#23 Lessons from the Courtroom – Valuing an ‘oppressed’ shareholder(s) interest

A recent judgment issued in the Supreme Court of Western Australia has provided further clarification for valuers when undertaking a valuation of a minority interest held by a shareholder(s) whereby they have instigated shareholder oppression proceedings.

Judge Martin, in the matter of Russell -v- Lee Holdings Pty Ltd [No 3] [2020] WASC 346, stated that ‘… the pro rata value per share …[is to be used] as the floor price … [from which any buyout of another shareholder(s) interest can occur].’

Historically case law has offered guidance to business valuation experts on the objective of the valuation in matters involving shareholder oppression. Derrington J, in Scottish Co-operative Wholesale Society v Meyer [1959] AC 324, informed us that the principle is that the oppressors should not obtain the benefit of their oppressive conduct. 

Significantly, in this case, Judge Martin utilised this ‘floor price’ to instigate a private bidding process between the two litigating shareholder groups whereby each group was permitted to submit an offer price to acquire the other group’s shares, but at a value not less than the pro-rata interest (or floor price).

Some of the key facts in relation to the valuation component of Russell -v- Lee Holdings Pty Ltd [No 3] [2020] WASC 346 are as follows:

Lee Holdings was the parent company with two subsidiaries, Lee Bros and Lee Pastoral Pty Ltd [13].

The shareholding of Lee Holdings was as follows [19 – 28, 105]:

• One A-Class governing share to R (deceased in July 2016). The attached rights of unilateral control were relinquished upon death and transferred to B Class share.
• One B-Class governing share to F
• 63,122 C-Class shares (non-voting) as follows:

1. § 21,041 to S
2. § 21,041 to N
3. § 21,040 to J

The ‘oppressive conduct’ was, in part, in relation to a New Share Issue in Lee Bros to the benefit of F and J (at the detriment of S & N) in the days leading up to the death of R [81 – 103, 106].

Judge Martin, by Orders on 16 May 2019, granted leave to adduce expert accounting evidence was sought as to the value of Lee Holdings including the two subsidiaries, Lee Bros and Lee Pastoral Pty Ltd [63].

Mr D of KM, acting for the Plaintiffs, assessed the value of Lee Holdings at $13,597,213 on a net asset basis (63 - 66). 

Mr A of BDO, acting for the defendants, responded to the report of Mr D and included in his assessment issues of possible discounts upon share values essentially based on considerations of lack of control and lack of marketability of the valued shares. 

Mr A calculated a share price based on the net asset value ascribed by Mr D and divided that aggregate net worth sum by the 63,124 shares as issued in Lee Holdings generated a result of $215.40 per each issued share in Lee Holdings, treating all of those shares equally. 

Mr A then concluded that discounts should be applied to the non-voting C Class Shares (presumably having regard to the existence of the B Class Share and the rights attached to that share) in the order of 30% -50% for the Lack of Control and 30% - 40% for the Lack of Marketability [63 – 66]. 

Judge Martin did not accept the position of Mr A and effectively dismissed any notion that such discounts should apply to the non-voting C Class Shares in this case, but did accept the share price calculated by Mr A of $215.40 as the ‘floor price’ for the sealed bid to be submitted under the mutual offer process orders that came to be issued [67].  

In summary, the decision handed down by Judge Martin in Russell -v- Lee Holdings Pty Ltd [No 3] [2020] WASC 346 provides further support to the notion that the most accurate valuation approach to be applied in matters involving shareholder oppression is the pro-rata value of the Equity Value of an entity.

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