This case illustrates that where an expert determination clause does not specify a valuation methodology to be adopted, it will be up to the expert to determine the appropriate methodology and the Court will not interfere with that decision.  Contracting parties who have a preference for a particular valuation methodology should ensure that the contract clearly stipulates that methodology.

Seven, Nine and Ten were parties to a Shareholders’ Agreement in relation to their respective one third investment in TX Australia Pty Ltd (TXA) (SHA).  On 14 June 2017, the directors of Ten resolved to appoint voluntary administrators and on 30 June 2017 receivers and managers were appointed to the assets of Ten.  TXA took the view that this constituted an event of default in relation to Ten under the SHA (which then triggered a compulsory disposal regime under which Ten was deemed to have offered its shares to Seven and Nine).  The SHA provided that in the absence of agreement between the parties, the price for the TXA shares held by Ten (as a defaulting shareholder) would be “a price determined by [TXA’s] auditor” who was to “act as an expert and whose decision will be final and binding” (clause 10.2(b)(ii)).  However the SHA did not specify a standard or methodology for determining “price”.

PWC (as TXA’s auditor) determined the value of Ten’s shareholding in TXA to be nil, using a market value methodology.  TXA as agent for Ten then offered the shares to Seven and Nine for a total of $1.00 and Seven and Nine accepted the offer.  Ten then argued that PWC should have determined the price based on a “fair and reasonable value” rather than a “market value”.

Stevenson J in the Supreme Court of New South Wales refused to find that clause 10.2(b)(ii) was void for uncertainty.  There was no “contractual vacuum” but rather the SHA left it to PWC to determine the methodology to be adopted.

Stevenson J also held that where parties have not directed an expert to adopt a particular methodology, it was not for the Court to interfere in an expert’s decision as to the methodology to be adopted.

In any case, His Honor found that PWC was correct to apply a “market value” pricing methodology because:

  • determination of “fair and reasonable” involves consideration of what is fair or reasonable in light of the individual circumstances of the vendor and purchaser.  However in this case, where the shares would be sold to a third party if Seven and Nine had not accepted the offer, the circumstances of that third party might also have to be considered.  This could give rise to a very wide ranging inquiry and variation, which was unlikely to be what the parties intended;
  • even if the parties had intended that a “fair and reasonable” methodology be used, it is unlikely they would have chosen the auditor as the expert.  While PWC was well suited to determine the market value (as it would have a detailed understanding of the financial position of TXA), it would be less suited to the more wide-ranging task of determining the fair and reasonable price;
  • the above construction of “price” was also consistent with how “price” was used elsewhere in the SHA.