Christine Hamilton Thompson v Michael Leith Thompson

• Jurisdiction: New Zealand
• Judge: William Young J
• Judgment Date: 13 March 2015
• Neutral Citation: [2015] NZSC 26
• Docket Number: SC 50/2014
• Court: Supreme Court
• Date: 13 March 2015

Between

Christine Hamilton Thompson

Appellant

and

Michael Leith Thompson

Respondent

[2015] NZSC 26

Court:

Elias CJ, William Young, Glazebrook, Arnold and O'Regan JJ

SC 50/2014

IN THE SUPREME COURT OF NEW ZEALAND

Appeal against a Court of Appeal (CA) decision that an $8 million restraint of trade payment was not relationship property under the Property (Relationships) Act 1976 (PRA) — parties transferred their business to a family trust during their marriage — appellant wife said it had been agreed to treat trust assets as if they were “in effect” relationship property on separation — post separation, the business was sold for $72.3 million and the $8 million payment was made by the purchaser to the respondent husband in return for a restraint of trade covenant — whether the restraint payment was the monetisation of a property right which was personal to the respondent but derived during the relationship and was relationship property — whether the parties had proceeded on the basis that the trust assets were to be treated “as in effect relationship property” — whether the restraint payment would have been relationship property if the company shares had remained relationship property — whether it was appropriate under s9(4) PRA (separate property, unless the court considers it is just to treat it as relationship property — property acquired by either spouse or partner while they are not living together) to classify the payment as relationship property.

Counsel:

A E Hinton QC and S H Ambler for Appellant

D A T Chambers QC for Respondent

JUDGMENT OF THE COURT

A The appeal is allowed and the judgment of the Court of Appeal is set aside.

B The $8 million restraint of trade payment received by Mr Thompson is declared to be relationship property.

C The case is remitted to the Family Court for the making of such orders as may be necessary to give effect to the declaration.

D The appellant is awarded costs of $25,000 together with disbursements to be fixed by the Registrar in respect of the appeal to this Court and costs and disbursements in respect of the proceedings in the Family Court, High Court and Court of Appeal to be fixed by those Courts.

REASONS

(Given by William Young J)

Table of Contents

A dispute about a restraint of trade	[1]
Some further background	[4]
The setting	[4]
The agreements	[9]
The significance of the HFI shares being held by the MLT Trust	[18]
The relevant provisions of the Act	[20]
The authorities as to the treatment of goodwill and restraints of trade under the Act	[24]
The authorities as to the application of s 9(4)	[36]
The approaches taken in the Courts below	[39]
Family Court judgment	[39]
High Court judgment	[42]
The approach of the Court of Appeal	[45]
Did the restraint of trade payment represent the monetisation of a property right which was personal to Mr Thompson but derived during the relationship and thus relationship property?	[50]
Our approach	[57]
Overview	[57]
The parties proceeded on the basis that the trust assets were to be treated “as in effect relationship property”	[58]
If the HFI shares had remained relationship property, the $8 million payment would have been relationship property	[67]
It is appropriate under s 9(4) to classify the $8 million payment as relationship property	[73]
Disposition	[77]

A dispute about a restraint of trade

1 Michael and Christine Thompson have reached substantial agreement on the division of their assets under the Property (Relationships) Act 1976 but one issue remains in dispute. This arises out of the sale in December 2006 of a family health foods/dietary supplements business. Associated with this sale was a payment of $8 million by the purchaser to Mr Thompson in return for a restraint of trade covenant. This appeal turns on how this payment should be classified for the purposes of the Act.

2 In the Family Court, Judge Rogers concluded that the payment was separate property under s 9(4)(a) of the Act because it was received by Mr Thompson after separation, and that no portion of the payment should be treated as relationship property. 1 Mrs Thompson appealed to the High Court with partial success. 2 Andrews J agreed that the payment was the separate property of Mr Thompson 3 but then exercised her discretion under s 9(4) of the Act to treat part of the restraint of trade payment to Mr Thompson as relationship property. 4 She did not determine how substantial that part was. Rather, she directed that if the parties failed to reach agreement on apportionment, additional evidence would be required at a further hearing. 5

3 Mr Thompson's subsequent appeal to the Court of Appeal was successful with that Court concluding that (a) the $8 million payment was, in its entirety, his separate property, 6 and (b) it would not be right to exercise the s 9(4) discretion to treat it (in whole or in part) as relationship property. 7

Some further background

The setting

4 Mr and Mrs Thompson married in 1971 and have five adult children. Mr Thompson worked in the health foods/dietary supplements industry. In 1984, they established Nutra-Life Health and Fitness Ltd (“Nutra-Life”). Health Foods International Ltd (“HFI”) was formed in 1989. Its function was to hold the shares in Nutra-Life and associated companies. The control and value of the Nutra-Life business thus lay, ultimately, in the HFI shares. These were initially held by Mr and Mrs Thompson but in 1994 they were sold to the ML Thompson Family Trust (“the MLT Trust”), one of a number of trusts established by the Thompsons to hold assets acquired during the marriage. The sale price was $1.11 million, which was the

assessed fair market value of the HFI shares at the time. Mr Thompson was a trustee of the MLT Trust along with a solicitor (Mr Bruce Dell) and an accountant (Mr Dean Ellwood)

5 Mr and Mrs Thompson separated in August 2002. From that time until the time of the transactions in issue in this appeal, Mr Thompson continued to work in the business.

6 In November 2006 Next Capital Health Ltd (Next) indicated a willingness to acquire the Nutra-Life business. Events proceeded quickly. The proposal which emerged was for $72.3 million to be paid for the business (including goodwill) and for $8 million to be paid to Mr Thompson in consideration for him agreeing to a two-year restraint of trade. As well, Mr Thompson was to have a continuing role as a director of Next and he was to invest $12 million in that company for a 19.95 per cent stake in it.

7 Under the ownership structure, the decision whether or not to accept the offer rested with trustees of the MLT Trust. They obtained advice from two sources: Deloitte and Simmons Corporate Finance. The former reported that the total offered (that is $80.3 million) “compares favourably” to amounts paid in relation to two other heath food/nutrition businesses. $80.3 million represented 8 times the forecast EBITDA 8 of Nutri-Life. The multiples in respect of the two other transactions were 7.6 and 8 respectively. $72.3 million (that is the $80.3 million less $8 million for the restraint of trade) was 7.2 times the forecast EBITDA. Of this figure Deloitte said: 9

[W]e believe that the Next Offer of 7.2x forecast EBITDA (if the Restraint of Trade payment is excluded) also compares very favourably to these transactions both standalone (ie, if compared directly to the 7.6x and 8.0x multiples), but more importantly once it is recognised that both these transactions would have had commercial restraints on the vendors and hence these multiples have not been adjusted downward to compare to the 7.2x, which has this element carved out.

Deloitte then commented on the restraint of trade and $8 million payment in this way:

Given Next's stated position that [Mr Thompson's] ongoing transition role, given his close knowledge of both businesses, is critical in bringing the two companies together and maximising the synergies between them, we believe that the value Next would ascribe to the transaction without [Mr Thompson's] contractual and equity commitment would be materially reduced. In fact, it is possible (and indeed likely) that Next (or any other prospective buyer) would [not be] interested in Nutra-Life at all without these commitments.

Simmons Corporate Finance said: 10

In our view, if the Restraint of Trade was not entered into, a purchaser would likely price the Transaction at a lower value as it would consider the acquisition to be more risky due to the increased possibility of competition.

In this second report, the fair market value of the then proposed two-year restraint was assessed at between $6.2 million and $9.6 million.

8 The trustees 11 agreed to support the sale of the business assets to Next for $72.3 million and the transactions were then entered into as proposed, save that the duration of the restraint of trade restriction was increased from what had been first proposed.

The agreements

9 The detail of the sale and purchase agreement is largely immaterial for present purposes and there are only three features which we need to mention.

10 The first is that the purchase price of $72.3 million was apportioned as to $49.4 million for goodwill and intellectual property and $22.9 million for the other assets.

11 The second is cl 6.1 which is in these terms:

Conditions

Completion, and the [parties'] obligations at Completion, are conditional upon the following:

• (a) Michael Leith Thompson (or nominee) agreeing to contribute the lesser of $12,000,000 and the sum necessary to subscribe for 19.95% of the ordinary share capital in Next Capital Health Group Limited at Completion (on an as-converted, fully diluted, basis) in cleared and immediately available funds to subscribe for stapled units in Next Capital Health...