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By Selwyn Black, Esq. and Nicholas Huang, Esq.
Carroll & O’Dea Lawyers
Sydney, Australia

Network Ten (TEN) has lost its bid to prevent a sale of its shares in TX Australia Pty Ltd (TXA) to the Seven Network (SEVEN) and the Nine Network (NINE) for $1 in the recent case of TX Australia Pty Ltd v Network Ten Pty Ltd; Network Ten Pty Ltd v TX Australia Pty Ltd [2018] NSWSC 559. It is understood that TEN intends to appeal the decision.

The Key Facts

  1. TEN, SEVEN, and NINE each owned one third of the share capital in TXA.
  2. TXA, TEN, SEVEN and NINE were parties to a shareholders agreement with respect to TXA (Agreement).
  3. The Agreement contained a compulsory disposal mechanism. If an “event of default” occurred to a shareholder, that shareholder would be deemed to have offered to sell their shares in TXA to the other shareholders.
  4. In June 2017, voluntary administrators and receivers and managers were appointed to TEN.
  5. TXA took the position that these appointments constituted an event of default occurring in relation to TEN, and that TEN was deemed to have offered to sell its shares in TXA (Shares) to SEVEN and NINE.
  6. Because TXA and TEN did not agree on a sale price for the Shares, the Agreement provided that it would be determined by TWC’s auditor, PwC.
  7. PwC produced a document (Report) which priced the market value of the Shares in various scenarios.
  8. TXA, SEVEN and NINE argued that the Report valued the Shares at nil.
  9. TXA, as agent for TEN, offered the Shares to SEVEN and NINE for a total of $1.
  10. Both SEVEN and NINE accepted the offer.

The issues

  1. TEN argued:
  1. that its voluntary administration and receivership did not trigger the compulsory disposal mechanism;
  2. PwC should have priced the Shares at a “fair and reasonable value” rather than a “market value”;
  3. PwC did not “determine” the price of the Shares in accordance with the Agreement; and
  4. the compulsory disposal mechanism was void for uncertainty, because it did not set out any formula or criteria for the calculation of the price.

The decision

  1. The judge rejected TEN’s arguments, finding that:
  1. based on the natural meaning of the relevant provisions in the Agreement, the appointment of administrators and receivers to TEN were events of default that engaged the compulsory disposal mechanism;
  2. because the Agreement did not set out any criteria for how the price of the Shares should be determined by PwC, it was open for PwC to price the Shares however it wanted to. In any event, the judge preferred a valuation based on market value rather than a fair and reasonable value.
  3. PwC made a “determination” of the price for the purpose of the Agreement despite TEN’s claims that:
  1. PwC specified two preconditions before it could make a determination, and those preconditions were not fulfilled;
  2. PwC never put the Report forward as a determination;
  3. PwC didn’t determine a price because PwC expressed a number of different outcomes based on different scenarios; and
  4. PwC incorrectly accepted instructions from TXA to value the Shares based on market price; and
  1. the compulsory disposal mechanism was not void for uncertainty because the valuation methodology was left for PwC to determine.

Conclusion

If TEN does appeal the decision, it will be interesting to see the outcome given the novel arguments raised by TEN in this judgment. Although TEN’s legal arguments were not compelling, it is understandable why TEN is frustrated by what happened - it sold the Shares for $1 when in one scenario they were valued at $42.9 million in PwC’s Report.