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

[2024] NSWSC 778

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

David Morgan Investments Pty Ltd v Maggie Beer Holdings Ltd; Maggie Beer Holdings Ltd v David Morgan Investments Pty Ltd [2024] NSWSC 778

Hearing dates:

19 June 2024

Decision date:

25 June 2024

Jurisdiction:

Equity - Commercial List

Before:

Stevenson J

Decision:

Expert to calculate Earnings having regard to each of cll 2.1, 2.2, 2.3(a) and 2.3(b)(vi) in Sch 11 of the Share Purchase Deed.

Expert to decide all Contested Matters in the Vendors’ Report.

Catchwords:

CONTRACTS – construction – proper construction of a Share Purchase Deed – purchase of an online hamper and gift business – dispute as to what principles the expert must apply in calculating earnings and earn out amount – whether expert must take into account changes in manner in which purchaser has conducted the business following purchase

Cases Cited:

Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7

Miles v Luneburger Franchising Pty Ltd [2021] NSWCA 248

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37

Orleans Investments Pty Ltd v MindShare Communications Ltd [2009] NSWCA 40

Reardon Smith Line Ltd v Hansen-Tangen; Hansen-Tangen v Sanko Steamship Co [1976] 1 WLR 989; [1976] 3 All ER 570

Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47

Victoria v Tatts Group Ltd [2016] HCA 5

Texts Cited:

P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters)

Category:

Principal judgment

Parties:

David Morgan Investments Pty Ltd (First Plaintiff/Cross-Defendant)
Emily McWaters Investments Pty Ltd (Second Plaintiff/Cross-Defendant)
Maggie Beer Holdings Ltd (Defendant/Cross-Claimant)

Representation:

Counsel:
M A Izzo SC / Z A Graus (Plaintiffs/Cross-Defendants)
S Mirzabegian SC / N L Gollan (Defendant/Cross-Claimant)

Solicitors:
Arnold Bloch Leibler (Plaintiffs/Cross-Defendants)
Herbert Smith Freehills (Defendant/Cross-Claimant)

File Number(s):

2024/112512

JUDGMENT

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

1. $20 million;

2. certain shares in the Purchaser; and

3. the “Earn Out Amount”. ^[1]

   1. Clause 4.1.

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

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

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

2. is subject to a maximum amount of $5 million.

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

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. 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]

    2. Clause 1.2.

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. 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]

    3. Clause 1.3(e).

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]

    4. Clause 1.3(g).

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

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. 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. 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]

   5. It was described as the “Earn Out Amount”, but it is agreed this was an error.

   6. As the difference between Earnings of $6,475,104 and the Base Earn Out Amount of $10 million was less than $1m: see [8(1)] above.

   7. I.e. the Base Earn Out Amount of $10 million plus nil on account of the Additional Earn Out Amount.

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]

    8. Because the Additional Earn Out Amount, Earnings less the Base Earn Out Amount of $10 million, was thus the maximum permissible, $5 million; to which was to be added the Base Earn Out Amount of $10 million = $15 million: see [8(2)] above.

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

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

21. Clause 2 is in the following terms:

“2   PRINCIPLES FOR CALCULATION OF EARNINGS AND EARN OUT AMOUNT

2.1   Calculation of Earnings

The Earnings must be calculated in accordance with the Accounting Standards (as applied in the preparation of the Accounts) as modified by the specific principles contained in clause 2.2 of this Schedule 11.

2.2   Specific principles

(a)   Any revenue earned or expenses incurred by the Business other than in the ordinary course of business must be disregarded in calculating Earnings. For the avoidance of doubt, revenue earned from the sale of fixed assets or Related Party Transactions (unless otherwise provided for in paragraph (e) below) and any government stimulus or other government support received by the Business would be disregarded under this clause 2.2(a).

(b)   Without limiting clause 2.2(a) of this Schedule 11, any revenue earned or expenses incurred by the Business in the Earn Out Period shall be disregarded in calculating Earnings, to the extent that such revenue or expense only falls within the Earn Out Period as a result of being accelerated or deferred and such acceleration or deferral would not have occurred in the ordinary course of business.

(c)   The Earnings must be calculated on the basis that it is consistent with that contained in the Accounts calculated on a normalised basis and excluding the impact or effect of transaction costs, charge-backs, management fees or internal cost allocations by the Purchaser, acquisition accounting entries and any post acquisition restructuring of the Business (including redundancies).

(d)   Additional items may be agreed in writing between the parties to be included and excluded from the calculation of the Earnings.

(e)   Where Related Party Transactions occur in the Earn Out Period, only so much of the revenue or expenses incurred by the Business as it would be reasonable to expect would be incurred had the parties been dealing at arm’s length, in ordinary course of business and on ordinary commercial terms, will be included in the calculation of the Earnings.

(f)   If the Purchaser acquires or commences a new business (New Business) during the Earn Out Period, any expenses earned in or incurred by the New Business will be disregarded in calculating the Earnings.

2.3   No Avoidance and conduct of Business

(a)   The parties agree that:

(i)   it is their intention that the Earnings represent the earnings before interest, tax, depreciation and amortisation of the Business during the Earn Out Period as if, during that period, the Business had been conducted in the ordinary course and in the same manner as it was conducted immediately prior to Completion; and

(ii)   the Earnings are to be calculated consistent with this principle.

(b)   From Completion and until the end of the Earn Out Period, the Purchaser:

(i)   must procure that (except with the prior written consent of the Vendors), the Company maintains its corporate existence and must not be wound up, dissolved or deregistered or undertake to be subject to any other Insolvency Event and no steps are taken to initiate any Insolvency Event in respect of the Company;

(ii)   covenants that it will not (and the Purchaser will procure that any other relevant entity designated by it to be the employer of the Key Personnel does not) constructively dismiss, make redundant or terminate the employment of any of the Key Personnel (except where the employment is terminated for reasons in respect of which the relevant employing entity has a right of immediate termination of that employment without notice in accordance with the applicable law or the terms of the Key Personnel’s employment agreement);

(iii)   must procure (insofar as it is able to do so) that the Company and Business is operated in good faith, with commercially reasonable business judgement;

(iv)   must act in good faith in its operation of the Business;

(v)   must not take any action in relation to the Business which reduces or is intended to reduce (in part or in full) the Earn Out Amount that would otherwise be payable to the Vendors; and

(vi)   will meet with the Vendors to consult with them prior to making any material change to the manner in which the Business is operated or transactions which may impact on the Earnings (including additional debt or borrowings (excluding any appropriate working capital facility), dividends or acquisition of assets), including by providing the reasons for considering the change. To the extent any such changes are made to the Business, the Earnings used to calculate the Earn Out Amount will be normalised to exclude the impact of the changes.” (Bold emphasis in original; italicised emphasis added.)

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

23. Subclause 4.1(c) provides:

“The Purchaser and the Vendors must instruct the Earn Out Expert to decide within the shortest practicable time the Contested Matters, the Earnings and the Earn Out Amount by applying the principles set out or referred to in cl 2.1.” (Emphasis added.)

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]

    9. Subclause 4.2(a).

    10. Subclause 4.2(b).

The competing contentions

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

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

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.

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

28. My conclusions are that:

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

Principles

29. There is no dispute about the relevant principles.

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]

“The rights and liabilities of parties under a provision of a contract are determined objectively,^[12] by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. ^[13]

…

Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. ^[14]

However, sometimes, recourse to events, circumstances and things external to the contract is necessary.”

11. (2015) 256 CLR 104; [2015] HCA 37 at [46], [48]-[49].

12. Citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656; [2014] HCA 7 at [35] (French CJ, Hayne, Crennan and Kiefel JJ).

13. Citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 350, 352 (Mason J); [1982] HCA 24; Reardon Smith Line Ltd v Hansen-Tangen; Hansen-Tangen v Sanko Steamship Co [1976] 1 WLR 989 at 995; [1976] 3 All ER 570 at 574 (Lord Wilberforce).

14. Citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (supra) at 352 (Mason J).

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]

    15. Miles v Luneburger Franchising Pty Ltd [2021] NSWCA 248 at [32] (Gleeson JA, Macfarlan JA and Simpson AJA agreeing), citing Electricity Generation Corporation v Woodside Energy Ltd (supra) at [35] French CJ, Hayne, Crennan and Kiefel JJ); Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd supra) at [46]-[51], [108]-[109] (French CJ, Nettle and Gordon JJ); Victoria v Tatts Group Ltd [2016] HCA 5 at [51]-[75] (French CJ, Kiefel, Bell, Keane and Gordon JJ); Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16] (Kiefel, Bell and Gordon JJ); Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18] (French CJ).

32. Further, as has also been correctly stated:

“… the only relevant meaning is that which the text conveys. This follows from the need to ascertain the intention expressed in the document. Although ... context and purpose are relevant, ultimately the court must attribute meaning to the words actually used.” ^[16] (Emphasis in original.)

16. P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters) at [19.60].

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]

    17. Clause 1.3 of the Share Purchase Deed provides that “Headings are for ease of reference only and do not affect interpretation”; see Herzfeld and Prince (supra) at [23.20] citing Orleans Investments Pty Ltd v MindShare Communications Ltd [2009] NSWCA 40 at [67]-[68] (Giles JA, Spigelman CJ and Allsop P agreeing).

The construction question

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

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.

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.

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).

38. Thus:

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

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

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

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

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

   18. See [21] above.

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

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

   19. Ibid.

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

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.

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.

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.

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.

40. 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?

41. 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”.

42. 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.

43. 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.

44. 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.

45. 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.

46. 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.

    20. See [11] and [15] above.

47. 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.

48. 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.

49. 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.

50. 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.

51. 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.

52. 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

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

“(e) If the Vendors notify the Purchaser that they do not agree with the Purchaser’s calculation of the Earnings or the Earn Out Amount then at the same time the Vendors must also deliver to the Purchaser a report signed by the Vendors (Vendors’ Report) setting out:

(i) the matters in respect of which the Vendors disagrees with the draft Earn Out Statement (Contested Matters);

(ii) the grounds upon which the Vendors disagrees with those matters;

(iii) the Vendors’ calculation of the Earnings; and

(iv) the Vendors’ calculation of the Earn Out Amount.” (Emphasis in original.)

59. The Vendors notified the Purchaser of 11 Contested Matters.

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

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.

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.

Contested Matters 7 to 9

63. Contested Matter 7 is that:

“The Earnings must be adjusted to account for the impact of the Business being prevented from implementing a new website, which resulted in lower website traffic.”

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.

65. I shall focus on Contested Matter 7.

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”.

67. The Vendors’ Report said, of this website:

“A new website launch was part of the Business Plan. [Hampers and Gifts] planned a staggered implementation so that the website would go live before peak Christmas period in August 2021 …

The Business could not proceed with the new website launch because the Purchaser directed [that other tasks be undertaken].

Had the new website been implemented, the higher load speed and functionality would have supported an increase in the number of organic search traffic. The failure to implement a new website instead resulted in reduced organic traffic to the website …”

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.

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).

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.

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

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”.

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.

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.

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.

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]

    21. See [24] above.

    22. Cf Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd [2015] NSWCA 275 at [76] (Bathurst CJ, Beazley P and McColl JA agreeing).

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.

Contested Matter 10

78. Contested Matter 10 is:

“The Earnings must be adjusted to account for the impact of the Business being prevented from implementing the 3PL [third party logistics] delivery strategy identified in the Management Presentation.”

79. The Vendors’ Report said, of this matter:

“In the Business Plan, the Business had identified a revenue opportunity in establishing individual third-party logistics (3PL) arrangements to service the Brisbane and Melbourne markets.

…

This opportunity was not realised because the Purchaser forced [Hampers and Gifts] staff to prioritise tasks for the [Purchaser’s] business that were unrelated to [Hampers and Gifts] and no further resources were allocated.”

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”.

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.

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

Contested Matter 11

83. Contested Matter 11 is:

“The Earnings must be adjusted to remove excessive marketing expenses incurred by the Business as a result of [the Purchaser] forcing the Business to implement an ineffective marketing strategy.”

84. Of this, the Vendors’ Report said:

“Prior to the acquisition, the Business took a year-round approach to revenue, with a balance of brand awareness campaigns and conversion campaigns.

…

Of the nine planned Brand Awareness Initiatives listed [in] the Business Plan, none were implemented during FY22 and FY23.

…

The Purchaser discontinued brand awareness advertising from the beginning of FY22 and instead ran numerous conversion and sales/discount campaigns driven by end of month sales targets.

…

This new marketing strategy substantially added to the overall advertising expense which, as a percentage of revenue, more than doubled between FY21 and FY23.”

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.

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

87. I propose to make the following declarations:

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:

1. in accordance with the specific principles set out in clauses 2.1 and 2.2;

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 clause 2.3(a); and

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

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.

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.

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

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Endnotes

Amendments

28 June 2024 - [44] and [87(1)] amended.

Decision last updated: 28 June 2024