Supreme Court New South Wales Medium Neutral Citation: International Petroleum Investment Company -v- Independent Public Business Corporation of Papua New Guinea [2014] NSWSC 1289 Hearing dates: 8, 9,10, 11 & 12 September 2014 Decision date: 31 October 2014 Jurisdiction: Equity Division - Commercial List Before: Hammerschlag J Decision: The Court declares that the RBC valuation is not binding on the parties. IPBC's cross-claim is dismissed. Catchwords: CONTRACT - construction - Bond Deed Poll incorporating terms and conditions of Exchangeable Bonds - Bonds to be exchanged on maturity into shares listed on the Australian Securities Exchange calculated by reference to their Current Market Value - if the amount of the Bonds plus interest exceeds the Current Market Value of the shares the defendant must pay the plaintiff a Cash Settlement Amount equivalent to the shortfall - Current Market Value in the first instance is the volume weighted average price (VWAP) over 20 trading days prior to Maturity Date - if the Issuer reasonably considers VWAP Value not to reflect Current Market Value it may issue an Alternative Valuation Notice - the terms and conditions include a procedure for the parties each to appoint an Independent Valuer to assess market value and the average of the two valuations is taken - defendant issued an Alternative Valuation Notice - each of the parties appointed an Independent Valuer - whether Alternative Valuation Notice was invalid as being out of time or because defendant did not reasonably consider that VWAP value was not market value of the shares - whether valuations by the Independent Valuers are not binding on the parties as not being in accordance with the Bond Deed - HELD Alternative Valuation Notice valid - valuation by Independent Valuer appointed by defendant not binding - valuation by Independent Valuer appointed by plaintiff binding Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Spencer v The Commonwealth (1907) 5 CLR 418 Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 HTW Valuers Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 MMAL Rentals Pty Ltd v Brunning (2004) 63 NSWLR 167 Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2013] QCA 271 Mio Art Pty Ltd v Mango Boulevard Pty Ltd [2012] QSC 348 Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 701 Holt v Cox (1997) 23 ACSR 590 Perpetual Trustee Co Ltd v Federal Commissioner of Taxation (1942) 65 CLR 572 Ronnoc Finance v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358 Airservices Australia v Canadian Airlines International Ltd (2000) 202 CLR 133 Elkington v Shell Australia Ltd (1993) 32 NSWLR 11 Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 National Provincial Bank Ltd v Bradberry [1943] 1 Ch 35 Willis v The Commonwealth (1946) 73 CLR 105 Gould v Vaggelas (1985) 157 CLR 215 Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 Sudbrook Trading Ltd v Eggleton [1983] 1 AC 444 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 Candoora No.19 Pty Ltd v Freixenet Australasia Pty Ltd [2008] VSC 478 Category: Principal judgment Parties: International Petroleum Investment Company - Plaintiff Independent Public Business Corporation of Papua New Guinea - Defendant Representation: Counsel: J.R.J. Lockhart SC with J.C. Hewitt - Plaintiff C.A. Moore SC with E.M. Peden and A. Hochroth - Defendant Solicitors: Clifford Chance - Plaintiff Herbert Smith Freehills - Defendant File Number(s): 2014/74705 Judgment INTRODUCTION 1HIS HONOUR: On 5 March 2009, the plaintiff, International Petroleum Investment Company (IPIC or the Holder), a corporation domiciled in Abu Dhabi, United Arab Emirates, subscribed for and was issued by the defendant, Independent Public Business Corporation of Papua New Guinea (IPBC or the Issuer), a corporate instrumentality of the Independent State of Papua New Guinea (PNG), 3,362 Exchangeable Bonds (the Bonds) each with a principal amount of $500,000. 2By this means, IPBC raised $1,681,000,000 which it used to finance participation in a liquefied natural gas project in PNG. 3The terms and conditions (the Conditions) of the Bonds are contained in a Bond Deed Poll (the Deed) made by IPBC on 23 November 2008. 4The Maturity Date of the Bonds was 5 March 2014. On maturity the Bonds were subject to mandatory exchange into up to 196,604,177 ordinary shares (the Shares) in the capital of Oil Search Limited (Oil Search or OSH) a company, incorporated in PNG, whose shares are listed on the Australian Securities Exchange (ASX). The exchange of the Shares for the face value of the Bonds was at a strike price of $8.55 per Share. 5Under the Conditions, if, on the Maturity Date, the Principal Amount of the Bonds being redeemed (plus accrued interest) exceeds the Current Market Value of all of the Shares, IPBC as the Issuer must pay to IPIC as the Holder a Cash Settlement Amount equivalent to the shortfall. 6The Conditions incorporate a mechanism to determine the Current Market Value of the Shares. The parties are in dispute about the operation of that mechanism. 7IPIC claims that the Cash Settlement Amount is $103,280,420.55. IPBC's position is that no amount is payable. 8On 14 May 2014 the parties entered into an Escrow Deed and a Side Agreement under which, without prejudice to each party's rights and contentions, IPBC paid to IPIC $62,976,564.23 on the footing that this reduces any amount owing. The balance of $40,303,856.33 has been paid into an escrow account to abide the outcome of these proceedings. 9IPIC sues for the balance plus interest. THE DEED 10The Conditions are contained in Annexure A to the Deed. They are complex and prolix. The critical condition is Condition 7, in particular, Condition 7.5.9. Because of their length, these and other relevant conditions to which reference is made below are not reproduced in the body of this judgment but in separate Schedules. 11Capitalised defined terms in the Conditions are also capitalised in this judgment. 12A brief summary of how Condition 7.5.9 operates will assist in the understanding of the dispute that has arisen. 13On the Maturity Date (which is the fifth anniversary of the Issue Date) the Bonds are exchanged for the number of Shares the Current Market Value of which equates to the Principal Amount (plus accrued interest) of the Bonds being exchanged. If the Current Market Value of the Shares exceeds the amount, only so many Shares as equal the amount must be delivered. If the Current Market Value of all of the Shares is less than the amount, the Issuer must pay the Holder a Cash Settlement Amount equivalent to the shortfall. A Calculation Agent calculates the Current Market Value of the Shares on the relevant Valuation Date (in this case, 10 Business Days before the Maturity Date) using the Volume Weighted Average Price (VWAP) of the Shares for the period of 20 consecutive Trading Days ending on the Valuation Date in order to determine the number of the Shares that must be delivered and the Cash Settlement Amount, if any. 14Under Condition 7.5.9 if, following an occurrence of an event or series of events, the Issuer reasonably considers that VWAP Value does not reflect the market value of the Shares, it can issue an Alternative Valuation Notice which must include a certification that it does not consider the VWAP Value to reflect the market value of the Shares, together with a statement setting forth the basis for that view. 15Within five Business Days after receipt of such a notice, the Issuer and the Holder are each to appoint an Independent Valuer to conduct a valuation of the Shares. If either fails to appoint an Independent Valuer, it is deemed both to have waived its right to make such an appointment and to have accepted the Independent Valuer appointed by the other as the sole Independent Valuer. 16If two Independent Valuers are appointed, they must conduct the valuation of the Shares using a methodology reasonably considered by each as appropriate. Each Valuer must issue a confirmation in writing confirming that the VWAP Value does or does not reflect the market value. If they both confirm that it does, the VWAP Value is taken as the Current Market Value of the Shares. If either or both considers that the VWAP Value does not reflect the market value, they must specify an Alternative Value. If one Independent Valuer confirms that the VWAP Value does not reflect the market value then the average of the VWAP Value as determined by the Calculation Agent and the Alternative Value is taken to be the Current Market Value of the Shares. If both Independent Valuers confirm that the VWAP Value does not reflect the market value of the Shares and specify Alternative Values then the average of the Alternative Values determined by the Independent Valuers is taken to be the Current Market Value of the Shares. Any determination by an Independent Valuer (in the absence of manifest or proven error) binds all parties concerned. OIL SEARCH 17Oil Search was established in PNG in 1929 and is that country's largest oil producer. Over 90% of its assets, including interests in liquefied natural gas (LNG) resources, are located in PNG. One of its main assets is a 29% interest in the PNG LNG Project (the Project), operated by ExxonMobil PNG Limited. The Project has two plants, described as "trains" and numbered 1 and 2 respectively, and there is potential for the development of a third train. In March 2014 it was anticipated that the Project would make its first LNG deliveries by the middle of 2014. 18In 2013 there were discoveries of oil at Taza in the Kurdistan province of Iran, and Mananda in the PNG Highlands, in which discoveries Oil Search has an interest. 19On 22 October 2013 Oil Search announced its third quarter 2013 results. It reported that it had a potential need for additional liquidity (the Liquidity Announcement). The announcement included the following: The period of exclusive negotiations between ExxonMobil and InterOil, regarding the development of PRL 15 containing the Elk/Antelope gas fields, expired in August. InterOil has recommenced a competitive bidding process for a majority share in PRL 15. We are following the sale process closely and are engaged with key players on potential development options for the gas. The Elk/Antelope resource could potentially be a source of gas for LNG expansion or could underpin a new LNG development. We continue to believe that being an owner of core gas and liquids infrastructure in PNG places Oil Search in a strong position, as new developments take place in the country. During the quarter, we spent US$400.0 million on exploration, development and production activities, of which US$279.0 million was related to the PNG LNG Project. This spend was funded by cash, operating cash flows and draw-downs from the PNG LNG project finance and our corporate debt facilities. At the end of September 2013, the Company held US$317.6 million in cash and US$350.0 million in undrawn committed funding lines, resulting in total liquidity of US$667.6 million. We have more than sufficient cover for our remaining equity share of the PNG LNG Project development costs, estimated at approximately US$360 million. However, given our recent exploration successes and the opportunity to move into the appraisal and development phases on key discoveries such as Taza and Mananda, it may be necessary to top up our liquidity prior to receipt of cash distributions from the PNG LNG Project. The magnitude, quality and longevity of the LNG cash flows provide us with considerable flexibility to access additional shorter-term funding, should it be required, and we continue to assess these options. 20Petroleum Retention Licence (or PRL) 15 is located in the onshore Papuan Basin and includes a gas discovery widely known as Elk/Antelope, which is considered to be the largest undeveloped gas resource in PNG. Prior to 5 December 2013, InterOil corporation, a company listed on the New York Stock Exchange, sold a 61.3% interest in PRL 15 to Total SA, another corporation listed on the New York Stock Exchange. On 5 December 2013, InterOil made a news release announcing the sale of its interest to Total SA. 21The following day, on 6 December 2013, investment bank Goldman Sachs commented, in a company update on Oil Search, that given Oil Search's existing strategic partnership with Total SA, they believed there may be an opportunity for Oil Search to participate directly in the Elk/Antelope development at some stage, which may require additional funding given Oil Search's relatively high level of gearing at that time. 22On 9 December 2013, Oil Search itself publicly announced that it had been in discussions with a number of key stakeholders associated with the PRL 15 sale process (the Potential Acquisition Announcement). It also announced that discussions were ongoing but that the nature of Oil Search's potential participation in any transaction was uncertain and there was no guarantee that any agreement would be reached. 23On 28 January 2014, Oil Search released a quarterly report reporting net debt of US$3,815 M. 24On 30 January 2014, Oil Search released a drilling report which was flagged as price sensitive on the ASX website. 25On 27 February 2014 Oil Search published its results for the year ended 31 December 2013 (the 27 February Announcement). On the day of the publication it also announced that it had reached agreement to acquire a 22.835% interest in PRL 15. It stated that the acquisition of the interest in PRL 15 was funded by the placement of 149.39 million Shares in Oil Search to the PNG Government at $8.20 per Share which represented a discount to the volume weighted average price of Oil Search Shares for the past month of less than 1%. 26The 27 February Announcement further stated that the Bonds which were issued to IPIC were to mature on 5 March 2014 and that IPIC had issued a Mandatory Exchange Notice to exchange its entire holding of the Bonds into 196,604,177 ordinary Shares in Oil Search and that once the Shares were delivered IPIC would become Oil Search's largest shareholder, holding approximately 13.2% diluted for the Government placement. MANDATORY EXCHANGE AND VWAP DETERMINATION 27During 2013 IPBC sought IPIC's agreement to "buy back" the Shares on maturity of the Bonds. 28On 30 October 2013, Mr Wasantha Kumarasiri (Kumarasiri), IPBC's Managing Director, met with IPIC representatives. He told them that IPBC was unwilling to recommend to the PNG Government that it pay a premium price beyond the original strike price of $8.55. IPIC's position was that $8.55 per Share was unlikely to be acceptable because it did not provide a sufficient return on its investment in the Bonds. IPIC considered Oil Search to have excellent growth prospects, which indicated a positive outlook for the Share price. One of the IPIC representatives apparently said that IPIC's view was that the intrinsic value of Oil Search shares was above $8.55 and IPIC had valuations confirming it. No agreement was reached. Kumarasiri described his mission at the time as "reasonably impossible". 29On 13 February 2014, IPIC gave IPBC a Mandatory Exchange Notice in accordance with Condition 7.5.2. 30On 28 February 2014, the Calculation Agent, the Bank of New York Mellon, made its determination in accordance with Condition 7.5.5, relevantly, in the following terms: In accordance with condition 7.5.5, we have made the following determinations in our capacity as Calculation Agent. (i) The number of Ordinary shares to be delivered to the Holder on the Unconditional Delivery Date in exchange for that Holders' [sic] Bonds shall be a. all of the Ordinary Shares, the amount being 196,604,177 Ordinary Shares (ii) The Current Market Value on the relevant Valuation Date of the aggregate of all of the Ordinary Shares comprising the Exchange Parcel in respect of the Holder's Bonds to be delivered to that Holder is AUD 1,610,188,209.59. (iii) The amount by which the aggregate Principal Amount of the Bonds being redeemed plus accrued interest on the Maturity Date exceeds the Current Market Value on the relevant Valuation Date of the aggregate of all the Ordinary Shares comprising the Exchange Parcels to be delivered to the Holder upon such Mandatory Exchange (the "Cash Settlement Amount") is AUD 103,280,420.55. 31The Calculation Agent enclosed details of its calculations. 32Under Condition 7.5.2 the Valuation Date was 17 February 2014, being 10 Business Days before the Maturity Date of 5 March 2014. I observe that, under the Conditions, Business Days do not include Fridays because commercial banks in Abu Dhabi are not open for general business on Fridays. 33The VWAP Period, being 20 consecutive Trading Days ending on the Valuation Date, was 20 January 2014 to 17 February 2014. 34The Calculation Agent determined that the VWAP was $8.19. This translated into a Current Market Value for the Shares $1,610,188,209.59. THE Alternative Valuation Notice Kumarasiri considers the position 35On or about 13 February 2014, Kumarasiri received the Mandatory Exchange Notice. 36In an affidavit sworn on 10 July 2014 he describes the thought process in which he then engaged, and the actions which he then took. 37He had been following the Oil Search share price. He says that by 17 February 2014 he considered that the VWAP did not reflect the market value of Oil Search shares on 17 February 2014 for three reasons. 38First, he considered that VWAP would not be a good measure of market value if the price for Oil Search shares was in a period of appreciation (or conversely, depreciation). His view, based on his observations, was that the share price was appreciating as at 17 February 2014. This was confirmed when the price went up from $8.33 on 17 February to $8.57 on 24 February. 39Second, his view was that in the period up to and including 17 February 2014 the market was concerned about what would happen upon the maturity of the Bonds and whether the PNG Government would retain a stake in Oil Search; Kumarasiri thought that this uncertainty was having a negative impact on the Oil Search share price and hence the VWAP. He says that IPIC's ability to obtain IPBC's stake under the Bond Deed was public knowledge and had been commented on in the press and by share analysts. It had become public knowledge that IPBC was trying to buy back the Shares from IPIC but had not succeeded. There was therefore uncertainty as to whether the PNG Government would continue to own a stake in Oil Search after the maturity of the Bonds. His view was that this uncertainty may have negatively affected the Oil Search share price during that period because first, he considered that the market saw the PNG Government's stake as strategically important for Oil Search particularly in relation to its activities concerning the Project and second, he thought that the market was concerned about the possibility that some shareholders would dump their shares in the event that the PNG Government no longer had a stake in Oil Search, and that this would depress the share price. 40However, Kumarasiri thought that it was likely that IPBC and the PNG Government would successfully negotiate a buy back from IPIC and even if this was unsuccessful there was a potential for the PNG Government to obtain shares via a special share issue. He therefore thought that the value of the Shares should not be affected by uncertainty over whether the PNG Government would continue to hold a stake in Oil Search and he thought that the true market value of the Shares was higher than the VWAP Value. 41Kumarasiri says he held the view, in the period up to and including 17 February 2014, that the market was concerned that the Project may not be on track and that its completion may be delayed which may have negatively affected the price of Oil Search shares during that period and hence the VWAP. His view was that such concern was unfounded because he knew that the Project was tracking well and was ahead of schedule, whereas public updates on the progress of the Project were provided infrequently and as at 17 February 2014 there was limited information in the market as to the progress of the Project at that time. 42He says he therefore considered that the price of Oil Search shares was not reflective of the true state of progress of the Project at the time and that the VWAP was less than the true market value of the Shares. He thought that his view that the VWAP of Oil Search shares below $8.55 did not reflect their true market value was supported by IPIC's stance that it was not prepared to sell the shares for $8.55 and comments to him that it had interest from other buyers to buy for more than that and it had valuations of Oil Search shares above that amount. 43He thought it was appropriate for IPBC to seek expert advice and confirmation as to whether his view was correct, to get approval from the IPBC Board to obtain that advice and to issue an Alternative Valuation Notice in the event that the advice confirmed his view. 44Kumarasiri convened a special meeting of the IPBC Board on 17 February 2014 at which he recommended, and the Board resolved, to approve "in principle" the issue of an Alternative Valuation Notice and the appointment of a financial adviser to conduct a valuation of the shares. The Treadstone Report 45On about 19 February 2014 he engaged Treadstone Partners (Treadstone), a corporate advisory firm which had advised IPBC at the time the Bonds were first issued. He dealt with Mr Sean Hogan of Treadstone and on 21 February 2014 he received a written report from Treadstone which he read. He formed the view that the conclusion set out in the report supported his view as a result of which he decided to recommend to the IPBC Board that it approve the giving of an Alternative Valuation Notice under Condition 7.5.9. 46The following are extracts from the Treadstone Report upon which the parties placed some emphasis in their submissions: Exchangeable Bond Background Current Situation ● In accordance with the terms of the transaction, on the 17 February 2014 [sic], being the valuation date, a value of A$8.19 was established for the OSH shares supporting the transaction. This was determined by calculating Volume Weighted Average Price (VWAP) of OSH shares over the 20 trading days preceding 17 February. ● If IPBC was to do nothing from this point forward, on or around 5 March, in addition to delivering the OSH shares, IPBC would also be required to make a cash payment of approximately A$71m to IPIC. These cash proceeds plus the OSH shares make up the Exchange Parcel. ● The cash component is calculated by taking the conversion price under the bond terms of $8.55 less the 8.19, being the value set on their Valuation Date, multiplied by the number of shares supporting the Exchangeable Bond transaction. ● However, under the transaction, an Alternative Valuation process can be initiated. ● The commercial intent of this process when originally negotiated was to provide IPBC with some flexibility at maturity and to address the circumstance where the OSH share price, for whatever reason, was trading below what was regarded as its fundamental value. ● The intent here was to ensure that IPBC was not unduly exposed to poor or weak market conditions, market manipulation or other non-PNGLNG project matters. ● In these circumstances, IPIC could initiate the alternate valuation process which would see an expert appointed to conduct a valuation process to establish a true value for the OSH shares and therefore the Exchange Parcel. ● In our opinion, there is a strong argument that the OSH price established on 17 February does not represent the true market value of the shares and IPBC should initiate the Alternate Valuation process. Some of those reasons include: - OSH shares have traded above the A$8.55 exchange price and the trailing VWAP exceeded A$8.55 for a sustained period - OSH shares closed at the time of writing at A$8.49, substantially above A$8.19 - Market consensus amongst equity analysts at the major Investment Banks values OSH at above $9.00, well above the Exchange Price - The current market trading price does not take into account the strategic value of the IPBC OSH stake to an acquired, which would be factored into any valuation The Alternate Valuation ● In our view the A$71m payment obligation of IPBC, whilst legally and technically correct, is not consistent with the negotiated intent of the parties, given the trading performance of the OSH shares and therefore we would anticipate that IPIC expects IPBC to initiate the Alternate Valuation process ● The Alternate Valuation process has the potential to remove the obligation of IPBC to make a cash payment to IPIC by establishing a value for the OSH shares above A$8.55 per share, or at least establish a higher value than A$8.19 ● We would strongly recommend that IPBC commence the Alternate Valuation process as there is sufficient external evidence to support a view that the fundamental value of the OSH shares is both above A$8.19 and A$8.55. That said IPBC must be mindful that, as advised by HSF, certain key dates have already been passed which both condenses the timeframe available to perform the process but also may impact the negotiation capacity of IPBC with IPIC OSH Trading Levels vs A$8.55 Potential reasons why OSG shares are trading below A$8.55 Uncertainty Surrounding IPIC Stake ● Given market awareness and publicity surrounding the dynamics at bond exchange date, there is uncertainty over the intentions of the PNG government with respect to the stake, IPICs stance on its exposure to OSH, and any other interlopers who may take the opportunity to acquire a stake in OSH. ● When such uncertainty arises, the market often adopts a "wait and see" approach, reducing buying support for the stock as A$8.55 is seen as the "cap" on trading value until stability returns to the share register. Project De-risking ● While the project is on the cusp of fist [sic] gas, a sustained period of production and cost reporting to the market will likely be a catalyst for an uplift in value as any perceived residual risk in the project dissipates. Delivering production within market guidance parameters is also likely to further reduce perceived risk surrounding subsequent trains and further upside potential at the project. No Train 3 Announcement ● The market had expected that close to first gas, the PNGLNG project would have made some announcement or commitment to a third train. Whilst it is widely believed that a third train will form part of the project, the equity market has been somewhat disappointed that nothing has yet eventuated. This has led to some softness in the OSH trading price Broader Market Weakness ● OSH's share price performance reached levels of A$8.55 in September and October 2013, but has been subject to broader weakness in the ASX market over the fourth quarter in 2013. Markets have recovered over the month of February, and OSH closed at A$8.49 on Friday 21st of February, reflecting an equity value very close to the exchange price 47The Treadstone Report makes various references to the amount of A$71 M. This is the shortfall between the principal amount of the Bonds and the value of the Shares based on the one-day VWAP price on 17 February 2014, which was $8.34. At that price the Cash Settlement Amount would be $71 M. IPBC gives the Alternative Valuation Notice 48On 24 February 2014, the IPBC Board passed a circular resolution giving approval to issue an Alternative Valuation Notice. 49On the same day Kumarasiri wrote to IPIC in the following terms: International Petroleum Investment Company Muroor (4th) Road Level 32, IPIC Square Abu Dhabi, United Arab Emirates Dear Sir, SUBJECT: ALTERNATIVE VALUATION NOTICE We refer to the Bond Deed Poll dated 23 November 2008 setting out the terms and conditions ("Terms and Conditions") applicable to the Bonds. Definitions in the Terms and Conditions apply when used in this Notice. Representatives of the Government of Papua New Guinea have recently visited the United Arab Emirates to discuss various alternatives in relation to maturity of the Bonds, including extension of the Maturity Date. Following conclusion of those discussions and failing to secure such extension of maturity, the option now is to allow the Bonds to mature in the ordinary course. Accordingly, the Independent Public Business Corporation of Papua New Guinea (the "Issuer") gives notice to the International Petroleum Investment Company under and in accordance with the requirements of condition 7.5.9 of the Terms and Conditions. The Issuer certifies that it does not consider the VWAP Value to reflect the market value of ordinary shares in Oil Search Limited for purposes of determining its Current Market Value on the relevant Valuation Date pursuant to condition 7.5.8. The Issuer's view is based on the occurrence of various events over the months leading up to the Valuation Date and subsequently, including the following: (a) OSH shares trading above $8.55 for a sustained period In late 2013, including satisfying the 20 day VWAP calculation for an extended period (b) Market volatility and weakness leading up to and during the VWAP period due to AUD volatility, Australian economic weakness and broader equity market movements. Much of this has subsequently unwound, leading to strong upward movement in the daily trading price of OSH. At the time of writing, OSH shares closed at $8.56, with an Intra-day high of $8.62 (c) Market speculation and misinformation around the OSH stake (d) Dampened market expectations around Train 3 due to Exxon being unsuccessful in the Inter Oil JV process (e) Further speculation surrounding OSH participation in Interoil/Total transaction and the subsequent potential need for equity funding It is the Issuer's view that impact of these events has led to weakness in the OSH share price during the relevant period and has resulted in a VWAP Value that does not reflect the appropriate value of the OSH stake supporting the Exchange Parcel. For and on behalf of THE INDEPENDENT PUBLIC BUSINESS CORPORATION OF PAPUA NEW GUINEA Mr WASANTHA KUMARASIRI, OBE MANAGING DIRECTOR INDEPENDENT VALUATIONS The parties appoint Independent Valuers 50On 25 February 2014, IPIC wrote to IPBC asserting that IPBC's Alternative Valuation Notice was invalid and ineffective. IPIC asserted that no Alternative Valuation Notice could be given under Condition 7.5.9 other than where Conditions 7.2, 7.3 or 18.2.11 applied (which was not the instant case) and that, in any event, an Alternative Valuation Notice could not be given at a point in time at which the Current Market Value had already been determined or become capable of determination. 51On 27 February 2014, IPBC informed IPIC by email of its firm view that the Alternative Valuation Notice was valid and it repeated this view in a letter of the same date. 52On 3 March 2014, IPBC appointed RBC Capital Markets (RBC), the investment banking business of the Royal Bank of Canada, to be an Independent Valuer. 53On or about 3 March 2014, without prejudice to its position that the Alternative Valuation Notice was ineffective, IPIC appointed KPMG Corporate Finance (KPMG) to be an Independent Valuer. 54On 5 March 2014 196,569,177 Oil Search shares were transferred to IPIC and on 7 March 2014 35,000 Oil Search shares were transferred to IPIC. All of the Shares have thus been transferred to IPIC. 55On 18 March 2014 RBC issued a report, entitled "Public Market Valuation Analysis of Oil Search Limited as at February 17, 2014" (the RBC valuation) which concludes as follows: Conclusion ● Pursuant to clause 7.5.9(v)(b) of the Bond Terms, RBC believes that the 20 day VWAP Value of A$8.19 per share does not reflect the market value of Oil Search ordinary shares. RBC believes that: - A stock underperformance gap in Oil Search shares (as evidenced on page 15) was alleviated post the announcements on February 27, 2014. - The divergence in Oil Search and Woodside P/NAV averages has narrowed since February 27, 2014 which suggests that investors' concerns have now been addressed. ● RBC has derived a trading range for Oil Search ordinary shares as at February 17, 2014 of A$8.52 per share to A$8.68 per share. ● For the purposes of the Bond Terms, RBC adopts the mid-point of the range of A$8.60 per share, as the Alternative Value for Oil Search ordinary shares. 56On 19 March 2014 KPMG issued a report (the KPMG valuation) which determined that the market value of an Oil Search share on 17 February 2014 was that derived from a 15 day VWAP rather than a 20 day VWAP. The KPMG report concludes as follows: Valuation of a single share in Oil Search As the VWAP corresponding to the 15 trading days mentioned above is AUD 8.19, we consider the market value of a single share in Oil Search as at the Valuation Date to be AUD 8.19. We note that this value approximates the VWAP Value. 57On 1 April 2014 the Calculation Agent provided its calculation of the Cash Settlement Amount, in the following terms: We have received an Alternative Valuation Notice dated 24 February 2014 from IPBC and have been subsequently advised that IPBC has appointed RBC Capital Markets as Independent Valuer and IPIC has appointed KPMG Corporate Finance as Independent Valuer. RBC Capital Markets has advised that the Alternative Value of the security is AUD 8.60. KPMG Corporate Finance confirms that the VWAP Value of the security is AUD 8.19. At the request of IPBC, we are calculating the Cash Settlement Amount based on the average of the Alternative Value and the VWAP Value as determined by the two Independent Valuers. The average value is AUD 8.395. Based on the average value, a) The number of Ordinary Shares to be delivered to the Holder shall be 196,604,177 Ordinary Shares b) The Current Market Value of the aggregate of all of the Ordinary Shares is AUD 1,650,492,065.88. c) The Cash Settlement Amount shall be AUD 62,976,564.26 58Although it makes no arithmetical difference, the Calculation Agent's description of the required calculation as "the average of the Alternative Value and the VWAP Value as determined by the two Independent Valuers" is wrong. KPMG did not adopt the VWAP Value as defined in the Deed. VWAP in the Deed is calculated over 20 Trading Days, whereas KPMG selected 15 days. The outcome is, however, the same. The RBC valuation 59For reasons which will become apparent later, it is necessary to deal with the RBC valuation in detail. 60It was prepared by a team (the Deal Team) headed by Mr Corey Fraiberg (Fraiberg), an investment banker with extensive experience in mergers and acquisitions. Fraiberg affirmed two affidavits exposing the process by which the RBC valuation was brought into existence. His second affidavit made some minor corrections to his first one. He was not cross-examined. 61Fraiberg says that in discussions with RBC colleagues from Australia and Canada it was determined to undertake an analysis to assess how Oil Search shares had performed over the period leading up to the Valuation Date and to assess whether the VWAP Period was representative of the market value of the security. He says it was considered appropriate to identify whether any extraordinary factors existed or events had occurred which had had an impact on the Oil Search share price so that they did not consider the 20 day VWAP to be an accurate reflection of market value, that is "not the price at which the shares should have traded on 17 February 2014". 62Fraiberg says that it is generally accepted in the investment banking industry that the views of the analyst community are typically reflective of the views of the market about a stock where the coverage of the stock is considered to be generally good by reference to the number and quality of analysts covering the stock. He says that Oil Search is considered to be such a stock. 63He says that he understood that the terms of the Bond Deed required a consideration of whether the 20 day VWAP reflected market value and that in order to assess the potential implications of particular events on the Oil Search share price, RBC considered the share price performance in the context of events that had occurred in the company's history. 64Fraiberg says it is common practice in investment banking to look at how stocks trade relative to one another over time, by reference to their stock prices and valuation multiples. He says it is common in the investment banking industry for a company's under- or over performance to be assessed by reference to its relationship and relative trading as against its peers or stock indices. 65The RBC valuation comprises four sections. 66The introductory section, Section I, is entitled "Situation Overview & Transaction Summary". It provides a summary of the critical characteristics of the Bonds and records that IPBC "has exercised its right to engage an investment bank to provide a financial assessment of Oil Search ordinary shares as at February 17, 2014". 67Section II of the RBC valuation is entitled "Financial Analysis". In it RBC develops a financial forecast for Oil Search and carries out its own net asset value (NAV) analysis of Oil Search based on an individual discounted cash flow (DCF) for each of the various components of Oil Search's business, so as to yield a DCF for, and NAV for, the whole. RBC's own assessment of the total NAV per share (NAVPS) was $9.28. 68Fraiberg explains that RBC's own NAV analysis did not in and of itself form the basis of RBC's conclusions about the market value of the stock, because stocks typically trade at a discount to NAV, and the Deal Team selected an NAV based on share analyst (meaning equity research community) consensus rather than one based on the Deal Team's own conclusion which relied on information not in the public domain. Fraiberg says that RBC's NAV analysis was essentially RBC's "due diligence" into the business being valued. 69Fraiberg opines that because stocks typically trade at a discount to NAV in the public markets, a more appropriate metric to rely on is typically the price to NAV ratio. Price to NAV ratio (P/NAV) is a ratio of share market price to NAV per Oil Search share (NAVPS). If the P/NAV is less than 1, the stock is trading at a discount to NAV. If above 1, it is trading at a premium to NAV. 70Section II contains a summary of the assessments of Oil Search's NAVPS by 14 institutional research analysts and the average of the analysts' target price per share as at 17 February 2014 (being the value they considered the stock would reach in 12 months' time). The average NAVPS was $9.55. The average target price as at 17 February 2014 was $9.64. 71Fraiberg says that RBC considered the views of 14 institutional research analysts before and after the Valuation Date, including their views on target price and NAVPS, and their recommendations on whether Oil Search was a "buy, hold or sell". It also considered the present value of the analysts' target prices. He says that the difference between the consensus view NAVPS ($9.55) and RBC's figure ($9.28) was less than 4%, which confirmed that RBC's assessment of the components of Oil Search's business was in line with the consensus view of the research analyst community. The closeness of the consensus view to the RBC assessment indicated to him that the market understood Oil Search and its asset base. However, RBC's NAV analysis did not bear upon the conclusions RBC reached about the market value of an Oil Search share. 72Section II includes a graph of Oil Search's P/NAV over the period of December 2012 to 27 February 2014 relative to three companies considered to be its closest (or Tier 1) peers, being Inpex Corporation, Santos Limited and Woodside Petroleum Limited (Woodside), selected because of the similarities of their businesses and the regions where they operate. Woodside was selected as the closest peer. 73The average P/NAV of Oil Search was 0.87x and the average P/NAV of Woodside was 0.88x. On 17 February 2014 Oil Search's P/NAV was 0.87x and Woodside's was 0.94x. On 27 February 2014 Oil Search's was 0.93x and Woodside's was 0.95x. 74Section III of the RBC valuation is entitled "Trading & Market Perspectives". It contains a price volume graph since the issue of the Bonds, a brief history of Oil Search's capital raising history and a brief summary of the importance of the Elk/Antelope transaction to Oil Search. It includes a section headed "Investor Concern Before and After February 27, 2014" and a section headed "Oil Search Uncertainty (Prior to February 27, 2014)". It contains quotes from views expressed by different analysts about Oil Search during the period and a summary of RBC's analysis of them. 75The section includes an analysis of Oil Search's share price performance and its share price performance relative to both its Tier 1 peers and other peers. In one chart Oil Search's share performance between 22 October 2013 and 17 February 2014 (that is from the date of the Liquidity Announcement to the Valuation Date) relative to the share performance of its peers is depicted. According to the chart, in this period Oil Search's performance was (5.2%) whereas its Tier 1 Peers' performance was (0.8%) so that relative to its Tier 1 Peers' Oil Search underperformed by 4.4% (parentheses denote negative numbers). Woodside's performance was (1.3%) so that relative to it Oil Search underperformed by 3.9%. 76In another chart Oil Search's share price performance from 17 February 2014 to 7 March 2014 relative to its Tier 1 peers is depicted. According to this chart, in this period, Oil Search outperformed its Tier 1 Peers by 5.3% (its performance was 8.6%). The average performance of its Tier 1 Peers was 3.3%. Oil Search outperformed Woodside, whose performance was 2.1%, by 6.5%. 77The section also contains the results of RBC's analysis of the relative liquidity of Oil Search shares, the history of short positions in the stock, the profile of its top 20 institutional shareholders and ownership position changes over time. 78Fraiberg says that the P/NAVs of Oil Search and Woodside in the period from 1 January 2013 to October 2013 tracked very closely (on average, there was no variance between the two companies over this period). He says that, therefore, even though there were differences in terms of stage of development of LNG projects and asset composition between the two companies, the market viewed them as comparables. As at 17 February 2014, the P/NAV gap between Oil Search and Woodside was 0.07x. According to Fraiberg this gap appeared to emerge around October 2013 (following the Liquidity Announcement), and widened in December 2013 (following the Potential Acquisition Announcement). His observation is that following the 27 February Announcement, the P/NAV gap between Oil Search and Woodside began to converge, such that it was only 0.02x by 7 March 2014. 79Fraiberg says that this indicated that there was potentially an overhang affecting the Oil Search stock in the period leading up to the Valuation Date, meaning anticipation by the market that more equity could be issued, or else come onto the market (for example, from the sale of a large share position by a shareholder or a significant treasury share issuance by a company). He says that an overhang will often limit the upside to the share price. 80Section III includes a graph tracking the Oil Search share price by reference to key Oil Search events between the announcement of the Bond issue on 25 November 2008 and 7 March 2014. 81Fraiberg says that prior to the Valuation Date the published material revealed that there were three key concerns about Oil Search held by the market, being: (a)the probability that it would need to raise additional capital (which could have been through equity), that was flagged to the market in the Liquidity Announcement, was high; (b)Oil Search's desire to participate in the Elk/Antelope gas discovery as confirmed to the market in the Potential Acquisition Announcement and how that would be financed; and (c)the market's awareness that with the Bonds about to mature, there were uncertainties about the intentions of IPBC and IPIC, including whether IPBC would continue on as a strategic shareholder in Oil Search. 82Fraiberg says that the summary of RBC's analysis of analyst concerns shows that after the 27 February 2014 Announcement, most of the analyst concerns that RBC identified were addressed. 83Section IV of the RBC valuation is entitled "Conclusions". It contains the following: VWAP · RBC's financial assessment of Oil Search indicates that: − Short positions: there was not substantial shorting of Oil Search ordinary shares around February 17, 2014 − Share Trading Volumes: Oil Search has been a liquid stock over the period of financial assessment − Volatility: the volatility of Oil Search is comparable to its LNG peers P / NAV · RBC's financial assessment of Oil Search indicates that: − From the beginning of 2013 up to October 22, 2013, Oil Search and Woodside have tracked each others P/NAV − Following Oil Search's announcement of a potential liquidity need on October 22, 2013 which was further exacerbated by Oil Search's confirmation of its interest in Elk / Antelope on December 9, 2013; RBC identified a growing P / NAV divergence between Oil Search and Woodside after this time that has narrowed post February 28, 2014. Period Oil Search Avg. P/NAV Woodside Avg. P/ NAV Difference Jan. 1, 2013 - Oct. 22, 2013 0.87 0.87 0.00 Oct. 22, 2013 - Dec. 9, 2013 0.87 0.90 (0.03) Dec. 9, 2013 - Feb. 17, 2014 0.85 0.91 (0.06) Feb. 17, 2014 - Feb. 28, 2014 0.89 0.94 (0.05) Feb. 28, 2014 - Mar. 7, 2014 0.92 0.94 (0.02) Impact of Elk / Antelope Transaction and Capital Raising · Oil Search's announcement of the acquisition of a 22.835% gross interest in PRL 15, financed by way of placement of 149.39 million fully paid ordinary shares to PNG at A$8.20 per share addressed many of the concerns which were being raised by the market as evidenced by: − Between October 22, 2013 and February, 17 2014 (20 day VWAP), Oil Search underperformed its peers by 4.4% − Oil Search outperformed its peers by 5.3% between February 17, 2014 (20 day VWAP) and March 7, 2014 − RBC believes this could evidence the removal of the stock underperformance gap in Oil Search ordinary shares of between 4% and 6% − The divergence between Oil Search's and Woodside's P/NAV charts narrowed to (0.02x), in line with the historical ratio between the two companies RBC Financial Assessment − RBC's assessed base case Oil Search NAV as at February 17, 2014 is A$9.28 per share − As at February 17, 2014, Oil Search traded at a 0.87x P / NAV however, as at March 7, 2014, Oil Search traded at a P / NAV of 0.93x (1) on the back of February 27, 2014 disclosure · Pursuant to clause 7.5.9(v)(b) of the Bond Terms, RBC believes that the 20 day VWAP Value(1) of A$8.19 per share does not reflect the market value of Oil Search ordinary shares. RBC believes that: − A stock underperformance gap in Oil Search shares (as evidenced on page 15) was alleviated post the announcements on February 27, 2014 − The divergence in Oil Search and Woodside P / NAV averages has narrowed since February 27, 2014 which suggests that investors' concerns have now been addressed · RBC has derived a trading range for Oil Search ordinary shares as at February 17, 2014 of A$8.52 per share to A$8.68 per share · For the purposes of the Bond Terms, RBC adopts the mid-point of the range of A$8.60 per share, as the Alternative Value for Oil Search ordinary shares Low High A$8.52 A$8.68 ● Represents the closing of a 4.0% estimated stock underperformance gap ● Represents the closing of a 6.0% estimated stock underperformance gap ● The Oil Search and Woodside P / NAV's largely tracked each other prior to the announcement of a potential liquidity need on October 22, 2013 ● The maximum average Oil Search to Woodside P / NAV gap over the divergence period was 0.06x or 6.0% (December 9, 2014 - February 17, 2014) ● Implies P / NAV of 0.89x to research NAV consensus which is within Oil Search's historical trading range ● Implies a P / NAV of 0.90x to research NAV consensus which is within Oil Search's historical trading range 84Fraiberg's explanation of the basis for RBC's conclusion is as follows. 85There was nothing unusual with respect to liquidity, shorting, volatility or changes in the institutional ownership profile that indicated that those issues were potentially having an impact on the Oil Search share price in the lead up to the Valuation Date. From the beginning of 2013 up to 22 October 2013 (the date of the Liquidity Announcement), the average P/NAV of Oil Search and Woodside tracked very closely (on average there was no variance between the two companies over this period). Following the Liquidity Announcement, a growing P/NAV divergence between Oil Search and Woodside had been identified, which was exacerbated by the Potential Acquisition Announcement. That divergence had narrowed after the 27 February Announcement. This indicated that there was an impact on the Oil Search share price due to the occurrence of certain extraordinary events unrelated to the value of the assets of the company, specifically the Liquidity Announcement and the Potential Acquisition Announcement, which meant that the 20 Day VWAP was not reflective of market value as at the Valuation Date. 86Fraiberg says that as well as reviewing Oil Search for extraordinary events, RBC also reviewed the Tier 1 peers for events such as liquidity, volatility, oversized short positions or oversized buying or selling. 87He says that the fact of the impact was supported by and consistent with: (a)RBC's consideration of the significance of Oil Search's acquisition of an interest in PRL15 and the share placement in the context of Oil Search's history and analyst concerns that had been articulated prior to the Valuation Date; (b)what often occurs in circumstances where a company announces a capital need (or a potential acquisition that will require a capital raising to fund it), which is that it creates an overhang in the stock which will often limit the upside to the share price; (c)the fact that the stock underperformance gap in Oil Search shares was alleviated after the 27 February Announcement, indicating that the Analyst Concerns had been addressed; and (d)the fact that the divergence in the average P/NAV of Oil Search and Woodside had narrowed since the 27 February Announcement, indicating that the overhang had been addressed. 88Fraiberg says that the amount of the underperformance was reflected in the following: (a)From the Liquidity Announcement to the 20 Day VWAP, Oil Search underperformed its Tier 1 Peers by 4.4% and Woodside by 3.9%. In the period from the 20 Day VWAP to 7 March 2014, Oil Search had outperformed its Tier 1 peers by 5.3% and Woodside by 6.5%. On that basis, 4.0% to 6.0% was estimated as the stock underperformance gap. (b)The P/NAVs of Woodside and Oil Search had tracked each other on average during the period 1 January 2013 up to the Liquidity Announcement. After that, the largest P/NAV divergence between Oil Search and Woodside was from the date of the Potential Acquisition Announcement to the Valuation Date, amounting to a divergence of 0.06x. On the basis of the otherwise very close trading relationship between the Oil Search and Woodside P/NAVs, the 0.06x divergence corroborated the upper end of the range. However, the 6.0% figure was used to corroborate the underperformance gap of 4.0% to 6.0%, which was computed based on the share price under- and over- performance referred to in subparagraph REF _Ref392503429 \r \h (a) above. As such, whether the P/NAV divergence between Woodside and Oil Search was recorded as implying a 6.0% or 7.06% underperformance would not have changed the fact that the P/NAV divergence corroborated the determination of the upper end of the 4.0% to 6.0% range. (c)Adopting 4.0% as the lower end of the underperformance range and 6.0% as the upper end resulted in a trading range for an Oil Search share as at the Valuation Date of $8.52 to $8.68. Given that the Bond Deed required a single value to be determined for an Oil Search share, it was determined that the mid-point of the two figures would be adopted as the Alternative Value, being $8.60 per share. The KPMG valuation 89The KPMG valuation records that its purpose was to determine the market value in respect of a single Oil Search security on a minority interest basis as at the Valuation Date. 90In Section 4, entitled "Valuation approach and methodology", it states: Standard of value: Market value In determining the value of an Oil Search security, KPMG Corporate Finance will use the following generally accepted definition of market value, being the estimated amount for which an asset should exchange hands on the date of valuation between a willing buyer and willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion. The valuation will not be adjusted for a 'special' purchaser who has particular connections or relationships with the business and can obtain additional benefits as a result of merging the acquired business with the purchaser's existing operations, or otherwise ascribes strategic value to the securities. 91In the same section it identifies that market value is commonly derived by applying one or more of the following valuation methodologies: the quoted price for listed securities; DCF; capitalised earnings; utilising information of trading in shares of, and transactions involving, comparable companies; and net assets. 92It goes on to state: After considering the standard of value, the market value definition, valuation principles and the applicability of common valuation methodologies, we consider the quoted prices for the security to be the most appropriate approach to value a single security, unless there is any reason to suggest that market price is not a true reflection of the market value for the security. Accordingly, we have considered whether there could be: · mispricing by the market; and/or · abnormal trading activity in Oil Search securities In considering these questions, KPMG Corporate Finance has: · analysed the recent share price movements of Oil Search securities · reviewed broker analyst research in Oil Search · analysed the recent trading volumes in Oil Search securities, to, inter alia, consider the liquidity of Oil Search securities · considered the frequency of release of material information from Oil Search to the market 93In Section 5, entitled "Valuation", under the subheading "Appropriate market value", it contains (by way of a table) a VWAP and liquidity analysis, and concludes as follows: ...we note that over the 15 day period prior up to the Valuation Date, 5.1 percent of Oil Search's shares were traded, ranging between closing prices of AUD 8.01 and AUD 8.37 per share at a VWAP of AUD 8.19. The 15 day VWAP is broadly consistent with the VWAP over 20, 30 and 60 days. Oil Search's VWAP over a longer periods is higher, at AUD 8.26 and AUD 8.32 over 90 days and 120 days, respectively. Having regard to the dates on which Oil Search provided information to the market in the period leading up to the Valuation Date, we are of the view that the most recent material information was the release on 28 January 2014 being their 31 December 2013 quarterly report, which highlighted aspects such as full 2013 production exceeding guidance, an increase in revenue for the quarter and increased 2014 production guidance... We note that on 30 January 2014 Oil Search released a drilling report, which was flagged as price sensitive in the ASX website. It is unclear to what extent the VWAP of Oil Search responded to this report, but this was the last price sensitive announcement disclosed to investors. In relation to selecting an appropriate period we have had regard to the following: · the market is well informed in relation to the activities of Oil Search · the release of information to the market and the dates of the release of this information · the trend in the share price being observed up to the Valuation Date. On this basis we consider the 15 trading days period from 28 January 2014 to the Valuation Date to be an appropriate period. Valuation of a single share in Oil Search As the VWAP corresponding to the 15 trading days mentioned above AUD 8.19, we consider the market value of a single share in Oil Search as at the Valuation Date to be AUD 8.19. We note that this value approximates the VWAP Value. THE PARTIES' CLAIMS IPIC 94Mr J Lockhart SC and Mr J Hewitt of counsel appeared for IPIC. 95IPIC claims the following relief: (1)A declaration that IPBC's Alternative Valuation Notice was not valid and effective as an Alternative Valuation Notice for the purposes of Condition 7.5.9. (2)A declaration that the RBC valuation is affected by manifest or proven error and is not binding on the parties. (3)An order that IPBC pay to it the amount of $40,303,856.33. (4)An order that IPBC pay interest from 19 March 2014 as at 12 September 2014 in the amount of $1,569,095.36 accruing thereafter at a daily rate of $7,729.51. IPBC 96Mr C.A. Moore SC, Ms E Peden and Mr A Hochroth of counsel appeared for IPBC. 97IPBC cross-claims for the following relief: (1)A declaration that the KPMG valuation dated 19 March 2014 purporting to be a valuation in accordance with Condition 7.5.9(vi) of the Deed is affected by manifest or proven error and is not binding on the parties. (2)Alternatively a declaration that either or both of the valuations of RBC dated 18 March 2014 and/or KPMG dated 19 March 2014 should be corrected to such figure as may be determined by the Court. (3)Further alternatively, an order that, in the event that the Court determines that a manifest or proven error has affected either or both of the RBC valuation and KPMG valuation: (a)IPBC (in the case of an error affecting the RBC valuation) procure from RBC; and/or (b)IPIC (in the case of an error affecting the KPMG valuation) procure from KPMG a fresh determination to be prepared having regard to the reasons of the Court. 98During the hearing IPBC moved to further amend by claiming an order that the moneys already paid over to IPIC in accordance with their arrangements, be repaid. The amendment was opposed. Granting it would probably have resulted in the hearing having to be vacated or split. The parties came to an extra-curial arrangement which will enable IPBC to sue separately for repayment of those moneys if the outcome of these proceedings justified it. THE MEANING OF MARKET VALUE 99A pivotal issue in these proceedings is the meaning of the term "market value" in Condition 7.5.9. 100Since Spencer v The Commonwealth (1907) 5 CLR 418, the concept of, and test for, market value at general law have had the settled meaning of that which a willing and knowledgeable but not anxious purchaser would pay a willing and knowledgeable but not anxious vendor in an arm's length transaction. In Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 514, the test was expressed as the value identified according to what price freely contracting, fully informed parties, would have offered and accepted for it. 101At general law, market values are the prices actually obtainable in market sales: HTW Valuers Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640. This is an objective standard: MMAL Rentals Pty Ltd v Brunning (2004) 63 NSWLR 167 at 177. The test for market value is to be contrasted with other tests such as for "fair value", "fair market value", "real value", "intrinsic value", "true value" and "actual value"; the distinction is sometimes difficult to draw but is old and fundamental: HTW Valuers Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 at 657; MMAL Rentals Pty Ltd v Brunning (2004) 63 NSWLR 167 at 176. 102What, however, did the parties intend "market value" in the Conditions to mean and what test, if any, did they intend to apply? 103IPBC's submissions did not extend to articulating the precise terms of some other test that might apply. 104The structure and operation of the Deed in general and a number of specific provisions make it clear, in my view, that absent abnormalities in the operation of the market, the parties intended, consistently with the general law, that the test for the market value of an Oil Search share would be the prices actually obtainable in market sales: * IPIC gets shares and, if necessary, cash, in exchange for the fixed money face value amount of the Bonds plus interest. The number of shares to be delivered as part of the effective repayment is fixed by reference to stock exchange prices. The mechanism is intended to give IPIC its money back. It can recover its money by selling its shares on the market. * the opening words of Condition 7.5.9, "If, following the occurrence of an event or a series of events, the Issuer reasonably considers that VWAP does not reflect the market value of the relevant security for the purpose of determining its Current Market Value on a Valuation Date", make it clear that the parties expected, absent the occurrence of a relevant event or series of events, that VWAP would reflect the market value. Hence the Alternative Valuation Notice must specify a reasonable basis for a different view. Current Market Value, as defined in Condition 7.5.8, is objectively ascertained by reference to VWAP. The definition of VWAP itself excludes from the calculation transactions not in the ordinary course, each Independent Valuer must confirm that VWAP either reflects the market value or does not. The Issuer Redemption Procedure in Condition 7.2 incorporates the same objective procedure. LATE ALTERNATIVE VALUATION NOTICE IPIC's contentions 105IPIC submits that the Alternative Valuation Notice was of no effect because it was given outside the deadline imposed by the Deed. 106It submits that on the proper construction of the Deed an Alternative Valuation Notice cannot be given later than 15 Business Days before the Maturity Date. The Alternative Valuation Notice was issued later than this, on 24 February 2014, which was 8 calendar days before the Maturity Date. 107IPIC abandoned a contention that an Alternative Valuation Notice can only be given where the Issuer notifies the Calculation Agent under Condition 7.1 or Condition 8.2.11, issues the Notice of Issuer Redemption under Condition 7.2 or issues the Notice of Clean-Up Redemption under Condition 7.3. 108IPIC acknowledges that there are no specific words in Condition 7.5.9 imposing any time limit on the giving of an Alternative Valuation Notice in the circumstances which occurred here, namely where the Calculation Agent makes a determination under Condition 7.5.5 having received the Mandatory Exchange Notice under Condition 7.5.2 and the Issuer then delivers an Alternative Valuation Notice. 109It puts that because there is a need to know the number of shares to be delivered on the Unconditional Delivery Date (in this case the Maturity Date - see Condition 7.5.4(i)) the entire process, including the Alternative Valuation Notice process, must be completed at least 15 Business Days before the Unconditional Delivery Date, being the 5 Business Days given to the Calculation Agent under Condition 23.1 to appoint an independent valuation expert plus the 10 Business Days comprising the Alternative Valuation Period allowed to each Independent Valuer under Condition 7.5.9(vi)(b). 110It submits that the reference to "VWAP" rather than "VWAP Value" in the introduction to Condition 7.5.9 in contrast to the reference to "VWAP Value" in Condition 7.5.9(v)(b) and 7.5.9(vi)(b) is a strong indication that the parties contemplated that the "VWAP Value" would not be known when the Alternative Valuation Notice was issued but would be known by the last day of the Alternative Valuation Period. 111It points out that Condition 7.5 operates on maturity or redemption in accordance with Condition 7.1, Condition 7.2 or Condition 7.3 and that Call Redemptions under Conditions 7.2 and 7.3 are initiated by a notice of redemption 25 Business Days before the relevant Call Redemption Date. The relevant VWAP Period in both cases is the period of 20 Trading Days ending on the Valuation Date which is the date that falls 10 Business Days before the Call Redemption Date. In both cases, the Alternative Valuation Notice must be given at the same time as the notice of redemption, 25 Business Days before the Call Redemption Date so that the Alternative Valuation Notice is given before the commencement of the VWAP Period. 112It points out that with respect to Condition 7.1, Condition 7.5.9 operates consistently with Conditions 7.2 and 7.3 if the relevant time period for the giving of the Alternative Valuation Notice is the date that is the 25th Business Day before the Maturity Date specified in Condition 7.1. 113It submits that it would make commercial sense for the Deed to have a specific time period for the giving of any Alternative Valuation Notice under Condition 7.1; for that period to be consistent with that applicable to Conditions 7.1, 7.2 and 7.3; and for an Alternative Valuation Notice having to be given before the end of the VWAP Period. IPBC's contentions 114IPBC puts that there is no express or necessarily implied time limit on the giving of an Alternative Valuation Notice in the circumstances which occurred here. It puts that the only limitation is that it must be given within a reasonable time. 115It relies on Condition 7.5.8 and, in particular, the words "Item (i)(b) and Item (i)(c) in the definition above shall not apply to the term "Current Market Value" as used in Condition 7.5.5(i)". This makes clear, it puts, that for the purposes of calculating the number of shares to be transferred the Calculation Agent always and only uses the VWAP. 116It puts that the Alternative Valuation Notice procedure determines the Cash Settlement Amount. Condition 7.5.7 delays payment of the Cash Settlement Amount until after the Unconditional Delivery Date (in this case the Maturity Date) if an Alternative Valuation Notice has been issued. Thus, the Deed expressly contemplates delaying payment of the Cash Settlement Amount until after the Maturity Date in these circumstances. 117It points out that no provision of the Deed makes time of the essence and there is no provision deeming there to be a waiver or lapsing such as is contained in Condition 7.5.3 and 7.5.9(iv). Consideration 118I uphold IPBC's contention. 119IPIC accepts that an Alternative Valuation Notice can be given in circumstances other than those expressly provided for in Condition 7.5.9. In contrast with those circumstances specifically identified in the Deed, no specific time limit is imposed for the present type of circumstances. The clear implication is that none, apart from a reasonable time, is intended: Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2013] QCA 271 at [22]; Mio Art Pty Ltd v Mango Boulevard Pty Ltd [2012] QSC 348 at [97]-[99]. 120The fact that Items (i)(b) and (i)(c) in the definition of Current Market Value in Condition 7.5.8 do not apply to the definition of Current Market Value as used in Condition 7.5.5(i) is compelling. For the purpose of calculating the number of ordinary shares to be delivered on the Unconditional Delivery Date only the VWAP is used. 121IPBC correctly points out that Condition 7.5.7 provides for delay of payment of the Cash Settlement Amount until after the Maturity Date if an Alternative Valuation Notice has been issued. If the VWAP calculation carried out by the Calculation Agent indicates that not all the Shares are to be delivered, the Issuer will hold the excess. In practical terms, there will not be an over-delivery. The sensible operation of Condition 7.5.7 makes allowance not for delay in delivery of shares but only in the making of the payment. This way, provisions of the Deed have congruent operation. 122It was not suggested by IPIC that the Alternative Valuation Notice was not given within a reasonable time. FAILURE REASONABLY TO CONSIDER VWAP NOT TO REFLECT MARKET VALUE IPIC's contentions 123IPIC submits that the Alternative Valuation Notice was of no effect for additional reasons. 124It puts that to invoke the entitlement to issue an Alternative Valuation Notice, IPBC had to consider, reasonably, that VWAP did not reflect the market value of an Oil Search share for the purpose of determining its Current Market Value on the Valuation Date. It puts that IPBC did not in fact so consider or, if it did, its consideration was not reasonable. 125It puts that under Condition 7.5.9 a threshold requirement for the issue of an Alternative Valuation Notice is a positive state of mind on the part of IPBC that VWAP did not reflect the market value an Oil Search share. It puts that Kumasiri's state of mind lacked the necessary positive quality and failed to meet the requirement that it be directed to market value. 126As to the lack of positivity, IPIC relies on two matters. First, it puts that the precise words used in the Alternative Valuation Notice do not certify that the Issuer considered that VWAP did not reflect the market value, but certified rather that the Issuer did not consider that it did. Second, Kumarasiri thought that the VWAP might not, rather than did not, reflect the value of the shares. It relied on the following evidence given by Kumarasiri under cross-examination: Q. That with all the information that you had at your disposal you thought that the VWAP value might not reflect the market value of the shares and you wanted to get advice, by way of activating the procedure under the bond deed to find out whether you were right? A. Yes, sir, yes, your Honour. Q. And is that reflected in what you have said in the third or the fourth paragraph of the Alternative Valuation Notice; you have said there that: "The issuer certifies that it does not consider the VWAP value to reflect the market value of the ordinary shares", in other words, you did not consider that it did reflect the market value. It doesn't say that you considered that it didn't reflect the market value, and that's an accurate reflection of your state of mind. Am I correct? A. Yes, your Honour. 127As to Kumarasiri's state of mind not being directed to market value, it puts that Kumarsiri gave oral evidence that he thought VWAP did not reflect the "true value" of the shares and that he relied heavily on the Treadstone report which referred to the commercial intent of the Alternative Valuation process, being to address the situation where the Oil Search share price was trading below what was regarded as its "fundamental value" and that there was sufficient evidence to support the view that the fundamental value of Oil Search shares was both above $8.19 and $8.55. 128As to the requirement under Condition 7.5.9 for IPBC's view to be reasonable, IPIC puts that IPBC was restricted to having regard to the occurrence of an event or series of events identified in the statement setting forth the basis for it referred to in Condition 7.5.9(i) and that the event or series of events purported to be relied upon could not reasonably have triggered the alternative valuation process. 129It puts that the basis for IPBC's view set forth in the Alternative Valuation Notice did not constitute reasonable grounds for considering that VWAP did not reflect the market value of an Oil Search share (in contrast to fundamental value or true value). 130IPIC accepts, that IPBC having issued what purports to be an Alternative Valuation Notice, IPIC has the onus of establishing that the conditions for its issue were not met. IPBC's contentions 131IPBC puts that Kumarasiri's evidence establishes a state of mind on his part sufficient to enliven Condition 7.5.9. It puts that IPIC's attack is fundamentally flawed because at no stage was Kumarasiri asked for his understanding of true or fundamental value and whether these concepts differed from market value as used in the Deed. It puts that it is unrealistic to conclude that Kumarasiri used these various terms in any technical or precise sense and that what he had in mind was enough. It puts that, at the lowest, IPIC has not discharged the onus of showing that the conditions for the issue of the Alternative Valuation Notice were not met. 132It puts that Kumarasiri had a number of reasonable grounds which informed his state of mind, including that: by 17 February 2014 Oil Search shares were trading at $8.33 and closed at $8.57 on 24 February 2014; there was market speculation about IPIC's 14% stake, which he considered to be unfounded and to be misinformation because he knew of the potential for the PNG Government to receive a placement through a special share issue; there was misinformation in the market about the progress of the Project which he knew was 95% complete, which was not known to the market at the time; and Treadstone had advised that there was sufficient external evidence to support a view that the fundamental value of Oil Search shares was both above $8.19 and $8.55. 133It puts that the assessment of whether Kumarasiri's belief was reasonable is objective and regard may be had to matters neither known by him nor taken into account by him in making that assessment. Consideration 134In my view, IPBC successfully invoked the Alternative Valuation Notice procedure. 135The initial assumption of the Deed is that Current Market Value is ascertained by reference to VWAP, which is a price-based formula. In my view, Condition 7.5.9, approached in a common sense way, requires no more than that the Issuer consider that the share price so calculated is not what it should be and that there be a reasonable foundation for this view. 136In addition to his affidavit evidence and the oral evidence referred to above, Kumarasiri gave the following oral evidence: Q. When you read the Treadstone report you understood that the intention of the parties to the bond deed in 2008/2009 was that the alternative valuation process was to provide IPBC with flexibility on maturity in the event that the share price for whatever reason was trading below what was regarded as its fundamental value? A. That's correct. ... Q. I see, but by 24 February you certainly knew the outcome was $8.19? A. Definitely, yes. Q. And your view was that that price did not reflect the fundamental true value of the shares? A. That's correct. ... Q. So, despite what Treadstone had told you, you thought you could activate the alternative valuation process if the share price, for whatever reason, was trading below its fundamental value? A. That's correct. ... Q. And surely you understood that, if the market response to that uncertainty is to mark down the price, then that also reflects a marking down of its market value. Did you not understand that? A. These are possibilities. What I noticed is, the appreciating share price and the various it is not a clear cut case like I can open the door and say it is raining. There are various matters, the Elk Antelope, the appreciating Elk Antelope share issue, the IPIC issue, the State as a participant, and various manipulations that can take place in the market. And what I noticed is, the share prices appreciating, rapidly appreciating, and my transaction is coming to valuation date. As at it coming, whether I am, as the issuer of the bond, whether I have a fair value which is referred in the bond deed as market value, am I going to get it? So I am issuing the notice and that notice will decide to issue, hand this over to specialist who will tell us, what is the value? So therefore, I am not the decision maker: What is that value? I am the decision maker that, whether I am going to receive at the issue of the bond the right value in the merits of the bond deed. 137So far as Kumarasiri's subjective state of mind at the time of the Alternative Valuation Notice is concerned, his evidence as a whole reveals that it was that the 20 day VWAP was too low. It may be observed that based on the closing price on 17 February 2014, he was right. 138Kumarasiri referred to different types of value including market value (without attention to differences in nuance), but it is clear that the tenor of his evidence was that he believed that the VWAP was lower than the stock exchange price he thought should be obtainable. I think that the evidence sufficiently establishes that Kumarasiri had market value in mind. 139I do not think that the fact of his belief is undermined by his evidence at one point that he thought VWAP Value might not reflect the market value and wanted to get advice by way of activating the procedure under the Deed or by the precise words of certification used in the Alternative Valuation Notice. Condition 7.5.9 does not require the Issuer to be imbued with a sense of certainty, but merely to reasonably hold the view that VWAP does not reflect market value. 140Kumarasiri undoubtedly placed reliance on the advice given in the Treadstone report, but not to the exclusion of all other matters. The Treadstone report contained a number of inaccuracies in relation to the operation of the Deed and, consequently, in relation to what it described as the "commercial intent" of the process. 141Although Treadstone at one point referred to "fundamental value", it also expressed the opinion that there was a strong argument that the Oil Search share price on 17 February 2014 did not represent "the true market value of the shares". 142I am by no means convinced that in assessing the reasonableness of the Issuer's consideration that VWAP did not reflect the market value, regard may be had only to an event or series of events known by it and identified in the Alternative Valuation Notice. But even if this be the case, in my view, the Alternative Valuation Notice sufficiently identified events to reasonably ground IPBC's conclusion. Sustained trading in Oil Search shares above the VWAP price was enough. 143One need look no further than to the KPMG valuation, which concluded that a 15 day period for the calculation of VWAP was appropriate, rather than the 20 day VWAP contemplated by Condition 7.5.9. 144But in any event, assuming an informed market, the view was reasonably open that the VWAP was not the market value of an Oil Search share on the last day of the VWAP period because the closing price on that day of $8.33 was considerably higher than VWAP. RBC VALUATION NOT OF MARKET VALUE AND AFFECTED BY ERROR? IPIC's contentions 145IPIC puts that market value for the purposes of Condition 7.5.9 means the price actually obtainable in market sales and that, in the absence of any abnormality affecting the operation of the market, this is the price for which an Oil Search share can be bought and sold on the ASX. 146IPIC submits that the RBC valuation is not a determination which binds the parties because it was directed to a value which is not market value. In an associated submission it puts that the RBC valuation does not bind the parties because it is affected by manifest or proven error within Condition 7.5.9 in that: (a)it determined that VWAP Value did not reflect the market value of the relevant security without identifying any abnormality in the functioning of the ASX or Oil Search's trading; (b)it took into account circumstances occurring after 17 February 2014; and (c)it used the comparative P/NAV ratios of Oil Search and Woodside to support a conclusion that Oil Search shares were trading at a price lower than that at which they should have been trading. 147It puts that RBC's conclusion that VWAP did not reflect the market value of Oil Search ordinary shares as at 17 February 2014 is based on a determination that investor concerns (all of which - it is common cause - were known to the market at the relevant time) caused an underperformance by the security. Given the absence of any abnormality in the operation of the market (such as short positions, liquidity, volatility or ownership profile) this exercise, IPIC puts, identifies an amount by which the market value of an ordinary share in Oil Search was underperforming by reference to some determinant of value which is not market value. 148IPIC called, as an expert, a forensic accountant, Mr Tony Samuel (Samuel). Samuel identified that there are three broad approaches generally used to value a business or asset: (a)a market based approach, which values an asset by reference to market comparable transactions, for example the sale of purchase of comparable assets in the market; (b)an income based approach, which values the asset by reference to the present value of the cash flows or profits generated by the assets; or (c)a cost or asset based approach, which values the asset by reference to the costs of replacing the asset. 149Samuel opined that RBC's methodology is not a recognised valuation methodology for determining market value and that RBC did not apply a methodology that would determine it. Amongst others, he opined that RBC measured what it considered to be a "stock underperformance gap" which assumed that the market value of an Oil Search share is equivalent to the average performance, during a particular period, of another or other companies. Samuel opined that this is wrong because the market value of a share in Oil Search is not reliant on the traded price of other securities. He opined that there is no sound rationale for assuming or concluding that the relative price movements of other securities will be relevant to, let alone produce, a market value of a share in Oil Search. He also opined that the RBC approach implicitly assumed, in his view incorrectly and without foundation, that Oil Search shares should trade at the same P/NAV ratio as Woodside and that Oil Search should trade at the average percentage performance of Woodside, Inpex and Santos at all times. IPBC's contentions 150IPBC puts that the Court should, in construing the Conditions, be hesitant to place too much reliance on the notion of the "normal" use in law of the expression "market value", but at the same time should conclude that the actual market price of a publicly traded share will only be good evidence of market value to the extent that the workings of the actual market in each case are seen to approximate the likely actions of the hypothetical parties to the Spencer transaction. 151IPBC supports the RBC approach as being a determination of market value by reference to comparables, including the price trend of comparable entities, which approach it submits is an orthodox valuation approach. It puts that IPIC has not discharged its onus of establishing otherwise. It also puts that IPIC needs to prove that no reasonable investment banker could have considered this methodology to be appropriate. It points to the fact that Fraiberg's evidence was unchallenged, both in his assessment that the methodology adopted was appropriate and that the approach is commonly used in the investment banking industry. 152It puts that the most appropriate method for valuing resource companies such as Oil Search is a DCF methodology. It puts that market value is not the same as market price and that there may be events or disclosures which affect the share price but which do not affect value. It says that RBC identified the Liquidity Announcement and the Potential Acquisition Announcement as two such events or disclosures. 153It puts that the actual market will not approximate the workings of the hypothetical market for a Spencer valuation where, on the valuation date, the market is affected by matters not impacting upon Oil Search's estimated future cash flows, or the risks associated with achieving those cash flows. Thus, a market affected by an "overhang", driven by a perception that IPIC may have been looking to sell a large block of Oil Search shares which the market could not absorb, that being a temporary effect; and investors "hanging back" to lower the Oil Search share price in hopes of participating in an anticipated capital raising. It puts that in each case this is not a hypothetical Spencer market because market activity will not approximate the negotiations of the hypothetical buyer and seller, as a result of the market being affected by an absence of willing buyers. 154It puts that a person could also reasonably conclude that the market price does not reflect market value where the market was not properly informed of all matters which impact upon Oil Search's estimated future cash flows or the risks associated with achieving those cash flows. 155It puts that the reasons for a divergence between market value and market price include (but are not limited to) where there is illiquidity, extraordinary volatility, substantial shorting, insider trading, or ill-informed short-term sentiment and that where a stock is liquid and well-traded, the stock price may be good evidence of market value for the stock, but is not the same as market value. 156IPBC called Mr Andrew Ross (Ross) a forensic account with experience in financial advice and valuation, and Ms Hildegunde Royle (Royle) a geologist and analyst with extensive experience in petroleum geology, equities analysis (including valuations) and finance in the energy industry. Royle has extensive experience in modelling and valuation of projects and companies for oil companies and equity investors. 157Ross gave evidence, along lines often led in this List, that deriving market value is an art not a science, that market price is not the same thing as market value, that many valuers use the DCF method and that differences, even large differences, between valuers' assessments of market values do not necessarily imply an error on the part of one valuer (his report did not contemplate error on the part of both). 158In his report, he gave his assessment of RBC's methodology. He said that valuers from disciplines or professions other than accounting, like share analysts and investment bankers, commonly adopt valuation approaches which differ from those used by accountants. In his oral evidence he accepted that he had never previously encountered the RBC methodology used in the present case. However, his opinion is that RBC's methodology was an appropriate methodology and was consistent with basic principles of valuation. 159Royle's evidence was that whilst RBC's approach to the valuation was appropriate and in keeping with equity market and industry standards, and whilst the way that RBC performed their calculation of the market value of Oil Search shares as at 17 February 2014 is not wrong, she would not have undertaken the calculation in the same way as RBC did. 160Her starting point was that the share price on the stock market does not always represent market value. Price is subject to considerable volatility unrelated to any changes in the company's operations. She says there is a large industry of analysts in investment banks, analysts in investor houses and consultants who focus exclusively on the detection of under- and overvaluations of stocks in order to identify investment opportunities who would be entirely superfluous if the equity market valuation was always representative of the market value of a stock. 161She distinguishes between events that have an impact on the value of a company's shares because they affect the underlying value of the company or its assets, and events which have an impact on the value of a company's shares due to consideration of how the share market will respond. 162She gave as an example of the latter kind of "market driven event" an anticipated capital raising, which often causes institutional investors to sit back from the market so as to allow a stock price to sag. She says capital raisings are typically done at discounts to the equity market price ((20 day VWAP) before the reference date is often used) and it is in the interest of investors to see the reference price as low as possible. Accordingly, she says that the prospect of an equity raising often causes the share price to decline in the short term and such market driven events do not affect the underlying value of the company and its shares. It is the occurrence of these types of events (among other factors) which investment bankers, analysts and consultants seek to identify to assess whether the market price in the equity markets is reflective of the market value of the company. 163She provided her analysis of the characteristics of Oil Search as a company, opining that, based on her valuation experience, the most appropriate valuation method applied to resources companies like Oil Search, is based on a DCF methodology. DCFs for each project are added and form the major part of the NAV of a resource company with the remainder comprised of cash, debt and some expected monetary value assessments for exploration. 164She gave evidence that the equity market prices shares on the basis of P/NAV to arrive at the equity price and that RBC's methodology, using P/NAV to track the underperformance of Oil Search versus its peer group and its closest peer Woodside, was appropriate and is a process she has used on numerous occasions to make investment recommendations and decisions. 165She says it is common practice for investors and analysts to compare the P/NAV ratios of two or more companies to see how the stocks compare, and to identify divergence in the P/NAVs as one way of determining if a particular stock is over-priced or under-priced, relative to its asset value and within the comparable universe of stocks. If the P/NAVs are tracking one another well, it generally indicates that the price of the shares is being affected by market wide factors. If the P/NAVs diverge, one can conclude that one of the stocks is being affected by a specific factor which is not affecting the wider market. In her opinion, this is essentially what RBC did. 166She says that having herself considered the tracking of the P/NAVs of Oil Search and Woodside in the period over 2013 until March 2014, in her opinion, two events caused the divergence between the two, namely, the Liquidity Announcement and the Potential Acquisition Announcement, and both led the stock price down as market participants saw a capital raising flagged and wanted to create a lower base from which the equity raising would be priced at a discount to the prevailing stock price at the reference date for the issue because buyers typically hold off "allowing the stock to sag". In addition, the uncertainty about the maturing of the Bonds could create an overhang over the market related to a concern that IPIC could be a gradual seller of its 14% holding, depressing the price over a period. 167Royle agrees with RBC's approach and its conclusion that the 20 day VWAP was not a true reflection of the market value of Oil Search shares as at 17 February 2014 because the price was depressed in anticipation of a capital raising. She says the market reaction was to mark the stock down to create a lower base from which a prospective equity offering would be priced. She also observes that investors closed the P/NAV value gap between Oil Search and Woodside (to 0.02%) after the removal of the uncertainties and that its underperformance is measurable against its peer group and Woodside. 168Whilst she agrees with RBC's approach of quantifying the value gap by reference to Oil Search's under- and over-performance relative to its peers, she says she would not have chosen the RBC calculation of the underperformance range of -4% to +6% because that range takes into account performance of the stock after the cut-off date of 17 February 2014 (and in her experience of equity markets practice, taking into account information after the date of valuation does occur and the RBC approach to the calculation is, in her opinion, reasonable, although she says she would not have taken the same approach). 169Royle says she would not have relied on the P/NAV gap between Woodside and Oil Search of 0.06 that RBC looked at in coming up with the high end of the range at +6%. She says that whilst that is a valid way to approach a valuation, if she had done the valuation, she would have kept the calculation simpler by just looking at the measureable share underperformance before 17 February 2014. She says this is because this approach limits the number of variables involved. 170She concludes that the most appropriate value for an Oil Search share on 17 February 2014 would be derived from the VWAP on that day, adjusted by the share price underperformance since 22 October 2013 because: a 1 day VWAP is measurable ($8.34) and represents the equity market value on the last day before the conversion date, and Woodside is Oil Search's closest peer. She considers that Oil Search's performance within the peer group is most relevant and meaningful. She considers Oil Search's performance in the peer group versus Woodside's performance in the peer group to be the most appropriate measure of adjusting the Oil Search share price "to account for the gap in the equity market price and the market value of [Oil Search's] stock price". 171As to the use of "hindsight", IPBC puts that reference may legitimately be had to what occurred when information was disclosed to the market as evidence of the extent to which the market price was inflated by non-disclosure. Hence, it puts, RBC was entitled to consider "how the market moved when the extraordinary matters that were causing the share price deflation were removed from consideration". Consideration 172There is no issue between the parties that the valuation to be conducted by the Independent Valuers under Condition 7.5.9(vi)(a) is to be of the market value, within the meaning of that term as it is used in the Deed, of an Oil Search share. There is no issue that if the RBC valuation is not of market value, it will not be a valuation in accordance with the Deed and will not bind the parties: see Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 701; Holt v Cox (1997) 23 ACSR 590. In that event, the RBC valuation would undoubtedly also be affected by "manifest or proven error". It is not necessary, in the present case, to determine where the boundaries lie between these two concepts. 173The RBC valuation entails the following four steps: an assessment of the NAV of an Oil Search share to enable the derivation of a P/NAV; a comparative study of the performance of Oil Search shares compared to its peers using P/NAVs; identification of circumstances explaining why, for a period straddling the VWAP Period, Oil Search shares underperformed their peers; and adjusting Oil Search's underperformance to eliminate the effect of the circumstances identified. 174Fraiberg considers that the RBC valuation is directed towards determining market value and he and RBC consider that the methodology adopted in it is appropriate. However, the RBC valuation is not a determination of market value. It is not a determination of what hypothetical willing and knowledgeable but not anxious purchasers would pay and what hypothetical willing and knowledgeable but not anxious vendors would take for an Oil Search share on the Valuation Date. 175Market price and true market value are not always the same. Markets can, and often do, operate imperfectly. However, when it comes to shares in a company which are being bought and sold on the stock exchange and there are no abnormalities affecting the market, the price at which the shares are changing hands in the ordinary course of business prima facie represents their value: see Perpetual Trustee Co Ltd v Federal Commissioner of Taxation (1942) 65 CLR 572 at 579, Ronnoc Finance v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 at 626, Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (1947) 74 CLR 358 at 361, Airservices Australia v Canadian Airlines International Ltd (2000) 202 CLR 133 at [444], Elkington v Shell Australia Ltd (1993) 32 NSWLR 11 176According to Fraiberg, the coverage of Oil Search stock by analysts was generally good. The closeness of the analysts' consensus view to the RBC NAVPS assessment indicated to Fraiberg that the market understood Oil Search and its asset base. 177Far from it being suggested that there were abnormalities affecting the market on the Valuation Date, the RBC valuation ascribes the divergence and reconvergence of Oil Search's P/NAV with that of its peers to information the subject of public announcements which information first engendered concerns on the part of the market and then later allayed them. This establishes that the traded prices accurately reflected the market values of an Oil Search share. 178The RBC valuation, even though it says it is, is not directed to the juridical concept of market value (within the meaning of that term in Condition 7.5.9) as it relates to an Oil Search share. It is directed to some other notion of value, perhaps intrinsic value is the best description, to be attributed to an Oil Search share via a valuation of Oil Search as a company. 179The RBC valuation is directed to attributing a value to an Oil Search share based on a valuation of Oil Search's assets not on the value purchasers and vendors in an informed market were placing on an Oil Search share. 180It provides an explanation why, at particular points in time before 27 February 2014, willing and knowledgeable but not anxious parties were paying and accepting prices which when compared to the prices after 27 February 2014 might be considered to be cheap. 181The elision of market value and the value which the RBC valuation addresses is most clearly revealed in Fraiberg's explanation that RBC's analysis indicated that there was an impact on the Oil Search stock price due to the occurrence of certain extraordinary events unrelated to the value of the assets of the company, specifically the Liquidity Announcement and the Potential Acquisition Announcement, which he says meant that the 20 day VWAP Period was not reflective of market value as at the Valuation Date. 182Two symptoms of the error into which the RBC valuation falls are the use to which it puts P/NAV comparables and the use to which it puts subsequent information (or hindsight). 183It may be accepted that the use of comparables is an orthodox methodology in determining market value. This entails identifying a comparable transaction or thing with an established market value and using that value to draw a conclusion as to the value of the transaction or thing being valued, making allowance (where appropriate) for dissimilarities so as to bring the two transactions or things as closely as possible in to line. 184Fraiberg explains that even though there were differences between Oil Search and Woodside, the market viewed them as comparables and their respective average P/NAVs tracked very closely from 1 January 2013 to October 2013. A gap emerged around October 2013 and after the 27 February Announcement the gap began to converge. 185The divergence and reconvergence is explained by reference to events peculiar to Oil Search and known to the market, the effect of which is then sought to be eliminated. Instead of taking the respective differences in performance between Oil Search (attributable to identified events) and Woodside as revealing differences in market value of their shares, the RBC valuation assumes that there is a fixed relationship between the market value of both and proceeds to eliminate the effect of the difference to bring them in to line, concluding that the result discloses the true market value of Oil Search shares. In my view, the starting premise that the market value of Oil Search shares can be derived by a comparison with the trading price of shares in peer companies is manifestly unsustainable, as is the elimination of the difference where that difference is attributable to the sentiment of an informed market. 186The comparative analysis of the performance of Oil Search and its peers carried out by RBC, rather than displacing the efficacy of market prices as the primary measure of market value, confirms that the divergence was market driven. I consider the conclusion that the underperformance gap or part of it represents the difference between market price and market value to be fallacious. 187In determining, including for the purposes of assessing damages, the value of a thing at a particular point in time, subsequent events may be looked at insofar as they illuminate the value of it as at that time. Where facts are available, they are to be preferred to prophecies: Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at 291; National Provincial Bank Ltd v Bradberry [1943] 1 Ch 35 at 42; Willis v The Commonwealth (1946) 73 CLR 105 at 116. What may be examined are later events which may throw light on the real value of the thing at the relevant earlier date: Gould v Vaggelas (1985) 157 CLR 215 at 220. Such events do not include supervening events which have affected the value of the thing but which do not arise from the nature or use of the thing itself. In the context of valuing a business acquired as a consequence of fraudulent inducement or misrepresentation, supervening events such as ineptitude and unexpected competition are not admissible to prove the value of the business as at the valuation date: Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at 291. 188There would have been nothing exceptional had the RBC valuation relied on subsequent facts which could and should have been, but were not, known to the market as at the Valuation Date. Such facts may have displaced the presumption that the actual prices at which Oil Search shares were changing hands were not an accurate reflection of their true market value. But that is not this case. The market factored into its prices the matters of concern identified by RBC. The allaying of these concerns by subsequent events are not facts which, if accepted, could rationally affect (directly or indirectly) the assessment of the market value of an Oil Search share on 17 February 2014 other than to confirm that the traded price on that day was indeed market value. 189On RBC's approach if, after 17 February 2014, the investor concerns identified by it had been exacerbated rather than allayed leading to the price being depressed, or if Oil Search's announcements had been more positive than they in fact were leading to the price rising, the performance gap noticed by RBC would be different, and accordingly the market value on 17 February 2014 would likewise be different. As at 17 February 2014 neither scenario was a certainty. The RBC approach makes no allowance for an alternative version of future history at that point. Logically and rationally in an informed market the price on 17 February 2014 cannot depend on future history at that point. 190Ironically, the RBC valuation establishes that the amount which it assesses as the value of an Oil Search share on the Valuation Date was not its market value. 191Royle was an impressive witness and clearly knowledgeable in her field. But, as is the case with the RBC valuation, her evidence was not directed to the market value of an Oil Search share as required by Condition 7.5. In my opinion, her analysis, like the RBC valuation, is directed to assessing not market value but some other value and her analysis incorrectly equates the two. 192Nothing turns on Royle's evidence that she would have undertaken a different method of calculation. 193Royle points out that there is a large industry of analysts who focus exclusively on the detection of under and over valuations of stocks in order to identify investment opportunities and that this industry would be entirely superfluous if the equity market valuation was always representative of the market value of the stock. This approach discloses the same elision of market value and some other value, as does the RBC valuation. The problem is further revealed by her statement that it is common practice for investors and analysts to compare P/NAV ratios to identify divergence as one way of determining if a particular stock is overpriced or underpriced relative to its asset value. She says if the P/NAVs are tracking one another well this generally indicates that the price of the shares is being affected by market wide factors. If they diverge, she takes the view that one can conclude that one of the stocks is being affected by a specific factor that is not affecting the wider market. This, she says, is in effect what RBC did. 194As Royle points out, the market marked down the price of Oil Search shares because as a result of the Liquidity Announcement and the Potential Acquisition Announcement buyers typically held off allowing the stock to sag because they wanted to create a lower base from which the announced equity raising would be priced, at a discount to the prevailing stock price, and also an overhang was perceived with respect to the possibility that IPIC could gradually sell down, depressing the price over a period. 195This approach overlooks the fact that the marked down price of the stock affected by a specific factor known to the market is the market price. What her technique uncovers is the potential for a bargain based on the divergence between market value, represented by market price, and intrinsic value, which is expected to have upward pressure on the market price in due course. The underperformance gap is a measure of the potential bargain to be had (or not had if things had turned out differently) in due course. 196In my view the methodology adopted in the RBC valuation does not yield a determination of market value and therefore does not produce an Alternative Value within the meaning of Condition 7.5. 197It has not been necessary to rely on any of the expert evidence of Samuel and Ross in reaching this conclusion. However, as is apparent, my conclusion accords with the opinion of Samuel whose view I prefer to that of Ross. There is one particular respect in which I prefer the opinion of Samuel to that of Ross, which deserves mention. Samuel opines that RBC's methodology is not a recognised methodology for determining market value. Although he had never seen it before, Ross opined that the methodology adopted in the RBC report is appropriate and is consistent with basic principles of valuation with respect to determining market value. He made reference to RBC's use of comparables as reflecting orthodox methodology. I have dealt with RBC's use of comparables above. I have concluded that the RBC valuation is not directed to market value. It follows that I do not accept Ross' opinion that the methodology adopted by RBC is recognised or reasonable as one directed towards ascertaining that value. KPMG VALUATION AFFECTED BY MANIFEST OR PROVEN ERROR? 198IPBC puts that KPMG failed to calculate market value according to their own chosen methodology. 199It puts that KPMG's methodology is based on the notion that where a security is publicly traded in a liquid market, the market on any given day efficiently factors in all known matters which impact on the value of the security into the share price. 200It puts that it follows that a proper (indeed the only) application of this methodology requires adoption of the closing price of Oil Search shares on 17 February 2014 as the market value, or alternatively, at most, the one day VWAP for that day because on dates prior to 17 February 2014 the market could not have efficiently factored into the share price, all known matters which impacted on the value of the security as at 17 February. 201On this footing, it submits that KPMG made a manifest error but one that is capable of correction by the Court determining that the value of an Oil Search share on the valuation date was either the closing price of $8.33 or the one day VWAP of $8.34. 202This submission is unsustainable. 203IPBC's description of KPMG's methodology is inaccurate. KPMG suggests that the quoted price is the most appropriate approach unless there is any reason to suggest that market price is not a true reflection of the market value. 204Condition 7.5.9(vi)(b) requires each Independent Valuer to confirm whether VWAP Value reflects the market value or does not. 205In considering appropriate market value, KPMG states that, amongst others, VWAP is often used as a trading benchmark and provides an indication of the market value of a share taking into account trading volumes and is therefore more in line with a consensus view as it represents a less biased observation than a single trade which may be influenced by particular circumstances. KPMG observes that VWAP is often used in transactions to determine a share price at a point in time. On this basis, KPMG considers it more appropriate to use a VWAP to determine the market value. KPMG then proceeds to consider the appropriate measurement period and comes to the conclusion, as is set out earlier in this judgment, that a 15 Trading Day VWAP is appropriate primarily because of the information released on 28 January 2014. 206The adoption of a VWAP is a methodology consistent with KPMG's approach that market prices are the best test of market value. 207There is no inconsistency between KPMG's stated methodology and its implementation of it. A VWAP gives weight to the volumes traded at particular prices. The appropriateness of the selected 15 day period is undoubtedly debatable, but that is a matter of judgment. I am not satisfied that this judgment is erroneous or that if it were the KPMG valuation is not binding. THE RESULT 208The result is that the KPMG valuation is binding on the parties whereas the RBC valuation is not. 209In accordance with Condition 7.5.9(ii), both parties appointed an Independent Valuer. Through no breach on the part of IPBC, the Independent Valuer appointed by it has not specified an Alternative Value in accordance with Condition 7.5.9(vi)(b) and (e). 210IPBC put that if the Court concluded that either or both of the KPMG valuation and the RBC valuation were not binding, the Court could itself correct any error, order the appropriate party to procure a fresh valuation, or determine the Alternative Value by judicial determination or referral to an expert. IPIC did not address any submissions with respect to what should occur in either of these scenarios. 211There is authority that where contractual machinery for the determination of a value under a contract has failed the Court may supply the required machinery itself: Sudbrook Trading Ltd v Eggleton [1983] 1 AC 444 at 483-484; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 616-617. 212The machinery for the determination of Current Market Value has not failed. It has to this point not operated as contemplated by the parties because the expert chosen by IPBC did not undertake the contractually mandated task. The Court was not directed to any provision of the Deed dealing with the circumstances which have arisen. I do not consider that the Court can impose an alternative machinery upon the parties: Candoora No.19 Pty Ltd v Freixenet Australasia Pty Ltd [2008] VSC 478 at [15]. 213The machinery is still capable of working. I do not consider that the time limit imposed by Condition 7.5.9(vi)(b) renders nugatory the entitlement of IPBC to have a valid and binding determination by an Independent Valuer appointed by it. 214At present there is nothing to suggest that RBC is unwilling to make a fresh determination in accordance with the Deed. To this point IPIC has not identified any reason why RBC cannot properly redo the valuation. 215If this remains the situation it would follow, in my view, that IPBC is entitled to request RBC to make a further determination in accordance with the Deed. I do not propose to order IPBC to do so. I will stand the matter over for the parties to consider these reasons and the course forward. 216Pending the outcome of that process there is no warrant for the making of an order for the payment out to IPBC of the moneys presently held in escrow. CONCLUSION 217The Court declines to make a declaration that IPBC's Alternative Valuation Notice is not valid and effective. 218The Court declares that the RBC valuation is not binding on the parties. 219IPBC's cross-claim is dismissed. 220I will stand the matter over to a future date convenient to the parties. The exhibits may be returned. Schedules (PDF) 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: 31 October 2014