Network Ten Pty Ltd v TX Australia Pty Ltd

BATHURST CJ: This is an appeal from a decision of a judge of the Equity Division of the Court declaring that the first respondent, TX Australia Pty Ltd (TXA), was required by a Shareholders Agreement between itself, the appellant, Network Ten Pty Ltd (Ten), and the second and third respondents, Nine Network Australia Pty Ltd (Nine) and Seven Network (Operations) Ltd (Seven) to register a transfer of Ten’s shares in TXA to Nine and Seven. As will be seen, the transfers were for nominal consideration.

At all material times, Seven, Nine and Ten were the only shareholders in TXA. TXA is a joint venture company established for the purpose of acquiring certain assets from its shareholders and using the assets so acquired to supply transmission and retransmission facilities to them.

The relationship between TXA and its shareholders was governed by a Shareholders Agreement between them dated 14 December 1999 (the Agreement). Generally speaking, the Agreement provided that, on the happening of certain events, including the appointment of a receiver to the assets or undertaking of a shareholder, the shareholder in question would be “deemed to have given a transfer notice” to the other two shareholders. Effectively, the defaulting shareholder would be taken to have offered to sell its shares to the other two shareholders at an agreed price, or, failing agreement, at a price to be determined by the auditor of TXA acting “as an expert”, whose decision would be “final and binding”.

On 14 June 2017, Ten was placed into voluntary administration, and on 30 June 2017, receivers and managers were appointed to its assets. The provisions of the Agreement to which I have referred at [3] above were thereby invoked. The parties were unable to agree on the sale price for the shares, and on 30 August 2017, TXA engaged its auditor, PricewaterhouseCoopers Australia (PwC), to determine the price.

On 19 January 2018, PwC provided TXA with a document described as a “valuation” of Ten’s shares in TXA (the PwC Report). TXA contended that the conclusion of that document was that Ten’s shares had no value and should be transferred for nominal consideration. Accordingly, as agent for Ten, TXA offered Ten’s shares to Seven and Nine for a total consideration of $1. That offer was accepted by Seven and Nine.

Ten contended that it was not obliged to transfer its shares at that price. First, it contended that PwC had not fulfilled the requirement in cl 10.2(b)(ii) of the Agreement to determine a “price”, or that if they had, that price was $42.953 million. Alternatively, if PwC had determined a different price, Ten claimed that, by relying on “market value” in making the determination, PwC had not determined the price as required by cl 10.2(b)(ii) of the Agreement, and therefore, Ten was not obliged to transfer its shares.

By contrast, Seven, Nine and TXA contended that PwC’s reliance on the concept of “market value” was in accordance with the Agreement, that PwC had determined that the shares had no value, and that the transfer price was therefore nominal or “nil”.

The primary judge accepted the respondents’ contentions and accordingly made a declaration that TXA was required to register the transfer of Ten’s shares in TXA to Seven and Nine.

To understand the issues and the reasoning of the primary judge, it is necessary to refer to the provisions of the Agreement and the PwC Report in some detail.

The recitals to the Agreement stated that the “Shareholders” (Seven, Nine and Ten) had agreed to incorporate TXA for “the sole purpose of establishing and operating the Business on their behalf”. The “Business” was defined in cl 1.1 of the Agreement as “the business of facilitating the roll out of digital broadcasting equipment located at each Site and each Leasehold Site and maximising the efficiency of the use of analogue and digital transmitters and translator facilities”.

To give effect to that objective, cl 2 of the Agreement obliged Seven, Nine and Ten to transfer “free of any Encumbrance” certain “Sites” and “Leasehold Sites” set out in Schedules to the Agreement, shares in certain subsidiary companies, a tower on a certain “Site” owned equally by Seven and Ten, and equipment described as the “Nine Equipment”, the “Ten Equipment” and the “Seven Equipment”, details of which were also set out in Schedules to the Agreement. It is unnecessary to specify the assets to be transferred in any further detail.

Clause 2.30 contained an acknowledgment by each of the Shareholders that their “initial capital contributions” to TXA, including the value of each “Site” and “Leasehold Site”, was $2,118,520.00 each, and that they would procure TXA “to issue to each of them 2,118,520 $1.00 fully paid ordinary shares” equalling the value of such capital contribution.

Clause 2.32 was in the following terms:

Clause 3.1 set out the objectives and obligations of the Shareholders under the Agreement. So far as it is relevant, it was in the following terms:

Clause 5.3 provided that each Shareholder was entitled to appoint a director to the board of directors of TXA for every 16.66% of the issued capital of TXA which the Shareholder owned beneficially and that a Shareholder was not entitled to appoint a director if it owned less than 16.66% of the issued capital of TXA.

Clause 6.1 provided that decisions of TXA in respect of certain matters “shall only be effective if made with the prior consent and approval of at least 75% of the members” of the board of directors of TXA. These decisions included those in respect of “the amount of capital to be contributed by the Shareholders for the purposes of the conduct of the Business whether by way of debt or equity”.

Clause 7.2 provided for the appointment of an auditor by agreement of the Shareholders.

Clause 8 dealt with the obligation of each Shareholder to contribute to funding and provided for share dilution in respect of a failure to do so. Relevantly, it provided as follows:

Clause 9 contained pre-emptive rights provisions. So far as it is relevant, it provided as follows:

Clause 10 dealt with default. Relevantly, it was in the following terms:

It will be seen that, under cl 10.2(c), unlike the pre-emptive rights provisions in cl 9, the defaulting Shareholder had no right to offer its shares to a third party if the other Shareholders did not agree to acquire its shares. Rather, that right was vested in the non-defaulting Shareholders. No argument was addressed to the question of whether, if the non-defaulting Shareholders declined to purchase their shares or exercise their rights under cl 10.2(c), the defaulting Shareholder could avail itself of the pre-emptive rights provisions in cl 9.

It should also be noted that cl 13 of the Agreement provided for disputes to be the subject of expert determination. No reliance was placed on this provision by any party.

In a letter of 7 August 2017 from Ms Eliza Penny, a partner at PwC, to Mr Paul Mullen, the executive chairman of TXA, Ms Penny stated that PwC’s ability to undertake the work to determine the “price” for the purpose of cl 10.2 of the Agreement depended upon the following:

In a response dated 21 August 2017, Mr Mullen indicated that PwC should assume that “price” referred to “market value – namely, the amount which a willing and knowledgeable, but not anxious, purchaser would pay a willing and knowledgeable, but not anxious, vendor for the asset in question”.

PwC’s engagement letter was dated 30 August 2017 and was addressed to TXA. So far as it is relevant, it was in the following terms:

On 7 November 2017, TXA wrote to PwC stating that they had written to the legal advisors to the receivers and managers of Ten on two occasions, inviting Ten to supply “information” or “submissions” on “the valuation methodology that the auditor may choose to use in the determination”, but had not received any response.

On 20 November 2017, Mr Mullen sent an email to Mr Richard Stewart, the partner at PwC who had been nominated in the engagement letter as the person responsible for the valuation. The email was in the following terms:

On 19 January 2018, PwC produced its Report. The Report was entitled “TX Australia Pty Ltd: Valuation of Network Ten Pty Ltd’s shareholding in TX Australia Pty Ltd as at 30 June 2017”.

The Report included a covering letter from Mr Stewart to Mr Mullen in the following terms:

Under the heading “Our scope and process”, the following comments were made:

Alongside the heading to the executive summary of the Report appeared the statement that “Our valuation of Ten’s share is based on a number of assumptions and represents one of what may be a number of possibilities”. The following comments then appeared in the executive summary:

There appeared underneath that summary a sensitivity analysis table which assumed various fees payable under a commercial contract for the provision of the services provided by TXA. Significantly, the outcome referred to as being based on the “ABC fee proposal”, namely, the outcome with a contractual fee of $7.3 million resulting in an equity value of $42.953 million, was the only highlighted portion of the sensitivity analysis table. The table appeared as follows:

Alongside the heading “Industry overview” appeared the statement that “While TXA is in the transmission and retransmission industry, the Company is heavily dependent on the performance and profile of the Free-To-Air Television industry”. The following remarks were then made in that section:

The “Industry overview” also stated that “TXA is in a unique industry due to the fact there are limited providers and large economies of scale”. Under that heading, the following comments were made:

The Report included a section entitled “Company overview”. Alongside the heading to that section, the following comments were made:

The following comments were then made in that section:

The Report contained a financial forecast for the period from the 2018 financial year to the 2022 financial year. It forecast ongoing “Shareholder Contributions”, totalling $1.5 million per annum.

In a section of the Report entitled “Approach”, the following remarks were made:

This section was followed by a page entitled “Potential scenarios and valuation outcomes”, in which the results of analyses based on various assumptions were summarised. Under the heading “Seven 50%/Nine 50% (Seven and Nine purchase the holding)”, two scenarios of relevance were set out:

Under the heading “Seven 33%, Nine 33%, Financial Buyer 33%”, the following scenario is of relevance:

Under the heading “Seven 33%, Nine 33%, Ten/CBS 33%” the following scenario is of relevance:

A note to these scenarios stated that all values presented were “based on a commercial fee arrangement with Ten of $7.3m per year. If a commercial fee of $3.2m per annum as suggested by TXA was agreed the value outcomes presented above would be $15m” (presumably, rather than $42.9 million).

Immediately following this section, the Report contained a section entitled “Forecast cash flow assumptions”. This section included the following comments:

This part of the Report contained a further section headed “Commercial contract assumptions”:

On the same page, there was a sensitivity analysis table identical to the one to which I have referred at [32] above, with similar highlighting on the outcome with a contractual annual fee of $7.3 million producing an equity value of $42.953 million.

Appendix 1 to the Report set out the valuation methodology. So far as it is relevant, it contained the following comments:

Appendix 3 contained three discounted cash flow calculations. The first calculation dealt with two scenarios entitled “As-is (Ten retains its shareholding)” and “Ten exits and does not use the services” respectively. In each case, the methodology produced a negative enterprise value of $3,912,000 for TXA on a stand-alone basis. However, that negative enterprise value was offset by 75% of the enterprise value of two companies in respect of which TXA held a 75% interest, namely, Combined Translator Facilities Pty Ltd (CTF) and Gold Coast Translators Pty Ltd (GCT). Seventy-five percent of the enterprise value of CTF was calculated at $1,619,000 while 75% of the enterprise value of GCT was calculated at $6,339,000.

What was described in Appendix 3 as “DCF method (2 of 3)” essentially amounted to an extrapolation of these figures with an adjustment for net debt. Because of the reliance placed by the respondents on this analysis, it is helpful to set it out in full:

The third of the discounted cash flow calculations entitled “DCF method (3 of 3)” included three scenarios based on different sets of assumptions. The first scenario, entitled “Seven and Nine purchases the shareholding and Ten is charged a commercial rate”, produced an equity value for Ten’s shares of $42.953 million. A similar result was reached in respect of the third scenario, entitled “Ten/CBS purchases the shareholding to avoid paying commercial rate”. The second scenario, entitled “Financial Buyer purchases the shareholding and Ten is charged a commercial rate”, produced an equity value for the shares of $9 million.

Appendix 7 of the Report was headed “Limitations and declarations”. Under the heading “Limitations”, the following comment was made:

Under the heading “Declaration”, the following remark was made:

The primary judge identified four issues which were raised in the proceedings. Only two of them remain relevant for present purposes. The first is whether PwC was entitled to proceed on the basis that “price” in cl 10.2 referred to the “market value” of Ten’s shares rather than a fair and reasonable price”, and second, whether the PwC report “determined” the price of Ten’s shares in accordance with cl 10.2(b)(ii) of the Agreement, and if so, for what amount.

So far as the first of the two issues is concerned, the primary judge suggested that, in a sense, the point was “moot” because the parties had agreed that the price would be determined by TXA’s auditor, PwC. He noted that Ten did not suggest that the course PwC adopted was “one that was unavailable, let alone irrational”. He stated that, provided that “PwC carried out the task entrusted to it – to ‘determine’ a ‘price’”, the fact that “it may have erred or taken irrelevant matters into account does not alone ‘render the determination challengeable’”.

Notwithstanding this, the primary judge expressed the view that the word “price” in cl 10.2(b)(ii) of the Agreement meant “market value”. In rejecting the contrary submission that it meant a “fair and reasonable price”, he stated that the determination of a “fair and reasonable price” involved the consideration of “what price is ‘fair’ and ‘reasonable’ in light of the individual circumstances of the vendor and purchaser” and that “those circumstances may not be the same for each purchaser”.

The primary judge also noted that, if neither of the non-defaulting shareholders wished to purchase the shares, the defaulting shareholder could sell its shares to a third party. He said that, in that event, if “price” meant a “fair and reasonable price”, then the circumstances of that third party shareholder might have to be considered, which could give rise to “a very wide ranging inquiry and lead to a circumstance where the ‘price’ to be paid to the defaulting Shareholder might, on any given day, vary depending upon the individual circumstances of the defaulting shareholder, the non-defaulting shareholders, or the third parties in question”.

The primary judge stated that it was “unlikely that the parties would have intended this result” and that, if the parties had intended “price” to have this meaning, it was “unlikely” that they would have chosen TXA’s auditor to make a “final and binding” expert determination about that matter. He stated, referring to MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167; [2004] NSWCA 451 at [59] (MMAL Rentals), that while TXA’s auditor would be “well suited to determine independently the market value of a defaulting shareholder’s shares in TXA because it would have detailed understanding of the financial position of TXA”, he or she would be “less suited to conducting the more wide-ranging task of determining the ‘fair and reasonable price’ of the shares”.

The primary judge also stated that his preferred construction of “price” as referring to “market value” was consistent with the use of the word “price” in cl 10.4 and cl 9(f) of the Agreement.

The primary judge also concluded that PwC had “determined” the price as required by cl 10.2(b)(ii) of the Agreement. He referred to the correspondence leading up to the PwC Report which I have set out above, and the covering letter to the Report dated 19 January 2018 and the various sections of the Report which I have summarised and extracted above.

The primary judge rejected the proposition that the statement in PwC’s letter of 7 August 2017 that its ability to undertake the work was dependent upon legal advice being received amounted to “an unfulfilled condition precedent to PwC making the determination requested”. He also referred to the statement in PwC’s covering letter to the Report that “the nature of the future arrangements between Ten and TXA is a crucial element in any evaluation”. He stated that “PwC’s point was that, assuming Ten was no longer a shareholder of TXA, the amount (if any) it agreed to pay TXA for the provision of the transmission services would affect the value of its shares in TXA”. He noted that it was “common ground that there was no long term commercial contract in place between TXA and Ten at 30 June 2017”, a fact which he noted that PwC recorded in its covering letter to the Report.

The primary judge noted the submission by Ten that a “determination” of a price should be construed to mean “a single price” for the shares. He accepted that “PwC expressed a number of outcomes as to the market value of Ten’s shares depending on what it described as various ‘scenarios’”. However, he concluded that PwC had “determined” a price. His reasoning was as follows:

On this basis, the primary judge made the declaration in respect of which the appeal is brought.

Ten contended that PwC had not “determined” a price as required by the Agreement. Alternatively, it contended that PwC had determined that the “price” of the shares was $42.953 million.

By contrast, TXA, Nine and Seven contended that the primary judge was correct in concluding that PwC had determined that the “price” was a nominal amount and that it was appropriate that Ten’s shares in TXA be bought for a total sum of $1.

Senior counsel for Ten referred to the terms of the agreement which I have summarised at [10]-[21] above. He also referred to cl 86 of the constitution of TXA, which he submitted contemplated that the auditor of that company might be a firm. Self-evidently, that is what occurred in the present case.

Senior counsel for Ten submitted that what could not be done in setting a “price” was give a range of values dependent on particular circumstances, with the price to be determined by the parties to the Agreement depending on which particular set of circumstances applied.

He emphasised that the requirement was to determine a “price” on the valuation date, which he submitted was the date of default. He accepted that there was no dispute that 30 June 2017 was the appropriate date for the auditor to have used as the valuation date.

Senior counsel for Ten referred to the email of 20 November 2017 from Mr Mullen to Mr Stewart, to which I have referred at [27] above. He submitted that the assumption which Mr Mullen asked Mr Stewart to make in that email, and the reference to the “most likely commercial arrangement” between Ten and TXA demonstrated that, when it came to the PwC Report, PwC understood that it was “most likely” that there would be a commercial relationship between Ten and TXA. However, he accepted that the email could be understood as not speaking as to the likelihood of such an arrangement being made, but rather, to the most likely arrangement if such an arrangement was made.

Senior counsel for Ten also referred to the engagement letter to which I referred at [25] above. He noted that PwC stated that they were acting on the instructions from TXA that market value was the “appropriate basis” to conduct the exercise. He stated that could not be seen as “a question of judgment”.

Senior counsel for Ten noted that, under the heading “Basis of value” in the covering letter of 19 January 2018 which accompanied the PwC Report, it was noted that, if a different basis of valuation was adopted, it “may materially impact the outcome of our valuation”. He referred to the sensitivity analysis table in the executive summary of the Report, which I have extracted at [32] above, and emphasised that the highlighted outcome was the one which stated a value of $42.953 million. However, he accepted that all PwC may have been doing was determining the sensitivity of the value to their key assumptions. Nevertheless, he submitted that, having regard to the sensitivity analysis table, the outcome of the valuation could not be zero.

Senior counsel for Ten submitted that the sensitivity analysis table showed that what PwC took from the email of 20 November 2017 from Mr Mullen to Mr Stewart was that there was a “likelihood” that there would be a commercial agreement between TXA and Ten, or the holder of Ten’s television licence, and that the fee to be paid under such an arrangement was $7.313 million annually, which led to a valuation of $42.953 million.

Senior counsel for Ten referred to the various scenarios set out by PwC to which I have referred at [39]-[41] above. He accepted that the same discount rate was applied to each of those scenarios, and that there was thus no account taken of the probability or possibility that one or more of them would come to pass.

Senior counsel for Ten also referred to the “declaration” which stated that the PwC Report was prepared on a “limited scope basis”. He accepted that this may have meant that they did not verify the assumptions which they were asked to make, and also submitted that “they didn’t even accept one assumption they were asked to make”, namely, the assumption that the “most likely commercial arrangement” would have involved a fee of $3.2 million, which was stated in the email of 20 November 2017, as I have set out at [27] above.

Senior counsel for Ten then referred to the relevant passages of the reasons of the primary judge, which I have set out at [60] above. While maintaining that, if PwC had determined a price, it was $42.953 million, otherwise, he submitted that it had not determined a price. He submitted that there could not be a process of “self-selection” as envisaged by the primary judge, as that was a process required by the Agreement to be undertaken by PwC.

In relation to the contention that PwC had determined that the shares had a nominal value, senior counsel for Ten submitted that this relied entirely on analysis of the dashes used in the table which I have set out at [48] above. He submitted that this evidence was in “stark contrast” to the sensitivity analysis table which I have set out at [32] above, pointing out that, where the equity value was said to be zero, the table said so. He also referred to the statements that the equity value was zero in the table which I have set out at [39]-[41] above. As a result, he submitted that the dashes could well indicate that PwC had no view on the question. He submitted that, if the contention that the price was determined to be “nil” arose purely out of the analysis of the table which I have set out at [48] above, it was “unsustainable” and “inconsistent” with the balance of the Report.

Senior counsel for TXA referred to the fact that TXA had sought information from Ten, and that ultimately, Ten’s solicitors had written to PwC informing that firm that “No agreement for broadcasting services has been discussed by Ten and TXA, let alone agreed”.

Senior counsel for TXA submitted that PwC was engaged to value “the 33.3% [shareholding] as at 30 June 2017 and thereby a price will be determined, because the price will necessarily follow from that valuation”. He submitted that PwC undertook that task and that the only place in the PwC Report where they determined the valuation of the shareholding was in Appendix 3, to which I have referred at [47]-[49] above. He emphasised that the abbreviation “MV” was defined in the glossary as “market value”.

Senior counsel for TXA submitted that the fact that PwC referred to three scenarios did not mean that a price was not “determined” for the purpose of the Agreement. He submitted that PwC said explicitly “We don’t know if there is a contract or if there is going to be a contract … if there’s not going to be a contract, or if there’s not a contract, we say it’s X. If there is going to be a contract we say it’s Y.” He submitted that, if PwC concluded that there was no contract, but did not make allowance for the possibility of there being one or someone coming to take up the excess capacity, then there may have been a mistake, but that such a mistake was not reviewable. He also submitted that the only relevant fact was “whether Ten would enter into a commercial agreement with TXA, not whether there are other purchasers out there”. He emphasised that an agreement had not been reached between Ten and TXA, and that, if PwC should have taken the possibility of one being reached into account, then that was a non-reviewable error.

Senior counsel for TXA stated that PwC’s conclusion was expressed in the table which I have set out at [48] above. He submitted that the fact that it was not “necessarily as well set out as it could be” was immaterial. He submitted that what PwC did fulfilled the request that was made of them.

Senior counsel for TXA submitted that the proposition that the PwC Report was a “determination” that Ten’s shares’ had no value was supported by the conclusion in the table which I have set out at [39]-[41] above. He also emphasised that the concluding line of the table at [48] above was entitled “PwC MV range”, thus stating that it was PwC’s market value determination. He submitted that, by contrast, there was no similar analysis of the calculations to which I have referred at [49] above. He referred to the fact that the calculations referred to at [47] and [49] above produced an “equity value” rather than a “market value”. He submitted that the scenario on which he relied was the calculation which produced a market value.

Senior counsel for Nine adopted the submissions of TXA. She submitted that the alternative scenarios to that referred to at [48] above were simply included for “completeness”, emphasising that the negative equity value in the first scenario was factored into the second scenario. Like senior counsel for TXA, she submitted that, irrespective of PwC’s subjective views of whether the PwC Report met the requirements of the contract, it in fact did so.

Counsel for Seven effectively adopted the submissions of the other respondents.

It is important to bear in mind that the task imposed by the Agreement upon the auditor was to determine a price for the defaulting shareholders’ shares in the absence of a price being “determined and agreed by the defaulting Shareholder and [TXA]” under cl 10.2(b)(i), and that the price so determined was a price at which the non-defaulting shareholders could “procure a third party to purchase the defaulting Shareholder’s [shares]” under cl 10.2(c).

It did not appear to be in dispute that, if the expert failed to determine a price as required by cl 10.2(b)(ii) of the Agreement, but rather, performed some different task, then the determination would be liable to be set aside: see Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (2015) 90 NSWLR 367; [2015] NSWCA 275 at [74]-[75] (Belvino) and the cases there referred to.

The reasoning of the primary judge is set out at [60] above. Essentially, the primary judge concluded that the price had been determined because it was simply a matter of applying the conclusions reached in the PwC Report to the particular scenario which fitted the facts. It was on the basis that what he described as the “as is” position reflected the facts existing as at the date of the valuation that he concluded that PwC had determined that the price was “nil”.

I do not think that the auditor does what is required under cl 10.2(b)(ii) of the Agreement if all that is done is to provide a mechanism from which the price can be determined. This is for a number of reasons. First and foremost, the Agreement required the auditor to “determine” a price, not postulate a series of scenarios and the price or value which followed under each of those scenarios, leaving the parties to select which one was appropriate. The difficulty which would arise if it were up to the parties to select the appropriate scenario is amply demonstrated by a consideration of what would occur if the parties had failed to agree on which of the alternatives was appropriate.

Second, it must be remembered that the “price” to be determined is the price at which the non-defaulting shareholders may procure a third party to purchase the defaulting shareholder’s shares under cl 10.2(c). That sits uneasily with the proposition that the auditor, rather than determining the price himself or herself, merely needs to determine a “self-selecting” mechanism.

In my opinion, cl 10.2(b)(ii) requires the determination of a single price at which non-defaulting shareholders can either purchase the shares or offer them to a third party. In these circumstances, in my respectful opinion, the primary judge was incorrect in concluding that it was sufficient for PwC to determine a “self-selecting” methodology from which the parties could determine a price.

It remains to be considered if PwC in fact determined a price in the PwC Report. Ten contended that PwC determined a price of $42.953 million, while the respondents submitted that the price that was determined was “nil”.

The matter falls to be considered having regard to the whole of the PwC Report. The first thing to be noted is that the covering letter accompanying the Report stated, under the heading “Engagement variation”, that PwC had “not been able to provide a valuation which, in our view, satisfies the purpose of the original engagement letter”. The engagement letter, which I have set out at [25] above, stated that the scope and purpose of the valuation was to provide a “determination of the price”. Thus, the comment of PwC in the covering letter, although not conclusive, rather tells against the proposition that the PwC Report determined the price.

In the executive summary of the PwC Report, which I have set out at [31]-[32] above, there first appeared a reference to what was described as “possible outcomes”. After discussing these outcomes, the Report contained the sensitivity analysis table showing “equity values” based on various contractual fees which might be paid by Ten or a third party for the services provided by TXA. The sensitivity analysis table included a price which produced a zero value consistent with the conclusion that, if Ten ceased to be a customer of TXA, and Seven and Nine bore the excess operating costs and capital expenditure, no additional value would be received by Seven and Nine for Ten’s shares.

Although referred to in the executive summary itself, the sensitivity analysis table did not include the arrangement referred to in TXA’s email of 20 November 2017 to PwC, namely, a fee of $3.2 million plus power costs producing a valuation of $15 million. However, the sensitivity analysis table did include a scenario involving what was described as “an arm’s length fee” based on what had been offered to the ABC for the services provided by TXA, which resulted in an equity value of $42.953 million.

While the latter figure was highlighted in the sensitivity analysis table, neither it nor any of the other “equity values” contained in it were stated to be the price for Ten’s shares or their market value. If that amount had been the price determined, either as a figure between a range of possible values or on a stand-alone basis, it would be expected that PwC would have said so and explained the reasoning which led to that conclusion. It did not do so.

As I pointed out at [35] above, after stating that Ten was “critical to the valuation”, PwC then stated that it had “modelled a number of scenarios”. PwC did not state a view in that section of the Report on which scenario was preferred.

The Report then identified potential purchasers and potential operating scenarios. That led to the tables to which I have referred at [39]-[41] above. The next section, under the heading “Forecast cash flow assumptions”, contained four factual scenarios on which “the business” could be valued. Apart from discarding the second set of assumptions, PwC expressed no preference for any of the other alternatives. The “Commercial contract assumptions” next referred to took the matter no further. Although there was a similar sensitivity analysis table to that appearing in the executive summary, and the figure of $42.953 million was again highlighted, there was no statement that this was the price determined pursuant to the engagement.

Then followed the appendices. I have summarised them at [46]-[51] above. As I pointed out, the scenarios which they covered were based on a series of different assumptions and ultimately came to the same conclusions as those which were set out in the tables which I have discussed at [39]-[41] above.

The respondents placed particular reliance on the “DCF method (2 of 3)” section in Appendix 3, which I have extracted at [48] above, and submitted that the row entitled “Ten Shareholding (PwC MV range)” showed that PwC had determined the market value (“MV”) as zero, in other words, that a willing, but not anxious, buyer would not be prepared to pay anything for Ten’s shares. If PwC had reached that conclusion, it is surprising that they did not say so expressly, rather than simply signifying this with a dash. Further, the first scenario from which that analysis was derived, entitled “As-is (Ten retains its shareholding)”, assumes that there would be no sale of Ten’s shares, which is hardly of assistance in determining the sale price. The second scenario, entitled “Ten exits and does not use the services”, is only one of a number of assumptions PwC had previously referred to without expressing a preference for any one of them.

In these circumstances, it does not seem to me that PwC determined that the price was “nil” any more than it could be said that it determined that it was $42.953 million. The fact that they did not reach a particular determination of price is supported by the statement of limitations and the declaration in the PwC Report which I have set out at [50]-[51] above.

For these reasons, I am of the view that PwC did not determine a price. It should be noted that, in the engagement letter, PwC stated that they would provide a “single point estimate”. Had they done so, they would have “determined” a “price” for the purposes of cl 10.2(b)(ii) of the Agreement. However, they did not do so.

It follows that the appeal should be allowed on this ground.

Senior counsel for Ten referred to the analysis which I undertook on the bases on which an expert determination can be reviewed in Belvino. He referred in particular to my comments at [81] and following to the effect that it was a matter of construction as to whether the parties intended to be bound by the expert’s construction of the formula which he or she was required to use as distinct from the application of the formula so construed. He submitted that, there being no particular meaning of the word “price” in a valuer’s field of expertise, the provision should not be construed as leaving the meaning of that word to the valuer. He submitted that “price” meant a “fair and reasonable” price.

Senior counsel for Ten referred to the provisions of cl 10.3, which denied an entitlement to a return of the assets contributed to the venture on a sale of shares pursuant to cl 10.2. He submitted that what was being looked at in the circumstances of the present case was “a closely held organisation dealing with a peculiar business model where in effect objectively the value doesn’t necessarily sit for the organisations in the assets itself”. He submitted that this was the sort of model where one would be looking at a “fair” price.

Senior counsel for Ten referred to the discussion by Spigelman CJ in MMAL Rentals at [52]-[60] of the meaning of the word “fair” in the context of the expression “fair market value”, where the Chief Justice suggested that the word “fair” involved proceeding “on the assumption, which may be contrary to the facts of a particular contractual relationship, that there is no impediment to the process of bargaining, whether in terms of availability of information or restraints arising from the characteristics of a particular vendor or purchaser or otherwise”. However, he submitted that the word “price” in the agreement in question in the present case meant something broader than that concept, and involved the concept of “true value”, “real value” or “intrinsic value”.

Senior counsel for Ten, while accepting that the concept of a “fair” price may involve “subjective” considerations, submitted that it was not beyond the expertise of an auditor to take account of such considerations. He submitted that an auditor would be in a position to “know intimately how this organisation runs and how this organisation is of value” to people dealing with it. He submitted that all the expertise of the firm appointed as an auditor could be called upon to consider those matters.

Senior counsel for Ten submitted that it was correct to say that the presumed intention of the parties was that the auditor could “determine a price by reference to what the auditor thought was just and equitable” between the parties. He also submitted that, objectively, notice could be taken of the fact that the parties intended, by contributing their assets to the joint venture, to “continue to reap the benefits” to be derived from them, so that the value of those benefits was a relevant consideration.

In its written submissions, Ten also referred to a series of cases which it submitted supported the proposition that, where a contract provides for a price, and a mechanism for establishing it without specifying any criteria for its determination, the usual implication is that the price is a “fair and reasonable” price. In its submissions in reply, it rejected the proposition that these cases only involved clauses dealing with the determination or review of rent payable under a lease.

TXA submitted that “cl 10.2 speaks of a ‘price’ that is to be paid … in exchange for Ten’s shares”. It submitted that the value was to be identified by determining a “market price” for the shares in accordance with the principles in Spencer v Commonwealth (1907) 5 CLR 418; [1907] HCA 82 (Spencer). It referred to the remarks by Gleeson CJ in Franke v CIC General Insurance Ltd (1994) 33 NSWLR 373 at 376 (Franke) that “generally in a legal context requiring valuation of real or personal property, the ordinary meaning of value is exchange value”, that is, the price “which would be obtained for the property in question in an arm’s length dealing between a willing but not anxious seller and a willing but not anxious buyer”. It submitted that the concept of “exchange value” was “inherent in the concept of a ‘price’ of an asset”.

TXA submitted that its construction was supported by cl 10.2, which conferred rights on non-defaulting shareholders to sell the shares to third parties. It submitted that the construction was also supported by the provisions of cl 10.4, which provided that, if one of the events referred to in cl 10.1(b), cl 10.1(c) or cl 10.1(d) occurred, which, generally speaking, identified circumstances in which TXA had become insolvent, then the shareholders agreed to cause the liquidator to sell the business “at a price and on terms acceptable to” the shareholders. It submitted that the primary judge was correct in considering that “price” in that clause was a price “acceptable to the shareholders that could be achieved in the market”. It was submitted that it also contemplated an “exchange value”. It submitted that the reference to price in cl 9(f) was to similar effect.

TXA submitted that this approach did not unduly restrict the auditor in determining the price, who would be able to obtain information from the parties and “consider a variety of approaches” to determining a market value, for example, “discounted cash flow” analysis, a “market approach” or a “net assets” value. It also submitted that the cases relied on by Ten arose out of rental determinations.

Senior counsel for TXA submitted that the fact that the auditor was a large firm such as PwC was not a reason to distinguish what was said by Spigelman CJ in MMAL Rentals at [59], to the effect that an auditor was an inappropriate person to determine a “just and equitable” or “fair and reasonable” price. He submitted that the construction of the word “price” could not depend on the identity of the auditor, who may be a sole practitioner. He also submitted that, having regard to cl 10.3, it was inappropriate to take into account the capital contributions made at the commencement of the joint venture in determining a “fair” price.

Nine made submissions that were basically in similar terms to those made by TXA. Senior counsel for Nine emphasised that, in contrast to the cases referred to by Ten in support of the proposition that “price” meant a “fair and reasonable” price, in the present case, the identity of any buyer was unknown at the time that the expert came to determine the price, it being either a non-defaulting shareholder or a third party. She submitted that, if the price were to be determined focusing principally on the circumstances of the vendor, the non-defaulting shareholders might find it “very difficult to procure a third party to purchase the shares”, and that in those circumstances, the construction contended for by Ten would involve the real risk that the non-defaulting shareholders would be deprived of the “valuable right” of selling the shares to a third party.

Seven made similar submissions to TXA and Nine.

If PwC had determined a price by reference to the market value of Ten’s shares, it would, in my opinion, be a determination in accordance with cl 10.2(b)(ii) of the Agreement.

In contending that “price” did not equate to “market value”, but to a “fair and reasonable” price, involving the concept of “true value”, “real value” or “intrinsic value”, Ten relied on a number of cases where there was a requirement to determine a price by a mechanism such as arbitration or expert determination without the provision of any criteria by which the price was to be determined. Generally speaking, the cases state that, in those circumstances, it should be implied that the expert or arbitrator was required to determine a price which was “fair and reasonable”.

In Foley v Classique Coaches Ltd [1934] 2 KB 1, an agreement to sell petroleum at “a price to be agreed by the parties in writing and from time to time”, with disputes or differences to be referred to arbitration, was held to be enforceable, the price being a “reasonable” price according to Greer LJ at 11-12, or a “fair and reasonable” price according to Maugham LJ at 15. It may be assumed that a “fair and reasonable” price for a commodity such as petroleum could be readily ascertained.

A similar conclusion was reached by the Judicial Committee of the Privy Council in Queensland Electricity Generating Board v New Hope Collieries Pty Ltd [1989] 1 Lloyd’s Rep 205 (New Hope Collieries). The proceedings involved a variation clause in a long-term agreement for the supply of coal at a price “to be agreed”, with a comprehensive arbitration clause. It was held that the price was to be a “fair and reasonable” price. However, Sir Robin Cooke, who delivered the advice of the Board, emphasised that the decision was not a subjective one. He stated at 210 that the statement of basic intention in the recitals, together with the detailed pricing provisions for the first five years of the agreement, laid down “broad guidelines” which were likely to be of “much help in determining what is fair and reasonable for later periods”.

Australia Pacific Airports (Melbourne) Pty Ltd v The Nuance Group (Australia) Pty Ltd [2005] VSCA 133 (The Nuance Group) concerned the power of a Review Board, the Chief Executive Officer, and ultimately, an expert to determine the financial terms of a lease for part of Melbourne Airport. Nettle JA made the following comments dealing with the question of whether the Review Board and the expert had sufficient guidelines to conduct a review of the financial terms of the lease:

In Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 616; [1982] HCA 53 (Wilson Parking), Brennan J, as his Honour then was, although dissenting in the result, stated that, where there was “an hiatus in the machinery for fixing the rent, the court will lean towards a construction of the lease which treats the machinery merely as a means of ascertaining what is capable of being ascertained objectively as a fair and reasonable rent”. His Honour noted that, in Sudbrook Trading Ltd v Eggleton [1983] 1 AC 444, the House of Lords had chosen to “construe a contract which requires the price to be fixed by a valuer as a contract for sale at a fair value to be ascertained by the valuer or, in default, by the court”, referring to the judgment of Lord Fraser of Tullybelton at 483-4. Brennan J stated that it was not necessary to consider whether the decision should be followed to that extent in Australia. However, his Honour went on to say at 617 that, in the case before him, the parties “may be taken to expect that the rental would be fixed by reference to the ordinary considerations with which conveyancers are familiar, and that a fair and just rental would be fixed accordingly”.

There are a number of matters which should be noted with respect to these cases. First, there was no suggestion in any of them that the “fair and reasonable” price would be determined other than by objective criteria. That was made clear in New Hope Collieries at 210 and by Brennan J in Wilson Parking at 617. Although Nettle JA in The Nuance Group at [52] stated that what could be taken into account was “the facts and circumstances of each party” at the time of the review, his Honour did not state that this involved the application of any subjective considerations.

Ultimately, the question is to be determined by the construction of cl 10.2(b)(ii) of the Agreement. The meaning of that provision, like any other provision in a commercial contract, is to be determined by “what a reasonable businessperson would have understood [it] to mean”, requiring “consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be served by the contract”: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; see also Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]-[17], [77].

In the present case, it seems to me that the price is to be determined objectively, and in particular, in a manner which does not take account of the subjective circumstances peculiar to each party. This is for a number of reasons.

First, the object of cl 10.2(b)(ii) is to enable the price to be determined promptly in default of agreement between TXA and the defaulting shareholder. It seems to me unlikely in these circumstances that the auditor would be required to investigate and determine a price based in part on the particular subjective circumstances of each party.

Second, and importantly, the price so determined is the price at which the non-defaulting shareholders, within a limited period of 30 days, could procure a third party to purchase the shares. If the price determined by the expert took into account matters other than the actual value of the shares objectively determined, the power to procure a third party to purchase the shares within that limited period of time may in truth have very little value.

Third, the expert is TXA’s auditor. Such a person, whether a member of a large firm or otherwise, would be able to value the shares by applying, to adopt the words of Brennan J in Wilson Parking at 617, an approach by which the value will be fixed by reference to the ordinary valuation considerations with which the parties, as sophisticated commercial entities, would be aware. Such valuation considerations are matters an auditor would be well-qualified to take into account, as distinct from seeking to determine a price which is “just and equitable” by reference to matters including the subjective position of the parties: see MMAL Rentals at [52]-[60].

In those circumstances, it seems to me that PwC was correct in approaching the task by seeking to determine the “market value” or “exchange value” in accordance with the test laid down by Griffith CJ in Spencer at 431-432, namely, what would a person “desiring to buy the [shares] have had to pay for [them] on that day to a vendor willing to sell it for a fair price but not desirous to sell?”: see also Isaacs J at 441. As Gleeson CJ said in Franke at 376, exchange value (the equivalent to “market value” as set out in Spencer) is “the price, in cash or in kind, which would be obtained for the property in question in an arm’s length dealing between a willing but not anxious seller and a willing but not anxious buyer”. That would be the price which the hypothetical third party referred to in cl 10.2(c) of the Agreement would presumably be prepared to pay.

That does not mean that PwC need apply any particular valuation technique to determine the price, nor does it mean that PwC is not entitled to make an assessment of the future prospects and cash flows of TXA in making the determination. Nor would it be inappropriate to take into account the fact that the value of the shares lies in access to the assets of TXA for use by the hypothetical purchaser in its business. These are all matters which may be relevant to the price that a willing but not anxious purchaser would be prepared to pay for the shares. However, the extent to which PwC considers it appropriate to take these matters into account is a matter for its judgment. It would not be reviewable by a court.

It follows that, had PwC determined the price by reference to market value, it would have performed the task assigned to it by the Agreement. The difficulty is that, as I have already concluded at [98] above, PwC did not determine the price.

In the result, the appeal should be allowed. So far as costs are concerned, Ten has only been partly successful, and in the event that it obtains a costs order in its favour, there may be an issue as to whether those costs should be paid by TXA rather than Seven or Nine. In these circumstances, I would make the following orders:

MEAGHER JA: I agree for the reasons given by the Chief Justice that this appeal should be allowed, and the suggested consequential orders made. The position in relation to the two issues – whether PwC “determined” a price and whether “price” described market value, rather than a fair and reasonable price – may be summarised shortly.

Under cl 10.2(b), if “[t]he price for the defaulting Shareholder’s Relevant Proportion” is not agreed within a period of seven days, that price will be “a price” determined by the Company’s auditor, whose decision is to be “final”. In ordinary language, an auditor cannot finally determine a price by merely giving various opinions as to price, each of which is conditional on a particular scenario existing or later coming to pass. For the reasons of the Chief Justice at [85]–[86] above, contextual considerations only reinforce that construction. That being so, PwC’s valuation report did not determine a price within cl 10.2(b)(ii) unless, properly understood, it also identified a single scenario as prevailing or, at least, ascribed a numerical probability to all scenarios, such that the weighted sum of the prices in each scenario might constitute the “price” determined. The review of its report at [89]–[97] above and [134]–[141] in the reasons of Gleeson JA below confirms that it did neither. This conclusion disposes of the appeal.

Nevertheless, this analysis also assists to resolve the meaning of “price” in cl 10.2(b). A price determined by the auditor under sub-para (ii) of that clause will be the price to be paid for the shareholding by any purchaser, including a third party procured by a non-defaulting Shareholder under cl 10.2(c). Accordingly, the parties would not be presumed to have intended that the price so determined would turn on circumstances specific to the eventual purchaser, whether those circumstances relate to the ongoing value of the shareholding to that purchaser or any equities arising between the vendor and purchaser from past contributions. That conclusion is supported by the other reasons in [119] above. In those circumstances, the parties should be taken to have adopted the test for market value in Spencer v Commonwealth (1907) 5 CLR 418 at 431–432, which is divorced from such considerations: see Commissioner of State Revenue v Placer Dome Inc [2018] HCA 59 at [23] (Kiefel CJ, Bell, Nettle and Gordon JJ), [158]–[160] (Gageler J). The method to be applied in determining that value remained a matter for the auditor.

GLEESON JA: I agree with Bathurst CJ. I would add the following brief observations by way of emphasis on the central question raised on appeal. That question is whether for the purposes of an exit provision in a shareholders’ agreement, a company auditor acting as an expert “determined” a price at which the shares of a defaulting shareholder may be transferred to the non-defaulting shareholders or to a third party.

The terms of cl 10.2(b)(ii) of the shareholders agreement are set out at [20] of the reasons of Bathurst CJ. The shares the subject of the exit provision is the 33.3 per cent shareholding of the appellant (Ten) in the first respondent (TXA). The company auditor of TXA is PwC.

PwC was engaged by TXA to provide a valuation of a 33.3 per cent shareholding in TXA as at 30 June 2017. In its engagement letter dated 30 August 2017, PwC stated that it would normally express its conclusion as falling within a likely range, “[h]owever to comply with the requirements of this engagement, we will provide you with a single point estimate, being a figure within that likely range”. If PwC had determined such a valuation, then the price of Ten’s shareholding would have been determined by PwC for the purposes of cl 10.2(b)(ii) because price would follow from that valuation.

That PwC did not determine a valuation of Ten’s shareholding for the purpose of the exit provision is apparent from the form and content of its report. PwC said so expressly in its cover letter dated 19 January 2018 that it had not been able to provide a valuation which satisfied the purpose of its original engagement letter, namely a valuation of 33.3 per cent shareholding in TXA as at 30 June 2017. And the format of PwC’s report did not include its “Conclusions as to the value of the Company”, as envisaged in its engagement letter dated 30 August 2017.

Whilst not determinative, both of these matters provide a rather stark indicator that PwC had not determined a price of a 33.3 per cent shareholding in TXA as at 30 June 2017.

Next, notwithstanding the heading on the Executive Summary at page 8 of the PwC report “Our valuation of Ten’s share is based on a number of assumptions and represents one of what may be a number of possibilities” (emphasis added), the content of the Executive Summary makes plain that PwC had not in fact determined a single point valuation of Ten’s shareholding as at 30 June 2017; the report contains no more than an analysis of a number of scenarios involving potential purchasers and possible operating outcomes.

That this is so is reinforced by the material appearing under the heading “Approach” at page 21 of the report. There it is stated that the summary on the following page headed “Potential scenarios and valuation outcomes” outlines PwC’s analysis of “the implications and valuation outcomes of the potential purchasers and operating scenarios”. Importantly, at no point does PwC decide, settle or resolve which of the potential scenarios and valuation outcomes constitutes its determination of the price of Ten’s shareholding as at 30 June 2017. That is unsurprising given PwC’s frank acknowledgment in its cover letter to the report that it had not been able to provide a valuation that answered the description of its original engagement letter.

Insofar as TXA and the other respondents pointed to the dash (“–“) in the column in Appendix III at page 36 of the PwC report as being PwC’s determination of a negative value for the price of Ten’s shareholding as at 30 June 2017, that submission suffered from a number of obvious difficulties.

First, it sought to read out of context and in isolation one table in the appendices to the report addressing discounted cash flow calculations in respect of one of a number of scenarios.

Second, it ignored the purpose of the appendices to the report, as stated under the heading “Approach” on page 21 of the report, which was to provide the details of calculations and assumptions underpinning the various valuation scenarios analysed by PwC in the report.

Third, nowhere in the report did PwC say that the table on page 2 of 3 of Appendix III rather than any other table in Appendix III, including the table on page 3 of 3 which gave a valuation scenario assessed at $42.9 million, was PwC’s determination of the valuation of Ten’s shareholding as at 30 June 2017. Each valuation scenario analysed by PwC was no more than one of a number of possibilities considered by PwC. PwC did not fix upon any “one” of those possibilities as its determination. It follows that PwC failed to determine a price of Ten’s shareholding as at 30 June 2017 as required by cl 10.2(b)(ii) of the shareholders agreement.