Jochen Kofahl v S L Keiley

The appellant, a mechanical engineer, invented the 'Hydraform Machine' in 1988, a brick-making machine suitable for low-cost housing. In November 1995, he entered into an oral joint venture agreement with the respondent (an American businessman) and John Carter to market and sell the machines outside Africa through Palmerfield Ltd, a British Virgin Islands company. The appellant received 80% of shares while the respondent and Carter each received 10%. The appellant granted Palmerfield an exclusive licence to manufacture and sell the machines worldwide outside Africa. Despite extensive marketing efforts in Argentina (which had a 5.5 million unit housing backlog), only 8 machines were sold by January 1997. The venture struggled due to lack of capital and no market research was conducted. In September 1996, the appellant repudiated the joint venture agreement, which the respondent accepted and cancelled on 6 January 1997. The respondent sued for damages representing 10% of Palmerfield's value. Blieden J found the appellant liable and declared the respondent entitled to 10% of Palmerfield's value as at 6 January 1997. Willis J subsequently valued the shares at US$100,000.

• What is the proper method for valuing shares in a company with no assets other than a licence and no capital?
• What is the appropriate valuation date for determining damages for breach of a joint venture agreement?
• What factors should a court consider when determining what a willing buyer would pay a willing seller for shares?
• Whether the respondent discharged the onus of proving the value of his shares in Palmerfield Ltd?
• Whether evidence of subsequent events (hindsight) may be considered in valuation or whether only information available to a prudent buyer at the valuation date should be considered?

1. The appeal is upheld with costs. 2. The order of the court a quo is altered to read: 'Absolution from the instance with costs.'

When valuing shares in an unlisted company for purposes of assessing damages, the court must determine what a willing reasonable buyer would pay a willing seller, attributing to the hypothetical purchaser reasonably detailed knowledge of the company, its management, assets, liabilities, potential and other relevant factors affecting prospects. The hypothetical prudent buyer is assumed to make full enquiries and have access to all information that would likely be available at the valuation date. Knowledge of problems that caused a venture to fail does not constitute impermissible hindsight if those problems would have been discoverable by a prudent buyer making proper enquiries at the valuation date. The plaintiff bears the onus of proving the value of shares and must adduce proper evidence, including expert testimony where appropriate, to discharge this onus. Where the evidence does not establish that shares had any value, absolution from the instance should be granted.

The court noted that the respondent, being a well-qualified businessman intimately involved in the venture who had attempted to raise capital and market the machine, should have been able to assist the court in determining value but chose not to testify. The court observed that Argentinian building contractors with knowledge of the machine and conditions in Argentina could have provided assistance but were not called. The court criticized the respondent's choice to call Patricia Scott, who worked part-time as an interpreter/translator in the United States, had never seen a Hydraform machine, did not know how it operated or what soil was suitable, and had no knowledge of factors affecting marketability, as an expert witness. Her evidence should have been rejected as being of no value. The court also noted that by January 1997, the venture's failure to sell machines despite extensive marketing and the attractive market conditions demonstrated that initial optimism and sales projections had proved to be unrealistic and misplaced.

This case establishes important principles for the valuation of shares in South African law, particularly in the context of unlisted companies with intangible assets. It clarifies that the willing buyer/willing seller test requires consideration of all information that would be available to a prudent buyer making full enquiries at the valuation date, and that subsequent events proving the accuracy of concerns apparent at the valuation date do not constitute impermissible hindsight. The case also reinforces the principle that the party bearing the onus of proving value (typically the plaintiff claiming damages) must adduce proper expert evidence and cannot rely on unqualified witnesses or speculative projections. It demonstrates the courts' approach to distinguishing between legitimate consideration of available information versus impermissible use of hindsight in valuation exercises.