Share price valuation: market value or fair and reasonable value?

The decision in TX Australia Pty Ltd v Network Ten Pty Ltd & Ors [2018] NSWSC 559 considers the issue of share price valuation and whether a method of market value or fair and reasonable value should be adopted. It is a useful case in understanding the significance of an expert's role in this determination, that will be held as final and binding.

Facts

  • Television networks Seven, Nine and Ten were all equal shareholders in TX Australia (TXA), a company supplying television transmission services in 5 Australian cities.
  • In June 2017, Ten went into voluntary administration, which TXA considered an event of default that triggered a mandatory sale of Ten’s shares in TXA to Seven and Nine.
  • In the Shareholder’s Agreement, the determination of the share had to be conducted by PwC, whose decision was final and binding.
  • PwC estimated the valuation of Ten’s shareholding in TXA to be $0 as at 30 July 2017 using market value methodology. This is because the Shareholder’s Agreement did not specify a standard for determining share price.
  • TXA, Seven and Nine argued that the share price should be determined based on market value in accordance with PwC’s valuation, whereas Ten argued that the price should be determined by a fair and reasonable value.
  • The reason why Ten argued for fair and reasonable value is because it would require PwC to consider individual circumstances which could increase its share price significantly.

Issue

Whether the methodology that PwC used was correct to determine the share price in TXA by way of market value instead of a fair and reasonable value.

Judgment

The Court found in favour of PwC’s chosen methodology of using market value to determine TXA’s share price. The Court noted it will not interfere with the method chosen by the expert in determining the share price unless another method was specified in the Shareholders Agreement.

The Court explained that regardless of this, there were four reasons why PwC was correct to construct price as market value rather than fair and reasonable value:

  1. What is fair and reasonable must involve a consideration of individual circumstances of both the vendor and purchaser. If Seven and Nine did not purchase these shares, the individual circumstances of third parties would have to be considered – unlikely the intention of the parties;
  2. PwC had a detailed understanding of TXA’s financial position to make a final and binding expert determination on price through market value, and were less suited towards conducting the wide-ranging price determination of fair and reasonable value;
  3. In deciding what is just and equitable, PwC would have drawn on an objective standard, pointing towards the method of share price by market value; and
  4. The construction of price through market value was consistent with other clauses referencing the term “price” in the Shareholder’s Agreement.

Lessons

This case is a good example of the outcomes that can occur when one insufficiently regulates a specific method or process in a shareholder’s agreement. It highlights that an expert’s determination on company valuation will not be interfered with by a Court, if no method is specified in the agreement between the parties.

Therefore:

  • If you do not want a third party to impose a valuation methodology, determine the methodology in the agreement.
  • In dealing with the methodology, you need to decide how much instruction to give to the expert in conducting the valuation.
  • Make sure that the correct terms are used which are consistent with the agreement. There is a difference between market value and fair and reasonable value (or potentially market value and fair value). A valuation on each of these bases may not yield the same result.