Ivesleigh Holdings Inc, Fontaine, Bilodeau & Cie Ltée, Baribeau & Fils Inc, Jeviam Inc v. Minister of National Revenue, [1978] CTC 2984

Roland St-Onge [TRANSLATION]:—The appeals of Ivesleigh Holdings Inc, Fontaine, Bilodeau & Cie Ltée, Baribeau & Fils Inc and Jevlam Inc were heard by me on September 16, 1977 in Quebec City, Quebec. At issue is the value of Class A common shares of Télé- Capitale Ltée (hereinafter referred to as “TCP”) on December 31, 1971.

The facts that are not in dispute are as follows:

(1) the respondent alleges that the Class A common shares (‘‘Class A shares”) of the share capital of Télé-Capitale Ltée (“TCP”) had an adjusted cost base of $7 on December 31, 1971, whereas the appel- lants maintain that the adjusted cost base of the Class A shares was $8.40 on that date;

(2) on December 31, 1971, the authorized and issued common share capital of TCP consisted of 5,000 Class A common shares and 5,000 Class B common shares having a par value of $5 each, distributed as follows:

(3) since the Class A shares which are the subject of the dispute had been subdivided before they were disposed of, for purposes of valuation the supplementary letters dated April 13, 1972 should be treated as applying at December 31, 1971, so that a Class A common share, or equally, a Class B common share, having a par value of $5 would be converted and subdivided into 190.8125 Class A common shares and 22.1875 Class B common shares having no par value;

(4) Class A and Class B shares are considered to be of the same value by the appellants and the respondents;

(5) on December 31, 1971, TCP did not own any subsidiaries;

(6) on September 1, 1972, TCP purchased all the shares of CHRC Limitée, Radio Laval Inc and Hardy, Radio & Television Ltd.

The appellants allege the following:

(1) the facts and the basis of valuation are mentioned in the report of J K Caldwell, CA, of Peat, Marwick, Mitchell & Co dated November 24, 1975;

(2) on April 1, 1971 TCP was declared a public company by supplementary letters patent, with the result that the existing restrictions on the transfer of its shares were removed;

(3) the “par share earnings”, $0.54 per Class A share when the adjusted cost base was calculated on December 31, 1971, subsequently fell to $0.46, as a result of the purchase of the subsidiaries on September 1, 1972;

(4) the multiple of 20 times the “par share earnings” is reasonable for establishing the rate of capitalization;

(5) on December 31, 1971 there was no restriction on the transfer of shares, and it was not until January 25, 1972 that an agreement was concluded respecting the Class A and Class B shares of the share capital of TCP.

Mr Jean-A Pouliot, President of Jevlam Inc, Mr Hervé Baribeau, a director of TCP, and Mr Douglas Durocher, CA, an associate in the firm of Peat, Marwick, Mitchell & Co, testified on behalf of the appellant companies and filed documents and related the facts pertaining to allegations 1 to 5 above stated.

Mr Pouliot explained that on December 31, 1971 radio and television in Quebec were in an excellent position and had good ratings, that TCP had signed advertising contracts for a period of nine to twelve months (which represented fifty per cent of the revenue for the year), that the clients in question were billed when the advertisement was broadcast, and that the said contracts could not be cancelled without the client having to pay a penalty.

Mr Baribeau testified that on December 31, 1971 the shareholders were all agreed (Exhibit A-12) that if the shares were not listed on the exchange, the minimum price for them would be set by multiplying earnings twenty times, even if no shareholders were interested in selling at that price; and that in his capacity as a director of TCP, he was familiar with all its financial operations and had insisted on $10 a share when the broker wanted to give only $8.40.

He admitted that nine months before TCP went public and purchased the three subsidiaries operating at a loss, the shares had been trading at $8.25; that by supplementary letters patent in 1967 an agreement had been concluded to the effect that if a sale took place the price of the shares would be determined by multiplying the earnings per share for the past five years by ten, and that Famous Players had sold its shares at a higher price than the one that was determined under this agreement.

In cross-examination he said that there had never been any question of selling all the shares to Nesbitt Thompson, and that if they sold for a sacrificial price (less than $10), it was in order to make them public and thus increase their value; that on December 31, 1971 there were no restrictions under the supplementary letters patent since the company was going public and the figure of 10 times earnings was becoming 20 times; that on that same date the earnings were estimated to be $0.50 per share, giving a value of $10 a share; that the earnings were in fact $0.54, but that owing to the subsidiaries that were showing a deficit, the said earnings were reduced to $0.46 a share; this‘is why the price of $8.40 was accepted instead of $10, since the company was to purchase the subsidiaries.

He also explained that on December 31, 1971 the shares were undervalued, that the advantage of going public was to rectify this value and that from comparison with other public broadcasting companies listed on the exchange, the minimum price for the shares was $10.

Mr Douglas Durocher explained the valuation of the shares prepared by an independent assessor, Mr Coldwell, who used the following data:

(1) the constant revenue per share of $0.54;

(2) the financial statements;

(3) the fact that such a return was reasonable in view of the nature of the company;

(4) the fact that multiplying earnings of $0.42 for the month of August 1971 by 20 was the appropriate method in the circumstances;

(5) he assumed that the entries in the books were accurate.

In cross-examination he was asked why $0.42 was used when the company’s financial statements for the previous three years indicated an average of $0.32 per share. He replied that Mr Pouliot had predicted earnings of $0.54 per share, and that taking into consideration the earnings of other public companies of the same type listed on the exchange, which were at 30 times the per share earnings, it was reasonable to use a multiple of 20 for earnings of $0.42.

The respondent for his part called only one witness, Mr Claude Camiré, an assessor with the Department of National Revenue, who filed his valuation report and explained it clearly and very convincingly. In order to determine the market value of the said shares, Mr Camire used the information supplied by the appellants. As a valuation base he used the value in terms of profitability, since TCP appeared to be in an enduring state. This base is calculated by applying the appropriate multiplier to the maintainable earnings.

In his valuation report he stated the following:

Multiplier

For several years the directors of Télé-Capitale Limitée had been planning to list their comnany’s shares on a Canadian exchange; this is why, in 1971, additional letters patent were applied for so that the share capital structure could be reorganized and the company name changed to its present form. We can therefore assume on December 31, 1971 that the common shares of Télé-Capitale Limitée will in fact be listed on one of the Canadian exchanges.

Consequently, the multiplier for the maintainable earnings of Télé-Capitale Limitée on December 31, 1971 must be determined on the basis of the public companies operating in the same field (television broadcasting) whose shares are traded on one of the Canadian exchanges.

For this purpose we Prepared the following tables for all the public companies which, according to our information, are operating in the broadcasting field:

— price/earnings ratio for the principal radio and television broadcasting companies on December 31, 1971, including certain data on Télé-Capitale Limitée;

— analysis by sector of operation of the principal radio and television broadcasting companies, including Télé-Capitale Ltée, in 1971;

— percentage distribution of the gross revenue of the:companies, including Tele-Capitale Ltée, by sector of operation for 1970 and 1971.

If we analyse each of these tables and take out the data on Standard Broadcasting Corporation Limited and Western Broadcasting Company Ltd, which have no interests or very few interests in broadcasting, and on the Class B shares of Chum Limited, which are different in kind from the other common shares, wc obtain the following multipliers:

On the basis of tables:		1		2
On the basis:	Earnings		Known or	Estimated
	realized	estimated earnings		earnings
	in 1971	on 31/12/71		on 31/12/71
High	17.2		17.2	11.0
Low	10.4		8.9	8.9
Mathematical average	14		12.9	9.8
Median	14.3		12.5	8.9

This table illustrates clearly the principle that a favourable future outlook or an upward earnings Curve should be reflected in the establishment of the multiplier (price/earnings ratio) or in arriving at the maintainable earnings.

In table 2 we see clearly that it is estimated earnings that take into account the future outlook, unlike table 1, where it is the multipliers.

Assuming, therefore, that Télé-Capitale’s favourable future outlook is to be reflected in the estimable earnings we can conclude that on December 31, 1971 a multiplier of between 8.9 and 11 would be realistic.

We must not forget that we are dealing on December 31, 1971 with a company whose shares are not traded on one of the Canadian exchanges.

Maintainable earnings

For the purposes of determining the maintainable earnings of Télé-Capitale Ltée, we have prepared the following two tables:

— data on operations, for the principal public radio and television broadcasting companies, including Télé-Capitale Ltée, for 1969, 1970 and 1971;

— data on balance sheets, for the principle public radio and television broadcasting companies, including Télé-Capitale Ltée, for 1969, 1970 and 1971.

After studying and analysing the facts contained in these two tables, we can conclude that Télé-Capitale Ltée is a company in a very good financial position, in which the estimated earnings of $0.54 per share on December 31, 1971 could be considered to be maintainable.

Establishment of the value

If we say that Télé-Capitale Ltée’s maintainable per share earnings are $0.54 and that a multiplier of between 8.9 and 11 would be acceptable, we ootain a value per Class A or Class B common share of the said company of between $4.86 and $5.97.

Moreover, if we consider the fact that on December 31, 1971 the Class A and Class B shares of Télé-Capitale Ltée were not being traded on any of the Canadian exchanges, and that a discount in the order of 10 to 20 percent should be taken into consideration to allow for this fact, we obtain a value per Class A and Class B common share of Télé-Capitale Ltée of between $4.15 and $5.05.

The Board finds that the evidence adduced by the appellants is far from being sufficient to establish an adjusted cost base of $8.40 on December 31, 1971. TCP’s financial statements for the previous three years showed average earnings of $0.32 per share. The appellants themselves admitted that the fact of being on the stock market had increased the value of their shares. On December 31, 1971, these shares were not yet on the stock market.

On the other hand the comparative tables provided by the respondent’s assessor clearly indicate that a multiplier of between 8.9 and 11 would be realistic, and that estimated earnings of $0.54 per share on December 31, 1971 could be considered maintainable.

Mr Camiré’s valuation report, and his explanations, have convinced the Board that TCP’s shares could not have had a value of over $7 a share on December 31, 1971.

For these reasons the appeals are dismissed.

Appeals dismissed.