David Morgan Investments Pty Ltd v Maggie Beer Holdings Ltd; Maggie Beer Holdings Ltd v David Morgan Investments Pty Ltd

1. [1]

   By a Share Purchase Deed dated 30 March 2021, the plaintiffs, David Morgan Investments Pty Ltd and Emily McWaters Investments Pty Ltd (“the Vendors”), agreed to sell the defendant, Maggie Beer Holdings Ltd (“the Purchaser”), their shares in Hampers and Gifts Australia Pty Ltd.

2. [2]

   Hampers and Gifts carried on an online gourmet hamper business known as “The Hamper Emporium” and an online gifts business known as “Gifts Australia”; defined together in the Share Purchase Deed as “the Business”.

3. [3]

   The consideration payable by the Purchaser for the shares in Hampers and Gifts was:

   1. (1)

      $20 million;

   2. (2)

      certain shares in the Purchaser; and

   3. (3)

      the “Earn Out Amount”. [1]

4. [4]

   These proceedings are concerned with the correct calculation of the Earn Out Amount.

5. [5]

   The Share Purchase Deed provides that the Earn Out Amount is to be calculated in accordance with Sch 11 of the Share Purchase Deed.

6. [6]

   In Sch 11, Earn Out Amount is defined to mean the “Base Earn Out Amount”, being $10 million, plus the “Additional Earn Out Amount”.

7. [7]

   The Additional Earn Out Amount is to be calculated as being the difference between “Earnings” and the Base Earn Out Amount of $10 million.

8. [8]

   The Additional Earn Out Amount is to be rounded down to the nearest $1 million and:

   1. (1)

      will be nil if the difference between the Earnings and Base Earn Out Amount is less than $1 million; and

   2. (2)

      is subject to a maximum amount of $5 million.

9. [9]

   The principal issue which divides the parties is concerned with the manner in which “Earnings” is to be calculated.

10. [10]

    In Sch 11, “Earnings” is defined to mean the earnings of the Business before interest, tax, depreciation and amortisation (“EBITDA”) during the period 1 July 2022 until 30 June 2023 (“the Earn Out Period”).

11. [11]

    Schedule 11 provides a mechanism for the Purchaser to provide the Vendors with an “Earn Out Statement” setting out, relevantly, its calculation of the “Earnings”. [2]

12. [12]

    The Earn Out Statement is to be a “profit and loss statement for the Business prepared in accordance with this Schedule 11 disclosing” the Earnings and the Earn Out Amount.

13. [13]

    Schedule 11 provides for the Vendors to give the Purchaser a “Vendors’ Report” setting out whether or not they agreed with the Purchaser’s calculation, and to set out any “Contested Matters”. [3]

14. [14]

    Schedule 11 then provides for a period of good faith negotiations failing which “the unresolved Contested Matters must be referred for resolution by an expert” in accordance with cl 4 of Sch 11. [4]

15. [15]

    On 29 August 2023, the Purchaser sent the Vendors a draft Earn Out Statement.

16. [16]

    Consistently with the definition of Earn Out Statement, the Purchaser’s 29 August 2023 Earn Out Statement was in the form of a profit and loss account and asserted that:

    1. (1)

       The “trading EBITDA”, and thus the “Earnings” for the Business, for the period 1 July 2022 to 30 June 2023 was $6,475,104; and

    2. (2)

       Thus, the Additional Earn Out Amount [5] was nil, [6] and thus, although this was not stated, the Earn Out Amount was $10 million. [7]

17. [17]

    On 10 October 2023, the Vendors served on the Purchaser their “Vendors’ Report” setting out 11 “Contested Matters”, and concluding that the Earnings for the period 1 July 2022 to 30 June 2023 were $15,504,867 and that, consequently, the Earn Out Amount was $15 million. [8]

18. [18]

    The parties then engaged in the good faith negotiations required under Sch 11 and, as no agreement was reached, agreed to appoint Ms Janine Thompson of McGrath Nichol as the “Earn Out Expert” (“the Expert”).

19. [19]

    What is in issue between the parties are the principles that the Expert must apply in determining the Earnings.

20. [20]

    In that regard, the critical provision is cl 2 of Sch 11.

21. [21]

    Clause 2 is in the following terms:

22. [22]

    Clause 4 of Sch 11 deals with the “Expert Determination”.

23. [23]

    Subclause 4.1(c) provides:

24. [24]

    Clause 4.2 provides that the Expert is to act “as an expert, not as an arbitrator”, [9] and that the Expert’s decision is “final, conclusive and binding” absent manifest error. [10]

The competing contentions

1. [25]

   In these circumstances, the Vendors seek a declaration that, properly construed, cl 2 of Sch 11 of the Share Purchase Deed has the effect that the Expert is required to calculate the Earnings:

   1. (1)

      in accordance with the “specific principles” set out in cll 2.1 and 2.2 of Sch 11;

   2. (2)

      as if, during the Earn Out Period, the Business had been conducted in the ordinary course and in the same manner as it was conducted immediately prior to Completion, in accordance with the principle set out in cl 2.3(a); and

   3. (3)

      by normalising the Earnings to exclude the impact of changes as described in cl 2.3(b)(vi).

2. [26]

   The Purchaser seeks a declaration that the Expert must have regard only to matters in cll 2.1 and 2.2, and not cl 2.3.

3. [27]

   The Purchaser also seeks a declaration that the Vendors’ Contested Matters 6 to 11 are not “Contested Matters” for the purposes of the relevant provisions in Sch 11 and are not capable of being decided by the Expert.

Decision

1. [28]

   My conclusions are that:

   1. (1)

      on the proper construction of the relevant provisions in Sch 11 of the Share Purchase Deed, the Expert is required to calculate Earnings having regard to the matters set out in each of cll 2.1, 2.2, 2.3(a) and the second sentence of cl 2.3(b)(vi); and

   2. (2)

      the Expert must decide all of the Contested Matters in the Vendors’ Report.

Principles

1. [29]

   There is no dispute about the relevant principles.

2. [30]

   A court in interpreting a provision of a document has regard to its words, its context, and the purpose of the document as a whole. The leading modern statement on the importance of context and purpose is found in the reasons of French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd: [11]

3. [31]

   The question is what a reasonable business person in the position of the parties would have understood the relevant terms to mean; an objective task involving identification of the imputed intention of the parties by reference to the contractual text, construed in the light of its context and purpose. [15]

4. [32]

   Further, as has also been correctly stated:

5. [33]

   It is agreed that headings used in Share Purchase Deed, and Sch 11 in particular, are not available to construe the provisions in question. [17]

The construction question

1. [34]

   The starting point is the wording of cl 4.1(c) set out at [23] above.

2. [35]

   That clause obliges the Expert to decide the Contested Matters, the Earnings and the Earn Out Amount “by applying the principles set out or referred to in clause 2.1”. It does not refer to cl 2.3.

3. [36]

   The principles “set out or referred to” in cl 2.1 are the Accounting Standards referred to “as modified by the specific principles contained in clause 2.2”. Clause 2.1 also does not refer to cl 2.3.

4. [37]

   The “specific principles” in cl 2.2 deal with the exclusion and inclusion of the various amounts enumerated in cll 2.2(a) to (f).

5. [38]

   Thus:

   1. (1)

      revenue and expenses incurred otherwise than in the ordinary course of business are to be excluded: subcl (a);

   2. (2)

      revenue and expenses accelerated or deferred otherwise than in the ordinary course of business are to be excluded: subcl (b);

   3. (3)

      transaction costs, charge-backs, management fees, internal cost allocations, acquisition accounting entries and post acquisition restructuring matters are to be excluded: subcl (c);

   4. (4)

      agreed “additional items” can be included or excluded: subcl (d);

   5. (5)

      only reasonable arm’s length related party transactions can be included: subcl (e); and

   6. (6)

      expenses of any “new business” acquired by the Purchaser are to be excluded: subcl (f). [18]

6. [39]

   However, the parties also agreed, in cl 2.3(a), that:

   1. (1)

      their intention was that the Earnings would represent EBITDA of the Business during the relevant period as if the Business had been conducted in the ordinary course and in the same manner as it was immediately prior to Completion: subcl (i); and

   2. (2)

      Earnings “are to be calculated consistent with this principle”: subcl (ii). [19]

7. [40]

   The language used in subcl 2.3(a)(ii) is in mandatory terms and describes what “[is] to be calculated”.

8. [41]

   Subclause 2.3 also travels beyond subcll 2.2(a) and (b), which exclude from Earnings any revenue and expenses outside the ordinary course of business, and states it to be a “principle” that Earnings will also be calculated on the basis of the Business being conducted in the “same manner” as it was prior to Completion.

9. [42]

   Further, in the second sentence of subcl 2.3(b)(vi), the parties agreed that the Earnings used to calculate the Earn Out Amount “will be normalised to exclude the impact of the changes” made to the Business.

10. [43]

    The first sentence of subcl 2.3(b)(vi) obliges the Purchaser to meet with the Vendors and “consult with them prior to making any material change to the manner in which the Business is operated”. But it does not impose on the Vendors any obligation to take any step in response to such consultation, or make any provision as to what was to happen if there was any contention about the proposed material changes.

11. [44]

    Contrary to the Purchaser’s submissions, I do not read the first sentence of subcl 2.3(b)(vi) as containing a condition precedent to the operation of the second sentence of the subclause. The second sentence is engaged if any “such” changes, that is any “material” changes, are made to the Business. In that event, the second sentence mandates that the Earnings will be normalised to exclude the impact of the changes. I do not read cl 2.3(b)(vi) as bespeaking the parties’ intention that such normalisation would only be required if the Purchaser had first engaged in the consultation concerning changes referred to in the first sentence. It would be a strange result if the Purchaser could make material changes to the manner in which the Business was conducted but the concomitant normalisation of Earnings called for by the second sentence of cl 2.3(b)(vi) only be required if the Purchaser had chosen first to meet with the Vendors and consult them about those changes. Reasonable business people in the position of the parties would not understand the clause to have this effect.

12. [45]

    What, then, is to be made of the provisions in cl 2.3, in circumstances where they are not referred to in cl 4.1(c) as being provisions the Expert must apply?

13. [46]

    They are in mandatory terms and impose obligations on both parties. That is particularly clear in relation to cl 2.3(a) as subcl (i) speaks of the intention of both parties: “their intention”.

14. [47]

    I also read the second sentence of cl 2.3(b)(vi) that way. It uses the passive voice, “will be normalised”, but can only sensibly be read as imposing on both parties a result whereby Earnings are normalised in the manner described in the event that the Purchaser makes a material change to the manner in which the Business is operated.

15. [48]

    This mandatory language points to the conclusion that the parties intended that they, and indeed anyone else required to calculate Earnings, must have regard to that which is required by these provisions. The parties agreed that any dispute between them about Earnings would be decided by the Expert and must have intended that such Expert calculate Earnings this way.

16. [49]

    The parties have agreed a precise mechanism by which any disagreement about that matter was to be resolved, namely by the Expert under cl 4.1. As the parties agree they are to calculate Earnings in accordance with cl 2.3(a) and the second sentence of cl 2.3(b)(vi), it would be a very strange result if their appointed expert was not also obliged to calculate Earnings this way.

17. [50]

    Looking at the matter more broadly, I cannot see what work subcl 2.3(a) and the second sentence of cl 2.3(b)(vi) would otherwise do if they are not an agreed statement of the principles in accordance with which the parties agreed that Earnings were to be calculated.

18. [51]

    In argument, Ms Mirzabegian SC, who appeared with Ms Gollan for the Purchaser, accepted that the Purchaser would, for the purpose of preparing its Earn Out Statement, [20] be obliged to calculate Earnings taking into account changes in the Business as required by cll 2.3(a) and 2.3(b)(vi) but submitted that, nonetheless, the Expert appointed under cl 1.3(g) could not do so. That would be a very strange result in circumstances where the parties agreed, in terms, that any dispute concerning the Earn Out Statement would be determined by such an expert.

19. [52]

    These matters point to the conclusion that, despite the absence in cll 4.1(c) and 2.1 of any reference to subcl 2.3, the parties did not intend either of cll 4.1(c) and 2.1 exhaustively to state the matters that the Expert could take into account.

20. [53]

    The fact that the parties did not use the word “only” in subcll 4.1(c) and 2.1 provides some, albeit not decisive, confirmation that this is the preferable conclusion.

21. [54]

    For those reasons, my conclusion is that the proper construction of Sch 11 of the Share Purchase Deed is as the Vendors contend and as is set out at [25] above.

22. [55]

    My attention was drawn to the provisions in cl 8 of the Share Purchase Deed which deal with the creation of “completion accounts” and provide a mechanism for resolving disputes in relation to such accounts. Those provisions are drawn in very different terms from those under consideration here and cast no light on the question of construction before me.

23. [56]

    It is true, as the Purchaser pointed out, that the obligations enumerated in cl 2.3(b) of Sch 11 subsist from Completion, which was 24 May 2021, until the end of the Earn Out Period, that is 30 June 2023, and thus for over a year prior to the Earn Out Period itself. But this is not surprising, as any “changes” made in the Business prior to the commencement of the Earn Out Period would appear to be just as relevant as any “changes” made during the Earn Out Period itself.

24. [57]

    Finally, although the parties agree in cl 2.2(d) of Sch 11 that “additional items” can be agreed to be “included and excluded from the calculation of the Earnings”, I cannot see how this assists understanding the nature of the parties’ intention. The fact is that the parties included cl 2.3 in Sch 11. It may be that they could have made more clear their intentions concerning the role that cl 2.3 should play. However, I am faced with the words that the parties have chosen and my conclusions as to what those words show as to the nature of their intention is as I have set out.

The Contested Matters

1. [58]

   The Vendors’ entitlement to notify the Purchaser of Contested Matters is set out in subcl 1.3(e) of Sch 11 as follows:

2. [59]

   The Vendors notified the Purchaser of 11 Contested Matters.

3. [60]

   There is no dispute that Contested Matters 1 to 5 are “Contested Matters” that may be referred to the Expert.

4. [61]

   Nor is there any dispute that if, as I have held, the Vendors’ construction of Sch 11 is correct, Contested Matter 6 is also a “Contested Matter” that may be referred to the Expert.

5. [62]

   As to Contested Matters 7 to 11, the Purchaser contends that, even if, as I have found, the Vendors’ construction of Sch 11 is correct, none of those contested matters is a “Contested Matter” that may be referred to the Expert.

6. [63]

   Contested Matter 7 is that:

7. [64]

   Contested Matters 8 and 9 also refer to the non-implementation of the “website”, or in the case of Contested Matter 9, updating that website, and raise the same issues.

8. [65]

   I shall focus on Contested Matter 7.

9. [66]

   The Vendors’ Report referred to a “Management Presentation” said to have been made by representatives of Hampers and Gifts on 12 February 2021 to representatives of the Purchaser prior to the Purchaser purchasing the shares the subject of the Share Purchase Deed, and thus the Business. The Vendors’ Report called what it contends was conveyed at this Management Presentation as Hampers and Gifts’ “Business Plan”.

10. [67]

    The Vendors’ Report said, of this website:

11. [68]

    The Vendors’ Report stated that “a new website would have had a positive impact on Earnings” and calculated those earnings at a figure that fed into the Vendors’ conclusion as to Earnings during the Earn Out Period.

12. [69]

    The Purchaser contends that even if, as I have found, that by reason of subcl 2.3(a) and the second sentence of subcl 2.3(b)(vi), a “change … made to the Business” from the “manner as it was conducted immediately prior to Completion” could be taken into account by the Expert when determining Earnings, what is contended for in Contested Matter 7 is not such a change. Rather, the Purchaser contends what is contained in Contested Matter 7 is a complaint about the manner in which the Purchaser has conducted the Business and not a matter that relates to subcll 2.3(a) or 2.3(b)(vi).

13. [70]

    The slides shown at the 12 February 2021 Management Presentation referred to Hampers and Gifts’ proposed “Website Renovation”, a “Brand Awareness Initiative”, “website optimisations” and like matters.

14. [71]

    In substance, Contested Matter 7 complains that these matters did not come to pass.

15. [72]

    Ms Mirzabegian and Ms Gollan submitted that this amounts to a claim akin to a claim for damages for a loss of an opportunity. But even if that is so, I do not see how it follows that it is not for that reason a “Contested Matter”.

16. [73]

    And, contrary to the Purchaser’s submissions, these are “matters which would be recorded on a profit and loss statement”, assuming that is a relevant consideration. The Vendors’ Report concludes with a form of profit and loss statement which the Vendors have populated with what they contend to be the appropriate sale revenue figures.

17. [74]

    I am not able to come to a conclusion as to whether or not, on analysis of all the facts surrounding these matters, the correct conclusion is that these matters amount to a “change” in the “manner” in which the Business was conducted prior to Completion of the Share Purchase Deed for the purposes of subcll 2.3(a) and 2.3(b)(vi) of Sch 11. Suffice to say that these matters may amount to such a “change” and certainly are not incapable of amounting to such a “change”. If they do, then it may be that the Vendors’ contentions as to the consequences so far as calculation of Earnings is concerned are correct.

18. [75]

    But these are matters for the Expert to consider. I am unable to conclude that they render the Vendors’ Contested Matter 7 incapable of being a “Contested Matter” for the purposes of Sch 11 and thus incapable of being referred to the Expert for resolution.

19. [76]

    I see no reason why the Expert could not determine these matters. I do not see how it could result in her acting as an arbitrator, rather than an expert, contrary to cl 4.2(a) of Sch 11, [21] even if, which seems unlikely, this would involve her determining “questions of mixed fact and law, or for that matter, pure questions of law”. [22]

20. [77]

    I reach the same conclusion in relation to Contested Matters 8 and 9. They also deal with the website referred to in the Management Presentation, although contending for different factual and financial consequences vis-a-vis the Business.

21. [78]

    Contested Matter 10 is:

22. [79]

    The Vendors’ Report said, of this matter:

23. [80]

    Contested Matter 10 thus raises a similar contention to those advanced in Contested Matters 7 to 9, namely that by not pursuing the identified “revenue opportunity” the Purchaser had made a “change” to the manner in which the Business “was conducted immediately prior to Completion”.

24. [81]

    Again, I am not in a position to determine whether or not this matter did constitute such a “change” but cannot conclude that it was incapable of doing so. I am therefore not persuaded that Contested Matter 10 is not a “Contested Matter” capable of reference to the Expert.

25. [82]

    Whether the complaint is made out is a matter that should be left to the Expert.

26. [83]

    Contested Matter 11 is:

27. [84]

    Of this, the Vendors’ Report said:

28. [85]

    This contention raises the same issue as in Contested Matters 7 to 10, namely whether a change in marketing strategy allegedly adopted by the Purchaser constituted a “change” in the manner in which the Business was conducted.

29. [86]

    For the same reasons as I have set out above in relation to the earlier Contested Matters, I am not persuaded that Contested Matter 11 is not a “Contested Matter” for the purpose of reference to the Expert.

Conclusion

1. [87]

   I propose to make the following declarations:

   1. (1)

      Declare that clause 2 of Schedule 11 to the Share Purchase Deed dated 30 March 2021 has the effect that an expert appointed in accordance with clause 4.1 of Schedule 11 is required to calculate the Earnings (as specified in the Share Purchase Deed) used to calculate the Earn Out Amount:

   2. (2)

      Declare that clauses 1.3 and 4.1(c) of the Share Purchase Deed require the parties to instruct the Expert to decide all Contested Matters set out in the Vendors’ Report served on 10 October 2023 (including Contested Matters 6-11) and the Earnings and Earn Out Amount.

2. [88]

   If there is any dispute about that, or about whether costs should follow the event, the parties should exchange short written submissions. I will deal with such matters on the papers.

3. [89]

   The parties should otherwise confer and agree on the orders necessary to give effect to these reasons.