Supreme Court New South Wales Medium Neutral Citation: In The Matter Of Contact 121 Pty Limited (ACN) 093 596 537) In The Matter Of Contact 121 (Qld) Pty Limited (ACN) 118 907 047) [2011] NSWSC 519 Hearing dates: 24 May 2011 Decision date: 24 May 2011 Jurisdiction: Equity Division - Corporations List Before: Hammerschlag J Decision: Declaration that the opinion as to the market value of all of the issued share capital in each of Contact 121 Pty Ltd (ACN 093 596 537) and Contact 121 (Qld) Pty Ltd (ACN 118 907 047) as disclosed in the Report of Halligan & Co dated 22 February 2011 is binding on the parties for all purposes in the proceedings Catchwords: CONTRACT - construction - expert's opinion as to market value of shares - whether alleged flaw in the methodology of an expert renders it other than an opinion as to market value within the meaning of the contract Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 Category: Procedural and other rulings Parties: Joseph Tawfik - First Plaintiff/Applicant Louise Genevieve Tawfik - Second Plaintiff/Applicant Martin Bruce Bill - First Defendant/Respondent Wayne Bevin Boden - Second Defendant/Respondent Representation: Counsel I.M. Jackman SC - Plaintiffs D.R. Pritchard SC - Defendants Solicitors Ryan Lawyers - Plaintiff DibbsBarker Lawyers - Defendant File Number(s): 2009/289276 Judgment 1HIS HONOUR: The plaintiffs brought proceedings against the defendants for orders under s 232(1) of the Corporations Act 2001 (Cth) alleging that the affairs of two companies, Contact 121 Pty Ltd and Contact 121 (Qld) Pty Ltd (together "the companies"), in which the plaintiffs hold 47.5 per cent of the shares and the defendants hold the remaining 52.5 per cent, had been conducted oppressively. 2The companies have at all material times carried on business as a telephone contact centre. 3The proceedings were resolved by consent orders made on 21 December 2009 under which the defendants (or if the parties otherwise agree), the companies, are to purchase the plaintiffs' shares. 4In the Consent Orders the Court noted that the parties had agreed to appoint Brendan P Halligan, a business valuer and chartered accountant, (trading as Halligan & Co), to provide a market opinion as to the market value ("Value") of all issued share capital in each of the companies and that the parties had agreed that the Value would be binding on them for all purposes in the proceedings. The agreed valuation date is 31 December 2009. 5On 21 December 2009, the parties and Mr Halligan also executed an engagement letter specifying the scope of Mr Halligan's instructions. He was to provide an opinion on the market value as at 31 December 2009 of all the issued share capital in the companies taken as a combined entity on the basis that the effect of any transactions between the companies was to be eliminated and on the assumption that conduct (which was described in the letter and which is alleged by the plaintiffs to have been oppressive) had not occurred. 6The letter provided that Mr Halligan would conduct the engagement in accordance with the professional ethical pronouncements of the Institute of Chartered Accountants in Australia, including professional standard APES 225 which is entitled "Valuation Services" ("the Standard"). The letter incorporated a document entitled Standard Terms, para 3.1 of which is in the following terms: We must use all reasonable commercial efforts to perform the services with professional competence and due care. However, the quality of the Services will depend on input from you 7Paragraph 5.2 of the Standard (issued in July 2008) contains, relevantly, the following: Where a Member in Public Practice prepares a written Valuation Report in respect of a Valuation Service the Valuation Report shall clearly communicate: (a) The name of the party engaging the Member; (b) A description of the business, business ownership interest, security or intangible asset being valued; (c) The date at which the value has been determined; (d) The date on which the Valuation Report has been issued; (e) The purpose for which the Valuation Report has been prepared; (f) The name and qualifications of the Member(s) responsible for the Valuation; (g) The scope of the Valuation including any limitations or restrictions; (h) The basis of the Valuation; (i) A statement whether the Valuation was undertaken by the Member acting independently or not; (j) The Valuation Approaches adopted in determining the estimate of value and the description of how they were applied; (k) The specific information on which the Member has relied and the extent to which it has been reviewed; (l) A description of the material assumptions applied in the Valuation and the basis for those assumptions... 8Mr Halligan provided his report on 22 February 2011 ("the Report"). He concluded that, as at the valuation date, the market value of all the issued share capital of the companies, taken as a combined entity, was in the range of $3.439M to $3.839M and that an appropriate point estimate of value within that range is $3.639M, approximately the mid-point. On this basis, the defendants are obliged to pay to plaintiffs $1,728,525. 9Appendix A to the Report is entitled "Important Matters". Under the heading "Reliance on Available Information", paras A.14 to A.16 state as follows: A.14 The statements and opinions given in this Report are given in good faith and in belief that such statements and opinions are not false or misleading. A.15 In preparing this report we have relied on information supplied by the Clients, which we believe to be reliable and accurate. A list of the information we have relied upon is appended to this report. We have no reason to believe that any material facts have been withheld from us, or that any information supplied to us was materially false. A.16 We have not verified or audited any of the information provided to us. 10The list of information referred to is in Appendix C. It contains the following: 1. Information provided in the initial submissions, responding submissions and responses by the companies to our questions. 2. Information provided in the post-draft submissions by both parties. 3. E-mail correspondence with the parties. 4. Research on Bloomberg, the ASX website, the Reserve Bank of Australia's website, and the Australian Bureau of Statistics' website. 11The Report includes an overview of the industry and analyses of the companies' unaudited financial statements for the financial years 2005 to 2009 and of the clients and sources of the companies' revenue. The Report recounts Mr Halligan's instructions to express an opinion of the Market Value of the shares and in its Glossary contains the conventional definition of that term, which is: An estimate of 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 acting at arm's length. 12The Report adopts the discounted cash flow ("DCF") method of valuation, which takes the expected cash flows to be produced by the business and discounts them back to a present value at the valuation date using a risk-adjusted discount rate. The basis for this selection is set out in paras 51 to 55 which are in the following terms: 51 We believe the most appropriate primary valuation method for valuing the business is the Discounted Cash Flow Method. 52 We believe that the Discounted Cash Flow method, supplemented with the Monte Carlo simulation technique, is appropriate because it can address a situation, as applies here, where there is a wide range of potential future cash flow scenarios that might arise due to "lumpy" revenue caused by clients coming and going. The method is also appropriate because it can address a situation where the business was loss-making at the valuation date, but was not insolvent at that date and where it was reasonable to expect that it would return to profitability in the future. In our view this was the case with the business of the Companies. 53 We believe the Sales Evidence Method is not appropriate because there have been no transactions involving the sale of all or part of the Companies or their business. The Companies received some offers for their equity or business around April to June 2008. However, we believe that no weight ought to be given to those offers in valuing the Companies or their business at the Valuation Date because the offers were only early-stage indicative offers and because the circumstances of the business changed significantly between when the offers were made and the Valuation Date. 54 We believe the use of the Capitalised Earnings Method would present considerable difficulties because the business was loss-making in the eighteen months leading up to the Valuation Date which creates a challenge in estimating maintainable earnings. There was also the challenge of estimating a capitalisation multiple for a business with highly volatile earnings and growth. 55 We believe the Orderly Realisation of Net Assets Method is appropriate as a secondary method of valuation used in support of the Discounted Cash Flow Method. 13In a section of the Report entitled "Valuation of the Business", the valuation model, and the basis for the adoption of the forecast revenue to be applied to it, is explained. An explicit forecast period of ten years from the valuation date is used. 14The Report records that the historical revenue of the business rose significantly in the three years to June 2008 but then fell dramatically in the 18 months to 31 December 2009. The Report states that the revenue of the business is "lumpy" because clients come and go and that this has been addressed by projecting the revenue in the explicit forecast period for five different categories of clients being; the largest four clients as at the valuation date; all other clients that existed at that date as a group; new small-sized clients as a group; new medium-sized clients; and new large-sized clients. 15With respect to new small-sized clients, paras 102 to 104 of the Report provide as follows: 102 We have calculated the revenue from new small-sized clients each period at 4% of the revenue from all existing clients in the relevant period. We adopted a figure of 4% based on observation of the historical relationship between new small-sized clients and existing clients over the 5 year period in review. 103 For the real annual growth rate in revenue from small-sized clients we have used a triangular distribution with the minimum value of 14%, a most likely value of 17%, and a maximum value of 20%, based on observation of the historical growth of the small client group. 104 For the average future life of the relationship with these clients we have used a triangular distribution with a minimum value of 1.0 years, a most likely value of 2.0 years, and a maximum value of 3.0 years. We have based these choices on observation of the historical pattern for similar clients. 16With respect to new medium-sized clients, para 106(c) provides as follows: For the real growth in revenue from the clients for the first five years, we have adopted 25%. For the real growth in revenue from clients after the first five years we have adopted 7%. We have based these choices on observation of the historical pattern for similar clients. 17By interlocutory application issued on 12 May 2011, the defendants seek a declaration that the valuation is not binding on the parties. By interlocutory application dated 25 March 2011, the plaintiffs seek a declaration that it is. 18Mr D.R. Pritchard SC appeared for the defendants, Mr I.M. Jackman SC for the plaintiffs. 19The defendant puts that the Report is not binding because it does not comply with the terms of the contract; see Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 336 per McHugh JA. 20Both parties provided written submissions which were significantly refined in oral argument, in particular by the correct abandonment of a number of manifestly unsustainable submissions on the part of the defendants. 21Ultimately the defendant identified and relied on only two bases for its contention, which can be distilled into the following and with which I will deal in turn. 22Firstly, it is put that the Report is not an opinion as to "the Market Value" of the shares because it does not reflect that Mr Halligan turned his mind to whether there was a particular "market" for them and hence did not make an assessment of the value of the shares in that market. 23This proposition is unsustainable. The Report reflects Mr Halligan's opinion as to Market Value which as I have said earlier, the Report defines. 24In paras 51 to 55 of the Report, in an unexceptional manner, Mr Halligan deals with the various different valuation methods, including the "Sales Evidence Method", and he provides reasons why the discounted cash flow method is appropriate, in the present case, for determination of Market Value. 25It was not (nor could it properly be) suggested that the DCF method was inappropriate. Put at its highest, the complaint is that a different valuation technique could have been adopted. 26As to this, it may additionally be observed that Appendix G, which is entitled "Trading Comparable Companies in Australia" reflects that, as at the valuation date, there was only one listed company in Australia with comparable operations to that of the companies and only one acquisition of a private company, which it was not suggested is comparable to the companies under consideration here. 27Secondly, the defendants put that (a)paras 5.2(k) and (l) of the Standard are incorporated in the contract between the parties; (b)those paragraphs require the Report to clearly communicate the specific information on which Mr Halligan relied and the extent to which it has been reviewed, and a description of the material assumptions applied in the valuation and the basis for those assumptions; (c)paragraphs 103 and 106(c) of the Report fail to meet these requirements because they do not identify any specific information describing in precise terms each fact establishing the historical growth of the small client group and the historical pattern for similar clients referred to respectively in paras 103 and 106(c) of the Report; and (d)the failure to meet the Standard in these respects has the consequence that the Report is not an opinion as to Market Value in accordance with the terms of the contract between the parties. 28Mr Jackman put that para A15, read with Appendix C, constitutes literal compliance with the Standard in that there has been a specification by Mr Halligan of the information which he has relied upon and the extent to which information has been verified or audited by him. 29That may or may not be the case. In any event, in my view the defendants' submission is unsustainable. 30It may be accepted that the requirement for Mr Halligan to comply with the Standard is a term of the parties' contract and that a failure in material fashion to comply with the contract by failing to meet its standards might vitiate the Report, so that it can properly be described as not being in accordance with the terms of the contract. 31Mr Pritchard correctly accepted that for the Report to be so vitiated that non-compliance with the Standard would have to be sufficiently material to warrant the conclusion that the Report is not properly to be described as an opinion as to market value, within the meaning of that term in the parties' agreement. 32In my view it has not been established that there has been a failure to comply with the Standard, let alone a material one. The paragraphs of the Report concerned reflect Mr Halligan's view of historical patterns in respect of a number of clients. On no realistic reading does the Standard require him to identify or describe each and every fact which establishes or contributes to the availability of a perception that there has been growth, or that there is the pattern which he identifies. 33In those circumstances it does not seem to me that the valuation is anything other than one as reflecting Mr Halligan's opinion as to the market value, in accordance with the terms of the contract between the parties. 34In my view the valuation is binding. It follows that the defendants' interlocutory process is to be dismissed. 35There is no issue between the parties that it follows that an appropriate declaration should be made. 36I declare that the opinion as to the market value of all of the issued share capital in each of Contact 121 Pty Ltd (ACN 093 596 537) and Contact 121 (Qld) Pty Ltd (ACN 118 907 047) as disclosed in the Report of Halligan & Co dated 22 February 2011 is binding on the parties for all purposes in the proceedings. 37The proceedings are stood over before the Corporations List Judge on 6 June 2011. 38The defendants are to pay the costs of the plaintiffs' interlocutory application and the defendants' interlocutory application. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 June 2011