By
cheekily offering to sell their shares in a closely-held company to a minority
shareholder at a price well in excess of what they considered the shares’ true
value in order to settle a shareholder dispute, majority shareholders gave the
High Court ammunition to justify a better payout for the departing minority
shareholder.
Alexandra Burnett sued in the High Court
to settle the value of her forty per cent minority shareholding in SciMed Ltd,
supplier of high-tech scientific equipment to research laboratories and
district health boards. She claimed to
have been frozen out of a management role within the company by majority
shareholders: father and son, Denholm and Sean Patterson.
The court was told SciMed started
business in 2009, taking over a valuable agency agreement with PerkinElmer
Inc. Listed in the US, PerkinElmer sells
and services scientific equipment.
SciMed generated 98 per cent of its revenue through the PerkinElmer
agency. Each SciMed shareholder was also
a director, with Ms Burnett responsible for sales and support. After her business relationship with the
other two directors broke down, she was removed as director.
Justice Gendall ruled that the majority
shareholders acted in an “unfairly prejudicial” manner towards Ms Burnett by
removing her as director. As a forty per
cent shareholder in a closely-held company there was an expectation she would be
involved in management. Under the
Companies Act, she was entitled to be bought out by the remaining shareholders at
fair market value. Assessing “fair
value” is difficult in closely-held companies; there is no open market.
A valuer for Ms Burnett valued the
company at about $1.5 million dollars and her forty per cent interest at $537,500. Majority shareholders valued the company at
$400,000 and the minority interest at $160,000.
Justice Gendall said the million dollar valuation was too high. This was valuing SciMed as if it were a
listed conglomerate like PerkinElmer when in fact SciMed ran an agency. Just prior to the High Court hearing, the
majority shareholders made an open offer to Ms Burnett: they would buy her out
at a price of $160,000 paid immediately with two further annual payments of
$15,000 conditional on Sci Med keeping the PerkinElmer agency, or in the
alternative they would sell to her their majority shareholding at $450,000. They emphasised that they did not wish to
sell and considered the $450,000 offer to be in excess of the shares’ worth,
but only made the sell offer as a means of settling the dispute. Justice Gendall said a $450,000 sell offer
being made by two shareholders holding a majority and who were intimately
involved in the business gave an indication of the true market value for SciMed
shares. His Honour fixed the price to be
paid Ms Burnett to buy out her forty per cent holding at $290,000 – an increase
of $100,000 over the $190,000 offered by the majority shareholders prior to the
High Court hearing.
Burnett
v. Patterson – High Court (19.08.15)
15.089