares as at 26 April 2006. Subsequent events which were broadly of a kind that would have been in the contemplation of the parties as they undertook the venture could be applied in hindsight. However, a subsequent event that was clearly outside the contemplation of the parties could not reasonably be taken into account in determining fair market value at valuation date.
[53] I shall assess the relevance of events and occurrences subsequent to 26 April
2006 in assessing the fair market value of the ―B‖ units and shares in light of these
principles.
Areas of difference between the experts
[54] Appendix E shows that Mr Lucas’s assessment of the fair market value for a
25 per cent interest in the ―B‖ units and shares is $3.52m whereas Mr Hussey’s valuation is $1.3m, a difference of $2.22m. During the course of the hearing, as new information and data was considered by the experts, changes were made to the Comparison of Enterprise Values table, and subsequent appendices, E1 and E2, were presented in evidence, reflecting these changes. Appendix E1 reflects a change in Mr Hussey’s approach to the minority discount. Appendix E2 adjusts for an alleged error in management revenue assumptions. Appendices E1 and E2 both reflect a change in approach to land values by Mr Hussey.
[55] The outcome was a reduction in the difference between the valuers of some
$300,000 to $500,000, so that the difference stood at somewhere between $1.7m and
$1.9m. Mr Lucas’s overall valuation of $3.52m did not change. Mr Hussey’s
valuation increased to $1.63-$1.68 (appendix E1) and $1.76-$1.81m (appendix E2). [56] The difference arises from seven areas:
(a) Revenue assumptions;
(b) Rental cost (reflecting land value increase);
(c) Small Company Risk Premium (―SCRP‖);
(d) ―Untested‖ cash flow discount;
(e) Derivative proceeding value;
(f) Minority and marketability discounts; (g) Pre-operational risks discount.
[57] Each of these areas will be addressed in turn.
The Lucas approach to valuation
[58] Mr Lucas utilised two sets of forecasts prepared by QPAM management, a five year forecast and a 40 year forecast. The five year forecast is dated February
2006 and the 40 year forecast, August 2005.
[59] The two sets of forecasts differed in several respects. Mr Lucas reconciled them to derive a consistent set of forecasts which he entitled ―Management Projections‖. He then adjusted these forecasts for a number of technical errors and factual inaccuracies.
[60] The changes made to the management forecasts about which there is no disagreement are:
(a) The absence from the five year forecasts of provision for income tax liability. Mr Lucas adjusted for income tax liability in those five years and also provided for the benefit of tax losses.
(b) The absence from the 40 year forecasts of an allowance for inflation in event rentals and merchandise sales from year 44. Mr Lucas adjusted for this.
(c) Adjustment in the depreciation rate applied to assess the sinking fund provided in the forecasts, to provide a higher rate applicable for furniture, fittings and equipment.
(d) Adjustment for the increased revenues from box office rights to apply the same basis as management had applied in relation to the naming rights agreement, to reflect a compounded rate of inflation.
[61] Having completed this process Mr Lucas developed a spreadsheet entitled Base Case Cash Flows. Mr Lucas discounted the Base Case Cash Flows at the discount rate he adopted, namely 13 per cent, to derive an enterprise value of
$21.47m. This is the agreed figure that appears in the three appendices as the base case DCF. This figure was then adjusted, as agreed by the two valuers, to derive the agreed adjusted base case DCF of $19.19m. The agreed adjustments to the base case DCF, as noted in appendices E, include adjustments to ACC and Auckland Regional Council rates, correction for a ticketing commission error in QPAM management’s original forecasts, allowance for electricity line connection charges and allowance for a minor delay in the commencement of the operation of the arena.
[62] Mr Lucas applied a discount rate for WACC (weighted average cost of capital) of 13 per cent. Mr Hussey says this discount rate should be increased to
15.5 per cent, that is, by 19 per cent. The 2.5 per cent increase is made up by:
(a) An additional small company risk premium (―SCRP‖) of 1 per cent.
(b) A factor of 1.5 per cent to allow for the cash flows being ―untested‖
and therefore more risk attaching to them; [63] These two issues are addressed below as (c) and (d). (a) Revenue assumptions
[64] In the appendices E Mr Hussey includes in relation to ―management revenue assumptions‖ the amount of $.49m. Mr Lucas includes for ―DPL uplift‖ $1.41m. The difference is $920,000.
[65] Mr Hussey’s assessment of $.49m is explained at para 5 of the joint statement
of experts dated 22 July 2010 as ―the effect on the enterprise value that arises
moving to recognising all revenue lines on the basis of management’s original assumptions (with the exception of box office rights from 2017 which we had previously agreed should be grossed up in 2017 to reflect the effect of inflation over the preceding ten years)‖.
[66] The experts state that if the Lucas model were adjusted to report the management forecast income, the effect on enterprise value would be broadly at this level, Mr Lucas’s estimate being in the order of $.56m. They have been unable exactly to reconcile the reasons for the variance, but note that it is relatively immaterial.
[67] Mr Hussey’s opinion is that there was no reasonable basis in April 2006 to depart from management’s revenue projections. He says that management processes appeared to be thorough and reliable. The initial base information came from a comparable Sydney venue. Importantly, the forecasts were updated regularly based on actual information from market participants and using the experience of Mr Mactaggart in operating a Melbourne venue (Mr Mactaggart did not give evidence) and of Mr Hines, General Manager for QPAM Limited (who gave evidence). Mr Hines considered that management’s projections were more compelling than placing reliance on Mr Lucas’s estimates as to performance numbers and average ticket prices.
[68] Mr Lucas’s approach, as set out in his brief of evidence, was as follows. He used management’s five year forecasts prepared to financial year 11 and the balance of the 40 year forecasts for financial year 12 through to financial year 46 (adjusted in relation to the matters agreed by the valuers).19
[69] He assessed the reasonableness of management’s key forecast assumptions
based on:
(a) Indicative evidence available from prior experience;
19 Refer [60] above.
(b) His research into other stadium operations with similar characteristics to the arena;
(c) Contractual agreements;
(d) Advice from PwC’s Sports Advisory Practice in the United States
(―PwC US‖).
[70] Mr Lucas adopted management assumptions in many areas including the average numbers attending performances, ticketing levies, cafe and catering commissions and commissions from merchandise revenues. In respect of these items, in the absence of evidence to the contrary, he accepted management’s projections as reasonable in his base case cash flows.
[71] He noted the importance in the forecast revenues of larger concerts which account for some ... per cent of forecast arena rental revenues, and event rental revenues which account for ... per cent of all forecast operating revenues.
Number of performances
[72] Mr Lucas noted management’s forecast of the expected number of annual performances at 101 covering a range of events and that larger concerts drive a significant proportion of the revenue based on gross ticket sales and estimated ticket numbers. He noted that while the arena is the only venue of its type in New Zealand and is ideally suited to holding large concerts, according to PwC US, the number of performances forecast would place the venue in the top ten arenas of the world. On the basis that at valuation date, the arena had not yet earned its place in the top ten, he adjusted down the number of performances to 91, being ten per cent lower than management’s projections.
[73] Mr Lucas referred to hindsight information, being the actual performances at the arena subsequent to valuation date which was available from the arena’s website. He noted that on an annualised basis for the period March 2007 (actual opening date) to December 2008 the information was consistent with management’s projections at
valuation date. But, he said, ―... this data does not give any cause to question the approach I have taken.‖ This second order check available with the benefit of hindsight information, did not identify for Mr Lucas any causes for concern in his assumptions.
Ticket prices
[74] Mr Lucas increased the average ticket price in the forecasts by 15 per cent above management’s projections, factoring in an average ticket price of ... compared with management’s ... .
[75] Mr Lucas said his review of actual prices for events in the arena either held or scheduled to be held in February and March 2009 indicated a current average price for large concerts in the region of ... . After allowing for inflation over the period, he calculated that would indicate prices in 2006/2007 in the region of ... per ticket. This was 30 per cent higher than management’s estimate of ... as the average price for large concerts.
[76] He then referred to survey results from ―Venues Today Top Spots‖ which he said indicated an average ticket price at the arena over the period October 2007 to October 2008 of US$76, which in New Zealand dollars equated to a price of around
$100 during that period.
[77] He also referred to average ticket prices at the Brisbane Entertainment Centre over the period October 2005 to October 2008, sourced from ―Venues Today‖. These were in the range of NZ$99 to $112 per ticket.
[78] Finally, he referred to advice from PwC US that ―forecast average ticket prices are low in relation to comparable arenas‖. He concluded that the ticket price assumptions in management’s projections were ―conservative‖. Therefore, for valuation purposes he considered prices at a level 30 per cent higher than in the management projections with 15 per cent applied in the base case cash flows. That resulted in an average ticket price of ... factored in the base case cash flows.
Event rental charges
[79] Mr Lucas noted that event rental charges were forecast by management in the range of ... per cent of gross ticket sales for large concerts with an overall event rental margin of ... per cent across all ticket sales. Mr Lucas referred to the difficulty in locating comparable data, but noted that the Adelaide Entertainment Centre (12,000 seats) reported event rentals of 13.1 per cent of gross ticket sales for the year ended 30 June 2007. He considered that based on the available evidence, management’s rates in the region of ... per cent ―may be conservative‖ but within the range observed in the industry.
DPL assumptions
[80] Mr Lucas used Decision Programming Language (―DPL‖), which he described as a financial modelling tool which allows for uncertainty relating to key assumptions, individually and cumulatively, to be incorporated within the valuation range. He considered a range of possible cash flow outcomes by adjusting certain key assumptions on the evidence available to him. He showed these assumptions inputted into the DPL analysis in a table at page 48 of his brief of evidence. He adopted assumption ranges under the headings ―Low‖, ―Base Case‖ and ―High‖ and applied these assumption ranges for financial year 7 onwards, being the first period for which management’s detailed cash flow assumptions were available to him.
[81] In the base case column in the table of assumptions, Mr Lucas decreased the number of performances by 10 per cent, increased the average ticket price by 15 per cent and in relation to event rental charges, while taking the management assumption at 10.2 per cent in the low and base case ranges, adopted 12.2 per cent as the assumption in the high range. Mr Lucas explained in response to cross-examination that this assumption was based on data from the United States which indicated that
10 to 15 per cent was a reasonable range.
[82] Mr Hussey was critical of Mr Lucas in declining to apply the hindsight information available from the arena as to the number of performances.
[83] He criticised Mr Lucas’s increase in the average ticket price by 15 per cent, pointing out that in making this assumption Mr Lucas started with hindsight information, actual arena prices in February and March 2009, and then continued his verification by referring to further hindsight survey information available from
―Venues Today Top Stops‖ (October 2007 to October 2008). Mr Hussey observed that the PwC US confirmation relied on by Mr Lucas did not appear to be related to any period.
[84] In relation to event rentals, Mr Hussey pointed out that reliance on the information from the Adelaide Entertainment Centre, reported at 13.1 per cent for the year ended June 2007, also involved the application of hindsight information.
[85] Mr Hussey said that overall he considered the management projections (performance numbers, ticket prices and quantities sold) to be a more compelling guide as to likely revenues than Mr Lucas’s assessment as to performance numbers and ticket prices which appeared to be based on overseas arena performances and US dollar equivalent ticket pricing. Mr Hussey considered that the United States figures did not necessarily translate into New Zealand dollars without also considering whether the increased prices adopted would affect the number of tickets sold.
[86] The end result of these adjustments criticised by Mr Hussey was that the adjusted base case input into the DPL programme was below management projections by an amount of ... .
[87] Mr Hussey also said that the inputs created an asymmetrical range of values around the event rentals, producing a shift in the midpoint which translated into the uplift to the total enterprise value of $1.41m in Mr Lucas’s valuation. He noted that the entire $1.41m uplift came from the manner in which the DPL has been applied to event rentals. While the other assumptions were symmetrical so that the central base case value remained the midpoint, the high range set for event rentals at 2 per cent above management’s event rental rate percentage of 10.2 per cent had produced the
$1.41m uplift.
[88] Mr Lucas confirmed in answer to cross-examination that the asymmetry in the event rental inputs was the driver to produce the $1.41m uplift. He said ―It will be. I can’t say I’ve proved that absolutely but the logic is right‖. He also confirmed that his reference point for adopting 12.2 per cent in the high range (which involves a 20 per cent assumed increase in event rental returns) was based on information sourced from the United States which suggested that 10 to 15 per cent was probably a reasonable range. He considered the comparison with Adelaide to be of less benefit because it was derived after the fact, in other words, was hindsight information.
[89] I consider Mr Hussey’s criticisms on these aspects have merit. While Mr Lucas approached his task in a methodical way and sought whatever external information was reasonably available to compare and contrast management assumptions, he has in fact relied considerably on hindsight information in making his assumptions about the number of performances, average ticket price and event rental rates. At the same time he has declined to use hindsight information available from the arena, which suggests that management assumptions were correct, particularly in relation to the number of performances.
[90] On the other hand, there is no evidence or information that suggests the management revenue assumptions were unreliable. Indeed, hindsight information suggests that they have been vindicated.
[91] I conclude that management’s assumptions as to the number of performances, ticket prices and event rental charges should be applied in the base case DPL analysis (subject to the alleged miscalculation addressed in the next section).
Alleged miscalculation in revenue forecast
[92] Mr Fisher extensively cross-examined Mr Hines and Mr Hussey about an alleged miscalculation in management’s projected income for June 2007. Mr Fisher put to the witnesses that the author of the spreadsheet inadvertently cut and pasted the formula used for the gymnastic event in May 2007 (which was not subject to the standard formula), to both the dance party and concert forecasts for June 2007.
Hence, instead of the standard formula of ―gross ticket sales x the specified rental percentage‖ being applied, the formula for the gymnastic event, being ―number of performances x ...‖, was mistakenly applied.
[93] If this was an error then I understand the revenue for June 2007 was understated by approximately ... .
[94] Mr Hines said the forecasts did not always treat similar events in the same way and that the forecasts were adjusted to reflect the necessity of accepting non- commercial terms for some events. He said this occurred sufficiently frequently to merit specific adjustment in the forecasts. Accordingly he did not consider the June
2007 entries were necessarily in error, but might equally have reflected discrete adjustment to recognise a flat fee rental. He said that situation was ―very common‖ so he was not sure there was an error in the spreadsheet.
[95] Mr Hussey said that on its face, it looked as if there could be an unintentional error in the spreadsheet. But he said he could not be categorical about it and referred to the possible explanation given by Mr Hines.
[96] Mr Hussey accepted that if the management forecast for June 2007 was in error in the respects identified this would make a difference of approximately $1.1m to his base case analysis; $1.3m if he used Mr Lucas’s discount rate of 13 per cent. Mr Hussey prepared appendix E2 showing the variation in his calculations that would result. He added an entry, ―Estimated effect if Hines spreadsheet in error‖, which showed his midpoint revised by $1.10m. This increased his base case enterprise value by $1.10m – to $16.19m applying Mr Lucas’s land growth values. Appendix E2 notes that ―the error‖ does not affect Mr Lucas’s calculations. Mr Lucas calculated his own inputs.
[97] The situation was not satisfactory. This issue was raised in cross-examination of Mr Hines and Mr Hussey but was not addressed by Mr Lucas. Neither Mr Lucas nor Mr Hussey treated the spreadsheet for June 2007 as being in error in their calculations. If there was an error, then neither valuer picked it up. But a knowledgeable, willing but not anxious purchaser might reasonably do so. When I
issued the interim judgment20 I sought input from Mr Lucas and Mr Hussey to check the June 2007 management forecast, and if they agreed there was an error, to take the agreed adjustment into account in re-running the DPL analysis. The experts advised that they were unable to agree whether there was an error in the June 2007 spreadsheet, having checked the 40 year and five year forecasts provided by QPAM, both as printed spreadsheets and as electronic Excel files.
[98] On the basis of the evidence I am not able to draw an inference that the spreadsheet is in error, inevitable as Mr Fisher submits the inference is. Therefore management assumptions are to be applied in the base case DPL analysis as I have concluded at [91] above.
(b) Rental cost (reflecting land value increase)
[99] In appendices E1 and E2 Mr Lucas allows for an adjustment in future ground rent of ... . Mr Hussey’s allowance is ...,21 based on Mr Cheyne’s valuation.
[100] The arena and carparks are situated on land owned by Ngati Whatua O Orakei Maori Trust. There is a head lease to ACC and a sub-lease to QPAM.
[101] The sub-lease dated 30 April 2007 is for a term of approximately 39 years from 30 April 2007 to 21 July 2046. The sub-lease essentially incorporates and requires observance by the sub-lessee, QPAM, of the terms and conditions of the head lease.
[102] Rental payable under the lease and sub-lease from August 2011 until expiry of the lease is the lower of:
...
20 See [242] below.
21 The figures in the second column headed ―Hussey midpoint‖ in the appendices E have been
revised as shown in the third and fourth columns, and can be disregarded.
[103] Rental for the carparks is to be separately assessed at three per cent per annum of the current freehold market value of the carparks (as defined), assessed as carparks and not on a highest and best use basis.
[104] It is common ground that:
The rental payable by QPAM from August 2011 is based on the
current
freehold market value of the land.
Management assumptions did not take into account, or did
not sufficiently take into account, prospective increases in land values
in
order to assess
future liability for rent.
The valuation by Mr Gary Cheyne as at the valuation date of
... is accepted
as the freehold market value of the land at that date.
The data set sourced by Mr Lucas providing base data on
Auckland Central
Business District (―CBD‖) commercial land prices from 1970 to 2009, but
most relevantly 1970 to 2005, is accepted.
The projected inflation rate for the period in issue is
three per cent per
annum.
[105] The difference between the parties is in the projected growth in land values from 2006 to the expiry of the sub-lease in 2046. Mr Lucas’s midpoint adjustment allows for an increase in ground rent of ... which assumes an annual percentage growth rate in the value of the Entertainment Centre and carparks at ... per cent for all relevant periods. Mr Hussey’s revised midpoint adjustment of ... assumes an annual percentage growth rate at ... per cent for all relevant periods. These figures appear in columns 1 and 3 of appendices E1 and E2. In column 4 is Mr Hussey’s calculation applying Mr Lucas’s three per cent annual growth rate, the midpoint allowance being ... . (The difference between this and Mr Lucas’s calculation is, as Mr Lucas said in evidence, immaterial).
[106] Mr Lucas’s position, taking into account the data set from 1970 to 2005, is that CBD land values are likely to increase in line with inflation. He therefore simply applied the agreed inflation rate of ... per cent per annum to the freehold market value of the land. Thus Mr Lucas’s calculations are based on an assumption that there will be no real growth in the value of land during the relevant period. His end position is that management forecasts should be adjusted to reflect a ground rental charge of ... per cent of market value from August 2011 and ... per cent from August 2046, with seven year rests.
[107] Mr Lucas considered that in the context of a 39 year cash flow projection, reference should be made to long term historical trends. From the data set he obtained which showed compound nominal annual growth to 31 December 2005 of
... per cent, he derived a compound annual real growth rate for that period of minus
... per cent. He noted that substantial large increases and decreases can occur in any particular year and that a recent history of strong growth is not necessarily evidence that the growth rate will continue. He referred by way of example to the 10 year period from December 1991 during which CBD commercial land prices actually declined in real terms, followed by a substantial uplift in 2002. He therefore considered the data set he obtained from December 1970 to be the best estimate of future real price appreciation.
[108] Mr Lucas expressed the view that the data set he sourced showed that short term volatility is dealt with by taking a longer time series. Accordingly, his clear preference was to take the longest time series available which was that going back to December 1970. He considered it ―dangerous‖ to take a relatively short time series because ―the whole world is constantly changing‖, and when data is volatile, taking a relatively short time series (referring to the period from 1991 or 1992 as preferred by Mr Cheyne), ―... it’s not long enough to hang your hat on ...‖.
[109] Mr Cheyne based his original opinion on a data set from 1999 to 2006 and assumed an annual percentage growth rate of value in the Entertainment Centre at ... per cent to August 2011 and at ... per cent thereafter, and for carparks, ... per cent
per annum for all periods. This resulted in the adjustment for ground rent shown in appendix E22 as Mr Hussey’s midpoint, of ... .
[110] However, when the data set sourced by Mr Lucas became available, Mr Cheyne accepted it, with certain reservations, as a better data set from which to analyse past changes in CBD commercial land values for the purpose of making predictions about future rates of change in such values.
[111] Mr Cheyne’s reservations related to changes in the economic, legislative and
regulatory framework in New Zealand which persuaded him that the data set prior to
1992 should be set aside. He identified four categories in the data set:
(a) December 1970 to December 1983 – strongly regulated and controlled economy which he assessed as of very limited relevance to the current business framework.
(b) December 1984 to December 1991 – a period of regulatory change in the New Zealand economy with consequent dramatic rises and falls in CBD commercial land prices.
(c) December 1992 to December 2005 – a period he assessed as having a similar economic, legislative and regulatory framework to that anticipated for the future, and therefore a relevant period.
(d) December 2006 to December 2009 – a period which postdates the valuation date and therefore not relevant.
[112] He said he placed very little weight on the information for the period December 1970 to December 1983 because of ―the extreme differences between then and now/looking forward to the future‖. He categorised the period December 1984 to December 1991 as a period of significant economic restructuring and deregulation and thus ―a transitional period‖ between the controlled economic conditions up to
the change of Government in 1984 and the more liberal environment ―which is
22 Also in column 2 of appendices E1 and E2.
expected to apply looking forward‖. He considered that from December 1992 through to December 2005 there was a similarity in the economic, legislative and regulatory framework with that prevailing at the present time and projected for the future.
[113] On the basis of the data he assessed compound annual growth rates
(nominal):
to December 2004, at ... per cent.
to December 2006, at ... per cent.
[114] Adjusted for inflation, the real compound annual growth rates were:
to December 2005, ... per cent.
to December 2006, ... per cent.
[115] He accepted, however, that 2005/2006 was a boom year for property and that future declines were inevitable. He used hindsight, taking into account market declines in 2008/2009, to give a more balanced long term view. With this adjustment
the final assessments he reached were:
Nominal compound annual growth rate,
... per cent.
Real compound annual growth rate, ... per cent.
[116] Mr Cheyne then applied ... per cent, being his assessed real compound annual growth of ... per cent plus inflation of ... per cent, to reach the allowance of
... shown as the revised midpoint for Mr Hussey, adopting Mr Cheyne’s valuation
approach.
[117] In answer to questions in cross-examination, Mr Cheyne expressed the view that the negative growth in the period 1970 through to 1992 distorted the overall average and because of the distortion, did not assist in forecasting forward from
2011. Accordingly, the period from December 1992 onwards is, in his view, a better period from which to look at history and to use as a basis for forecasting from 2011.
He said the Reserve Bank’s monetary policy had stimulated growth in the economy at large of which CBD land is one component.
[118] Mr Cheyne summed up his opinion by responding to the proposition that a realistic forecast in April 2006 of the real increase in the value of the land was only an anticipated inflationary increase of ... per cent:
No. Because that would say nought per cent real growth and I don’t believe
that there will be nought per cent real growth in the 40 years from 2011.
[119] Mr Cheyne supported his analysis that only post-1992 data should be taken into account in projecting future land values, by referring to the CPI data showing annual growth between one per cent and 3.4 per cent which he said supported the three per cent CPI figure adopted by the experts. He said he considered it entirely appropriate, in the same way as the CPI data is based implicitly on post-1992 figures, to break the land value figures into pre-1992 and post-1992.
[120] It is not difficult to accept Mr Cheyne’s general proposition that when looking at the length of a data set it is important to determine what it is actually saying, and then to take the longest data set ―consistent with what the future is expected to hold‖. He distinguished between matters of ―normal volatility and change‖ (in which category he placed the Asian financial crisis in 1998 which he said accounted for the significant decline in CBD land values in that period), and changes in the legislative and regulatory environment (as occurred in New Zealand prior to 1992 putting an end to double digit inflation that was characteristic of the period before 1986).
[121] However, Mr Cheyne resiled from the predictions he reached on the basis of the original data set that was available to him for 1999-2006. Those predictions of a
... per cent per annum nominal increase for the entertainment centre land between
2006 and 2011 and ... per cent thereafter, and for the carparks, ... per cent for all periods, contrast with the prediction he subsequently adopted of ... per cent per annum for all periods. In answer to cross-examination, he explained that the boom period in 2005 to 2007 contributed to the predictions from which he resiled, and he accepted it was unreliable to forecast that from 2006 to 2011 there would be an
increase in the real value of land compounding at the rate of ... per cent per annum. He noted that he had modified or softened the ... per cent real prediction to three per cent real for the longer term, which he has subsequently softened again to ... per cent real, recognising that the short term data he used was not a useful or reliable basis going forward.
[122] I believe the experience of Mr Cheyne in initially relying on a short term data set and subsequently recognising the unreliability of such a data set as a basis for long term future predictions demonstrates the risk of such an approach. The data set upon which he ultimately seeks to rely (post 1992), is not significantly longer than that on which he initially relied. Having accepted that the data base from 1970 sourced by Mr Lucas is better for the purpose, he then seeks to exclude all information in the data set prior to 1992. He relies on the monetary reforms from
1984 until 1991 having produced a very different economic environment from the preceding 20 years, as the rationale and justification for again relying on a short term data set. He proceeds on the basis that there will be no material change in the current environment going forward.
[123] There can be no doubt that the monetary reforms of 1984 to 1991 had a significant effect on the New Zealand economy, one of the effects relevant to land values being that inflation has been contained. But there are many other factors and forces that impact on the economy and in particular, commercial land prices in the CBD. The boom in 2006/2007 is an example of a short term distortion that can occur. In using the short term data set from 1992 Mr Cheyne considered it necessary to adjust for this short term distortion.
[124] The advantage of a long term data set is that the inevitable distortions of whatever kind and from whatever source, be they positive or negative, tend to be balanced and adjusted over the length of the data set. Markets invariably adjust following reaction to external factors. Periods of ―boom and bust‖ even out in the process of time.
[125] When the projection required is a very long term projection, approximately
40 years in this case, the advantage of having a data set that provides historical
information for a similar period is considerable. I agree with Mr Lucas that there is a real risk in taking any short term data set in the period prior to 2006 and using it as a basis to predict CBD commercial land values over the next 40 years. While Mr Cheyne significantly softened his projections as he considered the available data, and may yet be proved correct in rejecting that there will be no real growth in the 40 years from 2011, I consider Mr Lucas’s approach based on long term data to have greater validity. Unlike Mr Cheyne, Mr Lucas did not find the need to make adjustments to the data to account for short term aberrations, because the time period covered by the data set reflects the way the market itself adjusts for short term distortions and aberrations.
[126] I adopt the conclusions of Mr Lucas and the allowance in relation to ground rent of ... as shown in the first column of the appendices E.
(c) Small Company Risk Premium (“SCRP”)
[127] In calculating the WACC for QPAM, which he assessed at approximately ... per cent, Mr Lucas factored in a SCRP of 1.5 per cent. In doing so he recognised that investors may require a higher rate of return to reflect the small size of the business of a company and the lack of diversification typically evident in a smaller company’s business activities.
[128] Mr Hussey assessed the SCRP at 2.5 per cent with the WACC being correspondingly increased to ... per cent. He calculated resultant allowances of ... in the third and fourth columns of appendices E1 and E2.
[129] Mr Lucas referred to research undertaken by PwC about small company risk premia in the New Zealand context. Mr Lucas said the supporting material was not available, but he relied on the conclusions reached. He said the research suggests that the application of a SCRP is appropriate for companies in the New Zealand context with equity of less than $50m and that the SCRP typically lies in the range of nought to 3 per cent. He considered a mid-range SCRP of 1.5 per cent to be appropriate in estimating QPAM’s cost of capital.
[130] In answer to cross-examination he said:
I thought 1.5 per cent was pretty sound ... I’ve been reasonably hard on the asset beta. I could’ve gone with an asset beta of .9. As I said at the start, a lot of this stuff is, it’s a balance, and we have to say, well, where I might’ve been a little bit harsh here or a little bit generous here, but overall does it look right, and I think 1.5 was about right in the circumstances.
[131] Mr Hussey considered that Mr Lucas has understated the required SCRP. He referred to a publication about measuring the illiquidity discount23 which considered extensive material sourced in the United States and suggested that an illiquidity discount (SCRP) in the range of 3 to 3.5 per cent was appropriate for small companies.
[132] Mr Hussey said that because most small companies in New Zealand carry debt, a company with an equity of $50m would be assessed as having debt of about
$20m (30 to 40 per cent) and therefore having an enterprise value in the range of
$70m to $80m. He noted that on this basis QPAM is a very small company, having an enterprise value on the basis of the valuations carried out by himself and Mr Lucas in the range of ..., with revenues of approximately ... per annum. In his opinion it was:
... reasonable, appropriate and logical for the small company risk premium to
be more than 50 per cent ... of Mr Lucas’s scale.
[133] Mr Hussey focused on QPAM being a small company, and that its business is undiversified and undiversifiable, given that the approval of ACC is required to any assignee of the business (accepting that such approval is not to be unreasonably withheld).
[134] On the other hand, Mr Lucas placed considerable reliance on the ―monopoly‖ position of the arena in the market. The ―monopoly‖ exists because .... Further, a facility such as the arena is not commercially viable unless substantially funded from public money, a proposition not in dispute. Thus, QPAM is unusually and perhaps
uniquely protected against the normal susceptibility to the impacts of competition
23 Aswath Damodaran ―Marketability and Value: Measuring the Illiquidity Discount‖ (Stern
School of Business, July 2005). The full text of the article appears at http://pages.stern.nyu.edu/~adamodar/pdfiles/papers/liquidity.pdf on the New York University Stern School of Business Website. It does not appear to have been published.
and other external factors of small companies that do not have diversified revenue streams.
[135] Mr Hussey accepted the arena has a monopoly, but emphasised that it is only in a sub-section of the market. To that extent he accepted there was a benefit, but he countered that the cash flows from the business are unusually vulnerable to increases in the value of the land, instancing by way of example, that rates are based on land value.
[136] The experts are agreed that because QPAM is a small company, a SCRP is appropriate. There is also a measure of agreement that the SCRP will be in the range of nought to at least three per cent. Mr Hussey seeks to increase the upper limit of the range to between 3 and 3.5 per cent, based on the article by Professor Damodaran.
[137] I do not find the article relied on by Mr Hussey to be particularly relevant or its authority persuasive. The material identified by Professor Damodaran relates to the very large United States market. No data has been referenced by Mr Hussey which would relate Professor Damodaran’s research to the very small market in New Zealand. However, nor is the data available upon which PwC relied in reaching its assessment of a nought to three per cent range for the SCRP appropriate for small companies in New Zealand.
[138] It is accepted that QPAM is in an unusual, if not unique, position because of the contractual protection provided by the agreements with ACC, and that a public funder such as ACC is essential for such an enterprise to be viable at all. The contractual protection, while not accurately described as creating a ―monopoly‖ for QPAM, does provide important protection for the cash flows of the business for a period of 20 years. This removes much of the competitive risk which small companies invariably face in the marketplace and provides support for Mr Lucas’s view that QPAM is not near the top of the range for assessing SCRP.
[139] The question is where in the range, which I accept to be nought to three per cent in the absence of any persuasive evidence to the contrary, the SCRP should sit.
Given the unique position of QPAM as far as protection for its cash flows is concerned and that in the New Zealand market it is a reasonably sized company, I am not persuaded that a discount higher than the 1.5 per cent applied by Mr Lucas is appropriate. I bear in mind also the observation of Mr Lucas that it is a factor to be weighed in the balance in estimating the appropriate WACC of which the SCRP is one contributor only.
[140] Accordingly I conclude that the SCRP to be applied is 1.5 per cent.
(d) “Untested” cash flows discount
[141] Mr Hussey said that the discount rate of 13 per cent applied by Mr Lucas for the WACC should be increased by 1.5 per cent to allow for the cash flows of QPAM being ―untested‖ in that they are unsupported by any historical performance data. The effect of the increase in the discount rate advanced by Mr Hussey is a reduction of ... in the enterprise value, as shown in appendices E1 and E2. Mr Hussey considers the reduction of approximately 10 per cent in the enterprise value to be reasonable and appropriate.
[142] In advocating an increase to the discount rate for untested cash flows, Mr Hussey did not seek to adjust a factor in the formula applied by Mr Lucas in the assessment of the appropriate WACC for QPAM, as he did in respect of the SCRP. Rather, his position is that the WACC should simply be adjusted because in the ―real world‖, that is what is done to reflect the negative discount required to fairly assess the enterprise value of a company that has unproven cash flows.
[143] Mr Lucas said the correct approach is to identify the extent to which particular cash flows are at risk and make specific allowance for them by applying probability weighted cash flows. He explained that this is the exercise he undertook by applying the DPL programme to deal with the key uncertainties. He said the DPL financial modelling tool ―allows for the uncertainty relating to key assumptions, individually and cumulatively, to be incorporated within the valuation range‖.
[144] Mr Lucas said:
I undertook the exercise of probability weighting the cash flow forecasts using DPL, to deal with the key uncertainties which I considered should be addressed. We find DPL a very useful tool in dealing with specific uncertainties. In my opinion, the key specific uncertainties to be addressed were ticket pricing and event numbers. These are fully dealt with in the DPL analysis which shows a small increase, rather than a decrease as compared to the base case.
[145] Mr Hussey considered that ―... the modelling undertaken by Mr Lucas was not at all comprehensive‖. He was prepared to rely entirely on management’s projections and assumptions, accepted to be generally conservative.
[146] I have concluded at [91] above, for the reasons given, that management’s projections should be applied in the probability weighting exercise through the DPL analysis. It can be reasonably expected that management would have taken into account in their forecasting the usual risks associated with a new business, balanced in this case by the realistic expectations that could be attached to cash flows because of the ―monopoly‖ position of the arena and the demand for the type of entertainment for which the arena would provide a venue.
[147] There does not seem, therefore, to be a proper justification for the application of a further discount for untested cash flows as advanced by Mr Hussey. This would seem to be ―a blunt instrument‖, sought to be applied across the board following a detailed probability modelling exercise. It risks impacting on the overall integrity of the valuation.
(e) Derivative proceeding value
[148] The derivative proceeding was commenced on 27 September 2005 under CIV-2005-404-5093 (―the 2005 proceeding‖). The plaintiffs were WWNZ and John Paul Ustick, a director of QPAM at the relevant time and also a director of WWNZ and its parent company Worldwide Entertainment Inc. The defendants were QPAM and three members of the Jacobsen family, directors of QPAM (―the Jacobsen directors‖). They are not parties to this proceeding but are also directors of the second, third and fourth defendants in this proceeding.
[149] The statement of claim alleged that the Jacobsen directors procured the entry of QPAM into a ticketing services agreement with Ticketmaster without the knowledge of WWNZ and Mr Utsick. The plaintiffs pleaded that this was in breach of the defendants’ duties to QPAM in that the agreement with Ticketmaster resulted in an advance to QPAM which reduced the need for Jacobsen Venue Management Pty Limited (―JVM Pty Ltd‖) to provide debt funding of ... for the arena to meet the requirements of ACC. It was pleaded that this alleged breach of the duties of the Jacobsen directors to QPAM caused QPAM loss on the basis that the value of the monetary benefits accruing to QPAM under the ticketing services agreement with Ticketmaster were substantially below market value, particularised as being at least in a range of .... That loss was said to be established by comparing an offer from Ticketek, an opposition company to Ticketmaster, received six months later.
[150] The amended statement of claim dated 12 December 2005 sought an order under s 165 of the Companies Act 1993 granting leave to the plaintiffs to bring proceedings on behalf of QPAM. The stated grounds were that QPAM had a strong claim against the Jacobsen directors and the proceeding would have good prospects of success but should not be left to the Jacobsen directors or the shareholders of QPAM because the Jacobsen directors had effective control of QPAM.
[151] The Jacobsen directors filed a statement of defence in which they put in issue the claimed lack of knowledge by WWNZ and Mr Utsick, the pleaded conflict of interest and the claimed loss. They pleaded that Mr Utsick had been told from the outset that Ticketmaster was interested in providing ticketing services and was likely to provide debt funding in the amount of ... to QPAM as part of those arrangements, and that Mr Utsick had seen a copy of the Ticketmaster term sheet. Further, they pleaded that QPAM and the plaintiffs knew of and agreed to the Ticketmaster agreement, and that the Ticketmaster agreement was one of a number of agreements on the agenda for a meeting of the QPAM board on 1 May 2004 when the board unanimously resolved to enter into the various agreements, including the Ticketmaster agreement.
[152] The defendants further pleaded that the subsequent proposal by Ticketek, the only other participant in the New Zealand market for ticketing services, was on terms less favourable to QPAM than the Ticketmaster agreement.
[153] Terms of discovery were agreed by consent order on 3 February 2006, and both QPAM and subsequently the Jacobsen directors filed and served discovery lists. The plaintiffs failed to file any discovery list, did not inspect the defendants’ documents as required by timetable orders made by the Court on 6 December 2005 as varied on 24 February 2006, and failed to file affidavits in support of their substantive application which were required by the timetable orders to be filed by 31
March 2006. This was despite the substantive application being set down for hearing in the week commencing 24 July 2006. By memorandum of 21 April 2006, counsel for the defendants sought timetable orders on an ―unless‖ basis. In the meantime Worldwide Entertainment Inc had been put into receivership in the United States on
18 January 2006.
[154] The defendants took the position that because the plaintiffs had not filed their list of documents they would not make their documents available for inspection. Accordingly, as at valuation date, 26 April 2006, neither the plaintiffs nor QPAM had inspected the Jacobsen directors’ documents.
[155] In a memorandum dated 27 April 2006, counsel for WWNZ referred to the need for the receiver, Mr Goldberg, to form an independent view of the merits of the derivative proceeding, including the amount at stake, the apparent strength of the claim, the likely cost to QPAM and the prospect of executing any judgment. Mr Goldberg considered he had inadequate information to inform such a view and WWNZ noted that it would be obliged to seek further discovery.
[156] The hearing date of 24 July 2006 was later re-allocated. No steps have been taken subsequently to prosecute the claim.
[157] In summary, as at 26 April 2006 the plaintiffs had not filed and served their list of documents, nor filed their affidavits in support of the substantive application. Neither the plaintiffs nor QPAM had inspected the Jacobsen directors’ documents.
WWNZ was not able to reach a conclusion about whether to prosecute the proceeding and considered it lacked the information and documentation necessary to make that decision.
Additional documentation
[158] During his opening submissions Mr Fisher for WWNZ traversed in considerable detail documentation discovered in this proceeding by the Jacobsens in an affidavit sworn by Amber Jacobsen (one of the Jacobsen defendants) on 23
February 2010. The discovery was extensive, covering five closely typed pages. It included documents during the period of the alleged ―contra‖ transaction with Ticketmaster, which is at the heart of the derivative proceeding. Reference was made to 10 documents dated between 5 May 2004 and 20 May 2004 between the Jacobsen interests and Ticketmaster.
[159] The defendants objected to this additional documentation being admitted. They also objected to the evidence of Mr Jim Kotsonis of Ticketmaster, who appeared under subpoena issued by the plaintiffs.
[160] On 21 July 2010, having heard from both parties, I issued a provisional ruling. I granted provisional leave to the plaintiffs to include the documents relating to the derivative proceeding in the documents before the Court. However, I expressly stated that I did not determine that the documents were relevant and admissible, noting that I considered it premature for such a determination to be made. I said I would reach that determination after further consideration of the matter and in the light of all the evidence and submissions to be made. The ruling also applied to a supplementary volume of documents filed by the Jacobsens which were relevant only if and to the extent leave was granted to the plaintiffs in relation to the documents relevant to the derivative proceeding.
[161] WWNZ submitted that the valuer is entitled to take into account the evidence discovered by the Jacobsens in their supplementary affidavit of documents dated 23
February 2010 on the following grounds:
(a) The evidence should have been discovered under the order for discovery made in the derivative proceedings on 3 February 2006 as the documents clearly fall within the ambit of the consent order.
(b) The Jacobsen directors had a duty to identify the documents in question, namely agreements between JVM Pty Ltd and Ticketmaster, invoices, bank statements disclosing transfers of funds and the right of first and last refusal agreements.
(c) The failure to identify the documents was a breach of duty by the Jacobsen directors to describe any documents of which they were aware that were relevant and to state in whose possession those documents were.
(d) The failure to identify the documents was a breach of an order of the Court so it would be an abuse of process of the Court for the Jacobsens to get the benefit of their wrongdoing and have the evidence ruled inadmissible when it ought to have been discovered prior to the valuation date on 26 April 2006.
(e) The Jacobsen directors were under a fiduciary duty to disclose to QPAM their knowledge of the transactions between Ticketmaster and JVM Pty Ltd as it was a related party transaction and because they had a conflict of interest. Therefore as at the valuation date the information ought to have been known to QPAM and available to the valuer as at the valuation date.
[162] The defendants’ position is straightforward. They say the claim or right of action in the derivative proceeding must be assessed against what was or would have been available to a notional buyer and seller on valuation date, 26 April 2006. Subsequent developments and new matters of information are no more part of a proper valuation consideration as at that date, than would be other hindsight information such as actual performance figures and the terms of a subsequent settlement with Mainzeal in relation to the arena.
[163] The defendants submitted that the plaintiffs are attempting to avoid having the merits of the derivative proceeding assessed in even a preliminary way in that proceeding (the leave hearing in July 2006 having been vacated), but seek to receive some sort of value in this proceeding for the abandoned and untested claim. They say that the valuation exercise is intended to replicate what would or could have occurred between a notional buyer and seller on 26 April 2006, and that such a transaction could not have been influenced by information obtained in July 2008 (when WWNZ pursued documents by way of a subpoena issued on 6 March 2008 to Ticketmaster7 LLC in the United States), and discovery in this proceeding in 2009 against the defendants in this proceeding. That information could not conceivably have been obtained or reasonably obtainable as at the valuation date, even if the plaintiffs had not failed to progress the derivative proceeding, as they did.
[164] I agree with the defendants on this matter. The discovery obtained from the Jacobsen defendants in this proceeding, in particular through the affidavit of Amber Jacobsen sworn 23 February 2010, could have been pursued in the derivative proceeding, but it was not. As at the valuation date it was not available to, and not obtainable by, a willing purchaser of the ―B‖ units and shares, to add to the information such a purchaser may have had about the derivative proceeding. A willing purchaser would have been in no better position than Mr Goldberg, as set out in the memorandum of counsel for WWNZ dated 27 April 2006, that as receiver of WWNZ, he did not have the information that would enable him to assess the merits of pursuing the derivative proceeding.
[165] The Court of Appeal observed in its 2008 judgment24 (being the judgment in which the Court determined that the fair market value of the shares in QPAM should be assessed if necessary by the Court) that there was no obvious merit in allowing the 2005 proceedings to continue but noted it was not seized of a strike out application. The Court said:25
... the value of the claim (assuming it has a value) will in any event form part of the valuation exercise and on this basis the 2005 proceedings might be thought to be surplus to requirements.
24 Jacobsen Venue Management New Zealand Ltd v Worldwide NZ LLC [2008] NZCA 105 at [54].
25 At [53].
[166] As the Court of Appeal said, the right of action in the derivative proceeding is simply a valuation issue. To attempt in the course of this proceeding to inject into the valuation process, documentary evidence which was not available at the valuation date and had not been pursued in the proceeding in which it could have been obtained is a blatant attempt to introduce hindsight information.
[167] Therefore, possessed of an overview and understanding of the matter which was not available to me when WWNZ applied in the early stages of the hearing to have ruled admissible the additional documents against the objection of the defendants, and having considered full submissions from both parties, I am satisfied that the additional documents in relation to the derivative proceeding must be ruled inadmissible, for the reasons given.
[168] Accordingly I decline to enter into consideration of the additional documentation or of any relevance or lack of relevance it may have in assessing the value (if any) of the derivative proceeding in the valuation of the ―B‖ units and
shares in QPAM. However, I make the following observations:
The additional evidence comprises documents from which the
plaintiffs have drawn their own implications or inferences in support
of their
case as pleaded in the derivative proceeding. The defendants draw contrary
inferences. They maintain that the documents
are consistent with the
defendants’ case, that the relationship between Ticketmaster and JVM Pty
Ltd was both known to Mr Utsick
and critical to QPAM’s securing the
development agreement, its key asset. They say that some of the documents
clearly throw
serious doubt on Mr Utsick’s claimed lack of knowledge about
the Ticketmaster arrangements
with both QPAM and JVM.
While the plaintiffs seek that the Court consider the
additional documents, none of the crucial witnesses have been called. There
is
no evidence from persons having any knowledge of the additional
documents or the
circumstances surrounding them.
The evidence of Mr Utsick is not available to the Court, nor would it have
been available to a notional purchaser as at valuation date. It is common ground that the state of Mr Utsick’s knowledge is the key factor in the derivative proceeding. It is also common ground that Mr Utsick had a public profile of dishonesty such that he was unlikely to be a credible witness. Mr Goldberg, the receiver of WWNZ, who gave evidence in these proceedings, confirmed that it was ―absolutely fair to say‖ that he did not have a favourable view of Mr Utsick’s commercial ability or his honesty.
[169] In summary, my assessment is that the additional documentation, even if admissible, would not have enabled the Court to draw firm conclusions about QPAM’s arrangements with Ticketmaster to inform an assessment of the value of the derivative proceeding. I consider it would be inappropriate and improper for the Court to undertake such an inquiry based on a selection of documents which may not be complete and without the benefit of full evidence on all the relevant factual matters and the relevant surrounding circumstances.
Valuers’ assessments
[170] Mr Lucas valued the right of action, the subject of the derivative proceeding, at the enterprise level. He included it as an asset which he valued at $1.2m, contributing to his assessment of the enterprise value of 100 per cent of QPAM.
[171] Mr Lucas states in his brief of evidence that he understands WWNZ’s receiver had obtained documents from Ticketmaster which indicate that a Jacobsen entity received a benefit to the value of $1.5m in consideration of QPAM’s entry into the ticketing agreement. In this, he refers to evidence I have ruled inadmissible.
[172] In order to assess the value of the derivative proceeding Mr Lucas analysed the ticketing services agreement with Ticketmaster and the Ticketek proposal.
[173] He noted the key differences in the financial outcomes between the two alternatives as:
(a) Ticketek offered QPAM an interest free ... loan for seven years;
(b) Ticketek offered QPAM a booking fee rebate, and advertising and marketing support;
(c) The proposals were for differing durations. He assumed Ticketek’s proposal would be rolled over for three years on similar terms rendering them comparable on a time lapsed basis.
[174] Having analysed the revenue streams from the two alternatives on the basis of an assumption of $500,000 ticket sales per annum, he applied the WACC he adopted for valuing QPAM’s revenue streams, and reached a difference of $3.99m in favour of the Ticketek proposal.
[175] Mr Lucas then identified uncertainties in respect of the claim, even assuming the Court were to determine that the claim was good. They included:
(a) Demonstration that the Ticketek offer reflected achievable market value;
(b) Resolution of uncertainty around the inside charges; (c) Costs to pursue the claim.
[176] For these uncertainties he discounted the claim by 70 per cent to reach a contingent asset value of $1.2m which he incorporated in reaching the value of the
100 per cent equity of QPAM. Mr Lucas noted that Mr Hussey accepted his approach of valuing 100 per cent of QPAM, pro rating the outcome and applying a discount to reflect lack of control and marketing. On this basis Mr Lucas said the value of the derivative proceeding should be included as an asset of the company.
[177] In answer to cross-examination and questions from the Court, Mr Lucas accepted that the purchaser of a 25 per cent interest in the company would certainly be placed in a position of conflict with the existing shareholders in respect of the derivative proceeding, but he said ―... in principle the asset still belongs to the company and it should be entitled to pursue it‖. He suggested, ―You’d have to sort it out‖ as part of the purchase. He considered the principled approach was to value the
company including this asset at the 100 per cent level and ―... deal with those other things through your discounts‖. He concluded:
You can say the 25 per cent buyer would discount it very heavily for the conflict reason, but I can tell you that the 25 per cent seller will say it’s got to be in there because it’s a genuine part of my asset base.
[178] Mr Lucas noted that if the Court did not accept his valuation of the derivative proceeding, this would reduce his valuation by $225,000 to $240,000 for the 25 per cent interest.
[179] Mr Hussey said that ―valuation is a surrogate for what happens in the real world‖. His approach to valuing the derivative proceeding reflected the reality, as he assessed it, that the derivative claim could have no possible positive value to the holder of a 25 per cent interest in QPAM. He said for there to be value, a prospective purchaser would have to see additional value in acquiring shares in QPAM and pursuing the derivative action against co-interest shareholders and directors. In his opinion, faced with that prospect, a potential purchaser would either decide not to pursue the investment (on the basis that perhaps the majority interest- holder could not be trusted), or would require the derivative action to be abandoned to enable all interest-holders to commence their business relationship ―on friendly terms‖. He accordingly assessed the value of the derivative action as nil.
[180] Mr Hussey went further. In his view the possibility of such a claim was likely to create an overall negative view of the risk attaching to the potential investment and was likely therefore not to be disclosed to potential purchasers of the
25 per cent interest, who would have to work with the very parties who were the defendants in the derivative proceeding.
[181] Mr Hussey did not disagree in principle with Mr Lucas’s approach to
valuation of the right of action in the derivative proceeding. But he said:
... if you do it at that level then you would end up with an adjustment at another level because there’s two sides to every bargain, what the seller wants, what the purchaser will pay.
[182] He distinguished between fair market value and fair value. He said:
If he’s [the valuer] being asked to assess the fair market value, I think he will have regard to the position of the person coming in. If he’s being asked to assess a fair value ... that’s a greyer area ...
[183] In response to persistent questioning by Mr Fisher about the ―proper approach‖ to valuing the asset in a situation such as this — value the asset, discount for the risk of recovery and thereby reach the fair market value, the valuer treating the debt so valued as having been paid and the issue as dead — Mr Hussey responded: ―... you’ve got it entirely wrong‖. He queried what value a rational purchaser would put on the asset and concluded:
The purchaser, I believe, just wouldn’t pay for it. I suggest even the mention of that asset would devalue the whole asset that you’re talking about.
[184] In response to Mr Fisher that his approach was flawed, Mr Hussey said there was no suggestion that the majority were going to pay the debt because the debt in this case is a derivative action, and in order for the company to realise the asset it would have to take action against the majority. The party purchasing the 25 per cent interest would be the party paying for the asset and they would be coming into a situation of having to drive ―an ugly action‖ against their co-shareholders. In his opinion this would not increase the size of the ―pie‖, but would actually decrease it.
[185] I am persuaded by Mr Hussey’s evidence on this aspect. The reality is that as a matter of fair market value, the right of action in the derivative proceeding has no value unless a notional purchaser could be persuaded to pay something for the chance of the benefit. The only chance of deriving a benefit would depend on the derivative action proceeding with the support of the purchaser of the 25 per cent interest against parties representing the holders of the 75 per cent majority interest, the very persons on whom the purchaser of the 25 per cent interest would be dependent for co-operation in preserving and enhancing the value of the purchaser’s investment.
[186] Mr Lucas valued the derivative proceeding at the enterprise value level of
100 per cent of QPAM, allowing a significant (he described it in evidence as
―arbitrary‖) discount of 70 per cent. Mr Lucas’s valuation did not take into account
any further discount which might have been recognised when assessing the value of
the 25 per cent interest, to reflect the reality of the situation for the incoming purchaser of the 25 per cent interest, as described by Mr Hussey.
[187] In my view that reality has to be appropriately reflected in the valuation and I consider the consequence of recognising that reality is, as Mr Hussey insisted, that no rational buyer would pay anything for the right of action represented by the derivative proceeding. A willing, but not anxious, seller would have to acknowledge that reality, notwithstanding the item technically forms part of the seller’s asset base.
[188] It needs also to be noted that irrespective of the claimed merits of the derivative proceeding, there were also negative factors. They included Mr Utsick’s lack of credibility, the fact that this being a derivative proceeding required the leave of the Court which at valuation date had not been obtained, that the claims of WWNZ and Mr Utsick were firmly and specifically denied and resisted by the Jacobsen defendants in their statement of defence, the delay in pursuing the derivative proceeding which was the subject of comment by the Court of Appeal,26 and the costs of the proceeding.
[189] Accordingly I conclude that the derivative proceeding has a nil value in
assessing the fair market value of QPAM and the ―B‖ shares and units.
(f) Minority and marketability discounts
[190] Having reached their respective valuations of 100 per cent of the equity of
QPAM as shown in appendices E1 and E2, the valuers then determined the value of a
25 per cent interest, being the interest in QPAM held by WWNZ. From that value they deducted a discount for minority and marketability to reach the fair market value for a 25 per cent interest.
[191] Mr Lucas applied a discount of 22.5 per cent for both minority and marketability factors. In his opinion the appropriate range was 20 to 25 per cent and
he applied a discount in the middle of that range.
26 Jacobsen Venue Management New Zealand Ltd v Worldwide NZ LLC [2008] NZCA 105 at [53].
[192] Mr Hussey considered each of these two discounts separately and initially applied a 44 per cent discount for both factors. Following cross-examination on this issue he accepted the discount he applied of 20 per cent for the minority interest was, in the particular circumstances of QPAM, too high. He reduced this discount to 15 per cent. He adopted a discount of 30 per cent for marketability which he considered was ―conservative‖ and ―light‖. He applied these two discounts on a stepped basis to reach a combined discount of 40.5 per cent.
[193] The difference between the valuers as shown in appendix E1 is approximately ... in valuing the 25 per cent interest of WWNZ.
[194] Both valuers accepted that the two discounts dealt with different though related concerns. Mr Lucas considered that the assessment of minority parcels in small private companies is best done by taking a combined view of the discount for lack of control and marketability. Mr Hussey, referring to Valuing a Business: The Analysis and Appraisal of Closely Held Companies,27 which he described as a well regarded financial/valuation textbook for advanced practitioners, considered that the two discounts are normally considered and applied separately, and that each allowance should be specific to the matter and circumstances to hand.
[195] The minority, or as it is also referred to, lack of control discount, reflects the lack of control over the corporate entity exercised by the minority (in this case 25 per cent) interest. Within limits, the conduct of the business operation will be the subject of control exercised by another. (In the case of QPAM, the limits imposed on the control of the majority ―A‖ unit and share holders are highly relevant).
[196] The marketability, or as it is also referred to, illiquidity discount, reflects the impediments, including difficulty, risk and delay, which are likely to arise when the prospective purchaser becomes a seller and wishes to on-sell its stake in the
corporate entity. It reflects the risk of being locked in.
27 Shannon P Pratt, Robert F Reilly and Robert P Schweihs Valuing a Business: The Analysis and
Appraisal of Closely Held Companies (4th ed, McGraw-Hill, New York, 2000)
[197] I propose to consider these two discounts separately. While many of the relevant factors will pertain to both and the factors are closely linked, the lack of control factor operates during the course of the business into which the purchaser proposes to buy and the marketability discount operates at a future time when that purchaser wishes to sell or is placed in the position of a seller. The factors impact at different times and in different ways.
Discount for minority holding
[198] Mr Lucas, when under cross-examination, firmly resisted attempts to have him allocate a percentage of the combined discount of 22.5 per cent he applied, to the discount for the minority holding, but he accepted it had to be ―something‖. He said that control premia are highly variable but in this case it was difficult to see why any significant control premium would exist, even for 100 per cent of the shares. He referred to the fact that WWNZ has particular power because it has significant veto rights. Both ―A‖ and ―B‖ unit holders are required under the QPAM trust deed (which takes precedence in the event of inconsistency between it and the constitution of QPAM) to vote on matters requiring unanimous approval. These matters are set out in schedule 3 to the trust deed and include:
(a) Approval of annual budgets; (b) Issue of new units;
(c) Alteration of the unit trust deed;
(d) Transactions involving expenditure or disposal of any asset of the QPAM trust in excess of NZ$250,000 and transactions with an associated party.
[199] In addition he noted that the ―B‖ class shares have the right to appoint a
director. The constitution provides for:
(a) Not less than three directors. The holders of the ―A‖ shares may appoint three directors and the holder of ―B‖ shares may appoint one director.
(b) The quorum for shareholder and board meetings must comprise one
―A‖ class and one ―B‖ class shareholder or the shareholder’s proxy and one ―A‖ director and one ―B‖ director. Business cannot be transacted at either a shareholders’ or directors’ meeting without a quorum.
(c) The board has absolute discretion to approve any share transfer. (However, a 25 per cent shareholder with one representative on the board would not be able to block either shareholders’ or directors’ resolutions).
(d) Under the QPAM trust deed business profits must ultimately be distributed to the unit holders. This provides greater certainty of cash returns than would normally be the case for a shareholder in a typical company.
[200] In addition, the development agreement under the heading of Corporate Restrictions in cl 10.6 limits the activities of QPAM in a number of respects which, subject to ACC not unreasonably withholding its approval (which must be prior written approval), effectively limits QPAM to the business of the arena within the terms of the documentation entered into.
[201] Mr Lucas identified that these numerous factors relating to WWNZ’s minority shareholding give it rights ahead of those of a normal minority shareholder. He assessed its degree of influence to proximate that of a 50 per cent shareholder for the purposes of making a general comparison. On the basis of a schedule he provided (as appendix B to his supplementary brief of evidence) of discounts and premia he had previously observed in the marketplace, he noted that a 50 per cent shareholding attracted an overall discount for both minority and marketability discounts of 25 per cent.
[202] Mr Lucas said that because of the difficulty in identifying substantial empirical evidence as to the appropriate discounts in small private companies the schedule had been prepared as a basis for comparison.28 But he acknowledged he did not have personal knowledge of the transactions, nor was he able to provide details of the circumstances of the companies or the underlying transactions from which the material in the schedule was drawn.
[203] Mr Hussey started with the proposition that the discount for lack of control applicable to a 25 per cent interest would normally be in the range of 25 to 35 per cent. He referred to another PwC study of which he had become aware in a different case and which apparently supported this proposition. He acknowledged the points made by Mr Lucas as placing the lack of control discount at the low end, but notwithstanding these minority protection aspects, he identified that the holder of the minority interest is not the master of his own destiny and would not be in a position to intervene to force change in a situation, for example, where management was making poor decisions or being ineffective. While initially supporting a lack of control discount of 20 per cent he reduced this to 15 per cent which he described as
―the absolute floor‖.
[204] The situation of WWNZ as the 25 per cent holder in QPAM is unusual because of the contractual arrangements and agreements and the possibly unique oversight of ACC in respect of the business of the company, being operation of the arena. But the fact remains that WWNZ is a minority shareholder without entitlement as against the majority to have its way in the running of the business. To that extent I consider there is an appropriate basis for recognition of a lack of control or minority discount. I would put the ―something‖ which Mr Lucas acknowledged required recognition, below Mr Hussey’s ―absolute floor‖ of 15 per cent in the very particular circumstances of this case. I consider the minority discount should be in
the region of 10 per cent.
28 Mr Lucas said he provided the schedule to the Bright Star Company Valuations Master Class in
2009.
Marketability discount
[205] Mr Lucas acknowledged that the pre-emptive rights and lack of a liquid market would reduce the appeal for the purchaser of the minority interest in QPAM for which a marketability discount is warranted. Mr Hussey considered the pre- emptive rights and lack of liquidity have a very significant devaluing effect for any potential purchaser of the shares. He assessed the marketability discount at 30 per cent which he considered to be on the light side.
[206] There are significant factors which are possibly unique to QPAM and which distinguish it from other small unlisted companies, notwithstanding Mr Lucas’s observation in answer to cross-examination that ―there are lots of private companies which have fishhooks attached to them when they sell‖, and ―... everything is unique
... with these situations ...‖.
[207] In the case of QPAM the following factors are relevant:
(a) There are two sets of pre-emptive acquisition rights. In terms of the QPAM trust deed the ―B‖ unit holder is required to offer the ―B‖ units for sale to the ―A‖ unit holders by giving a transfer notice in terms of cl 10 which must specify (among other things) the name and address of the proposed purchaser and the proposed consideration. The ―A‖ unit holders then have the right to purchase the shares at the specified consideration. If the ―A‖ unit holder elects not to purchase, the consent of the ―A‖ unit holder is still required to the transfer of the
―B‖ units to a third party, but consent is not to be unreasonably withheld. There is a further right of pre-emption in favour of ACC. Only if ACC does not offer to purchase can there be a sale to a third party and then at a price no greater than that offered by ACC. Further, ACC has the right to approve any purchaser.
(b) The requirements for approval by ACC of a proposed purchaser are that the purchaser or assignee be responsible, respectable, solvent and of sound financial standing, stature and trading ability, capable of
performing the obligations of QPAM under the development agreement, and ―reasonably experienced in performing like obligations‖: cl 29.1(b)(iii).
[208] Various arguments were advanced by WWNZ through Mr Lucas and in the form of propositions put in cross-examination to Mr Hussey, to the effect that a vendor of the minority parcel would be motivated to minimise any potential negative effects of the pre-emptive rights process by endeavouring to negotiate informally with any prospective purchaser and also with the Jacobsens. That is no doubt so, but it is likely to be the situation for any seller of a minority interest, faced with limitations on disposition in the nature of pre-emptive rights or similar restrictions.
[209] WWNZ further argued that on the sale of a minority interest the Jacobsens would remain the majority interest holder and QPAM management would remain in place. Therefore ACC was unlikely to be an interested purchaser and would be concerned only to know who the ―B‖ director would be, if a sale of the minority interest took place. That also may be so, but the requirements for approval of a purchaser in cl 29.1(b)(iii) are significant. They would undoubtedly be taken into account by any prospective purchaser of a minority interest who would inevitably consider its own future position as a minority vendor, and is unlikely to assess the illiquidity risk against the continuity of the background assumed by WWNZ.
[210] Both experts agreed that the existence of pre-emptive rights, and in this case two sets of pre-emptive rights, reduces the appeal and hence the marketability of the investment in the 25 per cent holding of WWNZ.
[211] Mr Hussey again referred to the article of Professor Damodaran29 and deduced from the numerous studies undertaken that most illiquidity discounts fall in the range of 25 to 35 per cent. He considered that in this case the marketability concerns are unusually substantial, calling for a discount of at least 30 per cent for
the marketability or illiquidity risk.
[212] Mr Lucas, applying a combined discount factor by reference to the schedule he provided and also based on his own experience, said that the maximum discount for both minority and marketability rarely exceeds 40 per cent for a 50 per cent holding (with which he approximately equated the 25 per cent interest in QPAM for the reasons given above in the section on minority discount). He thus considered a combined discount of 20 to 25 per cent to be appropriate.
Conclusions on minority and marketability discounts
[213] Neither Mr Lucas’s schedule nor the material and data in Professor Damodaran’s paper (which have not been adapted to New Zealand circumstances) offer much assistance that can be relied upon. Mr Lucas acknowledged that his schedule was simply indicative and confirmed his own experience. He considered Mr Hussey’s revised combined discount of 40.5 per cent to be far too high. Mr Hussey, on the other hand, described the component parts of his combined 40.5 per cent discount as ―the absolute floor‖ (the minority discount) and ―light or easily warranted‖ (the marketability discount).
[214] It is apparent that there is no absolute percentage that should correctly be applied for these discounts separately or combined. There will always be a range, and opinions about that range are likely to differ depending on the approach and the emphasis given to the relevant factors.
[215] I have preferred to address the two discounts separately. I have concluded that about 10 per cent is appropriate for the minority discount. Given the very significant negative or devaluing factors that would affect the assessment of any prospective purchaser of the 25 per cent minority interest, I consider that a marketability discount of at least 25 per cent is appropriate.
[216] Combining those two discounts on a stepped basis, in the same way as Mr Hussey has approached the combined discount, I calculate a discount for minority and marketability of 32.5 per cent. Standing back and assessing as best I can the situation overall, I am satisfied that a combined discount of 32.5 per cent is about right to reflect the range of factors that apply in this case.
(g) Pre-operational risks discount
[217] Both valuers accepted there needs to be a discount to reflect pre-operational risk. Mr Lucas applied a discount factor of ... per cent for ―Probability of termination‖ to his assessed enterprise value for QPAM (...). This resulted in a discount of ... before division by four to obtain the value of a 25 per cent interest and before the minority and marketability discount.
[218] Mr Hussey assessed the value of a 25 per cent interest in QPAM, applied a discount for minority and marketability and, from the resultant figure, being the fair market value for a 25 per cent interest, applied a 25 per cent discount for ―risk attaching to QPAM arising from arena pre-operational development‖. The amount of the discount ranges from ... as shown in appendices E1 and E2. Mr Hussey’s initial discount was 32.5 per cent but he adjusted this percentage in his supplementary brief of evidence when he became aware of the obligation under the unit subscription agreement dated 9 March 2004 for the Jacobsens to advance a debt contribution of $2.5m to QPAM (if called upon) before WWNZ could be called upon to provide a further contribution on a dollar-for-dollar basis, up to specified maximums for debt contributions. He considered this factor relevant in assessing the potential risk attaching to the WWNZ shares because it significantly reduced the risk of any call being made against the WWNZ shares to meet the cost of pre-operational risks that became a reality. He therefore adjusted the pre-operational discount range to 20 to 30 per cent and took a mid-point of 25 per cent.
[219] Thus, when WWNZ submits ―Mr Hussey’s revised discount of 25 per cent is heavy-handed and unjustified. Mr Lucas’s 10 per cent allowance in relation to pre- operational risks is more than sufficient to cover all eventualities‖; and the Jacobsens submit ―... the array of issues applying to QPAM justifies a discount of 25 per cent rather than 10 per cent‖, the parties are not comparing ―apples with apples‖. It is obviously significant at what point in the valuation process the discount is applied.
[220] Mr Lucas recorded that the arena project encountered some difficulties prior to valuation date, including the termination of its initial architect with a new architect not having been appointed by valuation date, and an extension of the
practical completion date to 31 August 2006. He identified the following key issues at valuation date:
(a) Delay in anticipated practical completion date. (b) Uncertainty around final seating numbers.
(c) Roof bolt failure.
(d) Receivership of WWNZ’s parent company in the United States and the potential risk that ACC would enforce the default provisions of the development agreement.
[221] The risks identified in (a) and (b) were the subject of agreement between Mr Lucas and Mr Hussey and dealt with under agreed adjustments or in the operational cashflows.
[222] As to the risk of ACC terminating arrangements with QPAM as a consequence of default due to WWNZ’s parent company going into receivership ((d) above), Mr Lucas considered the risk was minimal because:
(a) ACC had made no suggestion that it was unhappy with QPAM as a potential operator of the arena.
(b) Mainzeal was working constructively towards completion of the arena as quickly as possible.
(c) QPAM held a bond and guarantee, referring to construction bonds of approximately $7m and a guarantee from Mainzeal’s parent company (Richina Pacific Limited), which made it unlikely that Mainzeal would seek to avoid its obligations at valuation date.
(d) Termination would inevitably have deferred the completion date and increased Mainzeal’s opportunity to claim for overruns in the vacuum
left if QPAM was removed and arrangements terminated as a
consequence of WWNZ’s parent’s receivership.
[223] Although Mr Lucas made no allowance for the termination risk in the cashflows, he made a round reduction of 10 per cent in the enterprise value of QPAM to allow for ―the slight possibility of termination‖. He noted that this risk would be eliminated if, as would almost inevitably happen in an arm’s length sale, ACC were to confirm that it did not intend to remove QPAM as a consequence of WWNZ’s parent’s receivership. He noted that ACC, while having obvious concerns about the construction problems with the arena, was not pursuing termination as at
26 April 2006 and had not done so subsequently.
[224] In his supplementary brief of evidence, Mr Lucas said that his 10 per cent allowance in relation to the risk of ACC terminating the contract was more than sufficient to cover all pre-operational eventualities. Elsewhere in his evidence he described the 10 per cent allowance as ―... probably pretty generous‖, and ―perfectly adequate for all the pre-operational problems‖.
[225] As to the roof bolt failure ((c) above), he noted it had been remedied in December 2005. Further, that Mainzeal were ―100 per cent comfortable‖ that after the relatively minor works, the structure was safe and fully compliant and that ―upon completion of the independent review, a robust process will have been followed and no further checks will be necessary‖.
[226] The reference by Mainzeal to the ―independent review‖ was to a requirement of a meeting of the Joint Project Control Group for the arena on 19 April 2006 for an independent peer review of the roof design which was not then completed (as Mr Lucas accepted). Mainzeal advised that it would take another month to six weeks for the full review to be completed. However, Mr Lucas was prepared to accept that
―the specific roof bolt issues had been resolved by valuation date‖. He said he had no evidence to suggest that the roof design, which was the subject of the full review, would be found to be materially defective in any way. He placed particular emphasis on the fact that Mainzeal had accepted that the roof bolt problem was their problem and there was nothing to suggest that Mainzeal would not be solely responsible for
any necessary remedial work under the terms of the design and construction contract with QPAM.
[227] Nor did Mr Lucas consider there was a need for any adjustment in relation to potential further or other problems from Mainzeal. He said it would have been
―most harmful for Mainzeal to have its performance bonds called and have someone else finish the job‖.
[228] The contract with Mainzeal was a fixed price with a guaranteed maximum price so construction risks lay with Mainzeal except to the extent it was likely that Mainzeal would default in the performance of its obligations under the project deed. Mr Lucas did not consider this a significant problem, the following being relevant factors:
(a) As at valuation date, construction was approximately 80 per cent complete.
(b) Mainzeal had stated privately and publicly that it was committed to seeing the project through, notwithstanding that the project had proved unfavourable for Mainzeal.
(c) Mainzeal was and is a substantial construction company and a subsidiary of the listed company, Richina Pacific Limited.
(d) QPAM had the benefit of two performance bonds provided by
Mainzeal by way of security.
(e) QPAM had the benefit of a guarantee by Richina Pacific Limited of the obligations of Mainzeal under the project deed.
[229] However, he identified a potential risk to QPAM in having to pay for engineer-approved variations above the guaranteed maximum price. Mr Lucas noted that as at 19 April 2006, W T Partnership identified the total of these variations at around ..., towards which QPAM would have had an obligation to contribute approximately ... . While there were additional costs anticipated, the extent of these
costs was not considered material because QPAM was accruing liquidated damages payable by Mainzeal at the rate of ... per day and was in receipt of legal advice that it was in a strong position in relation to any claims for variations and in respect of its rights to claim liquidated damages against Mainzeal.
[230] Mr Browne for the Jacobsens concluded his cross-examination of Mr Lucas by putting to him a proposition which involved the assumption of two indoor arenas just at or near completion, with identical contractual rights, cashflow forecasts and capital and debt structures, but with the following differences:
(a) Arena 1 has been completed on time, with no cost overruns, within budget and with no actual or potential claims for variation. There are no outstanding issues between the operator and the builder. There are no concerns about the roof structure or other matters of design or fitness for purpose and there had been no breaches of the construction contract practice requirements. The arena is ready to open.
(b) Arena 2 is not complete and is substantially behind its original due date. There are cost overruns, the allocation of which has not been finally assigned and others are expected. The builder is claiming for variations. There is a strained relationship between the builder (who is facing substantial losses on the project) and the operator, leading to allegations and counter-allegations, with mention of litigation being made. A roof issue has arisen and a review of the entire roof design is ongoing.
[231] Mr Lucas readily acknowledged that the completed arena would be preferable but he reiterated that the 10 per cent allowance he had made for the possibility of ACC termination was more than adequate to cover anything and any other issues associated with completion of the arena.
[232] Mr Hussey agreed that delay in completion (except for the roof bolt issue) and uncertainty about final seating numbers had been dealt with by the valuers at the enterprise value level. He did not attach much significance to the risk of termination
by ACC for a technical breach created by the receivership. But he identified other issues he considered of greater concern which were reflected in his discount of 25 per cent from his assessed value of the 25 per cent interest.
[233] He regarded the roof bolt issue to have the potential to be a costly and lengthy exercise to remedy and said that, as could be expected, Mainzeal’s view was optimistic and had to be viewed in context. He noted that the review from Murray Jacobs Limited (the independent reviewer) did not resolve all issues and that the design review required by the Joint Project Control Group needed to be extended to include an element-by-element analysis of all roof members to enable sign-off of the entire roof members. He concluded that, contrary to Mr Lucas’s position, there was no certainty as at April 2006 as to the extent of the roof problems, nor the extent of the remedies required. However, in answer to questions by Mr Fisher, while declining to revise his assessment of risk, he said it was just one factor of many in a range of 20 to 30 per cent, but ―... I haven’t put significant weight on that, on its own‖.
[234] He also identified concerns about the actual and potential breaches of the development agreement by QPAM arising from the arena not being delivered to specification, Mainzeal not having the technical and/or financial resources to complete the project, further delays, and QPAM lacking financial resources to be able to fund additional costs. But he accepted in reply to cross-examination that it was ―probably fair‖ to say that there was not really much risk of a problem falling upon QPAM because the likelihood of Mainzeal defaulting in the performance of its obligations was very low. Nor, he said in answer to further questions, had he drawn a negative inference or made any allowance for QPAM being unable to meet its financial obligations.
[235] However, Mr Hussey considered a prudent potential acquirer of the WWNZ shares would have been uncomfortable with the risks generally attaching to QPAM arising from the potential for:
• Significant legal costs from disputes with Mainzeal;
• Significant additional construction costs that were a possibility;
• Unresolved issues regarding the roof (irrespective that prima facie this might have been a Mainzeal responsibility); and
• Concern at ACC’s suggestion that the arena might not be ―fit for the purpose‖ and that QPAM could be adjudged to be in breach of the development agreement, with the potential for cancellation.
[236] He considered these factors had the potential to materially affect the value of the 25 per cent interest and that a discount in the range of 20 to 30 per cent, with a mid-point of 25 per cent, was appropriate.
Conclusions on pre-operational risks discount
[237] It is clear there was an element of risk at valuation date attaching to the known and possible pre-operational issues and that a discount to reflect these risks is appropriate. It seems to me that the discount should be allowed against the 100 per cent interest in QPAM before calculation of the 25 per cent interest and allowance of the discount for minority and marketability. The pre-operational risk factors surely affect the value of the business enterprise as a whole, not just the minority 25 per cent interest. Therefore, I find Mr Lucas’s approach to be the more logical one.
[238] However, I find it slightly illogical that Mr Lucas would allow a 10 per cent discount for the probability of termination by the ACC and also consider that the
10 per cent discount was sufficient to cover all pre-operational risks. Mr Lucas’s 10 per cent discount for the probability of termination was probably overstated given the low level of risk that both valuers attributed to that factor. But there was an array of potential risks, including the difficult relationship that had developed between QPAM and Mainzeal which, as Mr Hussey said, ―... would not be a situation that would make a rational and sensible investor comfortable‖. If the legal advice QPAM had been receiving, that it was in a strong position to resist any claims from Mainzeal was not correct, this issue had the potential for serious outcomes for QPAM.
[239] Viewed overall, I assess the potential for the identified risks to become a reality as low, but the impact on QPAM’s business if one or more of the risks became a reality to be significant.
[240] Adopting Mr Lucas’s approach and assessing the overall position as best I can, I consider an increase from 10 per cent to 12 per cent in the discount for pre- operational risks should be made.
Summary of determinations on valuation issues
[241] I summarise my conclusions on the valuation issues as follows:
(a) Revenue assumptions : Management’s assumptions as to the number of performances, ticket prices and event rental charges are to be applied in the base case DPL analysis ([91], [97] and [98] above).
(b) Rental cost (reflecting land value increase) : The adjustment of ... for ground rent as shown in the first column of the appendices E is to be adopted ([126] above).
(c) Small company risk premium : The SCRP to be applied is 1.5 per cent as factored in the ... per cent WACC applied by Mr Lucas ([140] above).
(d) “Untested” cash flows discount : No increase in the discount rate is to
be applied for ―untested‖ cash flows ([147] above).
(e) Derivative proceeding value : The derivative proceeding has a nil value in assessing the value of 100 per cent of QPAM and the value of the ―B‖ units and shares ([189] above).
(f) Minority and marketability discounts : 32.5 per cent is to be applied for the minority and marketability discounts combined ([216] above).
(g) Pre-operational risks discount : The discount of 10 per cent for
―Probability of termination‖ as applied by Mr Lucas is to be increased
to 12 per cent in respect of all pre-operational risks ([240] above).
Valuation of the “B” units and shares of WWNZ
[242] By agreement with counsel, on 4 April 2011 I issued an interim judgment on the valuation issues to the intent that the experts would factor in my determinations in the DPL analysis.
[243] After clarification on some matters pursuant to leave reserved, the joint memorandum of Mr Lucas and Mr Hussey dated 2 September 2011 was filed. The joint memorandum is annexed to this judgment as appendix E3. It factors in my determinations as set out in [241] above on the seven areas of difference between the experts, on the valuation issues. It shows the fair market value of the 25 per cent interest of WWNZ as $2.69m.
[244] I consider this assessment appropriately takes account of all relevant factors. I therefore determine that the fair market value of the 25 per cent interest of WWNZ in the ―B‖ units in the QPAM Trust and the ―B‖ shares in QPAM is $2.69m. In accordance with the judgment of the Court of Appeal,30 this is the consideration to be paid by JVMNZ for the minority interest of WWNZ.
Other issues
[245] Following determination of the fair market value for the ―B‖ units and shares,
the following issues require determination:
(a) When is the second defendant Jacobsen Venue Management New
Zealand Limited (―JVMNZ‖) required to pay for the ―B‖ units and
shares?
30 Refer [1] above.
(b) Whether interest on the amount payable for the ―B‖ units and shares is
payable on settlement. If so, at what rate?
(c) What are the rights of Worldwide in relation to the ―B‖ units and shares following notice by JVMNZ of the exercise of its pre-emptive rights on 26 April 2006?
[246] In the course of the hearing, the plaintiffs advised that a declaration seeking remedies if JVMNZ should default in settlement, in para F at page 10 of the plaintiffs’ fourth amended statement of claim, was not pursued.
Time for payment
[247] The plaintiffs claim in their fourth amended statement of claim:
C. Declarations that JVMNZ is obliged:
(i) to pay the total sum payable by tendering payment in the said amount in cleared funds at the address for service of Worldwide NZ in this proceeding; and
(ii) to make such payment within 14 days of the date of judgment herein.
[248] There does not appear to be any disagreement about C(i). I understand the address for service is at Brookfields, the solicitors for WWNZ.
[249] The plaintiffs plead that it is an implied term of the unit trust deed that in the event of a unit ―A‖ holder exercising its pre-emptive right of purchase consequent upon a change of control, it would be required to pay for the ―B‖ units and shares within a reasonable period after determination of the fair market value of those units and shares and that 14 days after determination is a reasonable period in the circumstances.
[250] The defendants rely on cl 10.5.2 of the unit trust deed which provides that the trustee (QPAM) will give directions as to the time and place for settlement of the unit transfers to be effected under cl 10. The defendants submit this is an express
provision governing the situation and that there is no basis upon which to imply a condition, particularly a condition that is contradictory to the express provision.
[251] I do not accept this submission. Clause 10 has no application in the present circumstances. It deals with a situation where a ―B‖ unit holder ―wishes to sell all or any part of its ―B‖ units to an identified willing third party purchaser ...‖. Here the transfer of the ―B‖ units and shares to JVMNZ was consequent upon a deemed disposal pursuant to cl 9.2.2, triggered by a change of control, namely, the appointment of a receiver of Worldwide Entertainment Inc on 18 January 2006.
[252] Although cl 9.2.2 purports to provide that on a deemed disposal cl 10 will apply, as the Court of Appeal stated in the 2006 judgment:31
... the cl 10 mechanism cannot be made to work where a deemed disposal under cl 9.2.2 has already taken place. The terms of the trust deed simply fail to deal with this situation in any workable way.
[253] In the Court of Appeal 2008 judgment, a differently constituted court agreed with those comments.32
[254] I do not consider that cl 10.5.2 can be extracted or isolated from cl 10 to give QPAM a role in a deemed disposal to which the mechanism in cl 10 cannot be made to apply. Clause 10.5.2 specifically refers to ―... transfers to be effected under this clause 10.‖ A deemed disposal under cl 9.2.2 is not ―effected under‖ cl 10. It has, as the Court of Appeal observed, already taken place.
[255] In the absence of an applicable provision in the unit trust deed, it is necessary for the Court to imply a term providing a reasonable period for payment by JVMNZ. The plaintiffs submit that 14 days from the date of judgment is a reasonable period. The defendants contend (if the Court does not accept their submission about cl 10.5.2), that 14 days is not a reasonable period when the amount payable is fixed by the Court, rather than by a transfer notice given by the ―B‖ unit holder under
cl 10. They submit that as a minimum a period of 28 days should be allowed.
31 Worldwide NZ LLC v QPAM Ltd CA122/06, 10 November 2006 at [21].
32 Jacobsen Venue Management NZ Ltd v Worldwide NZ LLC [2008] NZCA 105 at [30] and [31].
[256] I consider that 28 days is a reasonable period in the circumstances. The Jacobsen interests must have assessed within an approximate range the amount JVMNZ would be required to pay for the ―B‖ units and shares when they exercised their pre-emptive rights on 26 April 2006. I note that the Court of Appeal 2006 judgment refers to an undertaking given by the Jacobsens not to dispose of the ―B‖ shares (which the Court was satisfied covered both the ―B‖ units and shares) until the price to be paid was fixed (or determined by the Court), or the Jacobsens had paid $4.125m into a trust account to be held as security for its obligation to pay for the shares (and units).33 They will have been further informed by the interim judgment issued on 4 April 2011 and the determination of the experts dated 2
September 2011 on the basis of the interim judgment. However, this judgment also awards interest on the consideration to be paid. I consider a period of 28 days to be reasonable for the Jacobsens to put in place the necessary arrangements for settlement.
[257] Accordingly, I make declarations in terms of claim C of the fourth amended statement of claim, but the period in C(ii) shall be 28 days which shall run from the date of this judgment.
Interest
[258] The plaintiffs claim in the fourth amended statement of claim:
The ―sum payable‖ is defined in para A at page 9 of the statement of claim as the fair market value of the ―B‖ units (including the value of the ―B‖ shares) as determined by the High Court at the valuation date of 26 April 2006.
[259] The unit trust deed is silent as to payment of interest on the ―Sale
Consideration‖ payable on exercise of the pre-emptive rights in respect of the ―B‖
33 Worldwide NZ LLC v QPAM Ltd CA 122/06, 10 November 2006 at [36] and [38]. See [10]
above.
34 In further particulars (undated) provided by the plaintiffs in response to the request of the second to fourth defendants dated 17 August 2009 the interest rate claimed from 1 July 2008 is 8.4 per cent being the maximum prescribed rate applicable from that date.
units. And, in this case, there is no ―Sale Consideration‖ as that term is defined in cl 10 of the trust deed. Instead the consideration to be paid for the ―B‖ units and shares is their fair market value as determined by this Court.
[260] The plaintiffs’ claim for interest on the sum payable is made under s 87 of the
Judicature Act 1908 which relevantly provides:
87 Interest on debts and damages
(1) In any proceedings in the High Court, the Court of Appeal, or the Supreme Court for the recovery of any debt or damages, the court may, if it thinks fit, order that there shall be included in the sum for which judgment is given interest at such rate, not exceeding the prescribed rate, as it thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment:
provided that nothing in this subsection shall—
(a) authorise the giving of interest upon interest; or
(b) apply in relation to any debt upon which interest is payable as of right, whether by virtue of any agreement, enactment, or rule of law, or otherwise; or
(c) affect the damages recoverable for the dishonour of a bill of exchange.
...
(3) In this section the term the prescribed rate means the rate of 7.5% per annum, or such other rate as may from time to time be prescribed for the purposes of this section by the Governor-General by Order in Council.
[261] The prescribed rate of interest was 7.5 per cent as at the valuation date to 30
June 2008. From 1 July 2008 the prescribed rate increased to 8.4 per cent35 and from
1 July 2011 it decreased to 5 per cent.36
[262] WWNZ contends that the cause of action on which it relies arose under the unit trust deed when JVMNZ exercised its pre-emptive rights and thereby became entitled and bound to purchase the ―B‖ units and shares held by WWNZ, and that the
consideration, being the fair market value of the ―B‖ units and shares, is an
35 Judicature (Prescribed Rate of Interest) Order 2008 (SR 2008/145).
36 Judicature (Prescribed Rate of Interest) Order 2011 (SR 2011/177).
ascertainable debt in terms of s 87. WWNZ maintains that in the event JVMNZ failed to pay the sum payable for the ―B‖ units and shares as determined by the Court within the period specified by the Court, it would be open for WWNZ, pursuant to leave reserved as sought in the fourth amended statement of claim, to apply for judgment to be entered in terms of the cause of action pleaded.
[263] The defendants submit that the plaintiffs are not entitled to interest under s 87 because this is not a proceeding for the recovery of a debt and accordingly the Court has no jurisdiction to award interest under s 87. They contend there is no debt currently payable under the unit trust deed because the amount to be paid for the units and shares is not payable upon the exercise of the pre-emptive rights by JVMNZ but at a time directed by QPAM, the trustee. (This submission relies on cl 10.5.2 of the unit trust deed which I have held does not apply.)37 The Jacobsens further argue that JVMNZ is not required to make payment for the ―B‖ units and shares, and WWNZ is not entitled to payment, before the fair market value is fixed or determined by the Court.
[264] Relying on the authority in Body Corporate No 95035 v Auckland Regional
Council38 the defendants submit:
(a) Being called upon to make a declaration fixing a value (rather than to award a sum of money), is not something giving rise to jurisdiction to award interest under s 87.
(b) Liability to pay an amount to be determined is an inchoate liability, not a debt.
(c) A party seeking a declaration as to an amount may have a cause of action in that sense but it is not one covered by s 87. The second to fourth defendants have the same cause of action.
(d) Perceptions of unfairness cannot modify the jurisdictional position.
37 See [250]-[254] above.
38 Body Corporate No 95035 v Auckland Regional Council (1993) 6 PRNZ 559.
[265] They further contend that no ―cause of action‖ arises under which the plaintiffs could pursue JVMNZ for payment of any sum until either (as the Jacobsens contend) QPAM as trustee has given directions as to the time and place for settlement, or (as the plaintiffs contend) within a reasonable period of time after the fixing or determining of the fair market value.
[266] In Body Corporate No 95035 the respondent lessor brought proceedings in the High Court against the appellant body corporate lessee to recover arrears of rent together with interest. The lease between the parties provided for a rent review in November 1989 in accordance with the Public Bodies Leases Act 1969. In August
1991, the fixing of the rent for the remainder of the term of the lease from the 1989 rent review date to September 1996 was referred to arbitration. An award was published in November 1991 which increased significantly the rent for the relevant period. In the High Court the lessor obtained summary judgment for the arrears of rent arising from the difference between the old rent which the body corporate had continued to pay and the new rent determined by the arbitrator, together with interest under s 87 of the Judicature Act. On appeal the summary judgment was set aside and the application was adjourned pending the lessee’s application to set aside the award. However, the Court held that the issue of interest concerned a jurisdictional point which could be raised at any time (the lessee having made no submissions on the interest issue in the summary judgment proceedings).
[267] The Court of Appeal held that although the rent was backdated until 27
November 1989 it obviously could not be paid until the amount was known. Although the proceedings were to recover rent and the power under s 87 was available to the Court, the cause of action did not arise until the award was published:39
The lessors could not establish their claim to arrears of the rent unless and until the review process had resulted in the fixing of a new rent in excess of the old ... [A]n essential aspect of the right to recover debt here was not just an award but an award in excess of the old rental, which the Court is not entitled to assume would follow as of course.
39 At 564.
[268] Accordingly the Court held that interest should run from the date of the award determining the new rent, on arrears then accrued.
[269] The Court observed that while the result might not seem fair or reasonable, the Public Bodies Leases Act entitled the lessor to put the review process in train nine months before the term for the old rent expired so that a diligent lessor was likely to have the process completed before the new rent became payable.
[270] In Body Corporate No 95035 the Court of Appeal referred40 to the meaning of the expression ―cause of action‖ as being usefully described in Halsbury’s Laws of England:41
―Cause of action‖ has been defined as meaning simply a factual situation the existence of which entitles one person to obtain from the court a remedy against another person. The phrase has been held from the earliest time to include every fact which is material to be proved to entitle the plaintiff to succeed, and every fact which the defendant would have a right to traverse.
―Cause of action‖ has also been taken to mean that particular act on the part
of the defendant which gives the plaintiff his cause of complaint, or the subject matter or grievance founding the action, not merely the technical cause of action.
[271] I consider that Body Corporate No 95035 is distinguishable from the facts in this case on the following bases:
(a) In Body Corporate No 95035, no cause of action arose until the arbitrator’s award was published as it was only at that point that the existence of a debt was established, irrespective of its amount. As the Court of Appeal observed, it was only when there was an award that established a new rent in excess of the old rent that any liability or debt was established.
(b) In Body Corporate No 95035, the obligations of the lessor and lessee to each other were fully provided by the terms of the lease and the relevant statutes, in particular the Public Bodies Leases Act. There
was specific provision for the rent review and the process by which it
40 At 564.
41 Halsbury’s Laws of England (4th ed, 1973) Vol 37 Practice and Procedure at [20].
would be carried out. The lessee was not contractually bound to pay a rent increase until the review was complete and the determination resulted in an increase in rent.
[272] In this case the Court of Appeal concluded in the 2008 judgment that the unit trust deed did not address the question of how the value of the units would be fixed in the event of the Jacobsens exercising their pre-emptive rights following a change of control, so the Court was obliged to turn to an analysis of the intentions of the parties.42 It determined that the consideration to be paid for the units and shares would be their fair market value, to be agreed or determined by the Court.43 The effect of the Court of Appeal’s decision is that while cl 9.2.2 of the unit trust deed applied to give the Jacobsens the option of exercising their pre-emptive rights to purchase WWNZ’s units upon the change of control brought about by the receivership of Worldwide Entertainment Inc, the mechanism in cl 10 for fixing the price was not workable. In its place, the Court determined that JVMNZ’s obligation was to pay WWNZ the fair market value of the units and shares, as at the date on which the pre-emptive rights were exercised, namely 26 April 2006.
[273] The contractual obligation to pay the consideration for the units and shares arose in terms of the unit trust deed at the point the pre-emptive rights were exercised. While actual payment must be deferred until the fair market value is known (either by agreement or determination of the court), the legal obligation to pay the consideration for the units and shares was not dependent on determination of the amount of the consideration to be paid. Accordingly in terms of s 87 the plaintiffs’ cause of action arose at the point the pre-emptive rights were exercised.
[274] The distinction between the circumstances in Body Corporate No 95035 and this case is further demonstrated by the Court of Appeal’s consideration in Body Corporate No 95035 of whether it might appear unfair that the lessee gained some financial advantage as a result of the delay in the rent review process. The Court pointed out that the lessor, as the party seeking payment of interest, had some power
to mitigate loss caused by such delay by instigating the rent review process in
43 At [41].
advance of the review date. No such power to mitigate rests with WWNZ in the circumstances of this case. While the Jacobsens had the right, which they exercised, to purchase WWNZ’s units on the change of control, the Jacobsens alone stand to benefit from any delay in the process. The delays have been considerable while the parties have pursued legal proceedings to protect their positions under the unit trust deed, as the parties saw them. I note that the Court of Appeal ultimately rejected the Jacobsens’ interpretation of the unit trust deed in relation to the role of QPAM as trustee in the pre-emptive rights process.
[275] Section 87 does not require that the amount of the debt be known. For s 87 to apply there must be a cause of action giving rise to a debt that a party seeks to recover. Since WWNZ has established a cause of action and is pursuing payment of the debt which JVMNZ is contractually bound to pay, s 87 can properly be applied, notwithstanding that the amount of the debt was not known at the time the cause of action arose.
[276] Finally, the analogy suggested by the defendants with an advance repayable on demand without stipulation of interest does not, in my view, support their case. In that situation, only when demand is made does a cause of action arise. Demand may never be made and accordingly there would be no cause of action under which the lender could seek recovery of the debt. It follows that in such a situation interest under s 87 could be awarded only from the date of demand when the cause of action arose. That is not the situation here. The obligation for JVMNZ to pay the consideration for the ―B‖ units and shares, and accordingly the cause of action, arose when the pre-emptive rights were exercised, albeit that the amount of the consideration had yet to be determined.
[277] Once s 87 applies, the Court has considerable discretion to award interest ―as it thinks fit‖ as part of the judgment for the recovery of the debt, and to fix the rate of interest as it sees fit, but not exceeding the prescribed rate. The prescribed rate does not apply retrospectively.44 The Court also has a discretion to determine the part of
the debt on which, and the period during which, interest is to be paid.
44 See the observations of the Privy Council in Takaro Properties Ltd v Rowling [1987] 2 NZLR
700 (PC) at 719, applied in Securities (NZ) Ltd v Cadbury Schweppes Hudson Ltd [1988] 1
[278] No evidence was adduced by either WWNZ or the Jacobsens as to appropriate interest rates in the period April 2006 to the present time.
[279] In the absence of such evidence and in the exercise of the discretion conferred by s 87, I determine that interest shall be paid on the amount determined in this judgment as the fair market value of the ―B‖ units and shares, $2.69m, as follows:
(a) at the rate of 7.5 per cent (being the rate claimed at para B on page 9 of the fourth amended statement of claim) from the valuation date, 26
April 2006 to 30 June 2011;
(b) at the rate of 5 per cent from 1 July 2011 to the date of payment.
Rights of WWNZ pending payment for the “B” units and shares
[280] The plaintiffs claim in the fourth amended statement of claim:
D. Further declarations that the rights of Worldwide NZ under the Unit Trust Deed and the Constitution of QPAM both before and after the creation of the pre-emptive rights contract have been as follows:
(i) a right to hold legal title to both the ―B‖ units and ―B‖ class
shares;
(ii) a right to be entered on the Register of Unit Holders of the Unit Trust as holder of the ―B‖ units and on the Share Register of QPAM as holder of the ―B‖ class shares;
(iii) a right to an equitable interest in the ―B‖ units and/or in the ―B‖
class shares in the nature of a vendor’s lien;
(iv) a right to exercise the rights attaching to the ―B‖ units and the
―B‖ class shares and to act (and vote) in accordance with, and to protect, its own interests including the right to appoint a ―B‖ director to the Board of QPAM and for that director to exercise the rights of a director on the Board of QPAM.
(v) a right to a legitimate interest in ensuring a process which entitles it to a fair market value for the ―B‖ units and ―B‖ class shares and/or the Option.
[It is accepted by the plaintiffs that (v) no longer applies.]
NZLR 340 (CA) at 345.
E. A further declaration that Mr Gosney, as a duly appointed ―B‖ director of the Board of QPAM has been since 4 April 2006 entitled to hold the office of director of QPAM.
F. [Abandoned by the plaintiffs.]
G. An order rectifying the share Register of QPAM under section 91 of the Companies Act 1993 in terms of the declarations sought in paragraphs B(a), (b) and (d) above [sic],45 save that the order will only take effect upon Jacobsen NZ failing to settle the pre-emptive rights contract by tendering payment within 14 days of the date of judgment in this proceeding.
H. An injunction, restraining QPAM, Jacobsen NZ, Jacobsen F.T. and Jacobsen Pty from taking any direct or indirect action to interfere with:
(a) the lawful exercise by Worldwide NZ of its rights as the holder of the ―B‖ units in the Unit Trust and of the ―B‖ class shares in QPAM; and
(b) the lawful exercise by Mr Gosney of the rights of a duly
appointed ―B‖ director of QPAM.
Save that the order by way of injunction will only take effect upon Jacobsen NZ failing to settle the pre-emptive rights contract by tendering payment within 14 days of the date of judgment in this proceeding.
I. Leave be reserved to Worldwide NZ to apply for such further orders as may be appropriate.
[281] WWNZ pleads that it is entitled to the above declarations as to its rights under the unit trust deed and the constitution of QPAM both before and after the executory contract it pleads was created between WWNZ and JVMNZ upon exercise by JVMNZ of its pre-emptive rights under cl 9 of the unit trust deed. But the focus of WWNZ’s submissions was on its rights pending payment by JVMNZ for the ―B‖ units and shares.
[282] QPAM and the Jacobsens contend that upon the deemed disposal of the ―B‖ units and shares which occurred with the change of control, WWNZ’s entitlement to exercise the rights of a shareholder and to be treated by QPAM and the Jacobsens as
a shareholder, ceased. They say WWNZ is simply an unsecured creditor of JVMNZ
for the consideration payable for the ―B‖ units and shares upon the fair market value
being determined.
[283] It is accepted by all parties, as pleaded at para 12 of the fourth amended statement of claim, that the appointment of Mr Goldberg as receiver of Worldwide Entertainment Inc on 18 January 2006 effected a change of control of WWNZ within the meaning of cl 1.1 of the unit trust deed. The change of control triggered JVMNZ’s pre-emptive rights of purchase under the unit trust deed in respect of the
―B‖ units. The ―B‖ units correspond to and are stapled to the ―B‖ shares,46 so the provisions of the unit trust deed relating to transfer of the ―B‖ units govern also the transfer of ―B‖ shares.
[284] From 26 April 2006, when JVMNZ gave notice of the exercise of its pre- emptive rights, QPAM has treated JVMNZ as the holder of the ―B‖ shares in QPAM and the ―B‖ units in the QPAM trust. JVMNZ was entered on QPAM’s register of shares as holder of the ―B‖ shares previously held by WWNZ on or about 5 May
2006. The register records the date of transfer as 18 January 2006, being the date when Mr Goldberg was appointed receiver of Worldwide Entertainment Inc and the change of control became effective. WWNZ claims QPAM has acted wrongly in these respects.
[285] Clause 9 of the unit trust deed is headed ―Restriction on the Disposal of Units‖. Clause 9.1 relates to the disposal of ―A‖ units and is not relevant to the issues in this case.
[286] Clause 9.2 is headed ―Restriction on ―B‖ Units‖. Clause 9.2.1 provides:
9.2.1 Except as expressly permitted by clause 9.3, no ―B‖ Unit Holder is entitled to:
(a) sell or Dispose of ―B‖ Units in whole or in part;
(b) sell or Dispose of any Relevant Interest in ―B‖ Units; or
46 Clause 3.1 of the Constitution of QPAM. The constitution of QPAM and the unit trust deed together comprise the constitution documents. The unit trust deed is pre-eminent. It prevails if there is any inconsistency and the constitution must be amended to remove the inconsistency: cl 12 of the unit trust deed.
(c) create or grant any options or similar rights over ―B‖ Units.
[287] Clause 9.2.2 importantly provides:
9.22 A Change in Control is deemed to be Disposal of ―B‖ Units by the
―B‖ Unit Holder upon the occurrence of which the provisions of
clause 10 will apply.
[288] ―Dispose‖ is defined in cl 1.1, the definitions and interpretation clause of the
unit trust deed:
―Dispose‖ means in respect of Units held by a unit holder, the transfer or redemption of those Units.
[289] In the 2006 judgment the Court of Appeal said of a change of control:47
The important point for present purposes is that a change in control is treated as an actual disposal of B units, rather than a triggering of an obligation to offer them to the A unit holder.
[290] Clause 9.3 defines when ―permitted disposals‖ may occur. These arise only if the sale or disposal of the ―B‖ units is to:
(a) An affiliate of the ―B‖ unit holder; or
(b) The ―A‖ unit holder in accordance with the pre-emptive rights provisions; or
(c) Third parties where the ―A‖ unit holder has declined the ―B‖ units (providing the sale is on the same terms and conditions as were offered to the ―A‖ unit holder).
(It is not in dispute that the receiver of Worldwide Entertainment Inc is not an affiliate of WWNZ in terms of the definition in the unit trust deed).
[291] Clause 9.4 provides for the consequences of a sale or disposal to a third party. Even when the pre-emptive rights provisions have been followed, prior to the
transfer of units to a third party a deed of accession binding the transferee to all the
47 Worldwide NZ LLC v QPAM Ltd CA122/06, 10 November 2006 at [15].
provisions of the unit trust deed must be entered into. Clearly no such deed of accession has been entered into by the third party, Mr Goldberg, the receiver of Worldwide Entertainment Inc.
[292] Once the change of control and deemed disposal occurred on the appointment of Mr Goldberg, cl 9.5.2 came into play. It is headed ―Re-classification‖ and provides:
If a ―B‖ Unit Holder sells or otherwise Disposes of any or all of its ―B‖ Units to an ―A‖ Unit Holder, then the Trustee must procure the re- classification of those ―B‖ Units as ―A‖ Units.
Clause 9.5.2 required QPAM to re-classify the ―B‖ units upon their deemed disposal to JVMNZ. This QPAM did on 3 May 2006. Re-classification is mandatory following a disposal. Once effected, no ―B‖ shares remained.
[293] Clause 9.6 provides that the trustee (QPAM) must not register a transfer of any units unless the terms of cl 9 have been complied with. Mr Fisher relied on this provision in claiming that QPAM does not have the power to register a transfer of the
―B‖ units. However, in the case of a deemed disposal under cl 9.2.2 (which purports, ineffectively, to apply the provisions of cl 10), there can be no barrier to registration of the transfers of the ―B‖ units, re-classified as ―A‖ units.
[294] Clause 10, referred to in cl 9.2.2, sets out the mechanics for the exercise of pre-emptive rights when any ―B‖ unit holder wishes to sell all or any part of its ―B‖ units to an identified willing third party purchaser.
[295] Clause 10 provides:
10 PRE-EMPTIVE RIGHTS
10.1 Transfer notice
Any ―B‖ Unit Holder who wishes to sell all or any part of its ―B‖ Units to an identified willing third party purchaser (―Purchaser‖) on arms’ length terms must give notice in writing (―Transfer Notice‖) to the Trustee.
10.2 Relevant particulars
A Transfer Notice must specify:
10.2.1 the name and address of the Purchaser;
10.2.2 the number of Relevant Units that are the subject of the proposed sale:
10.2.3 the proposed consideration for the sale of the Relevant Units
(―Sale Consideration‖);
10.2.4 that the Relevant Units will not on completion of the sale be subject to any Encumbrance.
10.3 Acceptance by “A” Unit Holder
The ―A‖ Unit Holder has a right to acquire all or a part of the Relevant Units from the ―B‖ Unit Holder by giving written notice of its willingness to purchase the Relevant Units to the ―B‖ Unit Holder within 10 Business Days after receipt of the Transfer Notice from the Trustee.
10.4 Transfer of “B” Units to Purchaser
Any Relevant Units not transferred to an ―A‖ Unit Holder under clause 10.3 may be transferred by the ―B‖ Unit Holder to the Purchaser provided that:
10.4.1 the ―A‖ Unit Holder consents to the transfer of Relevant Units to the Purchaser, such consent not to be unreasonably withheld; and
10.4.2 the terms of sale to the Purchaser are no more favourable to the Purchaser than those set out in the Transfer Notice; and
10.4.3 before registration of the transfer of the Relevant Units, the Purchaser enters into an agreement with the other parties to this Deed containing the same terms and conditions as this Deed amended as reasonably required by the ―A‖ Unit Holder to protect it from any consequences of the transfer.
10.5 Role of Trustee
10.5.1 The Unit Holders each appoint the Trustee as their agent to the extent required to give effect to the provisions of this clause 10. The Trustee must give notice to the Transferor of which Relevant Units are to be transferred.
10.5.2 The Trustee will give directions as to the time and place for settlement of the Unit transfers to be effected under this clause 10.
[296] Despite the purported incorporation by cl 9.2.2 of the cl 10 mechanism on a deemed disposal, the cl 10 mechanism is unworkable in such a situation.
[297] In the Court of Appeal 2006 judgment, the Court said:48
[21] Clause 10 contemplates the establishment of the purchase price which the A unit holder must pay by a market mechanism, ie what an actual third party purchaser is prepared to offer. It anticipates that the B unit holder will have reached conditional agreement with the third party before giving the Transfer Notice referred to in cl 10.2. Unless the B unit holder has reached such an agreement with a third party, it will not be able to set in train the pre- emptive provisions. All of this means that the cl 10 mechanism cannot be made to work where a deemed disposal under cl 9.2.2 has already taken place. The terms of the trust deed simply fail to deal with this situation in any workable way.
[22] Counsel for Worldwide, Mr Fisher, sought to characterise a ―deemed disposal‖ as a legal fiction. He submitted that as cl 10 deals with transactions which have not yet occurred, all that a ―deemed disposal‖ under cl 9.2.2 entails is an obligation on Worldwide’s part to issue a transfer notice to Jacobsen, thus triggering the right of first refusal mechanism in cl 10.
[23] We do not accept that submission. It was open to the drafters of cl 9.2.2 to provide that a change in control triggers an obligation to give a transfer notice offering to sell the units, rather than constituting a disposal. Indeed, the former wording would have reflected more common practice. Even that approach would not work in this case, because a transfer notice must specify the price agreed with a third party, when none will have been agreed in the event of a change in control.
[24] In any event, the parties chose to provide that a change in control is treated as a disposal of the B units. The words are clear. That means that upon the appointment of Mr Goldberg as receiver of WEI, Worldwide was deemed to have disposed of the B units in breach of cl 9. It is treated as being in default under the trust deed.
[25] Clause 9.2.2 says the provisions of cl 10 apply when there has been a deemed disposal but, as noted earlier, that cannot be made to work. In order to make cl 10 operable following a deemed disposal, it is necessary to construe it in a manner that assumes the disposer of the B units is in default of its obligations to offer the A unit holder the chance to purchase the B units. That is to say, we construe cl 10 on the assumption that the pre- receivership Worldwide disposed of the B units (by their being passed to the post-receivership Worldwide) without first offering them to Jacobsen.
[26] The purpose behind the pre-emptive rights provisions is clear: it is to preclude the B unit holder from disposing of its interest to a third party without first giving the A unit holder the opportunity to end the joint venture and buy out the B unit holder’s interest. Jacobsen agreed to a joint venture with the pre-receivership Worldwide, but reserved the right to force Worldwide out if another party stepped into Worldwide’s shoes. If Worldwide under the control of Mr Goldberg were to be regarded as the valid successor to the Worldwide with which Jacobsen entered business, Jacobsen would find itself in a venture with a party with which it did not choose to enter into a joint enterprise.
48 Worldwide NZ LLC v QPAM Ltd CA122/06, 10 November 2006 at [21]-[27].
[27] Mr Fisher said Worldwide should be treated as if it had made a valid offer to Jacobsen under cl 10, which Jacobsen had accepted. He said that would mean Worldwide was in a position of an unpaid vendor of shares analogous with that of the plaintiffs in Musselwhite v C H Musselwhite & Sons Ltd.49 In that case, the contract for sale of shares provided for the purchase price for the shares to be payable in instalments. It was said that even though the contract had been executed, the vendors were still entitled to vote the shares in whatever way they wished pending payment of the full purchase price. We do not agree that that case is on point in the present situation. In Musselwhite, the vendors were not in default of any obligation. They were simply ordinary unpaid vendors. As we have said, Worldwide’s position is quite different. It has defaulted under the trust deed. It does not enjoy the same rights as a non-defaulting unpaid vendor.
(emphasis in [21] and [25] added)
[298] On the Court of Appeal’s assessment of the balance of convenience, it upheld the High Court’s refusal of an injunction requiring QPAM and the Jacobsens to treat WWNZ as still being the lawful owner of the ―B‖ shares and units. The Court did not determine WWNZ’s interim rights pending determination of the value of the units and shares and payment for them by JVMNZ.
[299] The Court noted that Mr Browne, counsel for the Jacobsens, accepted that WWNZ had an ongoing interest in the ―B‖ units in order to protect any lien or similar creditor’s right it would have if the Jacobsens defaulted in payment of the purchase price.50 The Court referred to the undertaking given by the Jacobsens after the hearing,51 which the Court considered provided reasonable protection for the position of WWNZ pending resolution of disputes between the parties and completion of the pre-emptive rights process.52
[300] In the Court of Appeal 2008 judgment,53 a differently constituted Bench agreed with the comments at [21] in the earlier appeal.54 The Court said that cl 10.3 provides the basis for the Jacobsens to acquire the ―B‖ units but otherwise cls 10.1 to
10.4 are beside the point. The Court rejected the Jacobsens’ argument that cl 10.5
gave QPAM the right to determine the consideration payable for the ―B‖ units and
shares, stating that it involved a role for QPAM that was not intended under
49 Musselwhite v C H Musselwhite & Son Ltd [1962] Ch 964.
50 At [34].
51 See [10] and [11] above.
52 At [39].
53 Jacobsen Venue Management New Zealand Limited v Worldwide NZ LLC [2008] NZCA 105.
54 At [31].
cl 10.5.2. The Court of Appeal made the declaration that brought the valuation issue before this Court, that the consideration to be paid for WWNZ’s units and shares was to be the fair market value, to be assessed if necessary by the Court.
[301] The Court of Appeal held that given the nature of the appeal the subject of the
2008 judgment, being by the Jacobsens against the refusal by the High Court of summary judgment and dismissal of an associated strike out application, it was not entitled to give a final adjudication on the interim rights of WWNZ pending completion of the sale of the units and shares to the Jacobsens.55
[302] The plaintiffs sought support for their claims from previous references in High Court and Court of Appeal judgments to the issue of WWNZ’s interim rights. In particular, reference was made to the observations of Winkelmann J in the judgment in which she declined the defendants’ application for summary judgment and strike out (other than relating to a cause of action in estoppel).56 Referring to the Court of Appeal 2006 judgment from which I have cited, she said:57
The Court of Appeal rejected WWNZ’s argument (advanced in reliance on the line of cases following Musselwhite & Son Ltd ...) that it has the rights of an unpaid vendor. I do not see the matter as being so straightforward as the Court of Appeal has viewed it. The legitimate interests of the ―A‖ unit holder, and ―A‖ shareholder as identified by the Court of Appeal in the identity of its joint venturer could be met by a restriction upon WWNZ exercising some of the incidents of ownership (perhaps depriving its director of the right to vote, but allowing it to receive financial information on a confidential basis so that it could meaningfully participate in the fixing of a price for the shares), without depriving it of all beneficial interest in the units and shares, and hence security for payment. That would be a reasonable and equitable term to imply.
[303] Winkelmann J was concerned with the defendants’ interlocutory applications. Her observations about WWNZ exercising some of the incidents of ownership related, in part, to the receipt of financial information on a confidential basis so that WWNZ could meaningfully participate in the fixing of a price for the shares. At the stage the matter was before Winkelmann J, QPAM was claiming an entitlement to fix the value of the ―B‖ shares and units which was subsequently rejected by the Court
of Appeal. That aspect of the matter has moved on following the determination in
55 At [54].
56 Worldwide NZ LLC v QPAM Ltd HC Auckland CIV-2006-404-1827, 1 December 2006.
57 At [83].
the Court of Appeal 2008 judgment, that the price for the ―B‖ units and shares
should be the fair market value as fixed by the Court if necessary.
[304] Mr Fisher, while accepting that the pre-emptive rights are intended to protect the ―A‖ unit holders (the Jacobsens) from being foisted with an unwanted partner, submitted that in change of control situations under the exercise of pre-emptive rights, a transitional period is unavoidable. He said the position of both parties must be considered. He submitted that the change of control in this case, the appointment of a receiver for Worldwide Entertainment Inc, was simply an event, ―the contractual mechanism‖, which prompted the pre-emptive rights under the unit trust deed and that it is wrong to construe the unit trust deed on the basis that this was an egregious default. Fair arrangements must have been intended for the interim period. He submitted that the unit trust deed is so badly drawn that it is not conclusive and that the Court should imply fair and reasonable arrangements for the interim period, as must have been intended by the parties.
[305] That argument was rejected by the Court of Appeal and I also reject it. On the contrary, the unit trust deed provides for the consequences of a change of control. Under cl 9.2.2 it is a deemed disposal. The transfer of the ―B‖ units is an event that has taken place. As the Court of Appeal observed in the 2006 judgment,58 had the parties intended that a change of control should prompt an obligation to give a transfer notice offering to sell the units rather than constituting a disposal, they could have so provided. Such a provision would have provided a basis for Mr Fisher’s argument that the change of control and exercise of the pre-emptive rights created an executory contract between WWNZ and JVMNZ. But by cl 9.2.2 an actual disposal is deemed to occur on a change of control.
[306] The unit trust deed and the constitution of QPAM do not provide any rights for the ―B‖ unit holders to continue to control the ―B‖ shares and units following a change in control. To the contrary, cl 9.5.2 requires the re-classification of the ―B‖ units as ―A‖ units on a disposal. The ―B‖ units cease to exist. Therefore, any implication to this effect would be contrary to the intention of the parties as
expressed in the unit trust deed.
58 At [23] and [24]. See [293] above.
[307] In Attorney General of Belize v Belize Telecom Ltd59 the Privy Council said, in making some general observations about the process for implication of terms:60
The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society.61
[308] The Board considered the traditional test for implication of terms in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.62 In that case their Lordships said:63
Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not sought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ―it goes without saying‖; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[309] I do not consider that interpretation of the pre-emptive rights provisions requires or permits the implication of terms such as WWNZ asserts. In the first place the meaning of cl 9.2.2 is clear. Upon a change of control, namely the appointment of Mr Goldberg as receiver of Worldwide Entertainment Inc, the pre- receivership WWNZ was deemed to have disposed of the ―B‖ units to the post- receivership WWNZ. The disposal was in breach of cl 9.2.1. It was not a permitted disposal under cl 9.3. Upon the deemed disposal the legal relations between the
parties changed because WWNZ was in default under cl 9.
59 Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 (PC).
60 At [16].
61 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL)
at 912-913.
62 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).
63 At 282-283.
[310] Secondly, as the Court of Appeal said in the 2006 judgment,64 the purpose behind the pre-emptive rights is that the Jacobsens agreed to a joint venture with WWNZ but reserved the right to force WWNZ out if another party stepped into its shoes. Another party has stepped into the shoes of WWNZ, namely WWNZ under the control of the receiver Mr Goldberg. The commercial purpose or ―commercially sensible conclusion‖65 of the pre-emptive rights provisions is to avoid a situation where the Jacobsens would find themselves in a venture with a party with which they did not choose to enter into the joint enterprise. The provisions reflect and implement this purpose. No implication of terms is required or warranted.
[311] Further, as Mr Sorrell emphasised in submissions for QPAM, the implied rights asserted by the plaintiffs have to be assessed against the relevant background:
QPAM is a closely held sole purpose company.
QPAM’s key assets are its rights under the
development agreement with
ACC. That agreement contains obligations relating to changes in the shareholding of QPAM.
The change in control of the holder of the ―B‖
units has created a breach of
the development agreement.
QPAM has sought consent from ACC to the transfer of the
―B‖ units to JVMNZ following its exercise of its pre-emptive
rights. (ACC has reserved its position pending resolution of the outstanding
issues but its consent may
not be unreasonably withheld).66
[312] I consider it clear that the parties always intended that in the event of a change of control, if the Jacobsens chose to exercise their pre-emptive rights, they
could force the defaulting party out of the joint enterprise.
64 At [26]. See [297] above.
65 See Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [9] and
[10].
66 Clauses 29 and 33 of the development agreement.
[313] Being in default WWNZ cannot claim the rights of an unpaid vendor on the authority of the Musselwhite line of cases. WWNZ is a defaulting vendor, not an unpaid vendor entitled to exercise shareholder rights in the same way as a vendor who is not in default. I agree with the reasoning in the Court of Appeal 2006 judgment set out above67 and consider that the conclusion I have reached follows logically and inevitably.
[314] The question remains whether WWNZ as an unpaid transferor (as distinct from an unpaid vendor under an executory contract for sale and purchase of the ―B‖ units and shares) is entitled to any right to an equitable interest in the ―B‖ units and shares ―in the nature of a vendor’s lien‖68 or whether WWNZ is simply an unsecured creditor of JVMNZ for the fair market value of the units and shares as at the valuation date, together with interest as awarded in this judgment but without any residual rights in the nature of a vendor’s lien.
[315] In Langen & Wind Ltd v Bell,69 the Court considered whether an unpaid vendor who is in default of his contractual obligations is entitled to a lien on the subject-matter of the sale, although the vendor has parted with possession of the subject-matter and although under the contract the purchase money is not payable until a future date.
[316] Mr Bell was entitled to hold shares in one of the plaintiff companies by virtue of his employment as a managing director. The agreement provided that on termination of his employment, Mr Bell would immediately execute transfers of his shares and deliver them with the relevant share certificates to the company. The price to be paid for the shares would not be ascertainable for two years because it was dependent on future events. Mr Bell refused to execute or deliver the transfers until he had been paid. The plaintiffs sought an order for specific performance of the transfers, essentially that Mr Bell execute the transfers and hand them over with the share certificates. There was no suggestion that Mr Bell, as the vendor shareholder,
would continue to exercise any shareholder’s rights in the intervening period.
67 See above at [297].
68 Claim D(iii) fourth amended statement of claim. See [280] above.
69 Langen & Wind Ltd v Bell [1972] Ch 685.
[317] The Court held there was clear authority that the equitable lien of an unpaid vendor applies in respect of such future instalments and that the equitable lien for unpaid purchase money is not lost by parting with possession.70 Brightman J cited from the judgment of Bacon V-C in Re Albert Life Assurance Co, ex parte Western Life Assurance Society:71
Now, although the rule of law upon which the doctrine of an unpaid vendor’s lien depends must be frequently influenced by the particular circumstances of each case in which it is said to arise, there is one plain principle which guides and governs its application in all cases. If it be expressed, or can be safely and properly inferred from documentary or other evidence, or from the nature of the contract, that it was the intention of the parties that the sale or transfer, however absolute in its terms, was subject to the condition that the purchase-money should be paid, or that the thing contracted to be done by the vendee should be performed, the lien will prevail. If, on the other hand, no such inference can be properly drawn – if the performance of the thing contracted to be done by the vendee was not the condition upon which the transfer was made, but the engagement to do the thing was the consideration for the transfer, the vendor, having accepted that engagement, has the very thing he bargained for, and cannot say that the consideration has not passed to him. In such cases the lien cannot prevail. ...
[318] The Court said there was no separate covenant or security for the purchase price. The agreement simply provided that the consideration payable to Mr Bell for each share transferred should be ―so much‖. Brightman J considered that:72
... the parties have not by their contract purported to exclude the lien which prima facie ... arises in the case of a vendor who has not (either under the terms of the contract or in the events which have happened) been paid the full purchase price.
[319] The Court concluded that Mr Bell was entitled in equity to a lien on the shares so transferred. Brightman J then noted the difficulty that arises because it would not be possible to require the company to accept notice of the lien. He determined that it was equitable that the Court not grant the equitable relief of specific performance unless the order sought would effectively safeguard the unpaid vendor’s equitable lien for the purchase money. The application for relief was refused but with leave to seek amended relief if proper security were available to Mr
Bell.
70 At 691.
71 Re Albert Life Assurance Co, ex parte Western Life Assurance Society (1870) LR 11 Eq 164 at
178-179
72 At 692.
[320] The Court was concerned only to ensure the availability of security for the payment of the purchase price to Mr Bell. There was no suggestion that Mr Bell would continue to exercise shareholders’ rights.
[321] The important distinction between the situation in Langen & Wind Ltd v Bell and this case is that, relying on the claimed vendor’s lien, WWNZ seeks declarations that would continue its shareholder and unit holder rights relating to the ―B‖ shares and units, pending payment.73 I have determined that WWNZ is not entitled to any such ongoing rights for the reasons given above. In addition, the reality of the situation is that since the change of control and the exercise by JVMNZ of its pre- emptive rights in April 2006, the business of QPAM has been controlled and managed on an ongoing basis to the exclusion of WWNZ. This inevitably followed from the refusal by the High Court (upheld by the Court of Appeal in the 2006 judgment) of an injunction requiring QPAM and JVMNZ to treat WWNZ as still being the lawful owner of the ―B‖ units and shares and Mr Gosney as a validly appointed director of QPAM. The relief sought by WWNZ would require the clock to be put back to 2006. This would place QPAM at risk of real detriment given its ongoing obligations under the development agreement with ACC. That risk and the impracticability of the situation which would result if the relief sought were granted, confirm that in the particular circumstances of this case, the declarations that relate to WWNZ’s claimed ongoing rights in respect of the ―B‖ units and shares must be declined.
[322] The change of control when Mr Goldberg was appointed receiver of Worldwide Entertainment Inc caused a default resulting in the deemed disposal of the ―B‖ units and shares and the subsequent exercise by JVMNZ of its pre-emptive rights under cl 10 of the unit trust deed. The clear intention of the parties under the unit trust deed is that the holder of the ―A‖ units and shares on exercise of the pre- emptive rights will pay the transferor of the ―B‖ units and shares the fair market value of those shares and units. The Jacobsens do not contend otherwise and so admit in their statements of defence. Indeed, Mr Browne’s concession to the Court
of Appeal recorded in the Court of Appeal 2006 judgment, acknowledged an ongoing
interest by WWNZ in the ―B‖ units to protect any lien or similar creditor’s right which it would have in the event of the Jacobsens defaulting in the payment of the purchase price.74 That acknowledgment was confirmed by the undertaking subsequently provided.75
[323] I conclude that the declarations as to WWNZ’s rights pending payment for the ―B‖ units and shares sought in claims D to I of the fourth amended statement of claim must be declined. The Jacobsens’ undertaking set out at [10] above, which is continuing pending payment for the ―B‖ units and shares of the amount determined by this Court, provides reasonable security to WWNZ.
Summary of conclusions
[324] I determine that the fair market value of the 25 per cent interest of WWNZ in
the ―B‖ units in the QPAM trust and the ―B‖ shares in QPAM as at 26 April 2006 is
$2.69m (see [244] above and appendix E3). [325] I make declarations that JVMNZ shall:
(a) pay interest on the amount determined as the fair market value of the
―B‖ units and shares ($2.69m):
(i) at the rate of 7.5 per cent from the valuation date 26 April
2006 to 30 June 2011; and
(ii) at the rate of 5 per cent from 1 July 2011 to the date of payment;
(The fair market value of the ―B‖ units and shares as determined ($2.69m) together with interest thereon being ―the
total sum payable‖); and
74 Worldwide NZ LLC v QPAM Ltd CA122/06, 10 November 2006 at [34].
75 See [10] above.
(b) Pay the total sum payable by tendering payment of the total sum payable in cleared funds at the address for service of WWNZ in this proceeding; and
(c) Make payment within 28 days of the date of this judgment.
[326] The declarations sought by WWNZ in claims D to I inclusive of the fourth amended statement of claim are declined.
Costs
[327] Both parties have had some success. My view overall is that the parties should each meet their own costs. However, specific issues relating to costs were raised and noted during the hearing. I therefore invite counsel to file memoranda addressing any costs issues within 28 days if costs cannot be agreed.
[328] On 30 January 2009, Associate Judge Robinson ordered that security for costs be provided by the plaintiffs agreeing to costs up to $227,320 being deducted from any amount which JVMNZ may be liable to pay to WWNZ in consideration for the shares and units pre-emptively acquired by JVMNZ, to be held as security by WWNZ for any amount to be awarded as costs in favour of any of the defendants.76
If costs have not been agreed or determined prior to the due date for payment by JVMNZ in terms of this judgment, the amount of $227,320 should be held in a solicitors’ trust account agreed by the parties until costs are fixed. Leave is reserved to apply.
Confidentiality orders
[329] Confidentiality orders made on 24 November 2011 apply to this judgment and these proceedings. The judgment has been redacted in accordance with the
confidentiality orders.
76 Worldwide NZ LLC v QPAM Ltd HC Auckland CIV-2006-404-1827, 30 January 2009.
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