In this article we examine the New South Wales Court of Appeal’s decision in Network Ten Pty Ltd v TX Australia Pty Ltd [2018] NSWCA 312, where it was recently decided that ‘the tribe has NOT spoken’ in relation to Network Ten’s seemingly never-ending legal battles, setting aside the declarations of the primary judge and dismissing proceedings in relation to a joint venture expert determination clause.

In brief

  • Many may have been concerned to see the end of Network Ten when it was decided early last year that they were to sell their shareholding in TX Australia to rival networks, Seven and Nine, for a total of just $1.00.
  • It is common for investors in a closely held joint venture company to sign a Shareholders’ Agreement, and these Agreements commonly include buy/sell provisions requiring one venture to sell to the other in specific circumstances, such as insolvency.
  • Such a provision was included in the joint venture agreement between Networks Seven, Nine and Ten regulating investment in TX Australia.
  • The issue in dispute was the operation of the Shareholders’ Agreement between the Networks, with the expert determination clause (which dealt with the need for defaulting Shareholders to transfer their shareholding) failing to set out a formula or specify any criteria for determining the price of the company’s shares, only stating: “..a price determined by [TXA’s] auditor who will act as an expert and whose decision will be final and binding.”[1]
  • Network Ten went into voluntary administration in 2017 and this was taken to be an event of default as per the Shareholders’ Agreement, which triggered the compulsory disposal of Ten’s shares.

Why is this an issue?

  • The subjective term ‘price’ has an array of different interpretations in a valuation context, and the appropriate interpretation will determine which method of valuation is used.
  • The appointed auditor, PwC, did not determine a single price for the company’s shares, but instead developed a mechanism from which the single price could be determined and this was found to be insufficient.

The decision

There were two main issues on appeal.

First issue – whether the price required referred to the ‘’market value’’ of the shares in question or a ‘’fair and reasonable’’ price.

The Court held that: The price had to be determined objectively and basing it on market value would have been permissible.

What does this mean?

  • The specific valuer methodology does not have to be expressed within the Agreement in order to have a clear and concise expert determination clause.  In fact, we suggest that the valuer’s methodology should not be stated, as circumstances revolving around the business are likely to vary from the time of creation of the Agreement to the time that the valuation is required.
  • However, if desired, the valuer methodology may be implemented in order to ensure the clear understanding on the part of the valuer. Careful drafting is necessary in both circumstances in order to sufficiently assist in the valuation process.

Second issue – Whether PwC’s report determined a price as required by the Shareholders’ Agreement.

The Court held that: The mechanism that PwC established for determining a single price, was insufficient.

What does this mean?

  • The Court of Appeal did not question the valuation methodology, maintaining the primary judge’s statement: “Where the parties have not directed an expert to adopt a particular methodology, it is not for the Court to interfere in an expert’s decision as to the methodology to be adopted”[2]
  • In these expert determination clauses, we try to provide the valuer assistance through asking questions such as ‘What is a fair price that a willing, but not anxious, purchaser would pay from a willing, but not anxious, seller?’

Conclusions

This decision highlights that the parties do not need to specify a valuation methodology, however, it is critical to give the valuer guidance as to the desired outcome.

There are also other ways in which a similar objective can be achieved, including so-called buy/sell provisions.

What is a buy/sell provision?

  • A mechanism where the parties may exit the existing relationship with one or more shareholders buying the shares of the other shareholders.
  • Commonly referred to as a ‘shotgun’ provision, where the initiating shareholder may activate the shotgun by providing a notice to another shareholder of their intention to purchase that shareholder’s shares at a specified price.  That shareholder must then either sell their shares at the specified price or purchase the initiating shareholder’s shares at that same price.
  • It may provide certainty to the shareholder as it will provide clarification on the basis of how a withdrawal will occur and can assist in speeding up the dispute.

Although, there is the possibility for disparity of power between two financially imbalanced shareholders, and it may not operate effectively in cases of insolvency.

If you would like to discuss any of the points raised in this issue, please do not hesitate to get in touch.

For further information please contact:

This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article