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[2007] ZASCA 41
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Kofahl v Keiley (348/2006) [2007] ZASCA 41; [2007] SCA 41 (RSA) (29 March 2007)
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THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
Not Reportable
CASE NO 348/2006
In the matter between
JOCHEN KOFAHL
......................
Appellant
and
S L KEILEY
......................
Respondent
Coram: Streicher, Heher and Jafta JJA
Heard: 7 MARCH 2007
Delivered: 29 MARCH 2007
Summary:
Company shares – valuation – relevant factors –
onus on the plaintiff.
Neutral
citation: This judgment may be referred to as
Jochen
Kofahl v S L Keiley
[2007] SCA 41
(RSA)
___________________________________________________________
JUDGMENT
___________________________________________________________
JAFTA JA
[1] This is an appeal against a judgment by Willis J in
the Witwatersrand Local Division in an amount of US $ 100 000,00
against the
appellant in favour of the respondent in an action in
which the issues had been split. Blieden J had previously declared
that the
respondent, as a result of the appellant’s repudiation
of a contract with the respondent, was entitled to 10% of the value
of Palmerfield Ltd calculated as at 6 January 1997. The valuation was
to be done on the assumption that Palmerfield was vested with
the
exclusive licence to manufacture and sell Hydraform machines
worldwide outside Africa. Willis J placed a value of US $ 1m on
Palmerfield Ltd.
[2] The appellant, a mechanical engineer
based in Boksburg, invented a brick making machine called ‘Hydraform
Machine’
in 1988. This machine may be powered by an electrical
or diesel motor. It is compact and easily transportable. It produces
bricks
by hydraulically compressing soil mixed with a small amount of
cement. The bricks are shaped in such a way that they interlock with
each other so as to make it unnecessary to use binding material at
construction. They also provide more thermal insulation and are
rendered impermeable by applying grout or a coat of paint. These
bricks are ideally suitable for building low cost houses. The
appellant
sold the machine in South Africa and other African
countries.
Patents had been
registered in the name of companies operated by the appellant.
[3] In 1995 Mr John Carter (Carter), a businessman from
Malawi, introduced the respondent to the appellant. The respondent is
an American
businessman with a degree in economics from Yale
University and a MBA degree from Havard University. At the time he
was a partner
in a business consultancy firm known as Robert A Weaver
Junior and Associates which operated as such in the United States.
The respondent
was stationed at its branch in Washington DC.
[4] Before the parties’ meeting the appellant was
anxious to sell the machines outside Africa. He had contacted the
Cement Institute
in Argentina in the hope that it would facilitate
the introduction of his business there. He had hoped also to explore
the market
in India and he held some discussions with a third party
in that regard. After the meeting the appellant was optimistic that
the
respondent was a potential partner to successfully drive the sale
of his machine worldwide. While the respondent saw the invention
as
presenting an opportunity for him to get involved in an exciting
venture. However, the respondent could not immediately get involved
in the venture with the appellant because he was still contractually
bound to the consultancy firm. Instead and acting on behalf
of the
firm, he proposed an agreement between the appellant and the firm for
the exploitation of the invention but the latter turned
it down.
[5] However, in November 1995 before the respondent left
the consultancy firm, he concluded an oral agreement with the
appellant to
market and sell the machines in countries outside
Africa. Due to the qualities of the machines, their target market was
the developing
countries. The parties decided to use a company as a
vehicle through which the joint venture was to be carried out. For
this purpose
they agreed, together with Carter, to use Palmerfield
Limited, the latter’s dormant company registered in the British
Virgin
Islands. The appellant was allocated 80% of shares in that
company while the respondent and Carter received 10% each. They
agreed
that the appellant would grant an exclusive licence to
Palmerfield to market and sell the machines outside Africa. The
appellant
was hopeful that the respondent would raise capital for the
company.
[6] At the time Argentina had a housing backlog
amounting to millions of units. This caused enormous optimism. As a
result the respondent
gave his partners unrealistically high sales
projections for the machines. At one point he estimated that in
Argentina alone, they
were going to sell 1000 machines in five years.
In January 1996 the respondent expressed the view that they might
realize profits
in an amount of $8,5m to $20m.
[7] The appellant had appointed Oscar Termine, an
architect in Buenos Aires, as his representative in Argentina.
However, by March
1996 the appellant had run out of money whereupon
the respondent undertook to take Termine over and to pay his salary.
The respondent
remained in Washington while Termine was doing the
marketing of the machine in Argentina. As Termine could not speak
English, the
respondent engaged Ms Patricia Scott, an Argentinian who
was then working in Washington DC, to interpret for him from Spanish
to
English whenever he had a telephonic conversation with Termine. At
that time Ms Scott was working for Special Olympics International,
an
entity that was involved in the development and organisation of
sports events for the physically challenged people. She was promised
a fulltime employment at Palmerfield in the event of the business
being successful. By virtue of her professional relationship to
the
respondent, she interacted almost daily with Termine, albeit by
telephone. She visited her relatives in Argentina once a year
and
claimed to have been familiar with the housing market there as
information relating thereto was easily available. She claimed
to
have been involved in the marketing of the machines but her
involvement would not seem to have gone any further than acting as
an
interpreter and translator. She never saw a hydraform machine nor did
she know how it was operated or what kind of soil was suitable
for
use in making bricks with the machine.
[8] The marketing of the machine in Argentina took the
form of a presentation by the respondent to the Cement Institute, an
entity
representing cement companies in Argentina. They were
exhibited at major trade fairs and demonstrated to municipal and
provincial
governments. An overwhelming interest was shown in the
machine by all those who were introduced to it. Despite the extensive
marketing
and the exposure it received, no more than 8 machines had
been sold by 6 January 1997.
[9] In May 1996 the relations between the appellant and
the respondent were strained and the appellant offered the
Argentinian franchise
in respect of the machine to the respondent for
US$100 000 but the respondent declined. The joint venture was
struggling to
carry on its operations because it had no capital. It
attracted no investments. As relations between the partners continued
to deteriorate,
further attempts were made to reach an amicable
dissolution of the joint venture without success. In June 1996 Carter
made an offer
for the business in Argentina to the respondent in
exchange of his shares in Palmerfield on certain conditions. Again
the respondent
declined the offer.
[10] In September 1996 the appellant repudiated the
joint venture agreement. The respondent accepted the repudiation and
cancelled
the agreement on 6 January 1997. Meanwhile the appellant
and Carter had approached some businessmen in Guernsey in the British
Virgin
Islands to invest in the venture as they still, at that time,
had hope in its success in Argentina. A presentation was made to
potential
investors who were impressed by the machine but instead of
investing in Palmerfield, they insisted that a new company, licensed
to
sell the machine outside Africa, be formed which would be fully
controlled and managed by them. The sum of US$100 000 was raised
and a company called International Equipment Distributors Ltd (IED)
was formed to be substituted for Palmerfield in Argentina and
other
parts of the world. With a capital investment of US$100 000,
there was again optimism that IED would succeed. But this
was not to
be. In November 1996 there were clear signs that IED was going to
suffer the same fate. In order to accommodate the investors
IED was
granted additional rights to sell machines in Africa.
[11] Following the cancellation of the agreement in
January 1997, the respondent sued the appellant in the Johannesburg
High Court
for damages in the sum of US$2 300 000 which, he
claimed, represented 10% of the value of Palmerfield, had the
agreement
been properly performed. At the trial the issues of
liability and quantum were separated. Blieden J was asked to
determine liability
only. The learned Judge found that the appellant
had indeed repudiated the agreement and issued an order in the
following terms:
‘’
1.
It is declared that the plaintiff is entitled to 10% of the value of
Palmerfield Ltd (Palmerfield), calculated as at 6 January
1997 on the
assumption that Palmerfield was vested with exclusive licence to
manufacture and sell the Hydraform machines worldwide
outside Africa.
2. The matter is postponed sine die for
the purpose of the parties calculating the aforesaid value. If the
matter cannot be resolved
by the parties, leave is granted to either
of the parties to set the matter down in this court for resolution of
this issue.’
[12] Resolution of the issue eluded the parties and as a
result the matter came before Willis J for determination of the 10%
value
of the shares. The learned Judge found that such shares carried
the value of US$100 000 and ordered the appellant to pay this
amount to the respondent. The appellant unsuccessfully sought leave
against the latter order only. The appeal serves before us with
leave
of this court.
[13] The only issue in this appeal is whether the
respondent on whom the onus lay, has established the value of the
shares in question.
Palmersfield did not have assets other than the
licence to sell the machines which it must be assumed it had, nor did
it have capital
for its operations.
[14] Willis J adopted, correctly in my
view, the approach of determining what a willing reasonable buyer
would have been prepared
to pay for 10% of the shares. He referred to
Holt and Others v Inland Revenue Commissioners
[1953] 2 All ER 1499
E-H. In that case Danckwerts J said
at 1501:
‘
The
result is that I must enter into a dim world peopled by the
indeterminate spirits of fictitious or unborn sales. It is necessary
to assume the prophetic vision of a prospective purchaser at the
moment of the death of the deceased, and firmly to reject the wisdom
which might be provided by the knowledge of subsequent events. …
By the terms of the section I have to
imagine the price which the property would fetch if sold in the open
market. This does not mean
that a sale by auction (which would be
improbable in the case of shares in a company) is to be assumed, but
simply that a market
is to be assumed from which no buyer is
excluded. … At the same time, the court must assume a prudent
buyer who would make
full enquiries and have access to accounts and
other information which would be likely to be available to him…’
[15] Our courts have time and again
determined the value of assets by reference to the price which a
willing seller might reasonably
expect to obtain from a willing buyer
(
Illovo Sugar Estates Ltd v South African
Railways & Harbours
1947 (1) SA 58(W)
at
73 and the authorities there cited). This method of determining the
value of property was affirmed by this court in
Scott
and Another v Poupard and Another
1971 (2) SA
373
(A). There Miller AJA said at 381E-G:
‘
What
has to be determined is what the actual value of the shares would
have been had the company been formed in accordance with the
agreement and had the appellants acted as they were required to do.
The ultimate criterion in regard to evaluation of the shares
of the
company on that hypothesis, and bearing in mind that the shares would
not be quoted on the market, is what a willing purchaser
would, at
the given time, have been prepared to pay to a willing seller for
such shares; and in considering that question it is necessary
to
attribute to such imaginary purchaser reasonably detailed knowledge
of the company, its management, its assets and liabilities,
its
potential and other relevant factors which might have a bearing on
the company’s prospects of flourishing and of paying
a
dividend.’
[16] In the present case the fictitious purchaser would
have, on the one hand, information relating to the attractive market
in Argentina:
the housing backlog there amounting to 5.5 million
units and the government’s budget of US$600 million for low
cost housing;
he would also take account of the fact that the machine
had impressive qualities which attracted interest of all those to
whom it
was introduced. He would consider that Palmerfield had an
exclusive licence to sell the machine. All these factors may tilt the
scale
in favour of buying the shares.
[17] But, on the other hand, our imaginary prudent
purchaser would have in his possession information which waters down
those attractive
factors. He would know that despite extensive
advertising and marketing the machines did not sell; that in January
1997 no more than
eight machines had been sold. He would be aware of
the fact that no market research was conducted prior to introducing
the machine
and that the company’s management failed to
establish whether the soil in Argentina was suitable for use by the
machine. He
would also consider that the company had no assets other
than the licence which it is deemed to have had and which was given
to IED
free of charge. He would establish that Palmerfield had no
capital and that its management was not based in Argentina, factors
which
would severely hamper it in its operations.
[18]
In placing a
value of $100 000 on Palmerfield the court a quo relied on:
The sales projections testified to
by Patricia Scott purporting to be an expert witness and the
evidence of Prof Wainer who valued
the shares on the basis of these
projections. Although she was born in Argentina she last worked in
Argentina in 1982. From 1991
to 1997 she worked for Special Olympic
International. Being fluent in Spanish she acted as an interpreter
and translator for the
respondent during the period January 1996 to
August/September 1996. She was obviously not qualified to express an
opinion as to
what sales could be achieved. Her evidence should have
been rejected as being of no value.
The appellant’s offer during
June 1996 to sell to the respondent the right to market the machine
in Argentina for $100 000
which it wrongly interpreted to have been
an offer in respect of 10% of such rights whereas it was an offer
for 100% of such rights.
The offer was not accepted by the
respondent.
Johan Blersch’s willingness to invest in the
project in Argentina. Blersch advanced money in respect of the
project in Argentina,
he did not acquire any equity interest in the
project.
The fact that Guernsey investors
were in September 1996 prepared to invest $100 000 and later an
additional $50 000 in the marketing
of the machine outside Africa.
However, the company International Equipment Distributors, a company
managed and controlled by them,
acquired the licence to do so, being
Palmerfield’s only (deemed) asset, free of charge.
The widespread enthusiasm generated
by the machine. However, by 6 January 1997 that enthusiasm had not
converted into meaningful
sales and had proved to have been
misplaced.
The
fact
that some sales had materialised by 6 January 1997. However, no more
than eight sales had been concluded by that date.
[19] In my view the evidence does not
establish that the right to market the machine outside Africa had any
value as at 6 January
1997. In the event the enterprise to market the
machine outside Africa, proved to be unsuccessful by reason of
cheaper products being
available, the unavailability of suitable
soil, traditional building methods, vested interests, labour costs
and in the case of Brazil
the availability of a cheaper manually
operated machine. The judge a quo mentioned the fact that the venture
was unsuccessful in
South America but was of the view that it was
with the benefit of hindsight that the reasons are known and that
hindsight may not
be applied in the valuation. In this regard he
relied on the judgment of Danckwerts J in
Holt
and others v Inland Revenue Commisioners
.
However, to the statement by Danckwerts J that wisdom which might be
provided by the knowledge of subsequent events should be rejected
Danckwerts J added that one must assume a prudent buyer who would
make full enquiries. There is no reason to believe that such a
purchaser would not have discovered many if not all the problems
which caused the project to fail. In the result knowledge of the
problems cannot be considered to be the wisdom of hindsight. In fact,
by 6 January 1997 Blersch, a South African businessman, had
become
aware, after two visits to Argentina, of at least some of the
problems. He thought that this was a high risk business and
that no
buyer would be prepared to pay anything for a 10% interest in the
project.
[20] This is not a case where
evidence and witnesses were not available to the respondent. The
respondent himself is a well qualified
businessman who had tried to
raise money for the project and who was intimately involved in
attempts to market the machine. He should
have been able to assist
the court in determining a value. There should also have been
Argentinian building contractors who had knowledge
of the machine and
of conditions in Argentina who could have assisted. Yet the
respondent chose not to testify and not to call witnesses
who could
be of assistance to the court. Instead of doing so he elected to call
a person who he had employed in the United States
on a part time
basis as an interpreter and translator and who did not know the
machine and who had no knowledge of factors that could
affect the
marketability of the machine.
[21] In these circumstances the court below should have
granted absolution from the instance. It follows that the appeal must
succeed.
[22] The following order is made:
1. The appeal is upheld with costs.
2. The order of the court
a
quo
is altered to read:
‘
Absolution from the instance
with costs.’
____________________
C N JAFTA
JUDGE OF
APPEAL
CONCUR: ) STREICHER JA
) HEHER JA