Trouble was a-brewing for a tea industry partnership
May 29, 2024A partnership agreement will typically contain a provision specifying what happens if a partner wishes to exit the partnership - for example, in the case of retirement. The agreement will then typically also contain a provision specifying how the outgoing partner's share in the partnership is to be valued, and what amount that partner will be paid by the remaining partners. This issue arose in the case of the Madura Tea Estates partnership - when the retiring partner considered that the partnership including goodwill was to be ascertained, and then multiplied by their own partnership share of 19%. The remaining partners instead considered that the partnership value would first need to be discounted for lack of control and lack of marketability.
The subject clause of the partnership agreement provided that, in the event that any of the remaining partners wanted to purchase the retiring partner's interest, then the value would be determined by an "independent and competent valuer". If the remaining partners did not wish to purchase the retiring partner's interest, then the retiring partner's interest can be offered for sale, and if not sold, then the partnership would be terminated or wound up.
The declarations sought by the retiring partner, as the plaintiff in these proceedings, included a declaration that the value of the partnership was $27,950,000, and therefore its share was $6,649,023.59, and that amount was a debt due and owing by the "Continuing Partnership" (as per section 43 of the Partnership Act).
The valuer appointed considered the various bases of value, such as market value, equitable value and fair value. The parties agreed that the appropriate value was to be "market value", but disagreed about how that market value was to be calculated. The valuer at first instance discounted the value by 10% for lack of control, and 20% for lack of marketability, resulting in the retiring partner's interest being discounted to approximately $3 million.
The Court noted that at common law and in the absence of any agreement, the retirement of a partner usually results in the general dissolution of the partnership, which leads to the partnership assets being brought in and sold, debts paid, and the surplus shared between all of the partners. This differs to a situation when a partner retires from a continuing partnership, which typically gives rise to a notional or technical dissolution. The Court favoured the position whereby "the amount to which [the retiring partner] is entitled from the continuing partners is an amount equal to its share of the value of the enterprise as a whole as if on a taking of accounts as at that date of retirement. Its entitlement is not simply to the amount for which its partnership interest might have been sold to a willing but not anxious purchaser on that date."
The continuing partners attempted to distinguish this situation by noting that the retiring partner was in the position of a minority shareholder wanting to sell its shares in circumstances where it has not been forced to do so. The Court disagreed, noting that the retiring partner was not seeking to sell its partnership interest to anybody.
The 'substance of the transaction' is not a sale of its interest to the remaining partners. Rather, [the retiring partner] is seeking payment of its entitlement on retirement.
The Court considered that its entitlement was not the market value, but rather, the value of the partnership, including goodwill, as at the date of retirement. It would be unfair for the retiring partner's interest to be discounted, in circumstances where the continuing partners could then go on to sell the business as a going concern and obtain a windfall gain.
The Court adopted the valuer's report and valuation of the business at $22,342,958, meaning the retiring partner's 19% share was valued at $4,245,162.
Contact the Shire Legal team if you have any questions.
Stay informed
Sign up to receive regular updates regarding changes to the law, Court decisions and other happenings of interest.
