Bruce-Smith Estate v. F.C. of T.

Judges:
Stephen J

Court:
High Court

Judgment date: Judgment handed down 23 October 1973.

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Stephen J.: In this appeal against an assessment to Estate Duty on the estate of the late Barbara Bruce-Smith the only matter in issue is the value for duty of a parcel of 253,028 fully paid ordinary shares of $1 each in the capital of Howard Smith Ltd.

The deceased died on 20 November 1969 and on that date ordinary shares in Howard Smith Ltd. were traded on the Sydney and Melbourne Stock Exchanges at prices within a range of $3.20 to $3.30 per share. The Commissioner adopted the lower limit of this range, $3.20, for the purpose of his valuation of the deceased's very large parcel of shares and placed a total value of $809,689.60 upon the parcel. The shares had been valued by the executors in the statement for duty at only $695,827, or $2.75 per share, and the executors of the estate of the deceased now challenge the Commissioner's higher valuation, which is said to be erroneous because it disregards the effect of the very substantial size of the parcel of shares in question and places upon them a value per share which, while appropriate enough as indicating the value of relatively small parcels of such shares, provides no proper basis for the valuation of large parcels.

The question is, then, whether or not any allowance should be made because of the extent of the holding when valuing large parcels of shares for purposes of estate duty.

Facts relevant to this question appear to me to be the following; the parcel, while large, comprises only some two per cent of the total listed ordinary share capital in Howard Smith Ltd., so that there is no question of the very size of the parcel carrying with it control of the company; there was, at the date of death, no prospect of early liquidation of the company and a consequent realisation of the asset backing of the shares; the nature of the share-holding in the company was such as to make the company relatively proof against a ``take-over''; its shares were quite closely held, its twenty largest holders holding over forty per cent of listed issued ordinary capital; its shares were not traded in large volume, the average monthly reported turnover of its shares on all Australian Stock Exchanges was only about 58,900 in 1969 and about 92,000 in 1970.

The Estate Duty Assessment Act 1914-1970 contains no general directions for the valuation of assets of an estate. Section 8 imposes duty ``upon the value, as assessed under this Act, of the estates of deceased persons''; sec. 10(2) speaks of the estate as comprised of ``items'', each having distinct descriptions and values. Apart from this, the Act casts no light for present purposes upon the applicable principles of valuation; sec. 16A contains special provisions as to the valuation of company shares but these are not relevant in this instance.

Before examining the authorities and looking at the matter only in the light of the statutory direction as to ascertainment of value of the estate of the deceased, comprised as it is of items having distinct values, I would conclude that the value of this large parcel of shares must be substantially less than the product of multiplying the value of one marketable parcel of the shares by the total number of marketable parcels held. I would assume that this large parcel lacks in greater or lesser degree one quality of any desirable investment, ready convertibility into cash, whether for the purpose of providing ready cash or so as to permit of a prompt switching of investments.

In fact the evidence confirms my assumption that this large parcel of shares is not realisable as readily as would be a single marketable parcel; the desirable quality of convertibility is to some extent wanting. This must affect the value of this large parcel as compared with an appropriate multiple of the value of a readily realisable single marketable parcel in all other respects of equal attraction but in addition possessing

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this advantage of convertibility. A large parcel of shares conferring control upon the holder may, for that reason alone, be of special value, and this may in some cases far outweigh the want of ready convertibility; however it is clear on the evidence in this case that this parcel confers no such control; the aspect of control may therefore be disregarded.

It follows that, since marketable parcels possess an attribute which this large parcel lacks, transactions on a market which deals in marketable parcels and reasonable multiples thereof will not accurately reflect the value of this large parcel. The Australian Stock Exchanges, on which these shares are listed, form such a market and this large parcel is on the evidence very many times larger than the number of shares involved in individual transactions in shares of this company on those exchanges. Accordingly stock exchange transactions in marketable parcels of these shares or reasonable multiples thereof at the date of death of the deceased will not provide an accurate measure of the value of this large parcel although it will provide a good indication of what that value would be were it not for its lack of ready convertibility into cash, sometimes referred to as the ``blockage'' factor.

There is, I think, no reason why in these circumstances valuation must proceed directly upon the basis of stock exchange quotations; such a method is in no sense mandatory, what is to be ascertained is the ``true value'' or ``real value'' of the assets comprised in the estate, it has been thus described by Williams J. in
Perpetual Trustee Co. (Ltd.) v. F.C. of T. (Murdoch's case) (1942) 65 C.L.R. 572 at pp. 578-579, in
McCathie v. F.C. of T. (1944) 69 C.L.R. 1 at p. 6 and in
Abrahams v. F.C. of T. (1944) 70 C.L.R. 23 at p. 29.

No doubt the legislation, in requiring the determination of the value of assets of a deceased, contemplates that that value may be quantified by reference to a notional sale on the date of death; such a process is central to the concept of value. In
Spencer v. The Commonwealth (1907) 5 C.L.R. 418, an early resumption case, Griffith C.J. remarked, at p. 431, that

``In order that any article may have an exchange value, there must be presupposed a person willing to give the article in exchange for money and another willing to give money in exchange for the article.''

He went on to propound the test of a notional sale between a purchaser desiring to buy and a vendor willing to sell for a fair price but not desirous to sell. Isaacs J., at p. 441, adopted a similar test, saying that the money equivalent of the loss to the owner of land was to be arrived at by supposing it to be sold by voluntary bargaining between that owner and a purchaser willing to trade, neither being so anxious as to overlook any ordinary business consideration. A test of this sort has ever since been treated as appropriate not only in resumption cases but also in the valuation of land for revenue purposes -
Commr. of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (Clifford's case) (1947) 74 C.L.R. 358 at p. 361 and p. 367 per Latham C.J., Rich and Williams JJ. and at pp. 373-4 per Dixon J., the latter drawing attention to one respect in which resumption cases call for special treatment: see also
Elder's Trustee and Executor Co. Ltd. v. F.C. of T. (1956) 96 C.L.R. 563 at p. 565 per Kitto J.; in
Robertson v. F.C. of T. (1952) 86 C.L.R. 463, Williams J., at p. 476, said ``The real value of an asset is its sale value, that is its prospective value''.

No doubt, too, where there exists an established market for a particular form of property the price on that market will usually reflect accurately enough its value and there will be no occasion for postulating a hypothetical purchaser, instead the market price provides evidence of accepted offers made by actual purchasers. Listed shares of course form a prime example of property having an established market, ``the biggest open market is the Stock Exchange'' -
Duke of Buccleuch v. I.R. Commrs. (1967) 1 A.C. 506 at p. 524 per Lord Reid - and ``almost invariably'' the value of listed shares will be the current market value - Clifford's case at p. 361; only where unusual factors apply will the market price not supply the appropriate value of such shares for duty purposes.

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ATC 4140

The present shares are listed shares but on the evidence I am satisfied that the price at which marketable parcels of such shares are traded on the Stock Exchange will not, in unadjusted form, truly reflect the value of this large parcel of shares. Perhaps its very size could be described as an unusual factor rendering inapplicable that market price and providing an exception to the almost invariable rule. However I would prefer to attribute this inapplicability to the fact that the Stock Exchange is not in fact the appropriate market for this asset, consisting as it does of a very much larger parcel than any normally dealt in in Stock Exchange transactions in Howard Smith Ltd. stock. There is, however, an alternative market which is appropriate; it is that on which large parcels of listed securities are dealt in. While it is not a formally organised market, as is the Stock Exchange, yet it can provide an accurate enough reflection of the value of large parcels and by postulating a hypothetical sale on that market at the date of death of the deceased a proper value of this large parcel of shares can be ascertained. The evidence in this case, to which I shall later refer in detail, describes this market and the price at which this parcel of shares could have been sold on it at the date of death of the deceased.

If this alternative market be resorted to for purposes of valuation no question of any allowance for a ``blockage'' factor will arise since the asset to be valued will not, on that market, be of unusually large size; instead, once the selection of the appropriate market price place has been made, only the ascertainment of the value of this parcel of shares by reference to what it would have fetched in that market place on the relevant date will remain to be done.

However the same result will, I think, be attained by following what is, perhaps, the more orthodox course of treating stock exchange quotations as relevant but allowing a discount off quoted prices on account of the ``blockage'' factor. Such a course raises directly the propriety of making an allowance for ``blockage'' and on this matter the decisions in this Court are in conflict.

In the unreported decision in 1945 of Williams J. in Kent & Martin v. F.C. of T. his Honour in terms rejected a submission that the value for duty of a large parcel of unlisted shares should be reduced on that score; the relevant passage is reproduced on p. 4046, of the judgment of Gibbs J. in
Gregory v. F.C. of T. 71 ATC 4034; (1971) 123 C.L.R. 547, which is the other direct authority on the point.

In Kent's case Williams J., in rejecting the submission by the appellant that a discount should be made for ``blockage'', said that when, in ascertaining the full value to the owner, the existence of a hypothetical purchaser is postulated he must be assumed to be one ready and willing to purchase the whole parcel and to pay its ``full value'', despite the fact that he may be the only potential buyer in the field. With great respect to his Honour, it seems to me that if, for the purpose of valuation, the existence of such a hypothetical purchaser is assumed, to make the further assumption that he will pay ``the full value of the property to the owner'' is to render the whole process unhelpful as an aid to valuation since the result will only be to pose again the initial question ``What is that full value?''.

His Honour, in the same passage, also referred to the fact that no passing of property occurs at the date of death, as it does in the case of a resumption, so that if the shares must be sold the personal representative of the deceased will be free to dispose of them gradually over a considerable period, the estate in the meantime receiving dividends in respect of unsold shares. His Honour must. I think, have had in mind no more than that a forced sale at distress prices was not to be assumed; to regard his Honour as expressing the view that the process of valuation should proceed upon the assumption not of the hypothetical sale occurring at the date of death of the deceased but, rather, of a series of hypothetical sales spread over a considerable period after that date, would be contrary to much authority; it suffices to refer to the later case of Robertson v. F.C. of T. in which in his Honour's own judgment it is said, at p. 476, that in valuing unlisted shares the court

``must estimate as best it may the price which a reasonably willing vendor would have been prepared to accept and a

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reasonably willing purchaser would have been prepared to pay for the shares in question at the date of death.''

It is noteworthy that despite his apparent rejection in Kent's case of the view for which the appellant here contends, Williams J. did, in later passages in his judgment, refer to the limited market for unlisted shares and to the fact that, because they are difficult to mortgage or sell, they are unattractive to those buyers who attach great importance to negotiability; they must, he says, for that reason be regarded as a long term investment and ``some discount must, as Lord Hanworth pointed out, be allowed on this account'', the reference being to his Lordship's judgment in
Re Paulin (1935) 1 K.B. 26 at p. 47, later reported on appeal in (1937) A.C. 26. His Honour concluded that he could not accept the evidence that the shares in a private company should, when compared with shares in a comparable company listed on the stock exchange, be, for that reason, depreciated ``to the extent suggested'' by some witnesses, but his Honour did allow some discounting for this lack of negotiability. No doubt his Honour was there concerned with the inherent lack of negotiability of unlisted shares in a private company possessing restrictive provisions in its articles of association; these were the prime causes of lack of negotiability; but if lack of negotiability exists in any degree its cause is irrelevant to its effect upon value. If there be in fact a lack of ready convertibility in the case of the present large parcel of shares and if the Act neither expressly requires that factor to be disregarded nor lays down any special basis of valuation which by implication produces such a consequence, but instead calls for the ascertainment of the real value of the shares to their owner; it appears to me to follow that a proper valuation should reflect that lack of ready convertibility.

Williams J. was concerned with unlisted shares but in principle there seems no reason to treat such shares differently from listed shares so far as concerns the ``blockage'' factor and I do not seek to distinguish the decision on that ground.

In Gregory's case Gibbs J., having set out the relevant passage from the judgment of Williams J. in Kent's case, expressed himself as unable to agree with some of his Honour's remarks and in particular said, at p. 4046, that since real value was what was to be ascertained for valuation purposes it must follow that, if as a matter of fact the size of a parcel diminished its real value, no principle of law ``requires a fictitious and excessive value to be attributed to it for purposes of estate duty''. With this view I respectfully agree; the fact that these views of Gibbs J. were expressed to be ``only peripheral'' to the issue before him in view of his rejection, on other grounds, of the one method of valuation which raised for consideration the question of discounts for large parcels, detracts little from their high persuasive authority.

There is one other decision in this court to which I should refer; in the decision of Williams J. in Murdoch's case, at p. 579, his Honour described as irrelevant evidence that there was no single person in fact willing to purchase the large parcel of unlisted shares there in question; these had conferred control upon the deceased and would give control to a purchaser if bought as one entire parcel. As I understand that judgment his Honour was doing no more than giving due weight to the factor of control inherent in the shares while in the hands of the deceased. It is not, I think, an authority on the question of ``blockage''.

In two Victorian valuation cases an allowance has been made for ``blockage'' in valuing large parcels of shares. In
Myer v. C. of T. (1937) V.L.R. 106, Martin J., in considering Victorian probate duty legislation which imposed no particular method of valuation, was concerned with an estate which included a shareholding in a proprietary company which in turn held a very large parcel of shares in a listed company. His Honour, in arriving at a value of the shares comprised in the estate, allowed for a substantial discount in the value of these latter shares because of the size of the parcel involved, rejecting the argument advanced on behalf of the Commissioner that no such allowance should be made. His Honour said, at p. 121, that one of the three main factors which the evidence revealed as

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operating in the mind of a prospective purchaser of shares was

``the facility with which the shares can be realised if occasion occurs when the investor requires the money he has invested - what Sir William Cullen in
Blackwood's Executors v. Commr. for Stamps (1917) 17 S.R. (N.S.W.) 447 at p. 455 calls `the free run of the market'.''

It is this very facility which is absent in the present case and the absence of which should, as in Myer's case, be reflected in a discount for ``blockage''.

In
Re Haunstrup (1960) V.R. 302, Sholl J. was concerned with later Victorian probate duty legislation which did prescribe a method of valuation involving a notional sale in the open market at date of death. Following close examination of the authorities, his Honour concluded that a discount was appropriate by reason of the large parcel of shares involved; he had before him the decision of Williams J. in Kent's case to the contrary which he regarded as an authority binding upon him and, at p. 313, distinguished it on the ground that it was concerned with the Estate Duty Assessment Act, which made ``value'' simpliciter the test. I find it unnecessary, in the circumstances, to examine the grounds stated for distinguishing Kent's case.

Concluding, as I do, that it is both permissible and necessary to make some allowance for the very large size of the parcel of shares here in question before using stock exchange quotations as a guide in the valuation of these shares. I turn now to the expert evidence given before me; it not only provides a measure of the appropriate discount on account of the ``blockage'' factor but also describes the alternative market on which large parcels of shares may be sold and establishes that the deceased's parcel of shares could have been disposed of on it. Mr. Wiesener, a member of a large broking firm, had for some years been acting exclusively as an institutional dealer being one of four partners of his firm who were engaged in its institutional dealings section. He was concerned only in share dealings on behalf of local and overseas banks, funds, insurance companies and other institutional investors, principally in ``off market'' transactions. It was a matter of every day activity for him to arrange the sale of large parcels of shares by or to such investors otherwise than through the stock exchange and he said that on a few days' notice the present parcel could have been disposed of, in one parcel or as several smaller parcels, at between $2.90 and $3.05 per share; on cross-examination he agreed that a figure of $3 per share was a likely sale price. Mr. Wiesener considered that such a large parcel of shares could not, however discreetly the transaction were undertaken, be disposed of on Australian and overseas stock exchanges in less than ``years literally; years in the plural'' without grossly depressing the price.

Mr. Troy had long been employed as an investment adviser to a large life insurance office and was very experienced in the investment activities of such institutions. He thought it difficult to conceal from the market the fact that a large parcel of shares was being sold over a period on the stock exchange, the knowledge that such a transaction was afoot would soon be generally known and a progressive reduction in prices would follow. The present parcel would, he thought, ``weigh fairly heavily on the market''. Large parcels, he said, tended rather to be sold off the stock exchange, thereby avoiding a prolonged period of selling during which the unsold shares would be subject to the usual risks of price fluctuation, quite apart from the progressive fall in prices which any gradual sale of the parcel in question would bring about. He regarded a sale of this parcel of shares off the stock exchange at the date of death of the deceased as capable of being effected at a figure not in excess of $3 per share, a buyer initially offering only about $2.90 per share but being prepared to pay up to that higher price.

A third witness, also a broker and having some experience of institutional investors, described the great difficulty of disposing of very large parcels on the stock exchange without gross depression of prices even if sales were carefully spread, particularly in the case of a relatively inactive stock such as Howard Smith Ltd. He regarded a discounted price of $2.80 as the price at

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which the deceased's shareholding could have been sold to large institutional buyers at the date of the deceased's death by sales ``off market''.

A fourth witness called on behalf of the appellants, also a broker, spoke of a price per share of only $2.72. Having regard to the relative experience of these four witnesses and to their evidence and, in particular, their cross-examination, I would prefer to accept the views of Messrs. Wiesener and Troy, both of whom I regarded as very impressive witnesses, rather than those of the other two expert witnesses for the appellants, although it is of course only fair to say that it is to be expected that on a matter of valuation such as this there will necessarily be differences of view between expert witnesses.

The respondent called one witness only, a Mr. Alexander, a senior partner in a large firm of chartered accountants, with experience in the valuation of shares and in the negotiation of sales of large parcels of shares. His view was that if offered for sale on the stock exchange over a short period after the death of the deceased an appreciable fall in market value would have resulted. He considered that if the parcel were, instead, to be sold to one buyer on a negotiated basis off the exchange a sale at $3 per share could have been concluded at the time of the death of the deceased. He was an impressive witness; his evidence as to sale price is, it will be seen, very much the same as that of Messrs. Wiesener and Troy.

I accordingly conclude that there did exist at the date of death of the deceased a ready market for a large parcel of shares such as those here in question and that if sold on that market at that date the shares would have realised about $3 per share. In the circumstances no complete precision is possible but on the evidence I think it proper to adopt as the likely sale price the sum of $3, yielding a discount of 20 cents for ``blockage'' factor.

In doing so I proceed upon the view that, consistently with what was said by Gibbs J. in Gregory's case and in accordance with my own views expressed above, the disabilities affecting the holder of a very large parcel of shares should be reflected in the value for duty; however two further considerations said to lead to a contrary conclusion were raised by counsel for the respondent. The first turns upon the decision of their Lordships in Duke of Buccleuch v. I.R. Commrs. (1967) 1 A.C. 506. It was submitted that in the light of that decision the proper course was not to regard the deceased's shares, for purposes of valuation, as one very large parcel but rather as a large number of smaller marketable parcels, to each of which it would be appropriate to apply ruling stock exchange quotations, the total of the values thus ascertained of these smaller parcels representing the value of the total holding of shares by the deceased. If this approach were correct in its entirety it would dispose of any suggestion that the size of a parcel of shares might affect its value.

It is, of course, appropriate, particularly in the setting of the English Finance Acts and of sec. 7(5) of the Act of 1894 and sec. 60(2) of the Act of 1910, to approach the task of valuation of the assets of an estate with an appreciation that it does not necessarily call for the valuation of all that part of the property of a deceased estate which is of one and the same character as one whole. However it would be quite inappropriate, in the search for the real value of this present parcel of shares, to find it in the sum of the market prices of such number of small marketable parcels as it is possible to divide it into. At least where, as here, all of the shares in the parcel are identical and there is an appropriate market for such an entire parcel, it would be wrong to adopt a method of valuation the essence of which, as applied to such a case, is to mask the existence of a substantial disability affecting that parcel, namely its lack of ready convertibility. Where no express provisions of the statute require this, no mere technique of valuation should be allowed to bring it about. If the parcel be truly subject to that disability in the hands of the executors, just as it was in the hands of the deceased, a statute which is concerned with the ascertainment of the real value of assets cannot contemplate the disregarding of the effect of that disability, any more than it can justify the overlooking of some valuable advantage possessed by assets, such as the control which a large parcel of shares may be able to confer if retained as one whole.

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Counsel for the respondent also urged that there were considerations of principle and policy which suggested that the Estate Duty Assessment Act should be so interpreted as to exclude any allowance for the ``blockage'' factor. Reference was made to what was said to be the American experience and to the arguments which had there prevailed, resulting in no allowance for blockage despite a degree of legislative silence on the topic; I was referred to a work on valuation by James C. Bonbright and to the authorities which it cited. This work was published as long ago as 1937 and reference to more recent sources discloses that the submission in fact relies upon what is now somewhat out-dated American authority; the current position appears to be very different, as a reference to Vol. 42 of American Jurisprudence (2nd) para. 262, to the annotation in 23 A.L.R. 2nd 775 and to Mr. Chisum's article in Vol. 20 of Stanford Law Review (1967-68) reveal. There is, I think, nothing to be gained from American authorities or practice which should lead me to any conclusion different from that at which I have arrived.

I accordingly conclude that the Commissioner's assessment is erroneous; the shares in Howard Smith Ltd. should have had assigned to them a value of only $3 per share and this appeal will be allowed accordingly; the duty will require to be reassessed upon this basis. As to costs, the appeal has been substantially successful although the appellants' figure of only $2.75 per share contended for in the notice of objection has not been sustained; while not specifically abandoning that figure counsel for the appellants did, in the course of the hearing, urge a value per share very close to that which I have determined and much of the evidence called on their behalf was consistent with this view. I think that the proper course will be to order the respondent to pay the appellants' costs of the appeal.