Case note on
Bakers Investment Group (Australia) Pty Ltd v Caason Investments Pty Ltd (no 2) (2014) VSC 598
In this edition of Damages Matters, Magda Di Vincenzo, Director in our Melbourne office, considers a case in which both the Plaintiff and the Defendant (by counter-claim) were found to have failed to establish any loss.
The Plaintiff, Bakers Investment Group (Australia) Pty Ltd is a financial services company involved in financial analysis and capital-raising activities in the energy sector.
The First Defendant, Caason Investments Pty Ltd is a private investment firm and the holding company of the Second Defendant, Hardrock Investments Pty Ltd.
Hardrock was initially owned by two individuals ('the Vendors'). Hardrock had two exploration licenses in relation to coal reserves in north-east Tasmania.
Caason entered into an agreement to acquire 100% of the shares in Hardrock for $10 million.
Caason then approached Bakers to help with capital raising. The parties agreed to form a new company, Newco, to establish and secure finance. Newco was to be owned 33.34% by Caason and 66.66% by Bakers.
Neither party fully performed the agreement.
In June 2011 Caason paid the Vendors $10 million for the shares. The purchase was funded as a result of an agreement between Caason and San Miguel Energy Corporation.
Each party made claims against the other with respect to a number of alleged breaches of the agreement.
The Claim by Bakers
Bakers made a claim against Caason for $46.8 million comprising:
- The market value of 66.66% of equity in Newco as at the date of the alleged breaches;
- Less the 45% of the equity that Bakers would have had to part with to obtain the funding required;
- Plus an expected fee to be paid to Bakers of $2 million.
The claim was pleaded as a loss of opportunity. The Court found that the claim failed at the threshold level, in that Bakers failed to demonstrate that it would have been able to raise the capital required by the agreement (and further, that even if it had, the agreement did not make any provision for Bakers to beneficially hold any equity in Newco). However, the Court did make some comments about the quantification of the claim. In short, it found that "a number of further complications arise in respect of the quantification of the value of that opportunity by reference to the expert evidence led".
Bakers' expert accountant valued Newco's equity at $207.2 million.
Bakers then calculated its loss as 21.66%(66.66% less 45%) of $207.2 million plus $2 million, resulting in $46.8 million.
The Court found several problems with this approach by Bakers:
- Bakers led no evidence with respect to the likelihood of the opportunity occurring. In quantifying a claim for lost opportunity, courts typically apply a discount by reference to the degree of probability of the opportunity materialising. This would have been difficult in this case given the lack of any evidence.
- The expert quantified the total value of the shares in Newco, Bakers sought damages of 21.66% of that total value. But the claim did not recognise that a minority interest is normally worth less than the pro rata value of the whole, as it provides little control of the entity. The Court found it unlikely that Bakers would have been able to establish that the value of its 21.66% holding in Newco would not have suffered a discount.
The Court found another issue with the valuation carried out by the expert. It noted that in arriving at his valuation, the expert had reference to several actual comparable market transactions. However, the expert did not have reference to the transaction between the Vendors and Caason completed in June 2011 for $10 million.
The Court found that this transaction was significant in arriving at the value of the shares in Newco and the failure to consider it "must, to some significant extent, undermine the reliability of [Bakers'] evidence as to valuation".
Furthermore, the expert based his valuation on resource data which was not known at the valuation date (1,036 million tonnes versus 246.5 million tonnes known at the valuation date). The Court stated that "if later information is to be relied upon, a discount should generally be applied to reflect the relevant level of uncertainty of the subsequent event."
The Court also found that the expert's report did not set out any calculation or description of the process by which he reached conclusions as to the enterprise value per tonne of resource. The expert stated in cross-examination that "it was not an arithmetic exercise" and "he took a collective view on all the various inputs and also used his judgement". The Court found that "it is not possible to verify the appropriateness or otherwise of the weight given ... to the various considerations contributing to the final enterprise value."
The Court concluded that even if Bakers had established that breaches by Caason caused some loss to Bakers, it was highly unlikely that Bakers would have established that:
- "the relevant opportunity ... would ever have resulted in Bakers ... obtaining a 21.66 percent shareholding in Newco.
- .... valuation of the equity in Newco should be adopted by the Court either in relation to the valuation as a whole, or in relation to a 21.66 percent shareholding.
- Bakers ... was entitled to make a claim of $46.8 million or any amount remotely within that vicinity."
The Claim by Caason
Caason claimed costs of $150,000 paid to the Vendors and costs paid to the Vendors by Hardrock of $487,449.
In addition Caason made a claim for $0.50 per tonne paid as royalties to the Vendors.
This claim arose because Caason agreed to increase the royalty payable to the Vendors from $1.50 to $2 per tonne in June 2011 when it purchased the shares with the funding provided by San Miguel.
The Court found that Caason had not proved that any loss or damage had been suffered as a result of any breach by Bakers.
This is because Bakers' failure to perform the agreement created an opportunity for Caason to own 98.7% of Hardrock, instead of the 33.34% it would have owned under the Agreement. The Court found it unnecessary to quantify Caason's interest in the shares, since it was common ground that their value was far beyond the $10 million paid for the Shares. Any expenses incurred in the process of obtaining the shareholding cannot be considered a loss suffered.
This is an interesting position for the Court to take: it assumes, without explicitly setting out the cash flows, that despite the additional royalties payable and the costs incurred (which presumably included higher funding costs) Caason was better off without the deal with Bakers. Caason might have been assisted in its case strategy by setting out clear 'but for' and actual scenarios and their associated cash flows and hence determining whether any losses had been sustained.
The judgment highlights a few potential issues for plaintiffs and the experts quantifying their losses:
- The importance of asking the expert the right question. In this case the expert was asked to value all of the shares in Newco rather than to quantify Bakers' loss. Had an expert been asked to quantify the loss, he or she would probably have addressed the issue of minority interest discount.
- The importance of using all existing relevant data.
- The need for a careful consideration of the use of hindsight in arriving at a valuation of an asset.
- The importance of setting out an expert's reasoning, even if it is not an arithmetic calculation.
- The need to consider 'but for' and actual scenarios and their associated cash flows when assessing damage.
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