The Court affirmed the general principle that, in deciding which valuation method to adopt in cases of oppression, it is ultimately concerned with compensating the oppressed party for the fair value of their loss. In calculating an amount for goodwill where the oppression was the misappropriation of a company name, the Court added a premium for the use of the name to the costs of transferring the name.
Mr Cheal and Ms Fitzpatrick operated a business for the manufacture and sale of surfboards, on behalf of a company which formerly traded as Chilli Surfboards Pty Ltd (Chilli 1). Following the breakdown of their relationship, Mr Cheal established a competing business also named Chilli Surfboards Pty Ltd (Chilli 2) and in doing so, diverted Chilli 1’s business to Chilli 2. The Chilli trademark belonged to Mr Cheal.
In earlier proceedings, Ms Fitzpatrick successfully established that Mr Cheal’s actions in appropriating the company name and any goodwill associated with that name amounted to oppressive conduct in breach of s232 of the Corporations Act 2001 (Cth), and also a breach of his duties as a director of Chilli 1. The Court ordered that Mr Cheal pay equitable compensation to Ms Fitzpatrick by acquiring her shares in Chilli 1 at a value based on half of the shareholders equity in the books of the company, plus an amount for goodwill. The parties elected for the Court to determine the amount of the goodwill, which was the subject of the current proceedings.
Ms Fitzpatrick submitted that the goodwill should be assessed by reference to the costs incurred by Mr Cheal in procuring the transfer of the company name from Chilli 1 to Chilli 2, which she calculated at approximately $5,000. Mr Cheal submitted that there was no evidence that Chilli 1’s company name and goodwill had any value beyond that associated with the Chilli trade marks.
The Court firstly noted that, in valuing an oppressed shareholder’s interest, its aim is to compensate the shareholder and put them in the position they would have been in, had the oppression not occurred. The Court’s key concern is determining the fair value of the loss incurred and it will err, if necessary, on the side of the oppressed party.
In this case, the Court accepted that most of the value of the goodwill of Chilli 1’s business was in its ability to use the trademarks belonging to Mr Cheal. Nevertheless, the fact that Mr Cheal chose to carry on a competing business using Chilli 1’s company name demonstrated that he considered there to be value in the use of the company name. Further, the Court considered that a fair price for Ms Fitzgerald’s shares required recognition of the fact that, by appropriating the company name in an oppressive manner, Mr Cheal had avoided paying the premium that Ms Fitzgerald might have demanded had her consent been requested.
The Court considered that a reasonable value attributable to the fact that Chilli 1 could have restrained the use of its name by another company and demand a premium for its consent to a change of name was $3,500. When added to the costs involved in the registration of the transfer of company name (which the Court valued at $500 rather than the $5,000 asserted by Ms Fitzpatrick), the total value of Chilli 1’s goodwill was calculated at $4,000.