Case note on
Patterson -v- Humfrey  WASC 446
"The shares should be valued on a basis that will place the oppressed party in the position as if there had been no oppression."
In this edition of Damages Matters, Ben Mahler, Associate Director in our Perth office considers a recent decision of the Supreme Court of Western Australia in Patterson -v- Humfrey  WASC 446 which addresses some valuation issues which arise in the context of a shareholder oppression dispute1.
In 1997 Mr Patterson and Mr Humfrey established Skybow Holdings Pty Ltd ('Skybow') to undertake property developments and make investments. The shares in Skybow were held equally by Mr and Mrs Patterson and Rodale Nominees Pty Ltd ('Rodale', and together, 'the plaintiffs') and by Mr and Mrs Humfrey and Kenesta Pty Ltd ('Kenesta', and together, 'the defendants').
Mr Patterson and Mr Humfrey were the only directors of Skybow. Mr Humfrey managed Skybow from its inception. He brought projects to the company, and managed its day-to-day affairs. Mr Patterson was initially involved in the operations of the company, but after about 2007 played a less active role.
In July 2012 an agreement was reached for the plaintiffs to exit the business and sell their shares to the defendants. However, the defendants' inability to obtain finance meant that the sale transaction was not completed. In December 2012, the plaintiffs proposed to buy-out the defendants. This was refused. (The defendants had a role managing a syndicated development of which Skybow was a member. If they disposed of their shares, they would breach a contractual requirement to hold at least 20% of the shares in Skybow). The plaintiffs commenced proceedings in 2013, citing historical oppressive conduct in relation to the management of the business which they alleged had produced a benefit for the defendants.
Note: For convenience, we refer to Mr Humfrey and/or Kenesta as "the oppressing parties". We are interested in the relevance of this case to oppression cases generally, with the particulars of the parties involved being of less relevance. For similar reasons, the plaintiffs are referred to as "the oppressed parties".
The expert evidence
A partner of KordaMentha was engaged in this case. He was asked by the plaintiffs to review the sufficiency of the books and records of Skybow. His evidence was accepted by Justice Le Miere. There was no opposing expert evidence and neither side put on expert evidence relating to the value of Skybow's shares.
On most issues in contention, the Court found oppressive conduct had occurred, and was likely continuing to occur. This was mainly based on lay witness evidence.
Having found that oppression had occurred, the next relevant issue was the proposed valuation of shares. The Court found it appropriate for an expert to be appointed to value the shares, and that the Court should fix the value "having received" this valuation. Justice Le Miere set out in some detail how the valuation of shares should be conducted by an expert for the purposes of remedying an oppression.
How should the shares be valued?
Justice Le Miere found that "the price [at which a share sale would occur] is to be fixed by the court having received the expert's valuation". He then gave directions on how that valuation should be performed.
The table below sets out a summary of the key valuation aspects of Justice Le Miere's directions.
Table 1: Valuation guidance
Who should buy out whom?
The plaintiffs (the oppressed parties) sought orders that the plaintiffs purchase the shares held by the defendants (the oppressing parties) in Skybow. Justice Le Miere considered whether the oppressed parties were entitled to purchase the shares of the oppressing parties, rather than the other way around.
Justice Le Miere found that the "Corporations Acts 233 confers on the court discretion to make any order that it considers appropriate in relation to the company". [Emphasis added] The objective of such an order is that "the oppressed are entitled to be released from the company if they find that because of the opponent's oppression they can no longer have their capital invested in it." [Emphasis added]
When looking at the case law supporting this objective, Justice Le Miere found that:
- Fedorovitch v St Aubins Pty Ltd2 established that although "[a predecessor to the Corporations Act] allowed the court to mould a remedy to suit the circumstances of a case, it was in the public interest that courts adopt a uniform approach to remedy cases of oppression"
- Fedorovitch also established that the "proper order was for the oppressor to purchase the shares of the oppressed"
- Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd3stated "the remedy of allowing a minority to acquire the shares of a majority was 'extraordinary and virtually unprecedented'".
In this matter, Justice Le Miere found that it "is appropriate that the defendants acquire the plaintiffs' shares rather than that the plaintiffs acquire the defendants' shares". There were three reasons:
- This satisfied the objective of allowing release of the oppressed parties from the company.
- The oppressing parties were historically the active managers of the business.
- The oppressing parties had a separate manager role in a syndicated development in which Skybow was a syndicate member. The oppressing parties had a contractual requirement in that role to own shares in Skybow. This role was at risk if the oppressed parties bought the shares, but not vice versa.
The plaintiffs submitted that the defendants had insufficient funds to purchase the shares, and that any delays in the process might unfairly prejudice them. Justice Le Miere considered this to be unproven, and was willing (to a point) to give the defendants the benefit of any doubt. However, he felt two concessions were appropriate:
- Firstly, "If the defendants are not able or willing to purchase those shares at [the price set by the Court within 28 days] then the plaintiffs will have the opportunity to purchase the defendants shares within 28 days", and
- Secondly, in that eventuality, the "amount of the loan owing by [the oppressing parties to the oppressed parties], including the amounts which I have found should be treated as if they were loans, together with interest, should be set off against the Purchase Price".
This judgment highlights that, in oppression cases:
- The valuation of the relevant shares should typically seek to remove any impact on value arising from the oppressive conduct. As Justice Le Miere's orders for the subsequent valuation reveal, this does not mean the valuation must be struck at a date prior to oppression, assuming the oppression can be dealt with via adjustments to earnings and/or the balance sheet at a later date.
- A valid way of treating expenses incurred in an oppressive manner may be to treat these as a loan to the oppressed party. Whether interest should apply depends on the nature of the oppression.
- Discounts should typically not be applied to the shares where they relate to a minority interest.
This judgment also seems to reinforce that the granting of an order requiring the acquisition of shares by an oppressed party would be an unusual outcome, and that an application for such an order is unlikely to succeed unless extraordinary reasons are established to the satisfaction of the Court.
1The commentary expressed in this article is
provided in the context of a general discussion of the valuation
issues raised in this case. The views expressed are those of the
author and not necessarily the views of KordaMentha Forensic. This
article does not purport to provide specific advice and should not
be relied upon for that purpose.
2Fedorovitch v St Aubins Pty Ltd  NSWSC 776
3Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd  NSWCA 97
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.