THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT

Not Reportable
CASE NO 348/2006

In the matter between

JOCHEN KOFAHL

Appellant

and

S L KEILEY

Respondent

Coram:
Streicher, Heher and Jafta JJA
Heard:
7 MARCH 2007
Delivered: 29 MARCH 2007

Summary: Company shares – valuation – relevant factors – onus on the
plaintiff.

Neutral citation: This judgment may be referred to as Jochen Kofahl
v S L Keiley [2007] SCA 41 (RSA)

___________________________________________________________

JAFTA JA

[1] This is an appeal against a judgment by Willis J in the
Witwatersrand Local Division in an amount of US $ 100 000,00 against
the appellant in favour of the respondent in an action in which the issues
had been split. Blieden J had previously declared that the respondent, as a
result of the appellant’s repudiation of a contract with the respondent, was
entitled to 10% of the value of Palmerfield Ltd calculated as at 6 January
1997. The valuation was to be done on the assumption that Palmerfield
was vested with the exclusive licence to manufacture and sell Hydraform
machines worldwide outside Africa. Willis J placed a value of US $ 1m
on Palmerfield Ltd.
[2] The appellant, a mechanical engineer based in Boksburg, invented
a brick making machine called ‘Hydraform Machine’ in 1988. This
machine may be powered by an electrical or diesel motor. It is compact
and easily transportable. It produces bricks by hydraulically compressing
soil mixed with a small amount of cement. The bricks are shaped in such
a way that they interlock with each other so as to make it unnecessary to
use binding material at construction. They also provide more thermal
insulation and are rendered impermeable by applying grout or a coat of
paint. These bricks are ideally suitable for building low cost houses. The
appellant sold the machine in South Africa and other African countries.
Patents had been registered in the name of companies operated by the
appellant.

[3] In 1995 Mr John Carter (Carter), a businessman from Malawi,
introduced the respondent to the appellant. The respondent is an
American businessman with a degree in economics from Yale University
and a MBA degree from Havard University. At the time he was a partner
in a business consultancy firm known as Robert A Weaver Junior and
Associates which operated as such in the United States. The respondent
was stationed at its branch in Washington DC.

[4] Before the parties’ meeting the appellant was anxious to sell the
machines outside Africa. He had contacted the Cement Institute in
Argentina in the hope that it would facilitate the introduction of his
business there. He had hoped also to explore the market in India and he
held some discussions with a third party in that regard. After the meeting
the appellant was optimistic that the respondent was a potential partner to
successfully drive the sale of his machine worldwide. While the
respondent saw the invention as presenting an opportunity for him to get
involved in an exciting venture. However, the respondent could not
immediately get involved in the venture with the appellant because he
was still contractually bound to the consultancy firm. Instead and acting
on behalf of the firm, he proposed an agreement between the appellant
and the firm for the exploitation of the invention but the latter turned it

down.

[5] However, in November 1995 before the respondent left the
consultancy firm, he concluded an oral agreement with the appellant to
market and sell the machines in countries outside Africa. Due to the
qualities of the machines, their target market was the developing
countries. The parties decided to use a company as a vehicle through
which the joint venture was to be carried out. For this purpose they
agreed, together with Carter, to use Palmerfield Limited, the latter’s
dormant company registered in the British Virgin Islands. The appellant
was allocated 80% of shares in that company while the respondent and
Carter received 10% each. They agreed that the appellant would grant an
exclusive licence to Palmerfield to market and sell the machines outside
Africa. The appellant was hopeful that the respondent would raise capital
for the company.

[6] At the time Argentina had a housing backlog amounting to millions
of units. This caused enormous optimism. As a result the respondent gave
his partners unrealistically high sales projections for the machines. At one
point he estimated that in Argentina alone, they were going to sell 1000
machines in five years. In January 1996 the respondent expressed the
view that they might realize profits in an amount of $8,5m to $20m.

[7] The appellant had appointed Oscar Termine, an architect in Buenos
Aires, as his representative in Argentina. However, by March 1996 the
appellant had run out of money whereupon the respondent undertook to
take Termine over and to pay his salary. The respondent remained in
Washington while Termine was doing the marketing of the machine in
Argentina. As Termine could not speak English, the respondent engaged
Ms Patricia Scott, an Argentinian who was then working in Washington
DC, to interpret for him from Spanish to English whenever he had a
telephonic conversation with Termine. At that time Ms Scott was
working for Special Olympics International, an entity that was involved
in the development and organisation of sports events for the physically
challenged people. She was promised a fulltime employment at
Palmerfield in the event of the business being successful. By virtue of her
professional relationship to the respondent, she interacted almost daily
with Termine, albeit by telephone. She visited her relatives in Argentina
once a year and claimed to have been familiar with the housing market
there as information relating thereto was easily available. She claimed to
have been involved in the marketing of the machines but her involvement
would not seem to have gone any further than acting as an interpreter and
translator. She never saw a hydraform machine nor did she know how it
was operated or what kind of soil was suitable for use in making bricks
with the machine.

[8] The marketing of the machine in Argentina took the form of a
presentation by the respondent to the Cement Institute, an entity
representing cement companies in Argentina. They were exhibited at
major trade fairs and demonstrated to municipal and provincial
governments. An overwhelming interest was shown in the machine by all
those who were introduced to it. Despite the extensive marketing and the
exposure it received, no more than 8 machines had been sold by 6
January 1997.

[9] In May 1996 the relations between the appellant and the respondent
were strained and the appellant offered the Argentinian franchise in
respect of the machine to the respondent for  US$100 000 but the
respondent declined. The joint venture was struggling to carry on its
operations because it had no capital. It attracted no investments. As
relations between the partners continued to deteriorate, further attempts
were made to reach an amicable dissolution of the joint venture without
success. In June 1996 Carter made an offer for the business in Argentina
to the respondent in exchange of his shares in Palmerfield on certain
conditions. Again the respondent declined the offer.

[10] In September 1996 the appellant repudiated the joint venture

agreement. The respondent accepted the repudiation and cancelled the
agreement on 6 January 1997. Meanwhile the appellant and Carter had
approached some businessmen in Guernsey in the British Virgin Islands
to invest in the venture as they still, at that time, had hope in its success in
Argentina. A presentation was made to potential investors who were
impressed by the machine but instead of investing in Palmerfield, they
insisted that a new company, licensed to sell the machine outside Africa,
be formed which would be fully controlled and managed by them. The
sum of US$100 000 was raised and a company called International
Equipment Distributors Ltd (IED) was formed to be substituted for
Palmerfield in Argentina and other parts of the world. With a capital
investment of US$100 000, there was again optimism that IED would
succeed. But this was not to be. In November 1996 there were clear signs
that IED was going to suffer the same fate. In order to accommodate the
investors IED was granted additional rights to sell machines in Africa.

[11] Following the cancellation of the agreement in January 1997, the
respondent sued the appellant in the Johannesburg High Court for
damages in the sum of US$2 300 000 which, he claimed, represented
10% of the value of Palmerfield, had the agreement been properly
performed. At the trial the issues of liability and quantum were separated.
Blieden J was asked to determine liability only. The learned Judge found

that the appellant had indeed repudiated the agreement and issued an
order in the following terms:

‘’1.
It is declared that the plaintiff is entitled to 10% of the value of Palmerfield
Ltd (Palmerfield), calculated as at 6 January 1997 on the assumption that Palmerfield
was vested with exclusive licence to manufacture and sell the Hydraform machines
worldwide outside Africa.
2.
The matter is postponed sine die for the purpose of the parties calculating the
aforesaid value. If the matter cannot be resolved by the parties, leave is granted to
either of the parties to set the matter down in this court for resolution of this issue.’

[12] Resolution of the issue eluded the parties and as a result the matter
came before Willis J for determination of the 10% value of the shares.
The learned Judge found that such shares carried the value of
US$100 000 and ordered the appellant to pay this amount to the
respondent. The appellant unsuccessfully sought leave against the latter
order only. The appeal serves before us with leave of this court.

[13] The only issue in this appeal is whether the respondent on whom
the onus lay, has established the value of the shares in question.
Palmersfield did not have assets other than the licence to sell the
machines which it must be assumed it had, nor did it have capital for its
operations.

[14] Willis J adopted, correctly in my view, the approach of determining
what a willing reasonable buyer would have been prepared to pay for
10% of the shares. He referred to Holt and Others v Inland Revenue
Commissioners [1953] 2 All ER 1499 E-H. In that case Danckwerts J said
at 1501:

‘The result is that I must enter into a dim world peopled by the indeterminate spirits of
fictitious or unborn sales. It is necessary to assume the prophetic vision of a
prospective purchaser at the moment of the death of the deceased, and firmly to reject
the wisdom which might be provided by the knowledge of subsequent events. …
By the terms of the section I have to imagine the price which the property would fetch
if sold in the open market. This does not mean that a sale by auction  (which would be
improbable in the case of shares in a company) is to be assumed, but simply that a
market is to be assumed from which no buyer is excluded. … At the same time, the
court must assume a prudent buyer who would make full enquiries and have access to
accounts and other information which would be likely to be available to him…’

[15] Our courts have time and again determined the value of assets by
reference to the price which a willing seller might reasonably expect to
obtain from a willing buyer (Illovo Sugar Estates Ltd v South African
Railways & Harbours 1947 (1) SA 58(W) at 73 and the authorities there
cited). This method of determining the value of property was affirmed by

this court in Scott and Another v Poupard and Another 1971 (2) SA 373
(A). There Miller AJA said at 381E-G:
‘What has to be determined is what the actual value of the shares would have been
had the company been formed in accordance with the agreement and had the
appellants acted as they were required to do. The ultimate criterion in regard to
evaluation of the shares of the company on that hypothesis, and bearing in mind that
the shares would not be quoted on the market, is what a willing purchaser would, at
the given time, have been prepared to pay to a willing seller for such shares; and in
considering that question it is necessary to attribute to such imaginary purchaser
reasonably detailed knowledge of the company, its management, its assets and
liabilities, its potential and other relevant factors which might have a bearing on the
company’s prospects of flourishing and of paying a dividend.’

[16] In the present case the fictitious purchaser would have, on the one
hand, information relating to the attractive market in Argentina: the
housing backlog there amounting to 5.5 million units and the
government’s budget of US$600 million for low cost housing; he would
also take account of the fact that the machine had impressive qualities
which attracted interest of all those to whom it was introduced. He would
consider that Palmerfield had an exclusive licence to sell the machine. All
these factors may tilt the scale in favour of buying the shares.

[17] But, on the other hand, our imaginary prudent purchaser would

have in his possession information which waters down those attractive
factors. He would know that despite extensive advertising and marketing
the machines did not sell; that in January 1997 no more than eight
machines had been sold. He would be aware of the fact that no market
research was conducted prior to introducing the machine and that the
company’s management failed to establish whether the soil in Argentina
was suitable for use by the machine. He would also consider that the
company had no assets other than the licence which it is deemed to have
had and which was given to IED free of charge. He would establish that
Palmerfield had no capital and that its management was not based in
Argentina, factors which would severely hamper it in its operations.

[18] In placing a value of $100 000 on Palmerfield the court a quo
relied on:
a)
The sales projections testified to by Patricia Scott purporting to
be an expert witness and the evidence of Prof Wainer who
valued the shares on the basis of these projections. Although she
was born in Argentina she last worked in Argentina in 1982.
From 1991 to 1997 she worked for Special Olympic
International. Being fluent in Spanish she acted as an interpreter
and translator for the respondent during the period January 1996
to August/September 1996. She was obviously not qualified to

express an opinion as to what sales could be achieved. Her
evidence should have been rejected as being of no value.
b)
The appellant’s offer during June 1996 to sell to the respondent
the right to market the machine in Argentina for $100 000
which it wrongly interpreted to have been an offer in respect of
10% of such rights whereas it was an offer for 100% of such
rights. The offer was not accepted by the respondent.
c)
Johan Blersch’s willingness to invest in the project in
Argentina. Blersch advanced money in respect of the project in
Argentina, he did not acquire any equity interest in the project.
d)
The fact that Guernsey investors were in September 1996
prepared to invest $100 000 and later an additional $50 000 in
the marketing of the machine outside Africa. However, the
company International Equipment Distributors, a company
managed and controlled by them, acquired the licence to do so,
being Palmerfield’s only (deemed) asset, free of charge.
e)
The widespread enthusiasm generated by the machine.
However, by 6 January 1997 that enthusiasm had not converted
into meaningful sales and had proved to have been misplaced.
f)
The fact that some sales had materialised by 6 January 1997.
However, no more than eight    sales had been concluded by that
date.

[19] In my view the evidence does not establish that the right to market
the machine outside Africa had any value as at 6 January 1997. In the
event the enterprise to market the machine outside Africa, proved to be
unsuccessful by reason of cheaper products being available, the
unavailability of suitable soil, traditional building methods, vested
interests, labour costs and in the case of Brazil the availability of a
cheaper manually operated machine. The judge a quo mentioned the fact
that the venture was unsuccessful in South America but was of the view
that it was with the benefit of hindsight that the reasons are known and
that hindsight may not be applied in the valuation. In this regard he relied
on the judgment of Danckwerts J in Holt and others v Inland Revenue
Commisioners. However, to the statement by Danckwerts J that wisdom
which might be provided by the knowledge of subsequent events should
be rejected Danckwerts J added that one must assume a prudent buyer
who would make full enquiries. There is no reason to believe that such a
purchaser would not have discovered many if not all the problems which
caused the project to fail. In the result knowledge of the problems cannot
be considered to be the wisdom of hindsight. In fact, by 6 January 1997
Blersch, a South African businessman, had become aware, after two visits
to Argentina, of at least some of the problems. He thought that this was a
high risk business and that no buyer would be prepared to pay anything

for a 10% interest in the project.

[20] This is not a case where evidence and witnesses were not available
to the respondent. The respondent himself is a well qualified businessman
who had tried to raise money for the project and who was intimately
involved in attempts to market the machine. He should have been able to
assist the court in determining a value. There should also have been
Argentinian building contractors who had knowledge of the machine and
of conditions in Argentina who could have assisted. Yet the respondent
chose not to testify and not to call witnesses who could be of assistance to
the court. Instead of doing so he elected to call a person who he had
employed in the United States on a part time basis as an interpreter and
translator and who did not know the machine and who had no knowledge
of factors that could affect the marketability of the machine.

[21] In these circumstances the court below should have granted
absolution from the instance. It follows that the appeal must succeed.

[22] The following order is made:

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.’

____________________
C N JAFTA
JUDGE OF APPEAL

CONCUR: )
STREICHER JA

)
HEHER JA
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From:
The Registrar, Supreme Court of Appeal

Date:
29 March 2007

Status:
Immediate

JOCHEM KOFAHL v STEPHEN S KEILEY

Please note that the media summary is intended for the benefit of the
media and does not form part of the judgment of the Supreme Court of
Appeal

In a judgment handed down today, the Supreme Court of Appeal (the
SCA) has set aside judgment of the Johannesburg High Court which
ordered Mr Jochem Kofahl (the appellant) to pay a sum of US$100 000 to
Mr Stephen Keiley, an American citizen. Keiley had sued Kofahl for
US$2 300 000 which, he claimed, represented profits he could have made
had the latter not breached their joint venture agreement to sell
Hydraform machines in Argentina. The trial court had ruled that Keiley
was entitled to 10% of the value of the company through which the
parties had agreed to carry out the joint venture business. The company
had no capital nor did it have assets except the licence to sell the

machines. The SCA found that Keiley had failed to prove the 10% value
of the company.