Salad Fresh Pty Limited v P&M Quality Smallgoods Pty Limited

1. [1]

   HIS HONOUR: This dispute concerns the proper interpretation of a shareholders agreement made by the three shareholders and the third defendant SPM Fresh Holdings Pty Ltd (SPM). The first plaintiff, Salad Fresh Pty Limited (Salad Fresh), holds 50% of the shares in SPM; the second plaintiff, Moraitis Family Investments Pty Limited (MFI), owns 25%; and the first defendant, P&M Quality Smallgoods Pty Limited (Primo), owns the remaining 25%.

2. [2]

   On 1 March 2013 Salad Fresh, MFI, Primo and SPM entered into a shareholders agreement. That agreement contained provisions intended to ensure that, without consent, no shareholder could dispose of its shares or effectively introduce new shareholders. It also included pre-emption provisions. Another “safeguard” was provided in clause 8.2, dealing with what might happen if there was a change in control of any of the shareholders. clauses 8.2 and 12 are at the heart of the current dispute and I will deal with them in some detail very shortly. Primo has a business of packaging and selling processed meats. It is a wholly owned subsidiary of Australian Consolidated Food Holdings Pty Ltd (ACFH). That means, for the purposes of the discussion that follows, that ACFH was Primo’s “Ultimate Controlling Entity” as defined in the shareholders agreement.

3. [3]

   On or about 20 November 2014, ACFH entered into a transaction with a Brazilian based company, JBS Smallgoods Holdco Australia Pty Limited (JBS), the effect of which would be to change the identity of Primo’s ultimate controlling entity. The plaintiffs say that Primo had to give the other shareholders a transaction notice within the meaning of clause 12.2 of the shareholders agreement. Although Primo purported to give such a notice on the 28 November 2014, the document that was in fact given did not qualify as a notice within the meaning of clause 12.2.

4. [4]

   Thus by the plaintiffs’ further amended statement of claim of 14 May 2015, they seek a declaration that the document issued on 28 November 2014 was not a valid transaction notice under clause 12.2 of the shareholders agreement. They seek an additional declaration that in the events which have occurred Primo has committed an event of default under clause 13.1 of the shareholder agreement, and that the plaintiffs had served a valid notice under clause 13.2 of the agreement on 1 April 2015.

5. [5]

   The statement of claim also claimed damages. However, by an order made at a directions hearing, I am to deal with all issues except damages. In argument, this was refined by the parties who agreed that if I considered that because in all probability, no damages arose, I should not make a finding to that effect but still allow a final hearing on the issue of damages. The reason for this point arising will hopefully become clear later in these reasons.

6. [6]

   I heard the proceedings on Monday 9 November 2015. Mr B W Walker SC and Mr T D Castle of counsel appeared for the plaintiff, and Mr I Pike SC and Mr J Burnett of counsel appeared for the defendants.

7. [7]

   I should commence by setting out the key provisions of the shareholders agreement.

8. [8]

   The parties agree on a series of factual propositions. The transaction between ACFH and its bidder, JBS, was initiated by Rothschild, the merchant bank. The initial contact was made with Mr Johnson, a partner in the Affinity Equity Partners Group who are private equity fund managers. Mr Johnson was acting for Primo and ACFH.

9. [9]

   On 29 October 2014, a heads of agreement executed as a deed was entered into by the Primo Group shareholders and JBS recording the parties’ intention to proceed with the sale of 100% of the shares in ACFH subject to due diligence and negotiations between the Primo Group shareholders and JBS, and ultimately the execution of a long form agreement.

10. [10]

    On 20 November 2014, JBS released an announcement to the market that it had that day entered into a conditional agreement to purchase 100% of the share capital in the Primo Group.

11. [11]

    On 28 November 2014 a notice was given to Salad Fresh, MFI, and SPM, the body of which, so far as relevant, is as follows:

12. [12]

    The price at which the transaction was confirmed was approximately 1.45 billion Australian dollars. That price was reached by means of a commercial negotiation between JBS and the owners of the ACFH shares. Mr Johnson’s evidence was that “Affinity did not use a valuation methodology in determining what place, what price, Claris (ie the owner of the shares in ACFH) should accept for Primo, and that he did not know what valuation methodology JBS used”. His evidence is that Claris focused on the return that would be achieved on its initial investment in ACFH which he described as “times money return and internal rate of return”.

13. [13]

    Mr Alvaraz, as the principal of JBS involved in the negotiations, gave evidence that JBS valued the Primo Group by a EBITDA (earnings before interest, taxation, depreciation and amortisation, excluding any abnormal items) multiple and the purchase price of 1.45 billion Australian dollars represented a multiple of 10.7 times the adjusted 30 June 2014 EBITDA of the Primo Group which was $135.7 million. This information was advised to Mr Parker on behalf of Salad Fresh by Mr Johnson in an email of 13 January 2015, and by JBS at a meeting on 14 January 2015.

14. [14]

    JBS had available to it, at the time of negotiating the price of the JBS transaction and entering into that transaction, the Primo Group’s EBITDA for the financial year ending 30 June 2014 at approximately $130 million.

15. [15]

    JBS excluded the negative contribution from a loss-making chicken business from Primo Group’s 30 June 2014 EBITDA for the purpose of the JBS transaction. The Primo Group agreed to close that business down after 30 June 2014 but prior to completion of the JBS transaction and, as such, the chicken business was not included and did not form part of the business purchased. This matter was also advised to Mr Parker of Salad Fresh at the meeting of 14 January 2015.

16. [16]

    Following the delivery of the document of 28 November 2014, Salad Fresh sought an extension of two weeks in which to respond. This extension was agreed and documented by a deed of variation executed on 4 December 2014 which extended the time for response until 19 December 2014. The deed of variation is unremarkable, but it is necessary to set out some of the recitals:

17. [17]

    There were meetings between the representatives of the shareholders in January, but the first indication that there was any dispute as to the status of the document of 28 November 2014 occurred on 19 January 2015, when Salad Fresh and MFI sent a letter to Primo alleging that the document was not a valid transaction notice along with their reasons for holding that view. Primo responded on 23 January 2015 asserting otherwise. The plaintiffs commenced the current proceedings on 30 January 2015.

18. [18]

    The JBS transaction was completed on 30 March 2015. JBS became the owner of the shares in the Primo company on 1 April 2015. Salad Fresh and MFI served a default notice under clause 13.2. Primo contested the validity of that notice and denies that there has been any default.

19. [19]

    Counsel posed the issue for me to determine was threefold:

20. [20]

    I will deal with these matters in turn. However, before I do I should make some general observations.

21. [21]

    The Shareholders Agreement is a very complex document. However, it was an almost impossible task for the drafter completely to protect the shareholders from having their close connection disturbed without the ultimate controlling entities being parties to some sort of contract. Accordingly, one should not be surprised if something falls between the cracks.

22. [22]

    Secondly, clause 8.2 is odd. In view of the fact that the parties have agreed to postpone the question as to whether any damages at all were suffered for the next tranche of these proceedings, I do not need to decide the matter. However, there is a very real difference between a promissory condition, a contingent condition, and a non-specific condition. Clause 8.2(a) provides that a change must not occur. It does not, as such, impose any obligation on Primo to ensure that the change did not occur. As to the distinction between promissory conditions and other conditions, see Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982)149 CLR 537. I have some doubts as to whether any claims can follow from clause 8.2(a) however, those doubts are affected by the fact that clause 12.1(b) speaks of a contravention of clause 8.2, and clause 13.1(g) refers to a shareholder breaching clause 8.2. I merely refer to these matters to make sure that people realise that they did have my attention, but in light of the fact that they are to be dealt with in the second tranche, I need take them no further.

23. [23]

    I now deal with the three issues.

Issue 1

1. [24]

   There is little doubt, as Mr Walker SC points out that there are some indications in the text of clause 12 that the notice must be given before the corporate transaction is entered into. I was a little unclear as to when it could be said that the transaction was entered into. However, it would seem clear now that when the deal was signed off on 20 November 2014, there became a binding transaction, albeit that completion was subject to various regulatory enquiries, consent, due diligence, etc. Thus, as a matter of fact I must take it as established that a legally binding transaction was entered into on 20 November 2014, eight days before the alleged transaction notice.

2. [25]

   The principal provisions of clauses 12.1 and 12.2 which indicate futurity are:

3. [26]

   Then there are, in clause 12.2(a), the words “wishes to conduct and give effect to”. However, it seems to me that these words have a continuous effect, and at all times after the shaking of hands, up until the final consummation of the transaction, the relevant party wishes to conduct and give effect to the corporate transaction so I do not consider that these words assist at all.

4. [27]

   Mr Walker SC puts that when one reads the document as a whole (particularly clause 12 as a whole), one can see that the commercial parties took the view that this notice needed to be given between (what Mr Walker SC calls) the time of shaking hands and the time of the lawyers finishing their work on the deal that had been agreed, but before the transaction was actually entered into in a binding way. He looks at the whole of clause 12 and points to the fact that there are very strict time limits given in respect of most of the steps. The purpose of clause 12 is set out in 12.1(b), that is; “it is likely that a Corporate Transaction would, but for this clause, give rise to a contravention of clause 8.2 at that time it is carried out”. I have expressed my doubts about that but the significant matter is that the parties have acknowledged that that is the situation. Accordingly, once there is the proposed change in the ultimate controlling entity in respect of one of the shareholders, the other shareholders have three options:

5. [28]

   The second and third of these rights needs to be exercised within a relatively limited time. Thus, under clause 12.3, there is five business days, after the date of the transaction notice, to serve notice in writing of intention to TAG.

6. [29]

   Obviously if the time for completion of the head agreement is relatively short, this is going to be awkward so that one would tend to favour the construction which gives more time for the process to take place. Likewise, under clause 12.4, there is a requirement which might, to an outside observer, seem almost impossible to meet that a valuation be obtained within 10 business days. Then under clause 12.5 there is a further three business days to give notice to other shareholders if certain things happen, and then under clause 12.6, the completion of any side transaction is to take place at 12:00 noon on the same day as that on which the corporate transaction is completed.

7. [30]

   In argument it was, I think, conceded that this causes problems depending on what time of day the head transaction was completed. The parties agreed upon the potential difficulties that might arise.

8. [31]

   Mr Walker SC says all these matters of timing disclose that the notice should be given before the transaction is documented, not merely before it is completed.

9. [32]

   On the other hand Mr Pike SC says that there is no real reason for taking that attitude. He says further that the document in other places, such as clause 10, demonstrates that it is clear that there are strict time limits, yet this is not reflected in clause 12.

10. [33]

    Mr Pike SC submits that the commercial purpose of clause 12 is not advanced by imposing any requirement that the transaction notice be issued before entry into the corporate transaction. The “other shareholder” only needs to determine whether to participate in the corporate transaction before completion of the corporate transaction. This commercial purpose is not advanced by requiring the transaction notice be issued before any entry into the corporate transaction. Again he puts that there is only a breach of clause 8.2 when there is an actual change in identity of the ultimate controlling entity, and that, again, is on completion not on entry into the transaction.

11. [34]

    Another line of attack by Mr Pike SC is to say that the word “may” in clause 12.2 is permissive because there is no mandatory requirement that the relevant party issue a transaction notice. (For instance if the other relevant shareholders consent to what is happening). To impose a mandatory obligation to issue a transaction notice by a certain time in the absence of any objective commercial reason for doing so, is not a conclusion that should be reached in a commercial document.

12. [35]

    It is very difficult to draw clauses, such as clause 12, and anticipate in advance all the possibilities. Technically the onus is on the plaintiff to show the Court that it is more likely than not that its construction is correct. I do not decide the case on onus because it does seem to me that whilst both positions are arguable, the arguments for the first defendant’s position, as I have set out by quoting Mr Pike SC, are more persuasive than those put forward by the plaintiff.

13. [36]

    Accordingly, in my view there is no necessity to issue a transaction notice before the actual corporate transaction is signed, sealed and delivered. It may be that the transaction notice needs to be given at least within a time that would allow all the steps in sub-paragraphs of clause 12 to take place, before the completion date in the head transaction, but that of course is a different matter and one that was not actually canvassed in argument.

Issue 2

1. [37]

   It is quite clear that the reason for the transaction notice is to allow the other shareholders to work out which of the three options that I have noted earlier will best suit their commercial interests. Mr Walker SC says for that purpose, it is necessary for the other shareholders to have proper information, and because of the relatively short time limits involved, that proper information must be contained in the transaction notice and if it is not contained in the document which purports to be a transaction notice, it is not a transaction notice at all. The argument then goes on to say that if there was no transaction notice given then there has been a default under clause 8.2 and this then leads to a default notice being given.

2. [38]

   A lot has been written about the construction of commercial contracts and mercifully I was spared being referred to most of the cases that are referred to in almost every piece of litigation. As Lewison & Hughes put it in the Interpretation of Contracts in Australia (2012, Lawbook Co) at [2.06], the Court may be assisted by consideration of the commercial purpose of the contract. However, what tends to happen is that each party has a different slant on the commercial purpose; a slant which favours it. In the instant case we have clause 12.1(b) which shows that the purpose is to provide an escape route against the contravention of clause 8.2 if the ultimate controlling entity is entering into a transaction which may change who that entity is. However, outside that main purpose, the plaintiffs still argue that for its commercial convenience it needs to have all the details to make an assessment; whereas the first defendant says that if it cannot, because it does not know the details, why should it be obliged to suffer the consequences of a default (because it is not a term of the contract that it must supply sufficient details for the other shareholders to be able to make up their minds as to what to do). It says that in the instant case it has done the best it can.

3. [39]

   The plaintiff denies that what the first defendant did do in the document of 28 November is the best it could; for instance, it says that there are so many ambiguities in the statement, such as the possibility of certain post-synergies put in place after acquisition, a multiple of 8 x EBITDA would appear to be appropriate, but, otherwise, 10.7 x LTM adjusted EBITDA would be appropriate. People assume that LTM stands for last twelve months, but it does not indicate which period of twelve months is relevant.

4. [40]

   There are good arguments put both ways, but again I favour that of the first defendant. The document should not be construed, in my view, as requiring the defendant to do anything more than it is practical for it to do. If the head transaction is not put together by any particular methodology, much rather than by instinct of the head buyer then it is hard to imagine that the parties who have then directed their mind to this situation would have said “well if that happens, the relevant shareholder who has no control over what his controlling entity did will have to pay a penalty for breach of clause 8.2”. That, to me, does not make commercial common sense. The other shareholders have been given as much information as is in the hands of the affected shareholder, and, it seems to me, that even though it might not be sufficient for the other shareholders to be absolutely sure of what is the best deal they can get and which is the best option to choose, the transaction is valid.

5. [41]

   I should note that I was not taken into the area which often is relevant of this sort of case which is the difference between an irregular notice and a void notice. All Mr Walker SC put on in that matter was that the valuation was such an important matter that it could not possibly be anything other than a mandatory requirement which would invalidate the notice if not complied with. However, I do agree with Mr Walker SC that it is not within the term “methodology” merely to say that there is a lump sum price of $1.45 billion.

Issue 3

1. [42]

   Because of what I have decided in 1 and 2 above, it is not necessary to deal with the allegation that there is an estoppel by deed. However, in case this matter goes further and I am held to be wrong I need to deal with it briefly.

2. [43]

   The plaintiff says that the rule that there is an estoppel by deed only applies in proceedings arising from the deed. This rule is constantly stated (see, eg Seddon on Deeds (2015, Federation Press) at page 184 where the authorities are noted). Because this is not an action on the variation deed, the principle of estoppel by deed cannot apply. (See Coface Australia v Sims Group Australia Holdings Ltd [2013] NSWCA 418, at [93] - [97]).

3. [44]

   But even on the “merits”, the argument must fail. Lewison on the Interpretation of Contracts (3rd ed 2004, Sweet & Maxwell) at 10.15, page 330, gives the illustration of Re Distributors and Warehousing Ltd [1986] 1 EGLR 90, where a deed of variation between the assignee of the reversion to a lease and two guarantors of the original tenant contained an acknowledgement by the guarantors that their obligations under the guarantee extended to the varied obligations to the tenant. It was held that this was insufficient to estop the guarantors from contending that the benefit of their guarantee had not been assigned to the assignee. That is very similar to the present case.

4. [45]

   Finally, the statement in the recitals when fairly read does not seem to me to be more than a mere indication that a piece of paper called a notice was actually given on the 28 November rather than an assertion that the same was valid for all purposes.

5. [46]

   Accordingly, if necessary, the estoppel point fails.

6. [47]

   Thus, it is not necessary for me to examine at all the fact that a notice of default was given under clause 13 and what might be its consequences. Had this been relevant I would have had some difficulty because of the paucity of information as to what happened after the default notice was served.

7. [48]

   In the event I merely dismiss the present proceedings with costs.