FLOOD v COWPER AND ANOTHER 1980 ZLR 111 (G)

Author: Trodat Zimbabwe

FLOOD v COWPER AND ANOTHER 1980 ZLR 111 (G)

1980 ZLR p111

Flynote

Arbitration — assessment of market value of property which is not regularly bought and sold — meaning of “market value” — when arbitrator’s G exercise of discretion may be set aside.

Headnote

The phrase “market value”, when used in relation to a block of shares not quoted on a stock exchange, means the price the block would fetch on the open market, assuming inter alia that the shares would be put on the market, that neither seller nor buyer would be under _H pressure to enter Into the sale nor motivated by subjective or personal considerations in fixing a price, that they would be reasonably well­informed on all facts affecting the value of the shares, and that the method of payment would be one normally used in such transactions.

The basic purpose in any assessment of the market value of property which is not regularly sold and the regular price of which is thus not readily ascertainable, is to fix a price which is fair to both the seller and the purchaser.

1980 ZLR p112

Pittman J

Where an arbitrator has a discretion in assessing the value of property, an exercise of that discretion can be objected to only if it was not made in accordance with the submission.

Cases cited _A

Novick & Anor v Comair Holdings Ltd & Ors 1979 (2) SA 116 (W)?

Salisbury Portland Cement Co. Ltd & Anor v Edwards Timber & Lime Industries (Pvt) Ltd & Anor., 1962 R and N 30? 1962 (2) SA 167 (SR)?

Scott and Anor v Poupard and Anor., 1971 (2) SA 373 (AD)? _B Heymann’s Estate v Featherstone, 1930 EDL 105.

Case information

C C Milton, for the applicant.

R Jagger, for the first respondent.

N M R Gardener, for the second respondent. _C

Judgment

Pittman J: This is an application by Mrs. Maureen Flood for the setting aside of the award in an arbitration conducted by the first respondent, Mr Cowper, as arbitrator, between the applicant and the second respondent, Mr Humphreys. It will be convenient to refer to Mrs.Flood _D and Mr Humphreys by name, and to the first respondent as “the arbitrator”.

The purpose of the arbitration was to determine the value on the 31st January, 1979, of Mr

Humphreys’ minority shareholding in a company named Umtali Clothing Industries (Private) Limited. By 1977 16260 _E shares had been issued and fully paid up in the company, of which 8 755 were held by Mrs. Flood’s husband, and the balance of 7 505 by Mr Humphreys, being 46,5 per cent. of the total. At that time, many disputes had arisen between Mr Flood and Mr Humphreys. Several legal proceedings were launched between them, culminating in Case No. GD _F 1519/77, in which Mr Humphreys, as the petitioner, applied for an order that the company be placed under judicial management. At that time the two directorships the company had been transferred to Mrs. Flood and Mrs. Humphreys from their respective husbands.

Case No. GD 1519/77 and an action for damages for defamation _G instituted by Mr Flood against Mrs. Humphreys, Case No. GD 1142/78, were settled on the 31st January, 1979, by an agreement between the two couples which contained, amongst others, the following terms:

“(2) Mrs. Maureen Flood (hereinafter referred to as ‘Mrs. Flood’), under takes and agrees to purchase from the Petitioner his shares in the Company. H

(3) The purchase price of the shares shall be determined by an arbitrator appointed by the President of the Society of Chartered Accountants of Rhodesia, provided that the President shall be directed to appoint a person who has not had any previous dealings with the parties.

1980 ZLR p113

Pittman J

(4)(a)The Arbitrator shall, in determining the market value of the Petitioner’s shares, base his assessment on the value of the assets of the Company less the amount of its liabilities and shall take into A account all other factors which in his opinion are relevant, including ­

(i)    In determining the values of all physical assets, they shall be valued at their current market value,provided that stocks shall be valued according to normal business usage.

(ii)   The B value of the Company’s shares in Elastics & Tapes (Private) Limited shall be determined in the same manner.

(iii)  The assets of the Company and of Elastics & Tapes (Private) Limited shall include all payments madeby them to Export Sales & Investments (Private) Limited less the proper expenses of that Company, and shall further include all monies expended C by the Company on a pension scheme for Flood.

(b)    Each party shall pay his own costs of appearing before the Arbitrator save for the costs of theArbitrator himself, which costs shall be borne in equal shares by the parties.

(c)    The Arbitrator shall have all powers conferred by the Arbitration D Act [Chapter 12].”

Mr Cowper was appointed as the arbitrator, and in February, 1979, he began investigating the value of Mr Humphreys’ 7 505 shares as at the 31st January, 1979. He later agreed with the attorneys of the two couples that after making a provisional assessment of the value, he would _E give each couple an opportunity to present argument and evidence to him if either wished to persuade him to alter the assessment.

He compiled his valuation, which I shall refer to as “the first award”, on the 10th September, 1979. However, by that time he had decided that _F it would be wrong for him to follow the agreed procedure, and, after explaining the method of valuation he had adopted, he presented that award in the following form:

“Having given due consideration to the foregoing matters I have determined the value of the 16 260 fully paid shares in Umtali Clothing Industries G (Private) Limited in the sum of $240 829 and the 7 505 shares owned by Mr J A  Humphreys in the sum of $111 158.”

Neither of the two couples was willing to accept this award without being allowed to appear before the arbitrator to present argument on it. Mr and Mrs. Flood also rejected it on the ground that the arbitrator had _H misconstrued the terms of the submission, but they took no active steps, either to have the award set aside, or to be given an opportunity to present argument. Because of their inaction, Mr Humphreys, citing the arbitrator and Mr and Mrs. Flood as the respondents, made an application in Case No. GD 2026/79 for an order that the arbitrator hear argument

1980 ZLR p114

Pittman J before making his award final, alternatively, that the award be declared to be final and binding upon the four parties to the submission dated the 31st January, 1979. _A

Case No. GD 2026/79 was settled by agreement between the parties and the arbitrator on the 22nd November, 1979, when by consent the Court ordered that the award be set aside and that the matter be referred back to the arbitrator for the purpose of hearing evidence and argument from the four parties to the submission. Such evidence and argument were _B duly heard on the 13th December, 1979, and the arbitrator made his second and final award on the 6th February, 1980, in a report which ended:

“Having considered the valuation of the shares in Umtali Clothing Industries arising out of the judicial hearing held in Salisbury on December 13, C 1979, I have now determined the value of the shares of that company in the sum of $232406 and those owned by Mr J A  Humphreys in the sum of $107 270.” On the 5th March, 1980, Mrs. Flood instituted the present application, Case No. GD 438/80, in which she now seeks orders (1) that the _D award be set aside in terms of section 12 (2) of the Arbitration Act [Chapter 12] on the ground that the arbitrator misconducted the proceedings, (2) that the submission of the 30th January, 1979, be redetermined by another arbitrator, appointed according to its terms, and (3) that the arbitrator and Mr Humphreys pay the costs of the application _E jointly and severally. Both the arbitrator and Mr Humphreys filed opposing affidavits, denying that the proceedings were misconducted. In addition, Mr Humphreys seeks an order for the recognition and enforcement of the award, with costs on the attorney and client scale.

In making the first award, the arbitrator discussed in paragraph 2.2 _F of his first report the method of valuation he had to adopt. He said:

   2.2    The terms of reference appear to be both directive and restrictive in that certain conditions are set on which to base the share value.

Although the Arbitrator ‘shall take into account all other factors G which in his opinion are relevant’ he is required in sub­clause (i) to value physical assets at current market value with the exception of stock which is to be valued according to normal usage. The share in the associated company is to be valued on the same basis while sub­clause (iii) requires all payments to Export Sales and

Investments (Private) Limited less the proper expenses of that company and pension payments to H

Mr Flood to be incorporated in the valuation. It therefore seems apparent that the reference to the ‘other factors’ constitutes a consideration only of an introduction of an element of goodwill over and above the valuations of the net physical assets. I do not believe that the recognition of such other factors as may be relevant is inten­

1980 ZLR p115

Pittman J

ded to extend as far as a valuation calculated on an earnings basis. However I believe it incumbent upon me to analyse such an alternative, and my considerations of this aspect are dealt with elsewhere in A this report.”

I understand by this paragraph that because of the directive and restrictive nature of the instructions in the submission, the arbitrator considered that the only “other factor” he could take into account in valuing the shares beyond those listed in the submission was the goodwill attaching _B to them.

The arbitrator then discussed in paragraph 3 of the first report various judgments and articles which dealt with the proper method of valuing shares not listed on a stock exchange. In particular, he mentioned a dictum _C of COLMAN J, in Novick & Anor v Comair Holdings Ltd & Ors then reported in digest form at 1978 (4) SA 672­3, and now in full at 1979 (2) SA 116 (W) at 145F. In deciding how to apply section 228 of the Companies Act of South Africa, which forbids the directors of a company to dispose of the whole or greater part of its assets without _D the approval of a general meeting of the company, COLMAN, J, raised the question of how the assets sought to be disposed of should be identified as constituting the greater part of the assets of the company, and he then said:

“It seems to me that the only test which can reasonably be applied in the E application of the section is the test of value. And by that I mean market value, in the sense of the price which the assets under consideration would fetch in a bona fide sale between a willing buyer and a willing seller, both of whom are reasonably well informed about the transaction, and neither of whom is under extraordinary pressure to buy or to sell, as the case may be.

Without F reference to authority I think I am entitled to say that that is the approach to the term ‘value’ which our Courts accept in commercial contexts.” The arbitrator commented:

“The judge concluded that the only test of value was the market value G which was that which would be paid in a bona fide sale between a willing buyer and a willing seller. With respect, I believe that to determine what would constitute a fair market value, reference must be made to the fundamental guidelines of earnings and net asset value.”

He then contrasted with the judgment of COLMAN J, the following _H remarks of MAISELS, J, in Salisbury Portland Cement Co Ltd & _A Anor v Edwards Timber & Lime Industries (Pvt) Ltd & Anor 1962 R  & N  30 at 35E? 1962 (2) SA 167 (SR) at 173H:

“As Mr Welsh has submitted, the argument for the applicants rests on a misconception, it seems to me, of the function of the arbitrator, which is to

1980 ZLR p116

Pittman J

determine what the first respondent’s shares are worth, and, having determined that, to assess the compensation which should fairly and reasonably be paid to the first respondent. It is obvious that, in order to do so, he must assess the value of the second respondent and the potentials of those A assets, the profits those assets may yield in the future. I think it is idle to contend that the documents which the applicants are persisting in withholding are not relevant to this question. It is perfectly true that the Courts have said time and again that questions of compensation must be determined by reference to the price which a willing vendor might reasonably expect to obtain from a willing purchaser, cf. Raja’s case [1939] AC 302? Illovo Sugar B Estates Ltd v SAR & H, 1947 (1) SA 58 (N). Nevertheless the correct approach of the arbitrator, it seems to me, is to try and fix a price for the property which, objectively regarded, is fair and reasonable to both parties. In doing so he must have regard to all the potentials of the property. He must obviously in a case such as the present act on a purely hypothetical basis. He has no market with which to determine the value of these shares, C such as would be the case if they were the shares of a public company quoted on the Stock Exchange, and he must endeavour to obtain the material on which to base his judgment from other sources. In order to do so it seems to me to be obvious that he has to know not only what the property is but what its potentials are.” D

The arbitrator summarised the judgment of MAISELS J, as holding that “an arbitrator should endeavour to fix a price for the property being valued which, objectively regarded, is fair and reasonable to both parties”. _E

He then proceeded to assess the net value of the company’s assets, and arrived at a figure of $303 660, of which total he credited $140 169 proportionately to the shareholding of Fir. Humphreys. In paragraph 5 he said that “earnings and their resultant dividends are of fundamental importance in investment considerations”, and he proceeded to value the shares of the company on an earnings basis, in order to compare such _F a valuation with the valuation of the company’s net assets. On that basis he valued the total shareholding at $94 260, with Mr Humphreys’ shares worth $43 510. His comparisons and conclusions were embodied in para graph 6 as follows:

“6. COMPARISONS AND CONCLUSIONS

   6.1.   The very material difference in the alternative valuations arises mainly from the following causes:

   6.1.1.   The restriction in dividend payments leading to an excessive accumulation of net current assets. Ed 6.1.2. The inflationary effect of fixed asset values.

   6.1.2.   The inflationary effect of fixed asset values. H

   6.1.3.   A substantial decline in profits due to the circumstances prevailing both within the trade and the area ­ Schedule 11.

   6.2.   The main objective in the valuation is to arrive at a fair valuation to both parties, following the decision in the Salisbury Portland

1980 ZLR p117

Pittman J

Cement case. Difficulty however is encountered in this respect as two opposing factors are present ­ assets of genuine value yielding poor returns.

   6.3.   It A must be recognized that no prudent businessman would invest his capital in a venture showing abnormally low yields particularly if at the time the future of that undertaking was unpredictable and he could not be assured of a reasonably rapid improvement in the situation. The political situation in Zimbabwe Rhodesia, the war situation and the general economic outlook in the trade were all B factors conducive to caution and conservatism.

   6.4.   The alternative share valuations based on net assets at $303 660 and earnings at $94 260 produce such divergent results that one must look to other means of arriving at an acceptable conclusion.”

In paragraph 7 he decided that a dividend yield basis for valuing the _C shares would be unsatisfactory for the same reasons that made an earnings basis unsatisfactory, because dividends are merely “the end product of earnings”.

Having decided to “discard” the three methods of valuing the shares already discussed, that is, the net asset value, the earnings basis and _D the dividend yield basis, the arbitrator proceeded to elaborate a further alternative method, which he called “the discounted net asset value”.

He explained it as follows:

   8.3.   In Umtali (clothing Industries the adjusted return of $23656 (vide para. 5.3) on the adjusted capital employed of $303 660 (vide para. 4) is 7,8 per cent. which from a risk and marketability point E of view is quite inadequate when measured against alternative investments. A price earnings ratio of 12,8 is too high when considering the shares which are for sale. On March 2, 1979, the price earnings ratios of some Zimbabwe Rhodesian market leaders were as follows (vice Rhodesian Financial Gazette ­ Schedule 12): F

Afdis        11,6

CAPS        11,0

Delta        12,9

Rhobank      10,5

D. Whitehead      5,1

Gatooma Textiles    6,3

   8.4      My G view is that as the normal trading yield at valuation date is too low, a different, although possibly unorthodox approach, should be made whereby the assets themselves rather than their productive capacity are turned to account to give an investor the return he requires. In other

words a prospective purchaser who cannot see a H satisfactory trading return on current results would look to a disposal of the net assets for a fair and reasonable profit. The resultant price paid for the shares would allay his fears that his trading return was inadequate in the event of the company deciding to continue operations but at the same time he would be provided with security of capital in the event of liquidation.”

1980 ZLR p118

Pittman J

The force of the word “discounted” is partly explained in paragraph 8.5, reading:

   8.5.   In order to wind up the company in an orderly and profitable A manner certain expenses would of necessity be incurred particularly the retention of the services of the managing directors so as to obtain the best possible terms of realization. I would assume that the stock and debtors of both companies could be disposed of or collected within three months whereas the fixed assets would probably take longer and for the purpose of this exercise a period of six months B is considered reasonable.”

He then assessed the discounted net asset value by reducing the net asset value of $303 660, firstly, by the costs of running down the company, and, secondly, by accepting that certain assets and stock would be sold at 10 per cent. below their book value. See paragraph 8.7, and compare the _C corresponding items in, for example, Schedule 2 of the first report. He thus determined the net asset value of the company on winding up at the revised figure of $288 995, instead of the original value of $303 660. He then took into account the fact that a purchaser of the shares would have expected a return of approximately 10 per cent. after taxation on _D his investment, over the period of six months that it would take to wind up the company. He decided that such a return could be calculated by further discounting the discounted net asset value of $288 995, by 20 per cent., because that further discount, after company tax at the rate of 48,375 per cent., would yield a return of approximately 10 per cent. _E (actually 10,3 per cent.) to the purchaser after six months. The final figure for the discounted net asset value of all the 16 260 shares in the company thus became $240 829, with Mr Humphreys’ 7 505 shares, valued proportionately at $111158. I confess that I do not understand the mathematics of this last discounting step, but as it is not in dispute I _F have not persisted in seeking clarification of it.

During the hearing on the 13th December, 1979, the arbitrator mentioned that he had made a mistaken assessment of the value of stock in paragraph 8.7 of the first report, and that the value of G the shares should have been $107 233, instead of $111 158. Mr and Mrs. Flood, in giving evidence, stressed that Mr Humphreys had only a minority shareholding. An accountant, Mr Smit, called as a witness for Mrs. Flood, discussed the valuation of the company’s industrial buildings used by the arbitrator, the tax liability they would attract on a winding­up _H sale, and the discount figure of 20 per cent. used for the return of 10,3 per cent. after tax, which the purchaser would obtain from his investment after six months. In argument Mr Milton, for Mrs. Flood, urged that in assessing the market value of the shares, the arbitrator had had no

1980 ZLR p119

limitation placed upon him by the submission, in particular as regards an earnings basis for the valuation. He also claimed that there was no _A possibility of the company being wound up, and that “the generally accepted basis for a valuation is that of earnings”. He also asked the arbitrator to reconsider the value of the company’s immovable property, and the points discussed by Mr Smut. _B

Mr Gardener, for Mr Humphreys, argued that the submission did limit the manner in which the arbitrator could value the shares, by requiring the basis to be the value of the assets less the amount of the liabilities. However, the arbitrator was entitled to take other factors into consideration, such as the earnings potential of the shares. He said that flee question of what a willing buyer and a willing seller would agree as _C the price, was not relevant, because Mrs. Flood had to buy the shares and was not a willing purchaser. He also submitted that the fact that Mr Humphreys had a minority holding was irrelevant, because the value of his shares should be determined simply as a proportion of the value of _D the entire shareholding of the company.

In his report explaining his second award of $107270, which was again based on the discounted net asset value of the company, the arbitrator began by discussing Mr Flood’s contention that a minority shareholding should be valued by reference solely to dividends. He _E rejected this, on the ground that if a company ceased to earn dividends, but retained valuable assets, its shares would still be of value. He continued:

“My report was based on a situation such as that suggested above, F whereby a certain type of investor would foresee a profit in a company being wound up for the reason that profits had almost run out and management had decided that in order to preserve the assets, operations should terminate and the assets be sold. In reply to my question as to what he would do in the event of the company running into losses, Mr Flood said he would consider three courses of action, i.e., try and remedy the situation, suspend operations G or close down. My conclusions in my first report resulted from anticipating this very approach. Although I considered cessation rather than suspension, the effect would be much the same except that in the latter case the fixed property and possibly the plant would be retained. I also left the option open in case the remedial alternative was adopted by affording the investor a low but acceptable return until business improved. I should point out that to H achieve these objectives, the attitude and voting strength of the minority shareholder would be of great importance as his concurrence would be necessary to pass the appropriate Special Resolution to implement the winding up scheme. The notion that a minority shareholder, or at least one holding in excess of 25 per cent. of the equity, has very little influence in company affairs, is not in my view entirely correct.

1980 ZLR p120

Pittman J

It should be noted that when referring to market value generally a purchaser of shares will always take into account the subsequent saleability of those shares and it is unlikely that successors in title would be bound by the terms of the agreement relating to the payments to Export Sales and Mr A Flood’s pension scheme. These conditions are obligatory in this particular valuation but as they would not be accepted in perpetuity the concept of market value in this instance is nebulous.

In concluding my remarks on the method of valuation, I would point out that despite the restrictive conditions imposed by the terms of the agreement, 1 considered all appropriate alternatives and in arriving at the discounted net B asset value basis embodied both the net asset method as required by the agreement and the earnings method which constitutes the underlying basis of the divided yield method.” He then proceeded to justify his retention of the valuation of the company’s buildings he had used in the first award and said that he had _C decided that the pre­taxation return required by a purchaser, who anticipated that the company would be wound up, should be 22,5 per cent. and not 20 per cent. He expressed his belief that the dominating consideration in the mind of the intending investor would be the benefits to him of a winding up. He then said: _D

5.        ARGUMENT LED BY COUNSEL FOR MR HUMPHREYS­ ADVOCATE R  GARDENER

Advocate Gardener submitted that I was bound by the terms of the agreement and although I was empowered to take other matters into account was nonetheless committed to approach the valuation in the E manner laid down. He considered that the question of a willing buyer never came into it as Mrs. Flood was bound to buy in terms of an agreement which had been made an Order of Court. He likened the transaction to an expropriation of property and also drew attention to the deletion of the underlining of the word ‘market’ in clause 4 (a) (i) in order to remove the emphasis from the accepted sense of the word and whatever influence F it may have had in my deliberations. He insisted that the approach to the valuation should be objective rather than subjective. He contended that the original cost of the shares, which had been the subject of some discussion during the hearing, had nothing to do with their valuation at January 31, 1979, and that if Mr Humphreys struck a successful bargain then that was his good fortune. He also stressed the point that Mr Flood’s G own witness, Mr J JSmit, agreed with my approach. I found nothing in Advocate Gardeners argument with which I disagreed.

6.        CONCLUSIONS

My conclusions on the hearing are as follows:

6.1        The basis of valuation, i.e., the Discounted Net Asset method, is the H correct one in these circumstances.

6.2        That the terms of reference set out in clause 4 (a) of the agreement place great emphasis on thevalue of the net assets. If comprehensive reference to net assets was not an influencing factor in the compilation

1980 ZLR p121

Pittman J

of the agreement, why was it referred to in such detail? If the ‘market value’ was to be determined by reference to other factors, why were net assets mentioned at all?

6.3        Mr Flood A in evidence said than’ he would not have signed the agreement were it to be based on the asset value only. I find this difficult to comprehend as clause 4 (a) (iii) of the agreement even

creates notional assets in the form of the payments made to Export Sales, less expenses, as well as the pension scheme for Mr Flood.

6.4        An B error of calculation appearing in clause 8.7 (b) (i) of the original report will be adjusted in arriving at the final award.

6.5        Taxation adjustments will be considered and if thought fit will be made in the light of Mr Smit’sevidence.

6.6        Note should be taken of the substantial discount which arises on assets of genuine value byapplication of this method of valuation: C

Net asset value of the company per clause

                                4 of the report                                 303 660

              Discounted net asset value of the   232 406 company ­ per schedule 2

                                Discount on value of net assets ­         $71254

                                          23^,5%                                         

6.7        Notwithstanding D the causes giving rise to the restriction on dividend distribution it must be borne in mind than’ had normal declarations and payments been made over the past years the valuation of the shares would have been proportionately reduced.”

After making certain minor adjustments to the figures used in the first _E report, he then finally fixed the purchase price of Mr Humphreys’ shares at $107 720.

In her founding affidavit (paragraph 9.04), Mrs. Flood quoted paragraph 2.2 of the first report, and alleged that in it the arbitrator _F “shows a preconceived limitation of the factors he may consider and that, bearing in mind the objective of reaching a market value, he erred in imposing a limitation on the facts he was entitled to take into account”. She observed (paragraph 9.06) that nowhere in the first award did the arbitrator find the market value of the shares, and she claimed _G (paragraph 9.07) that when the arbitrator said in paragraph 6.2 that “the main objective in the valuation is to arrive at a fair valuation to both parties”, this was not in accordance with the submission, which was to determine the market value. She also complained (paragraph 9.09) that in paragraph 6.3 of the second award the arbitrator claimed that _H Mr Flood must have known that the submission (meaning the valuation?) would be based on the asset value only, whereas his valuation was based on a discounted net value basis, and not on the market value of the minority shareholding. Further to this complaint (paragraph 9.10), she said that if the agreement had been one to deter­

1980 ZLR p122

Pittman J mine the net asset value of the company and its associates, an arbitration would have been superfluous, and any competent book­keeper could have calculated the net asset value. She alleged that the arbitrator confused a “valuation” with the determination of the market value. _A Then in paragraph 9.11 she alleged that in paragraph 5 of the second award the arbitrator had misdirected himself by accepting that the question of a willing buyer never came into the matter, because she was bound to buy the shares. She said she was a willing buyer and that is why _B she signed the agreement. Finally, in paragraph 9.12 she dealt with certain assurances which she had obtained from her counsel before signing the submission, apparently in order to substantiate her claim that the arbitrator had to take into account not only the company’s assets and liabilities, but also all other factors. _C

In his replying affidavit, paragraph 3, the arbitrator pointed out that the submission required him to determine the purchase price to be paid for the shares. He went on:

“That purchase price would necessarily be the price that a willing buyer D would pay to a willing seller of the shares or, in other words, the market value. My whole aim and approach throughout was to arrive at the price that such a buyer would be prepared to pay for the particular shares concerned. The final award which I made was my genuine and honest valuation Of the market value of the said shares arrived at after deep consideration of all aspects.” E

In paragraph 6 he said:

“An intelligent examination of the provisional award shoves that I had studied the valuation from four different viewpoint but at all times had borne in mind the ‘prospective purchaser’ Who might contemplate an investment in this company. For instance, in para. 8.4 the words ‘prospective F purchaser’ can only refer to the willing buyer mentioned in paragraph 3 this Affidavit. Such a person is a fundamental characteristic of a market valued.”

In denying in paragraph 9 that there was a preconceived limitation of the factors available to him in arriving at the valuation, he said: _G

“I point out that in paragraph 4 of the provisional award I arrived fit valuation on the net asset basis? in paragraph 5 I arrived at a valuation on the earnings basis taking into account the notional assets introduced into paragraph 4 of the Agreement (Annexure 1)? in paragraph 6 I compared the results of these alternative methods and, having found a wide divergence H between them, discarded both and looked for a further alternative? in paragraph 7 I considered the dividend yield basis which I rejected because of the close association between earnings and dividends? in paragraph 8 I considered an alternative method which, for the sake of a heading or name I called the ‘discounted net asset value’ method.

1980 ZLR p123

Pittman J

10. This valuation embraces both the net asset and earnings methods and arrives at a figure which affords prospective purchaser (the willing buyer) a satisfactory yield on an investment which is based on the disposal of the A company’s assets. The yield would be attractive to a certain type of investor who would in addition know that the option existed for the company to continue operations should such a decision be taken. The situation envisaged is in [act what pertained at January 30, 1979? i.e., net assets worth $303 660 yielding a minimal and unsatisfactory return. A prospective purchaser would be in the position off obtaining a quick return on valuable assets of between 22 B per cent. and 23 per cent. with the knowledge that should a decision be taken in the light of anticipated events to continue the company’s operations he would receive a yield, albeit small, during the bridging period until restoration of normal profitable activity.” In her answering affidavit Mrs. Flood claimed that the arbitrator’s _C affidavit was inconsistent with his reports. For example, she referred to his agreement in paragraph 5 of the second report with the argument that “the question of a willing buyer never came into it as Mrs. Flood was bound to buy in terms of an agreement which had been made an order of Court “. Also, she referred to his allegedly mistaken belief that _D there was a limitation of the factors he might consider, because he had said In paragraph 2.2 of the first report that he considered “the other factors” to “constitute a consideration only of an introduction to an element of goodwill over and above the valuation of the net physical assets”. Finally, she said: _E

   14.    Ad Paragraph 16.

I admit I am disputing the amount of the final award but say it is incorrect as the amount was not determined in terms of the submission but was based On a hypothetical winding up of both Umtali Clothing Industries (Private) Limited and Elastics and Tapes (Private) Limited, F whereas the Second Respondent was not in a position to cause a winding up, and the majority shareholder has no intention of causing a winding up.

   15.      In replying generally to the First Respondent’s Affidavit I state there is no mention in the

submission that the shares must be valued on the basis G of a winding ­ up and the First Respondent erred in so valuing the shares and disregarding the evidence that a winding­up was not contemplated.”

In his replying affidavit, Mr Humphreys disagreed that Mrs. Flood would purchase his shares at their “market value”. He said that the submission provided specifically that the “purchase price” of the shares _H would be determined by an arbitrator, but he denied that the arbitrator’s function was “to determine the market value of the shares as such”. He claimed that the arbitration had been conducted in accordance with the submission, and that he was entitled to an order enforcing the award and ancillary relief arising out of the submission. Mrs. Flood’s reply was

1980 ZLR p124

Pittman J

that the arbitration had not been so conducted, and that part of the ancillary relief claimed by Mr Humphreys is to be rendered by her husband, and not by herself. _A

In my opinion, the Court’s task is to decide, first, how the submission should have been interpreted by the arbitrator? secondly, whether in fact he conducted the arbitration in accordance with that interpretation? thirdly, whether Mrs. Flood’s criticisms of his conduct are nevertheless _B valid, and, if so, whether they justify the setting aside of the award? and finally, whether the relief sought by Mr Humphreys should be ordered.

In my opinion, the prescribed duty of the arbitrator was set out with indisputable clarity in the submission. He had to fix a purchase price for _C Mr Humphreys’ shares to be paid by Mrs. Flood. That purchase price was to determined by the arbitrator (1) by assessing the market value of the shares on the 31st January, 1979 (2) by basing that assessment on the value of the assets of the company less the amount of its liabilities, and (3) by taking into account all other factors which in his opinion were _D relevant. The effect of the remaining instructions, set out in subparagraphs (i), (ii) and (iii) of the submission are quite explicit, are not in dispute, and therefore do not require discussion.

The first point to be determined is the meaning in the present context _E of the phrase “market value”. This phrase, when used in relation to a block of shares not quoted on a stock exchange, must mean the price that that block would fetch if bought on an open market. However, it is not enough to say that the phrase therefore means simply the price that Mr Humphreys’ shares would or could have brought, if he had merely _F offered them to the public at large. To assess the market value. in this context, it must be assumed not only that the shares would be put on the open market. It must also be assumed, first, that neither the seller nor the buyer would be under any pressure to enter into the sale on such a market. Secondly, it must be assumed that neither party would be _G motivated in agreeing on the price by some subjective or personal consideration such as a desire to be associated in business with the other shareholder. Thirdly, it must be assumed that both the buyer and the seller would be reasonably well­informed about all facts affecting the value of the shares. Other assumptions are also required, for example, _H that the method of payment would be one normally used in such transactions. I think that these observations are too trite to require authority to be cited in support of them. But if it were necessary to cite such authority, I would think it enough to refer as examples to the judgments

1980 ZLR p125

Pittman J

of COLMAN J, and MAISELS J, already mentioned, and that of MILLER A J.A., in Scott & Anor v Poupard & Anor 1971 (2) SA 373 (AD) _A at 381F.

My purpose in making these observations is to stress that the basic purpose in any assessment of the market value of property which is not regularly sold and the regular price of which is thus not immediately ascertainable, is to fix a price which is fair to both the seller and the _B purchaser. In my view, when a judge enlarges upon that basic purpose, he is not altering it, he is merely emphasizing one or more aspects of it relevant to the case before him. For example, when a judge holds that the market value of a property means what a willing purchaser would pay to a willing seller on the open market, he is only emphasizing, by the _C repeated use of the world “willing”, that neither party must be under any compulsion to enter into the sale, and, by the use of the phrase “on the open market”, that the property must be assumed to have been purchasable by any one of the entire group of persons, who are normally interested in buying such property. I have not attempted to find _D a reported case in which all possible aspects of the basic purpose have been listed, because it is most unlikely that such a listing has eves been attempted, and I certainly do not intend to make such an attempt now.

I have discussed this matter in detail, because I think it is of crucial _E importance in this case to appreciate that the basic task of the arbitrator was to determine a price for the shares fair to both the notional seller and the notional purchaser, because he would be justified in assuming that such a price would be acceptable to both of them, would therefore be the one agreed to by them, and would thus be a fair _F determination of their market value. Of course, in this particular submission, certain instructions were given to the arbitrator which he had to follow. The cardinal one is that he had to base his assessment on the value of the assets of the company, less the amount of its liabilities. This instruction was absolute, in the sense that he was completely barred from _G using any material other than the net asset value as the basis or foundation or starting point of the assessment. However, because of the second instruction that he take into account all other factors which in his opinion were relevant, he was not merely entitled but also obliged to consider to what extent such other factors should affect the net asset _H value.

In my view, therefore, the arbitrator must be held to have conducted the arbitration in accordance with the submission, if he used the net asset value of the company as the basis of his assessment of a price for

1980 ZLR p126

Pittman J the shares fair to both the seller and the purchaser, provided that that net asset value was calculated as prescribed, and provided that he took into account all other factors which in his opinion were relevant in _A assessing that price. I repeat that the instruction upon which this last mentioned proviso was based did not entitle the arbitrator to ignore at any stage the difference between the value of the assets of the company less the amount of its liabilities. That difference had to continue to form the basis of his final assessment, although it could be an acted or _B modified by any other factor he considered relevant.

In his replying affidavit, paragraph 3, the arbitrator said:

“My whole aim and approach throughout was to arrive at the price that (a willing buyer) would be prepared to pay for the particular shares concerned. The final award which I made was my genuine and honest valuation C of the market value of the said shares arrived at after deep consideration of all aspects.” When this passage is read with paragraph 6.2 of the first report, and with the explanation of the discounted net asset value in paragraph 8 I think it has to be accepted that the arbitrator did properly understand what the _D submission obliged him to do, and did make his award accordingly.

The major allegations in Mrs. Flood’s two affidavits are, I believe, only elaborations of aspects of her two basic complaints: first, that the arbitrator was not entitled to hold that the main objective in the valuation _E was to arrive at a fair valuation to both parties and, secondly, that he erred in imposing a limitation on the facts he was entitled to take into account.

In my judgment, the first complaint is of no substance, because it is _F based on the incorrect assumption that a valuation fair to both parties is not an assessment of the market value of the shares. The second complaint is also of no substance because it cannot be maintained that in fact the arbitrator imposed the alleged limitation. He did make three different valuations of the shares, based: (1) on the simple difference _G between the value of the assets and the amount of the liabilities? (2) on the earnings of the company? and (3) on the dividends yielded by the company, but then he discarded all these three valuations. If he had proceeded to make a Fourth valuation which did not have as its basis the difference between the value of the assets and the amount of the liabilities, _H Mrs. Flood would have been justified in claiming that he had failed to follow the submission. But his fourth valuation, on the discounted net asset value basis, was based upon that difference, and hence followed the submission.

1980 ZLR p127

Pittman J

I am aware that there are certain passages in the two reports which viewed in isolation give some support for Mrs. Flood’s second complaint. _A But I consider that a study of the steps actually taken by the arbitrator in making his final valuation shows clearly that he did in fact make it without wrongly limiting himself in his approach. In other words, I accept the explanation of his approach set out in paragraphs 6 to 10 of his replying affidavit. In this regard I wish to point out that when the arbitrator said in paragraph 2.2 of the first report that the only other _B factor he would take into account beyond those listed in the submission was the goodwill attaching to them, I think he must have meant the totality of all the various factors which would influence their market value. In effect, he said this in paragraph 7 of his replying affidavit, and I see no reason to disbelieve that statement. I therefore reject paragraph 9.04 of _CMrs. Flood’s founding affidavit. There is no substance in paragraphs 9.05 to 9.09, because they are based on an incorrect assumption of the meaning of “market value”.

Paragraph 9.10 reads: D

   9.10.   Further to paragraph 9.09 hereof I state that had the agreement been one to determine the net asset value of the two companies, an arbitration would have been superfluous, and any competent book keeper could have calculated the net asset value. The [First Respondent has confused a ‘valuation’ with the determination of the market value.”

In _E argument, the case of Heymann’s Estate v Featherstone, 1930 EDL 105 was referred to in support of this complaint. As I understand it, the point sought to be made was that instead of adopting the judicial approach required of an arbitrator, with proper consideration of all relevant factors, the arbitrator here merely indulged in a mathematical _F exercise of addition and subtraction, without taking into account mathematical imponderables such as the fact that Umtali was a district suffering economically through the war, and that Mr Humphreys’ shares were a minority holding. This complaint is really only the complaint already dealt with, and in my view Is also answered by paragraphs 6 to _G 10 of the arbitrator’s affidavit. The case of Heymann’s Estate quoted in support, merely decided that a particular agreement to obtain a valuation of immovable property in a deceased estate from two valuers was not a submission, within the meaning of the Arbitrations Act of South Africa, and that therefore the Court had no power to appoint an umpire _H when the two valuers failed to reach agreement. That case has no relevance to the present dispute.

In paragraph 9.11 Mrs. Flood again complained of the passage in paragraph 5 of the second report, in which the arbitrator expressed his

1980 ZLR p128

Pittman J agreement with the argument that the question of a willing buyer did not come into the matter because she was bound to buy. The arbitrator has nowhere dealt directly with this complaint, although he stressed in _A paragraph 3 of his affidavit the concept of a willing buyer was necessarily involved in his assessment. I have accepted paragraph 3, and I consider that his professed agreement with the passage in paragraph 5 of the second report was simply an inadvertent inaccuracy.

In paragraph 9.12 Mrs. Flood put on record an assurance received _B by her from her counsel prior to her signing the submission. Neither such assurance nor her description of how the words “and shall take into account” came to be inserted in the submission, has any evidential value, and must be ignored. _C

Finally, in paragraph 9.13 she said:

   9.13   In paragraph 7 of the second award, the Arbitrator determined the value of the shares of the whole company and on that figure based the value of the 7 505 shares owned by Mr Humphreys. This is not a D determination of the market value of the shares I agreed to buy.”

Opinions may differ as to whether the arbitrator should have assessed the market value of the minority shareholding by treating it as simply proportionate to the market value of the entire shareholding. But his assessment was a matter of discretion which could only be objected to if _E it was not made in accordance with the submission. Mrs. Flood says that it was not a determination of the market value of the shares, by which I understand her to mean that this approach is yet another example of the arbitrator’s wrong interpretation of the submission. I reject this submission, again on the ground that she has misunderstood the meaning Of _F “market value” in the submission. For the same reasons, I reject her complaint, stressed in argument, that the arbitrator had no right to assume that the company would not be a going concern. See also paragraph 10 of the arbitrator’s replying affidavit.. _G

It follows that I must dismiss the application with costs. The arbitrator and Mr Humphreys have both asked for attorney and client costs on the ground that the application was frivolous and vexatious, and Mr Humphreys adds that it was brought simply for purposes of delay. I am not satisfied that any of these allegations is correct. The case in my view _H has not been an easy one to decide, as can be judged from the inconsistencies between the two replying affidavits, and I have no reason to think that Mrs. Flood brought it in bad faith, or with an ulterior motive.

1980 ZLR p129

Pittman J

As regards Mr Humphreys’ counterclaim for enforcement of the award, Mrs. Flood has objected to paragraphs 1, 2 and 4 only on the _A ground that her application should be granted. As she has failed on that ground, the application will be granted in respect of those paragraphs, with certain minor alterations of phrasing, but with costs awarded on the ordinary scale. As regards paragraph 3, this must be altered so that effect is given only to the undertaking in paragraph 9 (b) of the _B submission.

I therefore order as follows:

1.        The application of the Applicant against the First and Second Respondents is dismissed,with costs. _C

2.        The counter­application of the Second Respondent against the Applicant is granted asfollows:

(1)     The award dated the 6th February, 1980, made by the First _D Respondent as arbitrator in terms of an Order of this Honourable Court in Case No. GD 1519/77 is hereby declared to be a judgment of this Honourable Court.

(2)     The Applicant is hereby ordered to pay to the Second _E Respondent the sum of $55 973,73, with interest thereon at the rate of 10 per centum per annum from the 6th February, 1980:

Provided that the said sum of $55973,73 and the said interest shall be payable in accordance with paragraph 6 (b) of the Agreement referred to in the said Order of this _F Honourable Court.

(3)     The Applicant shall pledge her shareholding in Umtali Clothing Industries (Private)

Limited to the Second Respondent in accordance with paragraph 9 (b) of the said _G Agreement

(4)     The Applicant shall pay the costs of the Second Respondent.

Higham, Clift & Co., Umtali, and Honey & Blanckenberg, Salisbury _H attorneys for the applicant.

Coghlan, Welsh & Guest, attorneys for the first respondent.

Gargan Bros & Chadder, Umtali, and Bowles Brighton & Cole Bowen, attorneys for the second respondent.