By Barry Diamond
How is a mining company valued? Does it have goodwill? How does the goodwill analysis impact the valuation of the company’s land? What role do the facts, evidence and relevant taxing statute (the context) have to play in the analysis? These were the key questions to be answered by the High Court in Commissioner of State Revenue v Placer Dome Inc  HCA 59. The decision arose from a Western Australian stamp duty dispute, but it has implications far beyond stamp duty. It is significant for what it says about approaches to valuation methodology and evidence, the nature of goodwill and the contexts in which each of these things are considered. Placer Dome Inc was a substantial gold mining company with land and mining tenements around the world, including in WA. Barrick Gold Corporation was one of the largest gold mining companies in the world. Barrick led a hostile takeover of Placer. The acquisition was the largest of its kind in the gold industry. The amalgamated entity was to become the world’s largest gold mining business.
The decision concerned the ‘land rich’ rules in the former Stamp Act 1921 (WA) (and which have since been replaced with ‘landholder’ rules). Under these rules, a corporation was land rich if 60 per cent or more of the corporation’s total property (by value) comprised land (situated anywhere in the world). The land rich ratio was therefore total land (the numerator) divided by total property (less certain property excluded by the Stamp Act) (the denominator). If a person acquired a controlling interest in a land rich corporation, stamp duty was payable on the value of the corporation’s landholdings in WA.
Was Placer Dome ‘land rich’?
The Commissioner of State Revenue assessed Barrick’s acquisition for duty of $55 million on the basis Placer was a land rich corporation. Was this correct? The answer to this question required a closer examination of the numerator and denominator of the land rich ratio. Was the land (numerator) correctly valued? Was the total property (denominator) correctly identified and valued, and, in particular, was there goodwill (of substantial value) which could be included as property in the denominator?
Barrick argued the value of all of Placer’s land assets, comprising gold mines (the numerator), was $6 billion (of which the value of the mines in WA was $1 billion). It argued that Placer’s land should be valued using a discounted cash flow (DCF) methodology. Placer’s total ‘identified’ assets were valued at $9 billion. Barrick’s purchase price for all the shares in Placer (grossed up for liabilities) was $15.5 billion. It was accepted this was the value of the total property of Placer. After deducting certain excluded property of $2.5 billion (as required by the Stamp Act), it was agreed by the parties that the value of all of Placer’s property for the land rich ratio calculation was $13 billion (the denominator). Applying the land rich ratio ($6 billion of total land value divided by $13 billion of total property equals 46%), Barrick argued Placer was not land rich because the ratio was less than 60% and so no duty applied. Barrick said the difference between the purchase price ($15.5 billion) and fair value of identified assets ($9 billion), being $6.5 billion, was goodwill. This was the amount reported to the US Securities and Exchange Commission as goodwill for accounting purposes.
The Commissioner argued that a ‘top down’ valuation methodology was appropriate. This methodology starts with the total value of all of Placer’s property and subtracts the value of all non-land assets in order to arrive at a residual value for land. The Commissioner said that immediately before Barrick’s acquisition of Placer, Placer had no material property comprising goodwill, with the result that the value of Placer’s land exceeded the 60 per cent land rich ratio threshold. The plurality (Kiefel CJ, Bell, Nettle and Gordon JJ) and Gageler J concluded that Barrick had not discharged its evidentiary onus of proof on the statutory valuation exercise. Placer was land rich and the assessment stood.
The unexplained ‘gap’
The problem with Barrick’s argument was that the DCF methodology for valuing the land yielded a large gap between Placer’s land value and the purchase price for Placer. This raised a question about the reliability of the DCF calculation for the land and, in turn, a question about the $6.5 billion allocated to goodwill. The DCF analysis did not properly ‘cross check’ against the market value of the company. In trying to address this gap, the High Court made some important observations about valuation methodology and goodwill.
In terms of assessing value (valuation methodology), the High Court reiterated the starting point is the legislative scheme. The statutory context was important and different legislative schemes may require different valuation methodologies:
- This was a taxation scheme which required an assessment of the value of all of the corporation’s land assets and total assets in a going concern context.
- The statutory scheme (the Stamp Act) also modified the application of ordinary valuation principles (the ‘Spencer test’, as laid out in Spencer v Commonwealth  HCA 82) in two important ways:
- It required an assumption the hypothetical purchaser knew how to exploit the land; and
- The value of knowledge (intellectual property) was to be excluded from the valuation exercise.
In assessing the value of all of Placer’s assets, and, in particular, the amount Barrick said was goodwill, the High Court turned to the historical cases on the nature of goodwill, including the leading High Court decision of Federal Commissioner of Taxation v Murry  HCA 42.
The plurality reiterated and clarified what the High Court said in Murry (at ff):
- Goodwill can mean different things in an accounting, legal, economic and business sense.
- The attraction of custom remains central to the concept of goodwill.
- The legal concept of goodwill has three different aspects — it is a separate item of property, it is derived from sources, and it has a distinct value.
- Goodwill ‘attaches’ to the business to which it relates. It does not ‘attach’ to a particular asset.
The plurality reiterated that, as the nature of goodwill is linked to the custom of the business, the earning capacity of the business is relevant for valuing goodwill rather than the approach of comparing the purchase price for the business to the fair value of the identifiable net assets, which was the approach taken by Barrick (see –). This was the first reason to pause before accepting Barrick’s argument that the goodwill value was $6.5 billion.
Barrick said the $6.5 billion ‘gap’ between purchase price and the fair value of identified assets was goodwill or going concern value and that goodwill and going concern value were interchangeable. The plurality rejected this (at ).
Goodwill for legal purposes is different from going concern value. Goodwill is the right to continue to deal with customers. Going concern value is the right to continue to use the combination of business assets as an assembled whole to generate income. Goodwill, if it exists, may be no more than a component of going concern value (see –). In the context of the statutory scheme, the plurality said at  that the notion of going concern value, being the difference between an established mine and one just starting out, had no impact on the valuation of Placer’s property. There were essentially four reasons for this (see –):
- The statutory scheme required a comparison between the value of the land as part of a going concern and the value of the total property of the going concern. If going concern value inhered in Placer’s land, there was no statutory basis for stripping it out.
- The statutory valuation exercise required certain assumptions to be made. One of those was that Barrick was assumed to know how to exploit the land. This meant it could not strip out of the land, a value representing the difference between Placer as an established mine owner compared to a mine owner just starting out.
- The vast bulk of any going concern value of Placer would have been attributable to knowledge and intellectual property, essential attributes in operating an established mine. However, the value of knowledge and intellectual property was required to be excluded under the statutory valuation exercise.
- While there may have been factors other than knowledge and intellectual property which contributed to Placer’s going concern value, the evidence left it totally unclear how any such residual going concern value could be identified, valued and then distributed between Placer’s land and other assets.
Finally, Barrick could not prove on the evidence any sources of goodwill which could contribute to goodwill value. This included a rejection of Barrick’s argument that synergies to be enjoyed by the amalgamated group were sources of Placer’s goodwill. The synergies did not inhere in Placer at the time of the acquisition by Barrick, but arose after amalgamation (see –).
Gageler J diverged from the plurality on the issue of going concern value. Gageler J saw no reason why an Australian court should not recognise going concern value within the notion of ‘goodwill’ set out in Murry (at ). Further, the capitalised value of the synergies could be treated as going concern value of Placer (at ). However, the issue for Gageler J was that Barrick did not satisfactorily discharge its evidentiary onus. The extent to which a hypothetical purchaser would have attributed value to the assembled whole of Placer’s portfolio of mines (going concern value) was not explored in the evidence by Barrick. That gap in the evidence was enough for him to decide the appeal in favour of the Commissioner, along with the plurality (see –).
We can take away the following important principles from the decision:
- The application of an appropriate valuation methodology to particular items of property will depend on the legal and factual context.
- The definition and identification of goodwill also takes its colour from the legal and factual context.
- As custom is central to the concept of goodwill, the valuation methodology for goodwill should bear some relationship to the earning capacity of the business.
- Goodwill (continuity of custom) is not the same as going concern value (continuity of business as an assembled whole).
- Careful attention should be given to effectively discharge the evidentiary onus for valuations. An effective cross check of valuation methodologies is a step in the right direction.
Two key questions are left open, however:
- How will the principles of Placer Dome be applied in practice, in different valuation scenarios and contexts?
- Is there life in ‘going concern value’ and, if so, how might it be applied in a particular valuation context?
I await these developments in the law with great anticipation and interest.
AGLC3 Citation: Barry Diamond, ‘Goodwill and Valuations: Commissioner of State Revenue v Placer Dome Inc‘ on Opinions on High (22 January 2019) <http://blogs.unimelb.edu.au/opinionsonhigh/2019/01/22/diamond-placer/>
Barry Diamond is a Senior Fellow in the Melbourne Law Masters program, teaching State Taxes and Duties. He is a partner at PwC specialising in stamp duty law. He has advised on significant mergers and acquisitions, infrastructure projects and restructures. The assistance that George Papadakos provided on this post is gratefully acknowledged by the author.