WORLDWIDE NZ LLC AND ANOR V QPAM LIMITED AND ORS HC AK CIV 2006-404-1827

WORLDWIDE NZ LLC AND ANOR V QPAM LIMITED AND ORS HC AK CIV 2006-404-1827 29 August 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-1827UNDER The Companies Act 1993 BETWEEN WORLDWIDE NZ LLC First Plaintiff AND JOHN JAMES GOSNEY Second Plaintiff AND QPAM LIMITED First Defendant AND JACOBSEN VENUE MANAGEMENT NEW ZEALAND LTD Second Defendant AND JACOBSEN F.T. PTY LTD Third Defendant AND JACOBSEN VENUE MANAGEMENT PTY LTD Fourth Defendant Hearing: 21 July 2008 Appearances: Mr Fisher for plaintiff Mr A Sorrell first defendant Mr C Browne for Second, Third and Fourth defendant Judgment: 29 August 2008 at 4 p.m.JUDGMENT OF ASSOCIATE JUDGE DOOGUEThis judgment was delivered by me on29.08.08 at 4 pm, pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateCounselM Fisher, Barrister, PO Box 3236, Shortland Street, Auckland Mr A Sorrell, Barrister, Auckland Wilson Harle (C Browne), P O Box 4539, AucklandIntroduction[1] The plaintiff in this long running litigation has filed and served an application seeking orders against the defendants that they provide further and better discovery. The issues involving the second to the fourth defendant which arose because of the application have been resolved by way of a consent order. There remains the application against the first defendant. [2] The application had annexed to it a 'schedule of documents' which the plaintiff said the defendant ought to discover. The basis which the plaintiff advanced for asserting that the scheduled documents ought to be discovered was, briefly, as follows.In this case it is necessary to value certain shares/units in QPAM Limited/Quay Park Arena Management Trust. The plaintiff has retained an expert accountant, Mr Lucas, to assist it with preparation of a valuation report. Mr Lucas has given an affidavit in support of the present application. He deposes that it is his understanding that the matters in question include the assessment of the value of Worldwide's shares/units in QPAM Limited ("QPAM")/the Quay Park Arena Management Trust ("QPAM Unit Trust") as at either 18 June 2006 or 26 April 2006. He says that in order to carry out his task he requires certain additional information and he has been asked by the solicitors for the plaintiff to tabulate that information. The schedule which is annexed to the application for further and better particulars has been prepared by Mr Lucas, I understand.[3] In his affidavit Mr Lucas says that as a general approach he considers the proper basis of valuation is based on the ability of the business to generate future cash flows. He sets out certain categories of documents concerning which there can be little argument about. These include financial forecasts and cashflow forecasts. He stated that he would need, amongst other things, to understand the business's financial position and any historical trading results at valuation date because: this provides the starting point for the valuation, including assisting in determination of whether, given expected cashflows, the entity may be exposed to any material risk of failing or distress risk.[4] He said that particular information of interest would include under this heading: a) Historical profit and loss accounts;b) Details of any related party and non-arm's length transactions; c) Details of any contingent liabilities, actual, pending or threatened litigation for or against the company; d) Any written business plans. [5] He goes on to note that as at the valuation date, which the parties are agreed is 26 April 2006, the following was the position:19. While the venture had not yet started trading, I would expect information similar to that described above to have been prepared prior to making any decision to invest.[6] On the day on which the application had been set down for hearing Mr Lucas filed a further affidavit. In that affidavit he noted that communications between the parties to the litigation had revealed that QPAM was not intending to disclose for valuation purposes any documents coming into existence after the valuation date of 26 April 2006. [7] Mr Lucas referred back to his first affidavit and reiterated that his approach to valuation involved an assessment of the ability of QPAM/the QPAM Trust to generate future cashflows and the expected extent of such cashflows. He went on to say this:All information relating to the enterprise's ability to generate future cashflows and existing at the valuation date (which I understand is 26 April 2006) would be of primary relevance to my valuation. Information coming into existence after the valuation date may also provide useful evidence of what would have been reasonable expectations of the intending vendor and purchaser at the valuation date. I did not intend to imply in my first affidavit that such post valuation information would not be relevant. The way in which I would go about valuing the units and shares would be first, to make an initial assessment based on information existing as at the valuation date, and then, secondly to look at specific relevant information coming into existence after the valuation date to confirm the reasonableness of expectations at the valuation date. What a valuer is entitled to take into account in preparing a valuation is determined as a question of law. A valuer must conform to the principles established as to the correct approach to carrying out a valuation of shares and then apply the principles enunciated in the cases to the facts of the case before him.[8] In this case, it has become clear that Mr Lucas considers that facts occurring after the date of valuation may be relevant to the valuation of the shares and units as at 26 April 2006. The first defendant does not accept that information in that category is relevant and is opposed to making discovery of it. [9] During the hearing of the application it became evident that the way in which the application had been formulated would not resolve this issue between the parties. I would not, in other words, have been prepared to give a judgment that in some way was generally declaratory of the legal position in terms that were not referable to the facts of this particular case. At my invitation, Mr Fisher sought amendment to parts of the schedule to overcome this problem. The result was that the formulation of the documents which the applicant said the first defendant was required to discover was changed into subject areas. The first of these concerned "existing agreements in relation to the operation of the arena" including agreements with Ticketmaster7 PTY Limited. I will focus on that particular class of agreements as it is representative of the matters which were at issue between the parties. It is not necessary for me to set out at length what the issues involving Ticketmaster7 Pty Limited were. As I understand it though, the position, briefly, was as follows. The promoters of the venture, when at the point of their endeavours they were attempting to obtain funding for the venture, came to an arrangement, allegedly, with Ticketmaster7 PTY Limited ("Ticketmaster") in terms of which Ticketmaster would arrange for funds to be contributed to the venture as part of a wider arrangement which also gave Ticketmaster the preferential access to ticketing events which were to take place at the venue that the parties were proposing to construct and operate. The plaintiffs causes of action, again as I understand them, include allegations that in effect the promoters gave Ticketmaster the inside running for ticketing events at the arena as an inducement to get them to contribute or procure the contribution of funds to the venture. Further, the complaint that is made is in part that the promoters did not disclose the existence of this arrangement at the point when they were negotiating possible acquisition of an interest in the project with the plaintiffs. [10] Accordingly, the applicant by its application as amended, seeks discovery of:5.2 Documents received whether before or after the valuation dateunder such agreements.[11] I have italicised those parts of the wording of the schedule which have now been amended. [12] Those agreements include any arrangement that the defendants had with Ticketmaster. [13] In the next part of my judgment I will consider whether the plaintiff is entitled to discovery of payments received under the agreements after the valuation date.The correct approach to admissibility of evidence concerning post-valuation events[14] Both sides referred me to a number of authorities which they said dealt with this issue. [15] In Wood v Wood (1985) 1 FRNZ 576, Hardie Boys J, the parties in that case were married but separated in May 1975. The Judge was required to consider whether a valuation of shares in a company that were owned by one of the parties had been correctly carried out. [16] The Judge made reference to various authorities which deal with the question of whether circumstances which occur after the valuation date can be taken into account in completing the valuation. At page 584 he said:In this case, whatever valuation date were chosen, the application of hindsight would mean no more than treating assets at their true worth, as established by subsequent events. The alternative would be to take them at their book values, which are likely to be unrealistic, and that would also be unjust. However it is not necessary to resort to the policy of the Act in order to adopt this view. For, first, the theoretical willing but not anxious vendor would not sell at a price that reflected inadequate asset values, and the like- minded theoretical purchaser would not expect to buy at such a price. And secondly, the law is clear that a valuer is required to take into account events that have occurred since the date at which the value is to be assessed; in order to determine the proper weight to attach to the circumstances pertaining at the material date: McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1, at 16; In Re Gilmer (deceased), Public Trustee v Commissioner of Stamp Duties [1929] NZLR 61, at 63. (I hesitate to rely on what was said in the House of Lords in Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426, in view of the clear distinction made between a sale and the particular situation inissue there.) Once it is accepted that the valuation is to be as at April 1982, hindsight properly enables the Totara Flat property to be brought in at close to its sale price, for the sale occurred only a few months later.[17] I pause to observe that Mr Fisher relied upon the Bwllfa and Merthyr Dare Steam Colleries case, but I am clear in the view that it does not have any application in the case of share valuations, for the reasons given by Hardie Boys J in the Wooddecision. [18] In chronological order, the first of the authorities that Hardie Boys J referred to was the re Gilmer (deceased) decision. That case involved a valuation of the assets owned by a deceased estate which comprised part of the estate and which consisted of four hotel properties. No figure had been allowed for goodwill of the hotels as licensed houses and the trustees and executors disputed the entitlement of the Commissioner to add in a component on that account. Sim J, at page 63, was clear that while the value had to be ascertained at the date of the testator's death, the Court was, in determining the question, entitled to consider all that has happened since June 1919. June 1919 was the date of death and the date at which the valuation for the purposes of the Death Duties Act 1909 was to be carried out. A key question that would have affected the valuation in 1919 was whether or not prohibition was likely to be voted in 1919 or in the near future. Interested purchasers of the business would have considered that possibility: if prohibition was adopted, the value of the business generally, and there good will in particular, would have plummeted. Sim J, in his judgment (which was given in July 1928) said:If a valuation had been made in 1919 the valuer would have been influenced, doubtless, by the view that he took of the question whether or not prohibition was likely to be carried in 1919, or in the near future. But we know now that prohibition was not carried at the poll in 1919 or at any of the succeeding polls, and that those interested in the trade appear not to have much fear of it being carried in the near future.[19] It is also clear that the Court took into account the rents and premiums obtained in connection with the hotels when they were re-let after the owner's death. [20] The only other comment that I would make on that judgment is that the basis for the valuation is not made explicit in the judgment. There is a passing reference to another case in which the Court apparently approached the valuation on the basisof what would be obtained if the property was sold in the open market by a willing seller in its then condition. It seems likely that a similar approach was taken in re Gilmer (deceased). [21] Another case that was referred to was referred to in Wood v Wood was that ofMcCathie v Federal Commissioner of Taxation (1944) 69 CLR 1. [22] McCathie was a decision of the High Court of Australia. The case involved, again, a valuation of shares in a company which were owned by a deceased person and the proceedings took the form of an appeal against the determination of the Commissioner of the Federal Estate Duty to be charged. [23] The company owned a department store in Sydney. The deceased died on 7 August 1940. The Court said that its task was to ascertain the real value of the shares at the date of death, and said that market value is not always the same as real value. Williams J said that the "market value" test should not be used 'so as to depress the value of the property by exaggerating temporary disadvantages to which it is subject at the date of valuation and failing to give proper weight to its more permanent advantages'. The Court opined that some of the valuers had taken too pessimistic a view of the value of the company's shares even without taking account of the trading results for the year ended 15 July 1941 which included results which post-dated the deceaseds death. The Judge referred to an earlier decision of his in the Daandine (unreported, HCA, 26 August 1943, Williams J) case to the following effect:I have arrived at this conclusion without taking into account the result of the trading for the year ended 15th July 1941. In that year the gross sales were £325,338, and the net profit, after paying directors' fees £6,000, was £26,000. But I will venture to repeat the remarks that I made in theDaandine Case[10] on the question whether this evidence was admissible:— "Values must be calculated in the light of circumstances which existed on the material date, in this case 30th June 1939, but subsequent events can be taken into account in order to determine the proper weight to attach to such circumstances. Subsequent sales are just as admissible in evidence as prior sales, provided that in all the circumstances they are comparable. If between the material date and the date of the subsequent sale supervening events occur which alter the conditions previously existing, the subsequent sales would not be comparable and would be useless. But if on the material date there was a tendency in a district to closer settlement and for prices to rise, subsequent sales of property in subdivision at rising prices would beevidence in support of the view that it was correct to value land in the district suitable for subdivision which was being applied for some other purpose in the light of this potential value.[24] The Court then returned to the circumstances of the case in hand and said:The accounts for the year ended 15th July 1941 would be admissible, in my opinion, on the question whether the structural alterations had affected the trade in the years ended 15th July 1938 and 1939, whether these alterations would in the future lead to improved business, and whether the grave international situation was going to interfere with the trade of a retail store. These were matters existing and to be taken into account at the date of death, and the court should not be forced to speculate as to their future when the facts are known and can speak for themselves.[25] The passage just quoted makes reference to two matters that justify the admission of material in evidence which post-dated the date of valuation. The first is the reference to "structural alterations". This was a reference to the fact that the company had spent substantial amounts of funds on re-configuring the department store in the calendar year 1937, remodelling it, demolishing internal walls, putting in new lifts and other improvements. The result of the improvements was to temporarily adversely affect the profitability of the company during the year when the alterations were being carried out. This would have impacted on the financial accounts for the financial year 1938. As I understand the judgment, the Court considered that the potential affect of the alterations may have also been felt in the financial year 1939. However, in the long term they should have lead to improved business. That appears to be the justification for the Court accepting that evidence of a period following the date of valuation was relevant. It was evidence which would fill out the picture of the longer term trends and therefore avoid the possibility that the one-off event of renovations to the store may have been anomalous and exceptional, and that they may have been off-set by improved income resulting from the improved state of the premises. [26] Another case, which provides a helpful explanation as to the admission of evidence concerning subsequent events, was that of Trustees Executors and Agency Company Limited v Commissioner of Taxes (1941) 65 CLR 33. The issue which was to be determined in that case was the value of a life interest. The deceased and her husband were killed in a car crash with the deceased surviving her husband by a matter of half an hour. She was left a life interest in his will. The Commissioner ofTaxes contended that the widow was in a dying condition at the very moment the life interest vested in her and therefore her interest had no value and should be disregarded for duty purposes. The Court accepted that the widow was moribund at the instant of the testator's death. It was also stated that the calculation of duty upon the deceased's estate was not controlled by events subsequent to the death of the deceased. In this particular case, the contention of the Commissioner that that the widow was mortally wounded prior to her death was borne out by her death shortly after the point at which her life interest came into being. [27] As Rich ACJ put it:But subsequent events may be taken into account as evidence of what were the facts at the date of the testator's death. In the present case it must have been clear that the widow's life interest was worthless even during the half- hour for which she survived her husband. In Weldon v Union Trustee Company, (1925) 36 CLR 165 , 168 , 169 , 31 ALR 145, on appeal fromJameson's Case (above), it was held that the question in a case like the present was, "What was the actual value as at the date of the testator's death of the property of which the estate of the testator consisted at his death?" It was said --You are entitled to look at any evidence relevant to that issue, even if that evidence was not available at the date of the death of the testator; but that evidence must be relevant to the question of the value as at the date of the death.The present appeal simply involves the estimation of the value of an interest for life of a dying person. For at the moment of her husband's death it must have been evident to everybody that the life of the widow was not worth an hour's purchase. Adapting what was said by Schutt, J, in Re Jameson (ubi sup.) p 12,the value should be ascertained by means of an estimate based upon the facts and probabilities in existence at the time of (the widow's death), which would ordinarily affect that value, as in the case of the valuation of life interests.-- 30 ALR 445.In my opinion the learned Judge was right in discharging the order nisi, and this appeal should be dismissed, with costs[28] Stark J also dealt with this issue in his judgment, saying:In my opinion the Commissioner was entitled, in ascertaining the value of the life interest given by Dunne to his wife, to take into consideration the fact that the wife was mortally injured at the time of his death. The case is analogous to the valuation of annuities -- cf Re Richardson, [1915] 1 Ch 353; and In re Jameson, [1925] VLR 7 , 30 ALR 444, affirmed in this court,Weldon v Union Trustee Co Ltd ., (1925) 36 CLR 165 , 31 ALR 145. InWeldon's Case it was held that in estimating the value of an annuity such estimate should not be based upon the fact that the annuitant survived the testator for twelve weeks only, but the value should be ascertained by means of an estimate based upon the facts and probabilities in existence at the time of the testator's death which would ordinarily affect that value, as in the case of a valuation of life interests -- see 36 CLR at p 167. Higgins, J, said --It is evident that you have to find the value as at the date of the death of the testator, but that you are entitled to look at any evidence relevant to that issue, even if that evidence was not available at the date of death of the testator; but that evidence must be relevant to the question of value as at the date of the death[29] The third Australian authority to which I propose to make reference isCannane v Official Trustee in Bankruptcy (1996) 136 ALR 406. In that case the first instance court had expert valuations from both sides on the question of the value of the shares. The Federal Court made the following comment concerning the degree to which events subsequent to the date of valuation may be taken into account: It is well settled that events subsequent to the date of valuation cannot be taken into account directly in making a valuation: Longworth v Commissioner of Stamp Duties (1953) 53 SR (NSW) 342 at 348–9; Weldon (Commissioner of Taxes for Victoria) v Union Trustee Co of Australia Ltd(1925) 36 CLR 165. However, it is both necessary and relevant to take into account all facts affecting value which may have been in the contemplation of the hypothetical buyer and seller. These include the probability (if there be one) or even possibility of the events happening as they in fact did. So, if it be necessary to value for some purpose a remainder interest, the fact that the life tenant died shortly after the date the valuation is required will not, of itself, be relevant, where, for example, the death of the life tenant arose from an unforeseen accident. However, if the life tenant had been suffering a life threatening illness as at the date the valuation was required, the probability of death would be a relevant matter to take into account: Trustees Executors & Agency Co Ltd v Commissioner of Taxes (Vic) (1941) 65 CLR 33. [30] Another authority to which I was referred – and which I have found of particular assistance – is Riddle v Riddle HC CHCH CIV 2005-409-000335, 17 August 2005, Fogarty J. That case was concerned with valuation of shares in a private company. The company had been incorporated to carry on the business of stock foods supplier. At the date when the parties separated the business was only just getting underway. Subsequently it began to become profitable but then in the financial year 2003 it suffered a major setback from three causes. First, a major customer discontinued buying food from the company. Second, because of amistake made in the factory toxic food was produced which killed a number of calves. Finally, there was a downturn in the diary industry from which many of the customers of the business came. Fogarty J made the following comment about the use of post-valuation events in reaching valuations:[26] I am satisfied that the use of hindsight by Mr Hadlee in Wood v Wood was orthodox. Events post valuation are commonly employed by valuers as a cross-check on judgments as to what were foreseeable or what the market demand was at the time of valuation. This is particularly so when the hindsight event occurs close to the valuation date.[31] Fogarty J went on to say:[30] Here the poor performance of the second Bio-Stock company for the year ending 30 June 2003 is a fact. But it is not a fact which verifies and reinforces factors and trends apparent on 31 December. For it was not foreseeable that a lethal dosage in the food mix would kill 286 calves. As at December 2001 an investor would have examined not only the books of the company, such as they were, but have done due diligence as to the strength of the company's relationships with its customers. There is no indication that either Mr Keogh or Mr Hadlee examined what a would be purchaser would have judged to be the strength of the relationship with customers as at 31 December when they made their valuations. [31] It cannot be presumed that because the company lost Amuri Salmon in 2002 that meant that a buyer would have anticipated and discounted for that loss on 31 December. Obviously a buyer of a business selling specialist food into the dairy sector would take into account the discretionary spending ability of dairy farmers and the risk of the farmers reducing purchasing of stock food in times of reduction and pay out. Mr Keogh appears not to have undertaken any discounting of turnover, only treating the trend as up and extrapolating it. Mr Hadlee discounted turnover because of the poor performance of the business in 2002. But he could not recall when he learned of the three factors accounting for the decline. It is possible that Mr Hadlee was not informed of the lethal dosage to the calves, as Mr Keogh deposes in his affidavit that he had considerable difficulty getting coherent explanations from the husband for the poor performance of the business post December 2002. There is no mention in Mr Hadlee's valuation of either the loss of the salmon business or the downturn in dairy farming, let alone the lethal dosage to the calves. It may be that the husband did not initially give Mr Hadlee a specific explanation as to why the sales deteriorated.[32] In essence the Court decided that an investor interested in acquiring the business would not have anticipated the loss of the customer or that a lethal dosage in the food mix would kill the calves. Nor did the experts apparently take the viewthat a downturn in the industry was something that was foreseeable by potential buyers at the date of valuation. Therefore, these post-event occurrences were not available as evidence confirming the likely suppositions that theoretical purchasers would have made about the business at the valuation date.Discussion[33] The plaintiffs assumed that any evidence of post-valuation financial performance of the QPAM entities would be relevant to the question of valuation. They relied upon the Bwllfa & Merthyr Dare Steam Colleries, however that was not a case which has any bearing on the valuation of company shares. [34] The authorities which I have examined in the previous section of this judgment, in particular, Riddle v Riddle make clear the limited basis upon which evidence of subsequent events can be admitted. In general, the subsequent performance of a company cannot be relevant because that is not a matter that would be known to prospective purchasers as at the date of the valuation. However, if an inference can be drawn from an occurrence, particularly one soon after the date of valuation, which throws light on the understanding or expectations of the theoretical purchasers before the valuation date, then it may be admissible. In this case, no such basis has been suggested by Mr Fisher nor did Mr Lucas state that was the reason for wanting the additional discovery. I therefore conclude that the evidence which the plaintiffs seek to obtain on discovery from the defendant would not be directly or indirectly relevant to a matter in issue between the parties. [35] The result is that while the documents that are sought in category 5.2 of the schedule are in existence and have not been discovered (both points being conceded by Mr Sorrell for the purposes of argument), they are not documents which the defendants are obliged to discover and therefore the facts that are necessary to confer jurisdiction on the Court under Rule 300 are not present. The application as amended must therefore be dismissed. [36] If the parties are unable to agree on the matter of costs, they should file synopses not exceeding three pages within 10 working days._____________ J.P. Doogue Associate Judge