Expert determination: High Court takes a wine tour
By Timothy Lindsay & Jay Shaw
A recent High Court decision1 involving well-known Central Otago winery Peregrine Wines (PWL), which concerned a shareholder dispute arising from the application of a standard form share transfer mechanism in PWL’s constitution (the Constitution), highlights some of the key features of the expert determination process (particularly as a method of determining fair value for the purposes of shareholder buy-outs). The judgment provides important guidance for both the lawyers drafting expert determination clauses in shareholder agreements, and experts themselves in discharging their valuation mandates.
Background PWL is a boutique producer of premium (and enjoyable) Central Otago wines, specialising in Pinot Noir. The plaintiffs (the trustees of the Greg Hay Family Trust) (the Trustees and the Trust) and the defendant Peregrine Estate Limited (PEL) are the shareholders in PWL, with the Trustees holding 25.14% and PEL 74.86%. The Trustees determined to sell the Trust’s 25.14% shareholding in PWL. Accordingly, in March 2013 the Trustees approached PEL inviting them to make an offer. PEL responded with an offer of $1.568 million. The trustees, however, believed the Trust’s shares to be worth considerably more, $3.25 million. PEL was not prepared to pay the Trust’s price, but confirmed that it would buy the shares at “fair value” fixed in accordance with the valuation procedure in Clause 11.4 of the Constitution. PWL’s Constitution was a standard form ‘Avon Publishing’ document, with the relevant provision (Clause 11.4) printed without alteration. PWL appointed a valuer in accordance with Clause 11.4 (the Valuer), who produced a valuation report (the Valuation Report) determining the “fair value” of the Trust’s shares to be $2.62 million. PEL declined to complete a purchase at this figure and instead engaged its own advisor who provided an alternative fair value assessment of $1.275 million. High Court proceedings ensued. The Trustees sought specific performance (by way of summary judgement) of PEL’s obligation to buy the shares at the Valuer’s fair value of $2.62 million. High Court decision The High Court upheld the Trustee’s application for summary judgment and ordered PEL to perform its obligation to buy the Trust’s shares at the Valuer’s valuation of $2.62 million. In doing so, Matthews J made three key findings, each of which provides important guidance for drafters of expert determination clauses and valuers alike: • The Valuer had fixed “fair value” for the purposes of Clause 11.4 of the Constitution; • The valuation was final and binding on the Trustees and PEL; and • The valuation also fixed “fair value” for the purposes of s149 of the Companies Act. Did the expert fix “fair value” for the purposes of Clause 11.4 of the Constitution? Yes. The High Court highlighted two key pieces of evidence which, in the Court’s view, made it unarguable that the “figure arrived at is other than the fair value required under clause 11”: