FX Group Holdings Pty Ltd v Perpetual Trustee Co Ltd as trustee of the CPEC 8 Trust A (formerly the CHAMP IV Trust A) (No 3) (substantive)

[2025] NSWSC 1055

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

FX Group Holdings Pty Ltd v Perpetual Trustee Co Ltd as trustee of the CPEC 8 Trust A (formerly the CHAMP IV Trust A) (No 3) (substantive) [2025] NSWSC 1055

Hearing dates:

26-30 May 2025, 5 & 6 June 2025

Date of orders:

18 September 2025

Decision date:

18 September 2025

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Declarations made as sought by defendants.

Catchwords:

CONTRACTS — plaintiff buys controlling interest in foreign exchange trading and investment platform ‘Pepperstone’ for $150 million — vendor wholly finances the purchase in return for sharing ‘super return’ profits above $25 million for 4 years after vendor finance repaid — deal recorded in Heads of Agreement followed by Share Sale Agreement — when time comes to share ‘super returns’, plaintiff asserts Share Sale Agreement has $100 million drafting mistake requiring vendor finance to be deducted before ‘super returns’ are shared – plaintiff claims to have known this all along – parties seek competing declarations as to the proper construction of the contract.

BROWNE v DUNN – plaintiff does not refer to damaging document in three witness statements – whether cross-examiner obliged to invite witness to give explanation about document in cross-examination – fairness does not require this: at [142]-[145].

ONUS AND INFERENCES – plaintiff claims legal privilege – privilege waived after cross-examination – no evidence as to what legal advice was – whether cross-examiner obliged to ask what the advice was – onus on plaintiff – any inference draw adverse to the plaintiff, at [409]-[410].

PAROL EVIDENCE RULE — entire agreement clause – whether can have regard to commercial context, including Heads of Agreement — principles at [231]-[236], [257].

INTERPRETATION – complex drafting with defined terms and embedded definitions – multiple transaction documents — whether can construe contract with multiple transaction documents, where parties are not identical – consideration of McVeigh v National Australia Bank at [217]-[220] — testing initial construction in reiterative process, at [239]— whether construction leads to commercial nonsense — principles at [259], [266] — plaintiff’s construction makes contract vulnerable to manipulation – results in ‘double counting’ — dealing with surplusage at [245]-[246], [270].

RECTIFICATION — attribution of knowledge — Pepperstone shares held by corporate trustee — share sale negotiated by manager — transaction documents executed by trustee — trustee obliged to comply with direction by manager — principles at [388]-[390] — trustee intended to give effect to deal negotiated by manager — knowledge attributable — COMMON MISTAKE – principles at [397]-[400], [423] — UNILATERAL MISTAKE — consideration of Maralinga v Major Enterprises — principles at [426]-[428] — whether plaintiff unconscionably took advantage of defendant’s mistake — ‘sharp practice’.

CORPORATIONS – s 912A(1)(h), Corporations Act 2001 (Cth) – obligation to have adequate risk management systems at [452]-[453] – connection between s 254T(1), Corporations Act and directors’ duties at [454]-[456].

BREACH OF CONTRACT — ‘dividend sweep’ —purchaser obliged to maximise Pepperstone dividends ‘to the extent permitted by law’ — Pepperstone entitled to retain funds to meet “required NTA” under s 912AB, Corporations Act plus $10 million buffer — Pepperstone increases capital retention beyond agreed funds – whether purchaser has performed its obligation – principles at [476] – breach established.

PROFESSIONAL NEGLIGENCE — solicitors — retained to draft complex documents — urgency — solicitors work 24-7 to meet client demands — whether solicitor breached duty — unnecessary to decide.

Legislation Cited:

Competition and Consumer Act 2010 (Cth), ss 87CD, 137B

Corporations Act 2001 (Cth), ss 180, 254T, 912A(1)(h), 912AB, 926A(2)(c)

Cases Cited:

AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985

Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1

Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474

Australian Securities and Investment Commission v Westpac Securities Administration Ltd (2019) 272 FCR 170; [2019] FCAFC 187

Australian Securities and Investments Commission v RI Advice Group Pty Ltd (2022) 160 ACSR 204; [2022] FCA 496

Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266

Brookfield v Yevad Products Pty Ltd [2004] FCA 1164

Campbell v Hamilton (2019) 19 BPR 39,181; [2019] NSWCA 22

Cherry v Steele-Park (2017) 96 NSWLR 548; [2017] NSWCA 295

Cirrus Real Time Processing Systems Pty Limited v Jet Aviation Australia Pty Limited (2023) 113 NSWLR 80; [2023] NSWCA 280

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

Coveney v Asbestos Injuries Compensation Fund Ltd [2024] NSWCA 317

De L’Isle v Knight [2021] NSWSC 809

Deputy Commissioner of Taxation v Chamberlain (1990) 26 FCR 221; (1990) 93 ALR 729

DSHE Holdings Ltd (receivers and managers apptd) (in liq) v Potts (2022) 405 ALR 70; [2022] NSWCA 165

DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673

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

Fayad v B & G Properties Pty Ltd [2022] NSWCA 129

Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd (2021) 159 IPR 494; [2021] VSC 75

Fox v Percy (2003) 214 CLR 118; [2003] HCA 22

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407

George Wimpey UK Ltd v VI Construction Ltd [2005] EWCA Civ 77

Harris v Smith [2008] NSWSC 545

Hart v MacDonald (1910) 10 CLR 417

Hartog v Colin & Shields [1939] 3 All ER 566

Hawksford Trustees Jersey Limited v Stella Global UK Limited [2012] EWCA Civ 55

Insurance Australia Ltd v MOS Beverages Pty Ltd (2021) 286 FCR 1; [2021] FCAFC 165

Jireh International Pty Ltd t/as Gloria Jean’s Coffee v Western Export Services Inc [2011] NSWCA 137

JKC Australia LNG Pty Ltd v CH2M Hill Companies Ltd (No 2) [2020] WASCA 112

John Shaw v Richard Jeffrey (1860) 15 ER 162

Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd (2023) 276 CLR 500; [2023] HCA 6

Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70

Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184

Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336

Margaronis Navigation Agency Ltd v Henry W Peabody & Co of London Ltd [1965] 1 QB 300

McVeigh v National Australia Bank Ltd (2000) 278 ALR 429; [2000] FCA 187

Mead [2003] NSWSC 161

Medi-Aid Centre Foundation Ltd v Joys Child Care Ltd [2018] NSWSC 1586

Melbourne Yifang Group Pty Ltd v GuangaoA Group Pty Ltd [2023] VSC 577

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

Nankivell v Insurance Commission of Western Australia [2017] WASCA 143

Nemeth v Australian Litigation Funders Pty Ltd [2013] NSWSC 529

Onley v Catlin Syndicate Ltd (as the underwriting member of Lloyd’s Syndicate 2003) (2018) 360 ALR 92; [2018] FCAFC 119

Petera Pty Ltd v EAJ Pty Ltd (1985) 7 FCR 375

QBT Pty Ltd v Wilson [2024] NSWCA 114

Queenfield Pty Ltd v Gordon Finance Pty Ltd (2019) 60 VR 118; [2019] VSC 857

R v Birks (1990) 19 NSWLR 677

Resolution Life Australasia Ltd v NM Superannuation Pty Ltd [2023] NSWSC 98

Rockment Pty Ltd t/a Vanilla Lounge v AAI Limited t/a Vero Insurance (2020) 282 FCR 561; [2020] FCACF 228

Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65

Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In Liq) (2019) 99 NSWLR 317; [2019] NSWCA 11

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

SSABR Pty Ltd v AMA Group Ltd [2024] NSWCA 175

Standard Chartered Bank of Australia Ltd v Antico (1993) 36 NSWLR 87

Star Entertainment Group Limited v Chubb Insurance Australia Ltd (2022) 400 ALR 25; [2022] FCAFC 16

Tamplin v James (1880) 15 Ch D 215

Taylor v Johnson (1983) 151 CLR 422; [1983] HCA 5

The J & P Marlow (No 2) Pty Ltd v Joseph Hayes & Andrew McCabe (2023) 112 NSWLR 29; [2023] NSWCA 117

Thomas v State of New South Wales (2008) 74 NSWLR 34; [2008] NSWCA 316

Tutt v Doyle (1997) 42 NSWLR 10

Watson v Foxman (1995) 49 NSWLR 315

Wentworth v Lloyd (1864) 10 HL Cas 589

Westland Savings v Hancock (1987) 2 NZLR 21

Westpac Banking Corporation v Tanzone Pty Ltd (2000) 113 NSWLR 73; [2000] NSWCA 25

Zhong v Guan [2024] NSWCA 300

Texts Cited:

JD Heydon, Cross on Evidence (14th ed, 2023, LexisNexis)

Nick Seddon and Rick Bigwood, Cheshire & Fifoot Law of Contract (11th Australian ed, 2022, LexisNexis)

Category:

Principal judgment

Parties:

FX Group Holdings Pty Ltd (Plaintiff)
Perpetual Trustee Company Ltd as trustee of the CPEC 8 Trust A (1st Defendant)
PT Ltd as trustee of the CPEC 8 Trust B (2nd Defendant)
Perpetual Corporate Trust Ltd as trustee of the CPEC 8 Trust C (3rd Defendant)
The Trust Company (Australia) Ltd as trustee of the CPEC 8 Trust D (4th Defendant)
David Swinden (5th Defendant)
Georgina Gane (6th Defendant)
Natalie German (7th Defendant)
Sheldon Chapman (8th Defendant)
Toby Tan (9th Defendant)
Vincent Gross (10th Defendant)
Xiaohong Yan (11th Defendant)
Xingjia Zhang (12th Defendant)
Daniel Poon (13th Defendant)
Fiona Lock Rimmer (2nd Cross-Defendant)
Vishal Ahuja and the other persons also named in Schedule A t/as King & Wood Mallesons (12th Cross-Defendant)

Representation:

Counsel:
M Izzo SC, C Hamilton-Jewell, H Whitwell (Plaintiff/1st, 2nd cross-defendants)
PD Herzfeld SC, AG Willoughby (1st - 4th Defendants)
A Munro SC, R Pietriche (12th Cross-Defendant)

Solicitors:
Minter Ellison (Plaintiff)
Arnold Bloch Leibler (1st - 4th Defendants)
Collin Biggers & Paisley (12th Cross-Defendant)

File Number(s):

2022/311060

JUDGMENT

1. HER HONOUR: This case concerns a share sale agreement. Fiona Lock worked for a private equity firm on its investment in “Pepperstone”, which is a foreign exchange and financial products trading platform. In 2018, the private equity firm decided to sell its investment. Ms Lock was interested. The private equity firm agreed to wholly fund Ms Lock’s purchase with vendor finance of some $150 million, to be repaid within five years from Pepperstone dividends. In turn, Ms Lock agreed that, after the vendor finance was repaid, she would split ‘super returns’ with the private equity firm, being profits in excess of $25 million, for four years. To maximise loan repayments and profit-sharing, Ms Lock would also procure a ‘dividend sweep’ at Pepperstone to the extent permitted by law, leaving an agreed buffer for capital retention purposes.

2. The parties signed a Heads of Agreement, recording their bargain. A share sale agreement was prepared and executed, to give effect to the Heads of Agreement. Ms Lock incorporated the plaintiff, FX Group Holdings Pty Ltd, as purchaser. The first to fourth defendants were vendors. (The remaining defendants acquired shares through a management incentive scheme, after accepting an ‘invitation to tag’, and sold their shares on the same terms.)

3. Once the vendor finance was repaid, however, Ms Lock maintained that she was entitled to offset not only $25 million, but the total principal and interest repayments of the vendor finance (being some $210 million) before splitting any ‘super returns’. As a consequence, the vendors have yet to receive any ‘super returns’. Further, Ms Lock asserted that she had always known that the share sale agreement operated in this way albeit acknowledging that this did not accord with the Heads of Agreement nor what she knew the vendors’ intentions to be. In short, Ms Lock regarded herself as the beneficiary of a $100 million drafting mistake, while the private equity firm viewed her actions as commercial treachery.

4. The issues are:

1. What is the proper construction of the Share Sale Agreement?

2. If Ms Lock is right, are the vendors entitled to rectification of the Share Sale Agreement on the basis of common mistake or, alternatively, unilateral mistake?

3. If the vendors are right, or entitled to rectification, how much are they owed for ‘super returns’? Further, was the ‘dividend sweep’ obligation observed, where Pepperstone retained a progressively higher buffer than that agreed. If not, what buffer should have been retained and what additional amounts should have been distributed?

4. If Ms Lock is right and the vendors are not entitled to rectification, are the vendors’ solicitors, King & Wood Mallesons (KMW), liable to compensate the vendors for the ‘super returns’ which have not been enjoyed by reason of the firm’s professional negligence?

5. Finally, are the vendors entitled to equitable compensation from Ms Lock for breach of fiduciary duty, or damages from the plaintiff and Ms Lock for misleading and deceptive conduct by silence?

5. Much of what follows is concerned with the alternate rectification suit, professional negligence claim and the like. It may also be relevant to the commercial context against which the Share Sale Agreement may be construed: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]. Consideration of the first issue begins at [213].

Credit and inferences

6. The plaintiff called one lay witness, being Ms Lock. Strong competing submissions were made as to her credibility. The plaintiff submitted that Ms Lock was a candid witness who should be accepted as a witness of truth. KWM submitted that Ms Lock’s evidence was a concoction and her credibility was doubtful. The vendors went further and submitted that Ms Lock’s evidence gave rise to the “old conundrum, whether one should believe an habitual liar when he asserts that he is lying”: Petera Pty Ltd v EAJ Pty Ltd (1985) 7 FCR 375 at 379 per Wilcox J.

7. Ms Lock’s evidence was relevant to whether there was a common mistake when the Share Sale Agreement was executed. Specifically, did Ms Lock think the Share Sale Agreement meant something different than the vendors when the document was executed? Or did Ms Lock only purport to have always thought that, when KWM proposed to tighten up their drafting two years later.

8. As to demeanour, Ms Lock was intelligent, confident, attentive and careful. Ms Lock did look uncomfortable when maintaining her stance that she perceived that the vendors were proceeding on a misunderstanding as to the proper construction of the Share Sale Agreement but said nothing, including to her fellow investors and professional advisors. Ms Lock looked away when it was put to her that she was lying. Ms Lock looked increasingly unhappy in maintaining her asserted position in the face of contemporaneous documents which suggested otherwise. Ms Lock could not maintain eye contact. Ms Lock sought to distance herself from the ‘invitations to tag’ and insisted that she did not recall dealing with these, when there was an abundance of contemporaneous documents which suggested otherwise. Ms Lock’s position became increasingly untenable, particularly when taken through her contemporaneous spreadsheets, which documented her thinking at the time with precision.

9. There is a limit to which a trial judge should rely on demeanour, as opposed to “contemporary materials, objectively established facts and the apparent logic of events”: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [31] per Gleeson CJ, Gummow and Kirby JJ. As Lander J observed in Brookfield v Yevad Products Pty Ltd [2004] FCA 1164 at [416]:

… Often, especially in commercial causes, the best evidence of the events the subject of the inquiry in the trial is contained in the contemporaneous documents. Usually, documents are created in circumstances where parties do not expect the documents to surface in a trial. They often, therefore, contain the true account of the contemporaneous event.

10. There were a large number of contemporaneous documents in this case, which shed light on the accuracy of Ms Lock’s recollection. The evidentiary picture was not complete, however, as Ms Lock claimed privilege over her communications with her solicitors, Clifford Chance, when giving evidence in chief and during cross-examination. But, on leaving the witness box, Ms Lock waived privilege over an email to Clifford Chance, which led to waiver over related communications for a particular timeframe. On Ms Lock’s return to the witness box, limited further cross-examination took place and a small number of documents were tendered. But, having refrained from disclosing her communications with Clifford Chance in chief, Ms Lock’s evidence had some gaps. An important gap was what advice Ms Lock received from Clifford Chance as to the meaning of the ‘super return’ provisions of the Share Sale Agreement. I will return to this subject at [409]-[416].

11. Overall, I have come to a conclusion which is somewhere between the positions advanced by the plaintiff, on the one hand, and the vendors and KWM on the other. Two observations may be made. First, Ms Lock was an imperfect historian to the extent that, perhaps innocently, she attributed a state of mind that she held in 2020 – as to what the vendors would argue the Share Sale Agreement meant – to her state of mind in 2018, before there was any hint of an argument. The contemporaneous documents do not consistently support this retrospectivity, for example, at [306], [330].

12. Second, Ms Lock was a well prepared, intelligent witness with a clear eye to where her interests lay. Ms Lock was candid, on occasion, where I expect that she perceived that the contemporaneous documents before the Court meant there was nothing to be gained by denying the undeniable, or where she perceived that her candour was on a point that did not matter to her ultimate success. But I agree that Ms Lock was prepared to say what she thought would serve her interests, where she did not expect that there was any documentary evidence to contradict her: for example, at [407]. Ms Lock got into difficulty when further documents came to light, for example, at [278]-[288]. In the result, I have approached Ms Lock’s evidence with caution wherever it was not corroborated by contemporaneous documents or the evidence of another reliable witness.

13. The vendors sought a Jones v Dunkel inference in respect of the plaintiff’s failure to call its largest shareholder and Pepperstone’s chief executive officer, Tamas Szabo, notwithstanding that he attended the trial. The plaintiff submitted that there was no reason to call Mr Szabo, as the issue was Ms Lock’s state of knowledge when she executed the Share Sale Agreement and not what she told Mr Szabo about it later.

14. It is not necessary for a party to call an unnecessary witness: Apand Pty Limited v The Kettle Chip Co (1994) 52 FCR 474 at 490. On the pleadings, the issue was whether the plaintiff had a common understanding with the vendors at the time of execution of the Share Sale Agreement. Mr Szabo did not become a director and shareholder of the plaintiff until two months after the Share Sale Agreement was executed. But Ms Lock’s offer to acquire the Pepperstone investment – which became the Heads of Agreement – was put forward as a bid supported by Mr Szabo. Ms Lock and Mr Szabo communicated with reasonable frequency in respect of various iterations of the Heads of Agreement and the proposed Share Sale Agreement, before either document was signed: see [57], [62], [79], [139], [140] and [172].

15. In parallel, Ms Lock and Mr Szabo were negotiating the terms of their investment in the plaintiff. If Ms Lock then understood the proposed Share Sale Agreement to operate in the manner for which she now contends, that would have put a different complexion on Mr Szabo’s proposed investment. Ms Lock’s understanding of how the ‘super return’ provisions of the Share Sale Agreement would work is something they likely discussed at the time. Mr Szabo was likely able to give evidence as to what Ms Lock said about the ‘super return’ provisions at the time of execution of the Share Sale Agreement. I do infer that the uncalled evidence of Mr Szabo would not have assisted the plaintiff’s case.

The investor

16. The precise structure by which the Pepperstone investment was held and sold is slightly complex, but relevant to what the parties to the transaction understood, and the extent to which the knowledge of those further removed from the transaction can be attributed to those parties.

17. “CHAMP Private Equity” is a private equity firm, now known as CPE Capital (the Investor). John Haddock is the chief executive officer of the Investor. (He gave evidence in a fair manner.) The Investor uses money invested with it by institutional and high net worth investors. These moneys, and the investments purchased with the moneys, are held by third-party trustees in various unit trusts or “funds”. The funds relevant to these proceedings are CHAMP IV Trust A, CHAMP IV Trust B, CHAMP IV Trust C and CHAMP IV Trust D (now known as CPEC 8 Trust A, CPEC 8 Trust B, CPEC 8 Trust C and CPEC 8 Trust D respectively) (the Funds). The term of the Funds ends on 15 January 2027, unless extended for up to three years: cl 1, trust deed.

18. The third-party trustees of the Funds are Perpetual Trust Co Ltd, P.T Ltd, Perpetual Corporate Trust Ltd and The Trust Co (Aust) Ltd respectively (the Trustees). (As the holder of the Funds’ investments, the Trustees became the vendors in the Share Sale Agreement and, ultimately, the first to fourth defendants in these proceedings.) The Trustees are part of the Perpetual group of companies, and provide corporate trustee services to the funds management sector. Aaron Tran is a senior transaction manager employed by the Perpetual group of companies. Mr Tran was a meticulous, careful and impressive witness.

19. Each Trustee appointed a manager to manage their respective Fund, being the fifth cross-claimant, CHAMP IV Management Pty Ltd (now called CPEC 8 Management) (the Manager). Mr Haddock is a director of the Manager. The Manager could exercise all powers of the Trustees under the trust deeds and management agreements: cl 18.3(a); cl 2.1, trust deed. Further, the Trustee could only act in accordance with a direction from the Manager, except to the extent that to do so would be contrary to law, result in a breach of the trust deed or the Trustee’s duties, or may result in the Trustee incurring costs or obligations without an indemnity backed by sufficient Property: cl 2.1(a).

20. The Manager was obliged to make proposals to the Trustees for the investment of Trust assets and any alterations or disposals of investments: cl 2.2(a), Schedule 1, trust deeds. (As will be seen, the negotiations for the sale of the Fund’s investment in Pepperstone were conducted by the Manager, specifically, Mr Haddock and general counsel Jeremy Stevenson on behalf of the Trustees.) As long as the proposal contained the details and documentation required by the trust deed, the Trustee was obliged to effect the investment, alteration or disposal, unless prohibited by the trust deed: cl 2.2(c) and (d), Schedule 1.

21. The Manager was obliged to establish an Investment Committee, to include the chairman, chief executive officer and two managing directors of the Investor: cl 26(a). Mr Haddock is a member of the Investment Committee. The Investment Committee was to review and approve all investments and divestments by the Trusts: cl 26(c). The Trustee could not make an investment or divestment without the approval of the Investment Committee: cl 19.2(j), cl 2.1.

22. As Mr Tran put it, the Trustees held property on trust for those investing with the Investor. The Trustees were not involved in the day-to-day management of the assets held by the Funds. The Trustees did not investigate the merits of proposed transactions, but were responsible for the administration of the trust and to ensure compliance with the procedures prescribed in the trust deed before executing any transaction documents.

23. By and large, the Investor, the Manager and the Trustees or vendors were simply referred to in the contemporaneous documents as “CHAMP” or, later, “CPE”. In this judgment, I have generally referred to the Investor, unless it is necessary to be more precise.

The employee

24. Ms Lock was employed by CHAMP Group Services Pty Ltd (now known as CPEC Group Services Pty Ltd) as managing director: cl 3.1; Schedule 1 Item 1. Clause 6.2 of the Employment Agreement provided that Ms Lock was obliged to attend to the following duties:

…

(d)    act in the best interests of the Group and not intentionally do anything which is or may be harmful to the Group;

…

(g)    not act, or be seen to be acting, in conflict with the best interests of the Group; …

25. In addition, cl 7.5 provided that Ms Lock may be required, as part of her duties, to act as a director of one or more Group companies or a portfolio investment managed by CHAMP Group Services or another member of the Group. Group meant CHAMP Group Services and any related bodies corporate within the meaning of the Corporations Act 2001 (Cth): cl 1.1. This included the Manager.

The investment

26. Pepperstone operates an online financial trading platform on which people can trade various instruments including foreign exchange, commodities, indices and contracts for difference. The business was founded by Joseph (Joe) Davenport and Owen Kerr. Pepperstone’s trading platform is available to be used by traders located in different countries around the world.

27. In February 2016, the Investor acquired some 60% of Pepperstone from its founders, for which the Funds outlaid some $90 million. Ms Lock was working for the Investor at the time and led the ‘deal team’, together with colleagues Graham Brooke and Adam Gordon. The Investor established FX Holdco Pty Ltd (the Company) as the holding company of the corporate group forming the Pepperstone business. The Funds acquired shares in the Company, as did the founders. It is the Funds’ shares in the Company which were later sold via the Share Sale Agreement to the plaintiff.

28. As to the formalities for the acquisition of the Pepperstone investment, on 1 March 2016, the Trustees executed an Investment Deed with the Company and the founders. The deed provided that the Pepperstone business was now owned and operated by the Company. The Trustees were entitled to appoint the majority of the board. Subject at all times to the duties of each Director at law, a Director was entitled to perform their duties as a Director having regard to the interests of the shareholder who appointed them and to act on the wishes of that shareholder: cl 4.3. Ms Lock and Mr Brooke became directors of the Company, representing the interests of the Investor. Mr Haddock also appointed Ms Lock as chair of the Pepperstone board.

29. Also on 1 March 2016, the Company and the Manager executed the FX Trading Group Management Incentive Plan Deed. This became known as the Management Equity Plan (MEP). The Company could invite employees to participate in the plan and issue shares in the Company: cl 2.1.

30. Relevantly, the Investment Deed and the MEP both provided that, if the Trustees wished to dispose of their shares to a third party, the Trustees or Manager were obliged to serve a notice (an Invitation to Tag) on other shareholders, providing details of the proposed transaction, including “material terms of the proposed sale”: cl 10.2, Investment Deed; cl 6.5(b)(iii), MEP. If the invitation was accepted, then that shareholder was entitled to sell their shares on the same terms. It is these Invitations to Tag which bring the fifth to thirteenth defendants into these proceedings.

31. There was also a Financial Services Agreement relating to the Company dated 1 March 2016. The agreement is not in evidence. I infer from references to the agreement elsewhere that the Investor received fees under this agreement. As will be seen, as part of the negotiations, Ms Lock wanted to receive the fees payable under this agreement. This was agreed and allowed for in the ‘super return’ provisions.

32. I digress to note that, as Pepperstone was (and is) involved in the market for derivatives, the Australian Securities and Investments Commission (ASIC) required Pepperstone to retain a portion of its net tangible assets (NTA) to satisfy its obligation to have adequate financial resources under s 912A(1)(d) of the Corporations Act. ASIC may declare that specific provisions of Part 7.6 of the Corporations Act apply to a person or financial product as if the provisions were modified as specified in the declaration: s 926A(2)(c), Corporations Act. ASIC Class Order [CO 12/752] modified Part 7.6 by adding s 912AB to the Corporations Act for Australian financial services licensees permitted to issue derivatives or make a market for derivatives: sub-s (1). Sub-sections 912AB(4) and (5) concerned net tangible assets. Sub-section (4) required the licensee to have at all times an NTA (the required NTA) of at least the greater of $1 million or 10% of average revenue of the licensee. Sub-section (5) required the licensee to hold at all times cash and cash equivalents in an amount that was at least 50% of the required NTA and liquid assets that were at least 50% of the required NTA.

33. The extent to which Pepperstone could retain capital in excess of the required NTA, while the ‘dividend sweep’ was underway, formed part of the negotiations and is now an issue in these proceedings.

Deciding to sell

34. In early 2018, several changes to the regulatory environment, both here and abroad, prompted the Investor to review Pepperstone’s activities in the jurisdictions in which it operated. In particular, Mr Haddock was concerned that Pepperstone could be breaking the law by conducting foreign exchange trading operations in China. He became concerned at Pepperstone’s attitude to regulatory risk. The Investor concluded that Pepperstone’s business model would need to materially change, which would take at least a year and have significant execution risk. The Investor decided to look to sell its investment instead.

35. The Investor approached the founders of Pepperstone as to whether they were interested in acquiring the Investor’s stake, where Mr Davenport had expressed strong objection to exiting the China market as it would “hinder any sale process”. (The Investor, the founders and Ms Lock all had an eye to selling the Pepperstone business for a profit.) Pepperstone’s chief executive officer, Mr Szabo, chief financial officer Andrew Defina and Ms Lock expressed an interest in acquiring the Investor’s stake in Pepperstone.

36. In July 2018, Mr Haddock spoke to Ms Lock. He said the Investor might lend her the money to fund the purchase price, which could be repaid out of cashflow from the Pepperstone business. Ms Lock was interested. Mr Haddock then left negotiations to Mr Stevenson and Mr Gordon. Mr Gordon also assisted Ms Lock to refine the terms of her proposal to purchase the Pepperstone business. During the period between Ms Lock expressing interest in purchasing the Investor’s stake in Pepperstone until completion of the transaction, Ms Lock remained an employee and a director representing the Investor on the Pepperstone Board.

37. Mr Haddock told Mr Stevenson and Mr Gordon that it was important that the deal retain a ‘super return’ concept, being the ability of the Investor to share in amounts received by Ms Lock (or her special purpose vehicle) after repaying the loan. This would ensure that, if Ms Lock managed to sell the Pepperstone business for a large sum or if the business performed very well, then the Investor would share in the upside. Both the repayment of the loan and the ‘super return’ was to be supported by a covenant that the buyer was required to cause the Company to pay quarterly dividends to its shareholders in the maximum amount permitted by law. The ‘dividend sweep’ covenant would allow the loan to be repaid as quickly as possible and, after that, ensure that the buyer would receive the greatest dividends possible, which it was required to share with the Investor for a specified period.

38. The Investor’s solicitors were KWM. On 20 June 2018, KWM sent a costs agreement to Mr Stevenson, proposing to act for the Manager as manager of the Funds. KWM proposed to provide legal advice in relation to the proposed exit of Pepperstone, noting that the Manager had appointed separate tax advisors from which it would be obtaining all tax advice. (Deloitte was engaged to provide tax advice.) Mark McNamara, being a partner and head of private equity at the firm, proposed to be assisted by partner Matthew Coull and solicitor Laura Edwards. The vendors tendered a portion of a witness statement made by Mr Coull, which shed some light on what the solicitor thought and did. No Jones v Dunkel inference was sought by the vendors in respect of Mr Coull’s failure to give evidence.

39. But Mr Stevenson negotiated the heads of agreement (or term sheet) himself, to record the commercial terms of a deal. Mr Stevenson agreed that, although term sheets were typically done by the deal team, he drafted the term sheet in this case as they were dealing with an employee. He said the situation was “highly unusual and so as the senior lawyer for the business, I got more involved to assist.” Mr Stevenson agreed that it was obviously not appropriate for Ms Lock to prepare the term sheet on the Investor’s behalf.

40. In tandem, Mr Stevenson instructed KWM to prepare transaction documents so that they were ready as soon as the Heads of Agreement were signed. Mr Stevenson said he relied upon KWM to draft the transaction documents in a way that reflected his instructions, and to tell him if there was a problem with a proposed amendment or a more advantageous way to make a given amendment. Mr Stevenson said that the key thing that he brought to the transaction was to try to bridge the commercial terms to the external lawyers. It does appear, however, that draft documents went through ‘two pairs of hands’ in the sense that KWM’s work was checked by Mr Stevenson, for example, at [105], [113].

41. For her part, Ms Lock retained solicitors Clifford Chance and tax adviser PricewaterhouseCoopers (PwC). In what follows, I have focused on the negotiation of the ‘super return’, as it is that part of the Share Sale Agreement which has to be construed and, potentially, rectified.

Negotiating a term sheet

42. Over some seven weeks, Mr Stevenson and Ms Lock thoroughly negotiated all aspects of the 'super return’. On 12 July 2018, Mr Stevenson provided Ms Lock with a first draft Heads of Agreement. The Investor proposed to fund Ms Lock’s acquisition “entirely by a secured term loan to the Buyer (Acquisition Loan).” The Acquisition Loan would have a three-year term, to be repaid from all distributions of any form from the Company. The Buyer (Ms Lock’s special purpose company, which the parties referred to as BidCo and, ultimately, became the plaintiff) would covenant to cause the Company to pay out dividends every quarter to the extent legally permitted to do so. In addition, the parties would use their best endeavours to agree Definitive Documentation as soon as possible, such documentation to include:

… a deferred payment equal to 33% of the gross proceeds over and above the amounts used to repay the Acquisition Loan received by the Buyer for a sale of all or part of the Buyer’s interest in the Pepperstone Group prior to the 3^rd anniversary of completion.

43. That is, if Ms Lock sold the acquired interest in the Pepperstone group within three years, she would be obliged to pay one-third of any sales proceeds above and beyond the Acquisition Loan to the Investor. That evening, Mr Stevenson and Ms Lock spoke. Mr Stevenson reported to Mr Haddock that Ms Lock wanted at least five years to repay the Acquisition Loan and “wants this to be compelling on the basis of cashflow alone. Not going to base a decision on what she could sell it for.” Further, Ms Lock wanted a management fee and “would want some of the dividends stream – ie not all going to debt repayment.”

44. On 14 July 2018, Ms Lock provided her comments on the Heads of Agreement to Mr Stevenson, Mr Gordon and Mr Haddock. Ms Lock requested six years to repay the Acquisition Loan. Ms Lock wanted a management fee that was being paid to the Investor to be paid to her after completion, which she assumed was $1 million per annum. Ms Lock deleted the reference to a deferred payment (reproduced above).

45. On 15 July 2018, Mr Stevenson told Ms Lock that the Investor required some form of upside or profit-sharing arrangement to form part of any transaction with her. Ms Lock said she would accept an upside or profit-sharing arrangement if it included her making a fixed return before she shared receipts from the Pepperstone business with the Investor.

46. Following their conversation, Mr Stevenson circulated a second draft of the Heads of Agreement to Mr Haddock, Mr Gordon and the Investor’s chief financial officer Barry Zuckerman. Mr Stevenson reported, “She is focussed on a minimum return to her from management fee [etc] … She is open to sharing windfall returns … prefers a sharing over a certain return to her”. Mr Stevenson agreed to a term of six years for the Acquisition Loan. He proposed a covenant which permitted annual payments to Ms Lock, to ensure an acceptable minimum return to her in a downside case. In respect of Definitive Documentation, Mr Stevenson now proposed:

Acquisition Documentation to include a sharing of any “super return” to the Buyer which will provide for sharing on a 50-50 basis of any returns on a sale of Pepperstone Group prior to the 6 year anniversary over and above [2]x MOIC [multiple on invested capital] between the Buyer and the CHAMP Investors.

47. That is, if Ms Lock sold the acquired interest in the Pepperstone group within six years, she would be obliged to pay half of any sales proceeds above and beyond a fixed rate of return to the Funds. Mr Stevenson and Mr Gordon spoke. (Mr Stevenson was aware that Mr Gordon was also assisting Ms Lock.) On 16 July 2018, Mr Stevenson circulated a third draft of the Heads of Agreement to Mr Gordon. Mr Stevenson now proposed that, if Ms Lock sold the acquired interest in the Pepperstone group within six years, she would be obliged to share the proceeds in excess of $20 million with the Funds on a sliding scale, beginning at 50% and reducing to 10%. That is, the sharing of any ‘super return’ would not begin until Ms Lock received a minimum return of $20 million.

48. Later on 16 July 2018, Mr Stevenson substantially revised this in a fourth Heads of Agreement circulated to Mr Haddock, Mr Gordon and Mr Zuckerman. The profit-sharing arrangement had now expanded from profits on sale of the acquired shares in the Pepperstone business to dividends received on those shares after the Acquisition Loan had been repaid. In either case, Ms Lock kept the first $20 million. The ‘super return’ was to be shared 50-50 until year four, and then to step down each year by 10%.

49. Later that evening, Mr Gordon (on behalf of Ms Lock) emailed a fifth draft of the term sheet to Mr Haddock and Mr Stevenson. It was proposed to increase the threshold at which the ‘super returns’ were shared from $20 million to $25 million. Further, returns would only be shared 50-50 until the third anniversary (rather than the fourth anniversary) and then reduced by 10% each year until it reached zero.

50. On 17 July 2018, Ms Lock made some notes on the proposed deal. Ms Lock noted that the $25 million “FL return” needed to be clarified to exclude her management fee. In addition, the timing of the “stepping down of the upside sharing” needed to align with the term of the Acquisition Loan. If the term of the loan was five years, it “needs to be 20% by then. If 6 year, 20% then.” Later that day, Mr Gordon circulated a sixth version of the Heads of Agreement to Mr Stevenson, for discussion with Mr Haddock. Ms Lock proposed to exclude management fees from the $25 million dollars threshold. Mr Stevenson accepted the exclusion of the annual management fee when providing the seventh draft of the Heads of Agreement to Ms Lock on 20 July 2018, for consideration by Clifford Chance.

47. On 23 and 25 July 2018, Mr Stevenson circulated an eighth and ninth draft of the Heads of Agreement to Mr Haddock and Mr Gordon, addressing points raised by Ms Lock following her meeting with Clifford Chance. No issue was raised with the ‘super return’ portion of the term sheet. On 27 July 2018, Ms Lock proposed a minor amendment to the ‘super return’ provision, deducting transaction costs from sale proceeds before arriving at net proceeds. Mr Stevenson accepted this in an execution version, being version 10. Ms Lock signed the document on 28 July 2018.

48. The Investor then sought a competing offer from the founders of Pepperstone. On 9 August 2018, Mr Stevenson emailed Mr Kerr and Mr Davenport, setting out the elements of the proposed deal with Ms Lock and inviting an alternate deal. Mr Stevenson explained that the proposed deal with Ms Lock was that she would acquire the Investor’s shares for $150 million, funded by a secured Vendor Note repaid from distributions out of Pepperstone. In addition, the Investor “would share in a material proportion of any upside accruing to [Ms Lock] on further dividends and/or sale of Pepperstone.”

49. A competing proposal was submitted by the founders on 19 August 2018. The offer was not particularly attractive, offering to pay only $100 million for the Investor’s shares in the Company, and that funded by vendor finance but with no upside sharing. Mr Stevenson said that Ms Lock was not involved in discussing the offers submitted by the founders, as the offers were confidential and it was inappropriate as she was on the other side of the transaction.

50. On 21 August 2018, Mr Stevenson provided the Heads of Agreement signed by Ms Lock and the founders’ offer to KWM. Mr Stevenson asked for work to begin on transaction documents, which were “likely to be broadly similar under the various scenarios”. As Mr Stevenson explained, two principal transaction documents would be involved. The first document was a share sale agreement, by which the Trustees would sell their shares in the Company to Ms Lock’s special purpose vehicle. The second document was a loan note deed poll (Loan Note), to be executed by Ms Lock’s company and by which it would issue loan notes to the Trustees in consideration for the shares acquired.

51. At KWM, solicitors in the Corporate group began work on the Share Sale Agreement, while solicitors in the Banking & Finance group began work on the Loan Note. Negotiations continued between all parties. On 25 August 2018, Mr Stevenson instructed KWM, “Things heating up on Pepperstone – we are going to go exclusive with the best bid by [31 August 2018] and so we will need to move to sharing documents early next week (if not before)”.

52. On 29 August 2018, Mr Kerr submitted a revised proposal. By 30 August 2018, KWM had prepared a draft Share Sale Agreement and Loan Note. Mr Stevenson also responded to Mr Kerr’s offer, noting “it contains neither a material upfront consideration … or sharing of the upside on any sale of the Acquired Shares (to compensate for the zero $ down). By way of guidance, we’d be looking for a 50-50 sharing of any upside.”

53. Ms Lock was also improving her offer, which would have the additional attraction of being supported by Pepperstone’s chief executive officer, Mr Szabo. On 30 August 2018, Ms Lock emailed Mr Szabo, suggesting “tweaks” to proposed arrangements between them. Ms Lock recorded that the model she had sent Mr Szabo assumed 50% “upside sharing with CHAMP” at all values, but proposed a reduction in that percentage figure from Year 4 on.

54. On 31 August 2018, Ms Lock provided a revised offer to buy the Investor’s interest in Pepperstone, supported by Mr Szabo. The proposal was said to contain improved terms, including a revised upside sharing arrangement increasing the Investor’s share in years five to eight, with economic sharing maintained for the life of the Funds. In addition, a covenant would be included that the Buyer would not trap cash in the Company, through a committed payout ratio mandating that the Buyer ensure more than 90% of net profit after tax (NPAT) was paid out quarterly by the Company. Ms Lock improved her offer by pausing the annual 10% step-down at 20% until the eighth anniversary.

55. Later on 31 August 2018, KWM provided a further draft of the Share Sale Agreement and Loan Note to Mr Stevenson. KWM noted that the Share Sale Agreement did not include the ‘super return’ sharing concept contained in Ms Lock’s term sheet, but this could be included if her proposal was preferred. That evening, Mr Stevenson forwarded Ms Lock’s revised term sheet and accompanying letter to KWM, noting that it was the “clear front runner”.

56. Negotiations continued over the weekend. On Saturday morning, 1 September 2018, KWM sought instructions from Mr Stevenson in respect of Ms Lock’s revised offer, “Have you agreed the ‘super return’ concept with [Ms Lock]? That is not currently included in the draft [Share Sale Agreement].” Mr Stevenson confirmed, “Super return is critical and will be improved in our favo[u]r but use the format in her latest offer.” That is, KWM was asked to begin drafting in respect of the ‘super return’, based on Ms Lock’s revised offer.

57. Mr Coull prepared a first draft of the language to be used in the Share Sale Agreement to give effect to the ‘super return’ concept. Mr Coull said he did so by tracking the wording in the Heads of Agreement that had been provided by Mr Stevenson on Friday night. By Saturday afternoon, Mr Coull had prepared a draft ‘rider’ for the Share Sale Agreement in respect of the ‘super return’, comprising a proposed clause entitled “Uplift Payment” and additional defined terms including Buyer Net Equity Proceeds, Buyer Total Equity Proceeds and Equity Proceeds. This was the starting point of the contentious provisions which are the subject of these proceedings.

58. On Saturday, Mr Haddock met with Mr Stevenson and Mr Gordon to discuss the offers from Ms Lock and Mr Kerr. Mr Haddock said he thought that Ms Lock’s offer was preferable as it included the ‘super return’ concept, whilst Mr Kerr’s offer did not. They discussed what improvements could be negotiated to Ms Lock’s terms. Mr Gordon and Mr Stevenson called Ms Lock. Ms Lock agreed that Mr Gordon told her that she needed to improve the profit-sharing arrangement to share profits with the Investor on a 50-50 basis for the life of the Funds, after the Acquisition Loan was repaid and the first $25 million was retained. Ms Lock reported to Mr Defina, Mr Davenport and Mr Szabo that it was “looking positive” but the Investor wanted “some more sharing of the upside (this will need to be moderated).”

59. Mr Stevenson made amendments to the Heads of Agreement, which he circulated for comment to Mr Haddock and Mr Gordon. (By my count, this was the twelfth draft.) At 6.00 pm, Mr Stevenson provided the marked-up term sheet to KWM, asking that the draft documents be revised for his review on Sunday, with a view to providing Ms Lock with the documents on Monday. So far as the ‘super return’ was concerned, Mr Stevenson now proposed that returns in excess of $25 million (excluding the management fee) be shared 50-50 until the termination of the Funds. KWM prepared a second draft of the Share Sale Agreement and Loan Note, together with an Invitation to Tag. The ‘rider’ had now been incorporated into the Share Sale Agreement.

60. Later that evening, Mr Stevenson provided Ms Lock with his revised term sheet (now the thirteenth draft), advising that this reflected the minimum needed, from the Investor’s perspective, to have Ms Lock’s offer accepted by Mr Haddock and the Investment Committee. Ms Lock agreed that it was now proposed that the profit-sharing arrangement would be 50-50 until the termination of the Funds. She understood that what was proposed was that there would be repayment of the Acquisition Loan, the Buyer would keep the next $25 million of returns, and profits would be shared equally after that date until the termination of the Funds.

61. That night, Mr Stevenson spoke to Ms Lock about the revisions to the Heads of Agreement that he had sent through. Ms Lock said she agreed to the changes to the profit-sharing arrangement contained in his draft. Ms Lock also asked if the Investor would agree to a loan fee being paid directly to her, rather than to her special purpose vehicle. (The term sheets had, to this point, proposed payment of $4.5 million to Ms Lock for her role in ensuring the repayment of the Acquisition Loan.) Mr Stevenson said that this was acceptable. Mr Stevenson also provided the revised term sheet to KWM, which agreed to send revised documents to Mr Stevenson.

62. Early on Sunday, 2 September 2018, KWM provided Mr Stevenson with another draft set of documents, being the Share Sale Agreement, Loan Note, an Invitation to Tag and an annotated Heads of Agreement “to help you reconcile provisions in the docs back to [the term sheet].” The annotated term sheet noted that cl 9 of the Share Sale Agreement addressed the ‘super return’, while “Net Proceeds” in the term sheet had been defined as “Buyer Net Equity Proceeds”. I will return to this draft at [80].

63. Negotiations continued between Mr Stevenson and Ms Lock. Ms Lock sent a revised term sheet to Mr Stevenson and Mr Gordon, which she offered to execute when needed (the fourteenth draft). Ms Lock agreed that the only change which she then made was that the profit-sharing agreement would cease at the current end of the Funds, rather than any extended end. Ms Lock agreed that she proposed that, after repayment of the Acquisition Loan, the Buyer would retain the first $25 million of any returns from the Pepperstone business. Thereafter, profits would be shared 50-50 with the Investor until the termination of the Funds on their current end date.

Heads of Agreement

68. On 2 September 2018, Ms Lock provided Mr Stevenson with a signed Heads of Agreement, being version 15. Mr Haddock did not sign the document but emailed Ms Lock, confirming that the document reflected their discussions.

69. In its final form, the Heads of Agreement stated that it had been prepared in connection with the proposed transfer of the Funds’ controlling interest in Pepperstone by the sale of shares to Ms Lock’s special purpose vehicle (the Buyer). Except for certain provisions not presently relevant, the provisions of the Heads of Agreement “are not otherwise legally binding on the parties, however they form the basis on which the parties will, in good faith, negotiate the long form definitive transaction documents (collectively “Definitive Documents”) for the Transaction.” The parties acknowledged that the terms remained subject to review by legal, tax and accounting advisors.

70. The Heads of Agreement then set out “Agreed Key Terms”. In short, the Funds would sell their shares in the Company to the Buyer for $150 million. The acquisition would be funded entirely by the Acquisition Loan. The term of the Acquisition Loan was 5 years from completion, “Repaid from all distributions of any form from [the Company] or another entity in the Pepperstone Group.” The Buyer was to provide various covenants, including to procure a ‘dividend sweep’: (emphasis added)

Shall cause [the Company] to pay out dividends every quarter to the extent legally permitted to do so. Subject to the below minimum and maximum cash levels, there will be a minimum payout ratio of 95% of NPAT after taking into account the regulatory cash requirements of the Company. Payout will not be required if the company has less than an agreed minimum amount (with reference to prior levels) in cash or cash equivalents and all amounts of cash and cash equivalents over $60m are to be swept regardless of the NPAT test.

71. As will be seen, the precise terms of this obligation proved to be the last commercial ‘sticking point’ negotiated by the parties before executing the Share Sale Agreement. As to ‘super returns’, the Definitive Documentation was to include the following:

Acquisition Documentation to include a sharing of any “super return” to the Buyer by providing for sharing of any returns from the investment in [Company] shares (including dividends retained by the Buyer post repayment of the Acquisition Loan and the net proceeds on a sale of the interest in [the Company] or all or part of the Pepperstone Group) in excess of $25m (excluding the annual management fee) between the Buyer and the [Funds] 50-50 until the current end of the … Funds (with no extensions). Obligations under this clause to be secured by a share mortgage or equivalent (continuation of the security under the Acquisition Loan).

Net Proceeds means the pre tax proceeds received by the Buyer (less any transaction costs, if applicable) less the total payments due under the Acquisition Loan.

72. The Heads of Agreement noted that MEP participants may be able to “tag” into the Transaction, with “The treatment of MEP … to be agreed between the parties.”

73. The Heads of Agreement then referred to a side letter regarding the Investor’s continuing relationship with Ms Lock. In short, Ms Lock agreed to continue to represent the Investor on various boards and to provide consultancy services in respect of new investment opportunities for the Funds. In addition, the side letter would provide for $4.5 million to be advanced to Ms Lock “in recognition of her personal contribution to ensuring the repayment of the … Acquisition Loan.” The Heads of Agreement further noted:

Fiona Lock will pay (or cause the Buyer to pay) the first $4.5m from any proceeds received by the Buyer from the Pepperstone Group after repayment of the Acquisition Loan to CHAMP. For the avoidance of doubt, this amount is not included in the $25m to be retained by the Buyer before the calculation of the super return above.

Structuring of these arrangements remains subject to tax and legal advice.

74. Finally, the Heads of Agreement provided for Exclusivity. The vendors granted the Buyer eight days to complete the transaction documentation. When asked whether this timeframe reflected the urgency to sell the Pepperstone investment, Mr Haddock said “partly that and it's partly if you can drive a timetable, you drive it, and we were looking to drive the timetable. … We had momentum. We wanted to take advantage of the momentum and try and get the thing done as quickly as possible. It wasn't there was some ‘had to get it done’ by a certain date; it was more driven by the momentum.”

75. Similarly, Mr Stevenson advised KWM that the Investor had “gone exclusive” on the basis of the attached Heads of Agreement and it was “Full steam ahead”. Mr Stevenson also advised that he would provide his comments on the documents later that day. Separately, Mr Stevenson emailed Deloitte, advising that the Investor was looking to sign binding documentation by the end of the week. A tax structure paper was sought, showing the likely outcomes for the Funds from the proposed transaction. Mr Stevenson apologised for the “compressed timeframe” but said “there is now a compelling commercial imperative to get this deal signed up as soon as possible.”

76. In cross-examination, Mr Stevenson explained that, as the deal had gone exclusive with one party, they did not have the competitive tension of two bidders at that time, “so in these situations you want to move very rapidly to get to binding documentation”. That is, there was no actual urgency, albeit the Investor was certainly applying significant time pressure to its professional advisors.

77. For her part, Ms Lock emailed Clifford Chance and PwC on Sunday afternoon, advising that the Investor was “serious about this timetable and I need to put the resources in to hit it. Please let me know if you think this will be an issue for either of you.” Ms Lock asked to meet with both Clifford Chance and PwC on Monday, 3 September 2018 at 9.00 am so that she could walk them through the term sheet and answer any questions with a view to meeting again later that day to “start talking issues / structure.”

78. Ms Lock agreed that she then understood that the profit sharing agreement set out in the Heads of Agreement would be implemented in more detailed transaction documents. She intended at the time that the more detailed transaction documents would implement the profit sharing agreement as set out in the Heads of Agreement. Ms Lock agreed that she intended that the transaction documents would implement a profit sharing agreement whereby, after the Acquisition Loan was repaid, the returns from the Pepperstone business, including all dividends, would be shared 50-50 between her company and the Investor, after her company retained the first $25 million, and with a side letter concerning a further $4.5 million. Ms Lock assumed that the Investor also intended that the detailed transaction documents would implement a profit sharing agreement of that kind.

79. At 4.00 pm on Monday, 3 September 2018, Clifford Chance emailed Mr Szabo and Mr Defina, noting that Ms Lock had requested that they be sent the key terms of the transaction, which were provided. These included a portion of the Heads of Agreement, albeit the provisions relating to the side letter and Loan Fees were not included. It did include the transaction overview, details of the Acquisition Loan, required covenants and details of the Definitive Documentation. Presumably, Ms Lock had met with Clifford Chance and PwC by this time, as she had endeavoured to arrange the day before.

Vendor prepares documents

80. Meanwhile, Mr McNamara provided the KWM team with comments on the transaction documents, noting “A few things to talk to [Mr Stevenson] about.” Later on Sunday 2 September 2018, Mr Stevenson provided KWM with his initial comments on the transaction documents, thanking everyone for their work over the weekend, “With a big push we’ll have this signed by Friday.” KWM was asked to have someone double check that all of the questions and emails which had passed over the weekend had now been addressed.

81. Clause 9 of the Share Sale Agreement then provided:

9    Uplift Payment

9.1    Uplift Payment

Each time the Buyer receives Equity Proceeds (each, a "Trigger Time"):

(a)    the Buyer must calculate the Uplift Amount and notify the Buyer of the Uplift Amount, in each case within 3 Business Days of the relevant Trigger Time; and

(b)    if the Uplift Amount is greater than zero, the Buyer must pay to the Vendors (in their Respective Proportions) in cash, an amount equal to the Uplift Amount in respect of those Equity Proceeds (each, an "Uplift Payment") within 5 Business Days of the relevant Trigger Time.

9.2    Calculation of Uplift Amount

The Uplift Amount is an amount calculated (at each Trigger Time) in accordance with the following formula:

Uplift Amount = (A x 0.5) - B

Where:

A =    Buyer Net Equity Proceeds at the relevant Trigger Time

B =    All Uplift Amounts previously payable prior to the relevant Trigger Time

9.3    Duration

The Buyer's obligations under this clause 9 remain in force until the date that the Vendors Representative notifies the Buyer in writing that the CHAMP IV funds have been wound up.

9.4    Non-cash consideration

If any Buyer Equity Proceeds take the form of non-cash consideration, the Company and the Vendors must determine, in good faith, the fair value of the non-cash consideration by no later than the relevant Trigger Time. The fair value so determined will be deemed an amount of Equity Proceeds paid to the Buyer for the purposes of this clause 9.3.

9.5    Partial sale of shares

Where a sale or disposal of shares in the Company by the Buyer will not result in all of the shares in the Company held by the Buyer having been realised for cash (whether because the Buyer retains those shares or sells them in exchange for securities in another person), there will be deemed to have been paid as part of completion of the relevant transaction for each share not realised for cash, Equity Proceeds of an amount equal to the cash price for a shares of the same class sold for cash in the relevant transaction.

82. In his comments, Mr McNamara suggested that “Buyer” be changed to “Purchaser” throughout. He suggested a number of amendments to cl 9 to ensure that Ms Lock could not “game” the clause by selling the shares to an affiliate or third party and thereby avoiding the uplift.

83. For his part, Mr Stevenson suggested a number of amendments to ensure that calculation of the Uplift Amount was certified, reconciled to accounts, and secured. He also queried cl 9.5 in respect of the partial sale of shares, “We would want to continue to capture upside. The question is whether we would accept only the upside on retained shares or deem there to still be the full holding. I think the former is the fairer option.”

84. As to whether the Buyer had received Equity Proceeds, and was thus obliged to calculate the Uplift Amount, this term was defined as follows:

Equity Proceeds means (pre-tax) amounts paid (or deemed to be paid under any of clauses 9.3 (sic – 9.4?) or 9.5) in respect of all securities in the Company held by the Buyer, including by way of:

(a)    a dividend or other distribution; and/or

(b)    any distribution in a winding up; and/or

(c)    a return of capital; and/or

(d)    a return of capital on a share buyback; and/or

(e)    proceeds from any sale or disposal of shares in the Company (net of any transaction costs incurred and paid by the Buyer in respect of the sale or disposal of those shares);

(f)    proceeds from any repayment or redemption of any shares in the Company,

and in the case of (a), (c) and (d), to the extent retained by the Buyer following repayment of the Vendor Loan Note Deed Poll, but to avoid doubt:

(g)    excluding any management fees paid to the Buyer by the Group …

85. The text below sub-paragraph (f) and before sub-paragraph (g) was referred to by the parties as the ‘tail piece’. It is where the suggested drafting mistake was ultimately said to be. Mr Coull said that his understanding of the definition of Equity Proceeds as recorded in this draft was that before repayment of the Loan Note, any dividends, returns and distributions obtained by the Purchaser would be captured as Equity Proceeds. He inserted the tail piece to ensure that any dividends, returns and distributions obtained by the Purchaser following repayment of the Loan Note would still fall within that definition. It was his view that the drafting according with the wording in the then draft of the Heads of Agreement.

86. Mr McNamara suggested several amendments to the definition of Equity Proceeds, including deleting “all” in the chapeau and suggesting amendments to better capture the different scenarios that could unfold under cl 9. He queried whether the effect was that, if Ms Lock had to contribute more capital in the future, she would have to share 50% of the return on that capital with the Investor, “not sure I can glean that answer from the [term sheet]”. He merged sub-paragraphs (c) and (d).

87. Mr Stevenson made no comments on this definition.

88. As to calculating the Uplift Amount, the formula in cl 9.2 utilised the following defined terms:

Buyer Net Equity Proceeds means (at each relevant Trigger Time under clause 9):

(a)    the Buyer Total Equity Proceeds; less

(b)    the aggregate amount outstanding under the Vendor Loan Note Deed Poll (including principal and accrued but unpaid interest); less

(c)    an amount equal to $25,000,000.

Buyer Total Equity Proceeds means the aggregate of all Equity Proceeds received by the Buyer (at each relevant Trigger Time under clause 9).

89. In respect of the definition of Buyer Net Equity Proceeds, Mr McNamara queried the deduction of the amount outstanding under the Loan Note in sub-paragraph (b): “Is this just measuring what is left owing under the VLN at a trigger time or are we trying to account for the total value of the VLN (repaid and remaining outstanding)?”.

90. For his part, Mr Stevenson also queried the deduction of the amount outstanding under the Loan Note in sub-paragraph (b):

“Not sure this works – this number would reduce whereas the agreement is to give us 50c of every dollar after payment of the loan in full (ie including all interest) and then the next $25m going to Buyer. Until loan is repaid and they have their $25m they don’t pay us anything. But until loan repaid EVERY dollar goes to repayment.”

91. KWM had also circulated a draft Invitation to Tag, describing the material terms of the transaction as including the following:

(Uplift Payment): the Tag Buyer agrees to pay the [Funds] an additional amount in cash (following the completion of the Proposed Transaction). If amounts received by the Tag Buyer in respect of the Sale Shares (such as dividends and any net proceeds of sale) exceed $25,000,000, 50% of the amounts received over that threshold are to be paid to the [Funds]. This payment is contingent on the matters described above and no such payment may in fact eventuate …

92. Mr McNamara made no comments on this portion of the Invitation to Tag, while Mr Stevenson commented in respect of the $25 million, “After repayment of the loan notes in full.”

93. Mr McNamara organised a telephone conference on Monday, 3 September 2018 with Mr Stevenson, Mr Gordon and Mr Coull, for an internal review of Corporate documents. The meeting took one hour. Handwritten notes were taken of the meeting, although none of the matters noted appear presently relevant.

94. Someone from KWM printed out both Mr McNamara and Mr Stevenson’s comments on the Share Sale Agreement and made further notes on both print-outs, apparently before and during the telephone conference, recording consideration of the comments before the meeting and further instructions and discussion during the meeting. It is likely that Mr Coull printed out these documents, as there are several emails from him to his secretary asking her to perform this task from time to time. From these print-outs, the following picture emerges:

1. As to cl 9, it was noted that there would be no extension to the date for winding up the Funds “per [Ms Lock’s] comment”. The discussion appears to have focused on adding additional controls so that Ms Lock could not “game” the clause by issuing more shares, selling shares, or exiting the arrangement before repayment of the Acquisition Loan.

2. Mr Stevenson gave instructions to delete cl 9.4.

3. Mr Stevenson was concerned that the Buyer be compelled to pay dividends. The banking team advised that this obligation existed in the Loan Note; it was decided to replicate that provision in the Share Sale Agreement.

4. As to the definition of Equity Proceeds, a note was made in respect of Mr McNamara’s comment on sub-paragraph (e) regarding the proceeds of any share sale net of transaction costs, “Costs – need to catch everything in her pocket.”

5. As to the definition of Buyer Net Equity Proceeds, Mr Stevenson’s comment in respect of sub-paragraph (b) was heavily marked, underlined, circled and copied across in handwriting to the print-out of Mr McNamara’s comments. Mr Stevenson’s comment was clearly considered, with a note made “To discuss”. A handwritten note records that the sub-paragraph was intended to address all payments made under the Loan Notes (principal and interest). “Plus need to solve the 4.5m interest figure re the $25m.”

95. The last portion of the handwritten note of the telephone conference was reviewed and supplemented, apparently recording a review of the covenants contained in the Loan Note and the extent to which these covenants should be brought across to the Share Sale Agreement.

96. Soon after the telephone conference, Mr Coull and Mr Stevenson spoke again. Mr Coull said they discussed the need to ensure that the definition of Equity Proceeds was broad. Mr Stevenson asked Mr Coull to add the word “all” at the beginning of the definition, which he agreed to do. Mr Coull did not recall discussing the specific wording of any other parts of the definition of Equity Proceeds.

97. According to Mr Stevenson, he had concerns about the drafting and asked Mr Coull about the definition of “Equity Proceeds”. Mr Stevenson said that he was concerned that the ‘tail piece’ was unclear and possibly inconsistent with the idea that the Buyer “received” Equity Proceeds each time it received a dividend under the ‘dividend sweep’. Mr Coull said that the wording did not have that effect and that the wording was necessary to make sure that the Buyer applied all dividend amounts it received to pay down the Acquisition Loan while it remained outstanding. Mr Coull assured him that the drafting worked.

98. Mr Stevenson said that he accepted Mr Coull’s explanation “and I did give comments like, ‘Well, I just want words like “all” in there. I want to make sure we're capturing everything here.’”. Mr Stevenson asked Mr Coull to amend the definition to make clear that “Equity Proceeds” operated so that the Buyer was taken to receive such proceeds every time it received any type of dividend or other form of distribution on and from completion. This included, among other comments, a request that he include the word “all” at the start of the definition. Mr Stevenson told Mr Coull that they needed to ensure there could be no leakage; every dollar the buyer received had to go to repay the loan and then, after the buyer retained $25 million, every dollar was to be split between them. Mr Coull said he would amend the definition of “Equity Proceeds”.

99. Although Mr Stevenson made no file note of this conversation, he said it was a conversation which stuck in his mind. Mr Stevenson said “the thing I just kept banging on about is, ‘we have to capture the upside sharing’”. Whilst Mr Stevenson found the architecture of KWM’s drafting quite hard to follow, he emphasised that they needed to capture every single dollar that Ms Lock received so that, after she took her $25 million, “There can’t be anything leaking out any other way of getting money out. Everything goes 50-50.”

100. Later that evening, Mr Coull provided Mr Stevenson, Mr Gordon and Deloitte with a further draft of the Share Sale Agreement “to reflect discussions today”. Clause 9 had been substantially amended. While cl 9.1 and cl 9.2 had minor changes, the balance was re-written. Clause 9.3 now provided for certification of the Uplift Amount. Clause 9.4 provided that the Purchaser would provide information in support of its calculation. Clause 9.5 was an anti-avoidance clause. Clause 9.6 obliged the Purchaser to provide undertakings set out in Schedule 3, to be replicated from the Loan Note, once settled. Clause 9.7 provided that the Purchaser’s obligations remained in force until the current end date of the Funds, defined as the Winding Up Date.

101. The definition of Equity Proceeds had been amended as follows:

Equity Proceeds means all (pre-tax) amounts or consideration received (whether directly or indirectly) by the Purchaser or any Affiliate of the Purchaser in connection with the Company, including:paid (or deemed to be paid under any of clauses 9.3 or 9.5) in respect of all securities in the Company held by the Buyer, including:

(a)    by way of:

(i)   a dividend or other distribution; and/or

(ii)    any distribution in a winding up; and/or

(iii)    a return of capital in any form including by way of buy back or cancellation; and/or

(d)    a return of capital on a share buyback; and/or

(iv)    proceeds from any sale or disposal of shares in the Company or in any Affiliate of the Company (net of any transaction costs incurred and paid by the Buyer in respect of the sale or disposal of those shares); and/or

(v)    proceeds from any repayment or redemption of any shares in the Company or in any Affiliate of the Company,

and in the case of (i), (c) and (iii), to the extent retained by the Purchaser following repayment of the Vendor Loan Note Deed Poll, but to avoid doubt:; and

(b)   any ancillary or collateral arrangements associated with any of the above,

but to avoid doubt,

(c)    excluding any management fees paid to the Purchaser by the Group

102. Mr Stevenson added in cross-examination that “under the (iii) under (a), you know, the example there is we're trying to capture any kind of way that there could have been money coming out, that we were capturing it, so buybacks of any type. So just another example of the edits made as a result of the conversation.”

103. The definitions of Buyer Net Equity Proceeds and Buyer Total Equity Proceeds had now become Purchaser Net Equity Proceeds and Purchaser Total Equity Proceeds respectively. Sub-paragraph (b) of the definition of Purchaser Net Equity Proceeds was clarified in light of both Mr McNamara and Mr Stevenson’s comments:

Purchaser Net Equity Proceeds means (at each relevant Trigger Time under clause 9):

(a)    the Purchaser Total Equity Proceeds; less

(b)    the aggregate of:

(i)   amounts paid under the Vendor Loan Note Deed Poll (including principal and interest paid; and

(ii)   amounts outstanding under the Vendor Loan Note Deed Poll (including principal and accrued but unpaid interest) if any; less

(c)    an amount equal to $25,000,000; less

(d)   any third party advisory costs incurred and paid by the Purchaser in respect of any sale or disposal of shares in the Company.

Purchaser Total Equity Proceeds means, at a Trigger Time, the aggregate of all Equity Proceeds received by the Purchaser or an Affiliate of the Purchaser at the Trigger Time and all previous Trigger Times (at each relevant Trigger Time under clause 9).

104. The plaintiff submitted that it was these changes to the definition of Purchaser Net Equity Proceeds, in response to Mr Stevenson’s comment, that caused the drafting problem. Until then, the Heads of Agreement was consistent with the tail piece. When KWM added in “amounts paid under the Vendor Loan Note Deed Poll” in the definition of Purchaser Net Equity Proceeds, this was said to have the effect of deducting the whole of the amount paid under Loan Note for a second time. As a result, the provisions departed from the Heads of Agreement.

105. By reply email, Mr Stevenson provided a first draft of the side letter with Ms Lock. Mr Stevenson also reviewed the revised Share Sale Agreement, “Nothing else left off [the] page on my quick review. It looks good and reflective of our discussion.” Mr McNamara and Deloitte were requested to confirm that there were no issues. Mr Stevenson said he would review the document with Mr Gordon and Mr Haddock in the morning.

106. Mr Stevenson said that when he discussed the ‘tail piece’ with Mr Coull, “he had said that that was a critical connection with the vendor loan note deed and the documents, and I'd said, ‘Well, as long as we're capturing all the payments, I'm okay.’ And so on the basis that I'd had those conversations I didn't have anything else to add, because I thought the clause worked. For the record, I still think the clause works because of the use of the word "all" at the top and the wording "including" so … but that’s my view, it still works.”

107. As to whether Mr Stevenson discussed the ‘tail piece’ with Mr Coull in the terms that Mr Stevenson described, he was precise and cautious when giving evidence. Mr Stevenson was emphatic that he recalled a conversation which took place seven years ago, of which he made no file note. Mr Stevenson first committed his recollection of the conversation to writing two years later. I place greater weight on what the contemporaneous documents may reveal.

108. The word “all” was certainly added to the chapeau to the definition of Equity Proceeds. Beyond this, the handwritten notes on the print-out of Mr Stevenson’s comments, the print-out of Mr McNamara’s comments and the separate file note make no comment or reference to the ‘tail piece’. The only amendments to the ‘tail piece’ made by Mr Coull were consequential, in particular, changing the cross-referencing and changing “Buyer” to “Purchaser”.

109. Whilst I do not doubt Mr Stevenson’s honesty, or that he emphasised the importance of capturing all upside – likely along the lines of his comment reproduced at [89] – I am not satisfied that there was a specific discussion with Mr Coull about the ‘tail piece’ in the terms described by Mr Stevenson. Mr Coull’s description of their conversation accords with Mr Stevenson’s focus and comments on the Uplift Payment provisions and embedded definitions, as recorded in the contemporaneous documents.

110. I consider it more likely that Mr Stevenson’s recall reflected what he came to think about the tail piece as a result of subsequent events. That is, his recollection is most likely an example of what McLelland CJ in Eq described in Watson v Foxman (1995) 49 NSWLR 315 at 319:

… human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.

111. I should not be taken, however, as having accepted the stronger criticisms made by KWM of Mr Stevenson as a witness.

112. In the wee hours of Tuesday, 4 September 2018, KWM’s banking team provided revised drafts of the Loan Note and Invitation to Tag, together with an annotated term sheet for the latest drafts of the Share Sale Agreement and Loan Note. The Invitation to Tag had been updated to include Mr Stevenson’s comment in respect of the Uplift Payment and now read:

(d)   (Uplift Payment): the Tag Buyer agrees to pay the CHAMP Investors an additional amount in cash (following the completion of the Proposed Transaction Completion). If, after the vendor loan notes have been repaid in full, amounts received by the Tag Buyer or its affiliates in respect of the Sale Shares (such as dividends and any net proceeds of the sale of those Sale Shares) exceed $25,000,000, 50% of the amounts received over the threshold are to be paid to the CHAMP Investors. This payment is contingent on the matters described above and no such payment may in fact eventuate;

113. Mr Stevenson advised Mr Haddock that he was “checking the mark up now”.

First draft to Ms Lock

114. Later in the evening of 4 September 2018, Mr Coull provided Clifford Chance with the first draft Share Sale Agreement. In the wee hours of 5 September 2018, KWM’s banking team provided Clifford Chance with the first draft Loan Note.

115. Ms Lock’s usual practice at the time was to work from home on Wednesdays and Fridays. On the morning of Wednesday, 5 September 2018, after dropping her children at school, Ms Lock reviewed the draft Share Sale Agreement at home, including cl 9 and its definitions. Ms Lock said it became clear to her that, in ascertaining Equity Proceeds in the case of a dividend or other distribution, or by way of a return of capital, the amount was to be calculated by reference to the extent such dividends, distributions or returns of capital were retained by the Purchaser following repayment of the Loan Note. The aggregate amount of all Equity Proceeds was used to calculate the Purchaser Total Equity Proceeds. Purchaser Net Equity Proceeds was calculated by reference to Purchaser Total Equity Proceeds less the aggregate of all amounts paid under the Loan Note and amounts outstanding under the Loan Note less $25 million and third party advisory costs. This meant that amounts reflecting any repayment of the Loan Note would be excluded at the time of calculating Equity Proceeds and would then also be deducted in calculating the Purchaser Net Equity Proceeds.

116. I think Ms Lock’s recollection of her understanding of the draft Share Sale Agreement on the morning of 5 September 2018 is, like that of Mr Stevenson, a little aspirational and likely reflects what she came to think or understand about the operation of the provisions. As will be seen, Ms Lock developed her understanding of these provisions over several days.

444. The licence granted by the Financial Conduct Authority was not a New Licence. It will be recalled that completion of the Share Sale Agreement was conditional on that authority approving the transfer of Company shares to the plaintiff. Approval was given on 16 November 2018. Completion occurred on 28 November 2018.

445. I agree that the combined effect of these provisions is that the Company is entitled to acquire New Licences with regulatory capital requirements and buffer amounts of up to $6 million. I do not agree that the Company is entitled to withhold an additional $6 million on that account, whether the Company holds New Licences or not.

446. Nor is it entirely clear whether the Company is entitled to withhold up to $6 million beyond the Buffer Amount to meet the requirements of New Licences. I did not have the benefit of submissions of this subject from the vendors. The contractual regime tightly constrains the Company’s ability to acquire New Licences, with their associated requirements to retain cash. Otherwise, the plaintiff’s obligation to repay the Loan Note and share ‘super returns’ with the vendors would be eroded. On one view of it, the Buffer Amount is self-evidently sufficient to cover requirements associated with New Licences, particularly where there is a mechanism to review and increase the Buffer Amount each year, having regard to inter alia the regulatory capital requirements and buffer amounts associated with New Licences. Where the parties sought to make further submissions on the precise amount payable to the vendors, I would be assisted by submissions on this aspect.

447. As to other legal requirements which may restrict the Company’s ability to declare dividends in the amounts in the table above, the vendors pointed to s 254T(1) of the Corporations Act 2001 (Cth), which provides:

254T   Circumstances in which a dividend may be paid

(1)    A company must not pay a dividend unless:

(a)   the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and

(b)   the payment of the dividend is fair and reasonable to the company’s shareholders as a whole; and

(c)   the payment of the dividend does not materially prejudice the company’s ability to pay its creditors.

450. As to s 254T(1)(a), Ms Wright was asked to consider whether the net assets of the Company were positive at the end of each quarter, from March 2021 on. Ms Wright calculated that it was, with surplus assets ranging from some $85 million to $122.5 million on each balance sheet date. Mr Stone did not consider this. It would thus appear that the requirement of s 254T(1)(a) was satisfied and permitted a dividend to be paid. Andrew Brown also considered the requirements of s 254T(1) of the Corporations Act in respect of appropriate amount of capital retention, to which I will return.

451. The plaintiff pointed to two other legal restrictions, being s 912A(1)(h) of the Corporations Act and director’s duties under s 180. The vendors submitted that the contractual obligation was not framed by reference to what the plaintiff’s board thought was the extent permitted by law. If s 254T(1) permitted a greater distribution of dividends than the Company resolved to distribute, there was a breach of cl 2.6(a) of Schedule 3 even if there was no breach of s 180 of the Corporations Act.

452. Looking first at s 912A(1)(h) of the Corporations Act, the sub-section provides that a financial services licensee must have adequate risk management systems. The obligation was considered in Australian Securities and Investments Commission v RI Advice Group Pty Ltd (2022) 160 ACSR 204; [2022] FCA 496, in the context of providing adequate protection for investors from the consequences of cyber-attack. Rofe J observed at [54]:

Although s 912A(1)(h) does not appear to have been the subject of any relevant prior judicial consideration, the notion of “adequacy” … imports a normative standard of conduct against which the licensee’s performance can be judged. …

453. Her Honour earlier adopted what was said by Allsop CJ in Australian Securities and Investment Commission v Westpac Securities Administration Ltd (2019) 272 FCR 170; [2019] FCAFC 187, albeit in respect of related provision s 912(A)(1)(a), at [173]:

The provision is part of the statute’s legislative policy to require social and commercial norms or standards of behaviour to be adhered to. The rule in the section is directed to a social and commercial norm …

454. Turning to director’s duties, s 180(1) of the Corporations Act provides:

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)    were a director or officer of a corporation in the corporation's circumstances; and

(b)    occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

455. The intersection between directors’ duties and s 254T was considered in the “Dick Smith” case, where directors were said to have breached their duties by approving a dividend without properly considering the requirements of s 254T. At first instance, Ball J (as his Honour then was) noted in DSHE Holdings (Receivers & Managers Appointed) (In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4) [2021] NSWSC 673 at [448]:

Section 254T sets out fundamental principles relating to the payment of dividends and it is to be expected that a director acting with reasonable care and diligence would, before participating in a decision to pay or to declare a dividend, be familiar with those principles and take reasonable steps to satisfy himself or herself that the company, in paying a dividend, would comply with them.

456. The Court of Appeal also noted in DSHE Holdings Ltd (receivers and managers apptd) (in liq) v Potts (2022) 405 ALR 70; [2022] NSWCA 165 at [112]-[113] (Leeming and Kirk JJA, Basten AJA):

[112]   It is well-established that a contravention of directors’ duties may be made out by failing to take reasonable care to ensure that the company did not breach other legal norms …

[113]   Merely because an action of a company is likely to breach, will breach, or does in fact breach some other legal norm does not necessarily establish a breach of the duties owed by the directors to the company. Conversely, just because an apprehended breach did not in fact occur does not necessarily establish that there was no failure to comply with the duties of directors.

457. Pepperstone Group Ltd is subject to the obligation in s 912A(1)(h) of the Corporations Act to have adequate risk management systems. The directors of the Company, and each of its subsidiaries, are obliged to discharge their duties in accordance with s 180(1) of the Corporations Act, that is, to discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director “in the corporation's circumstances”. Those circumstances included the fact that Pepperstone, by the control of its majority shareholder, is obliged to distribute dividends “to the extent permitted by law”, that is, maximising dividends where possible.

Capital retention

458. This brings me to the second issue, being the appropriate capital retention at the time when dividends were declared. The evidence on this issue was in two tranches. First, as to the appropriate capital retention, the vendors relied on the expert evidence of Mr Brown, while the plaintiff relied on the expert evidence of Huseyin Sahin. Second, as to how the capital retention factored into any increased dividend that should have been paid, the parties again relied on forensic accountants Ms Wright and Mr Stone.

459. Mr Brown was asked to ascertain the amount of capital that Pepperstone was required to hold in order to comply with s 254T(1) of the Corporations Act 2001. Mr Brown requested, but had not been provided with, information relating to Pepperstone’s margin requirements. Absent that information, Mr Brown estimated the margin posted by Pepperstone and its clients by relying on regulatory margin requirements, information on Pepperstone’s website, terms and conditions, risk management policy and “Prime Broker Initial Review”. As the information available on the Pepperstone website was not as at the date when dividends were declared, Mr Brown assumed that the information on the website had not changed since the dates when dividends were declared.

460. Mr Brown explained that capital required equalled exposure multiplied by variation.  Exposure represented the amount of money exposed to market risk.  The Net Open Position (NOP) was usually used, being the sum of all open positions in one direction (for example, a “long" position) netted against all positions in the opposite direction bracket (for example, a “short" position). Variation, or movement, represented the amount that an index price may fluctuate for a given time period.  A statistical analysis process called Value at Risk (“VaR") quantified the extent of possible price movements for a given confidence level bracket (for example, 99%) and time period (for example, 10 days).

461. Using this approach, Mr Brown analysed Pepperstone’s two client trading books, being the “S-Book” and the “X-Book”. Pepperstone’s S-Book is immediately 100% externally hedged. Pepperstone’s X-Book is not externally hedged and 100% of trades are internalised, with trades matched against each other where possible. The residual NOP is managed within risk limits; any excess above risk limits moved into the S-Book. Whilst the accumulation and netting of client positions in the X-Book may permit Pepperstone to reduce the exposure to be hedged, the gap before that hedge is effected may present greater risk given volatility in the gap, being the VaR. Mr Brown noted that the portfolio appeared quite balanced, given the low VaR numbers on average historically.

462. In his first report, Mr Brown calculated a minimum capital requirement for both the S–Book and X–Book of between $13 million and $20 million when dividends were declared in February, May and August 2023.  He did not include a cash buffer for operating expenses.  Whilst $13 million had historically proven to be an adequate buffer against extreme price gap events for Pepperstone, Mr Brown considered that the same may not be true on a forward-looking basis, if the business underwent change. He concluded that an appropriate amount of cash was a minimum of $16 million with an upper range of $20 million.

463. Mr Sahin did not undertake his own calculations but reviewed the reports of Rochford, KPMG and Mr Brown, indicating which portions of each report he considered preferable. He noted that the authors adopted similar methodologies but reached different conclusions, driven by different data sets, assumptions and judgements in respect of the S-Book calculation, and applying different confidence levels to the VaR methodology for the X-Book.

464. So far as the S-Book was concerned, Mr Sahin considered it more reasonable and appropriate to use a maximum NOP of USD $200 million. For the X-Book, Mr Sahin opined that Pepperstone should hold capital closer to the top end of the confidence level range, at 99%. Mr Sahin also considered that it was appropriate to hold four weeks of 'fixed' operating expenses, being $8.3 million.  In total, Mr Sahin considered that an appropriate risk capital buffer was between $23.4 million and $33.8 million, and it would be reasonable for Pepperstone to be closer to the high end of that range.

465. Mr Sahin was also asked to look at the performance of Pepperstone in the September 2023 quarter and noted that, if the Company had only held $10 million in risk capital, this would not have been enough. Mr Brown considered that Mr Sahin’s retrospective analysis did not assist as, when making a decision in respect of appropriate capital to hold, Pepperstone would not have the benefit of retrospection. The exercise undertaken by Mr Sahin also rearranged the financial performance of Pepperstone over a specific period in a scenario that did not occur, where Mr Sahin used a 30-day cumulative P&L position, not cash, to assess different risk capital amounts. I agree. This is no criticism of Mr Sahin; he simply did what he was instructed to do.

466. In his second report, Mr Brown defended the ‘data set’ used in his analysis of the S-Book. He had analysed the data over the lengthier period than that used by Rochford and KPMG. That data indicated that the Pepperstone business had materially changed, such that the more recent data set was more appropriate. (Mr Sahin broadly agreed with this). Mr Brown set out in detail how he had analysed the X-Book and remained of the view that his analysis was appropriate and Mr Sahin’s was not superior, particularly given that Mr Sahin had not got into the data.

467. Following a conclave, and allowing for Pepperstone’s operating expenses, Mr Brown considered that the appropriate risk capital requirement for Pepperstone at the dividend declaration dates was between $16.3 and $21.4 million. This figure was not in addition to the regulatory capital amount. Mr Sahin considered the appropriate risk capital requirement was $22.8 to $32.1 million. That was in addition to the regulatory capital amount.

468. As to which of the capital retention experts to accept, Mr Brown gave precise, measured evidence and made reasonable concessions. Mr Sahin was a solid and experienced witness. There are three factors which, I think, favour Mr Brown’s views. First, Mr Brown had the advantage of having undertaken the data analysis himself, whilst Mr Sahin completed, effectively, a ‘desk-top’ review of Mr Brown’s report, together with the previous reports of Rochford and KPMG.

469. Second, I think that two of the three reports examined by Mr Sahin, being Rochford and KPMG, cannot be said to be independent. That is not to criticise the authors, but to note the basis on which they were commissioned. It will be recalled that the Rochford report was initially prepared in April 2020, before being updated and relied on by the Company in February 2023. As earlier described at [313]-[315], the contemporaneous emails between Ms Lock, Mr Szabo and their Pepperstone colleagues in relation to the Rochford report indicate that the report was prepared to support a case to the Investor to increase the Buffer Amount substantially. As a document was prepared with that end in mind, I do not think that the instructions and assumptions provided by Pepperstone to Rochford can be assumed to be conservative or objective but, rather, focussed on a particular purpose. As such, I consider that the original Rochford report should be approached with some circumspection.

470. As also noted at [375]-[380], the updated Rochford report, on which the board of the Company relied in February 2023, was commissioned the same day as the plaintiff commenced these proceedings. It is difficult to see that these two events were unrelated. Likely, the updated Rochford report was commissioned, at least in part, to bring pressure to bear on the vendors to increase the Buffer Amount and, perhaps, more widely. While the Company then retained KPMG to provide a second report, that firm was instructed to validate the models and TLR Stack that had been recommended by Rochford. Perhaps it is not surprising that Mr Sahin arrived at a capital retention amount which was lower than both Rochford and KPMG.

471. Third, in reaching his figure, Mr Sahin took a conservative approach at several junctures. From having read a great deal of Pepperstone emails and reports in the course of preparing this judgment, the business appears to have had a significant risk appetite. That is, I do not think that the Pepperstone is as conservative as Mr Sahin.

472. But Mr Sahin arrived at a capital retention amount which was higher than Mr Brown. Both experts used a risk-based framework. Mr Sahin exercised his professional judgement, as did Mr Brown. There is no right or wrong answer for a correct capital retention amount. Mr Brown concluded, effectively, that the Buffer Amount was still pretty close to the mark.  If I look at the table above, then the Agreed Assets for February, May and August 2023 (being the dates on which Mr Brown focused in his first report) were between $19.5 million and $22 million.  I accept that hindsight is not a fair benchmark, but I apply it nonetheless. This suggests that Mr Brown's range of $16.3 million to $21.4 million was slightly low.  The average Agreed Assets for all six dividend declaration dates in the table is $18.4 million, which is comfortably within Mr Brown's range.

473. In the result, I see no reason to depart from Mr Brown’s views, albeit making some allowance for the possibility that his calculations may be slightly low. The mid-point of Mr Brown’s range was $19 million, which includes the regulatory capital amount. I consider that a figure of $20 million is appropriate.

Breach

474. The plaintiff submitted that failing to hold the TLR as recommended by Rochford, and then KPMG, would have resulted in a contravention of s 912A(1)(h) and directors’ duties. Whether or not, by reference to the expert evidence now before the Court, there would in fact have been a breach of s 254T was irrelevant. The Company’s directors would have been in breach of their duties if they had disregarded the conclusions reached by Rochford and KPMG without an obvious basis for doing so.

475. The vendors submitted that neither Rochford nor KPMG report provided independent advice on the appropriate amount of capital to retain. Rochford was simply engaged to review the board’s approach. KPMG was engaged to review and ‘sense check’ Rochford’s approach. Neither Rochford nor KPMG were considering the position where the plaintiff was under a contractual obligation to maximise dividends, as in fact was the case. Neither of their analyses provided a proper foundation for the directors to form a view about the appropriate level of capital to retain.

476. This case is not about whether Pepperstone Group Ltd complied with its obligation under s 912A(1)(h), nor whether the directors of the Company performed their duties in accordance with s 180(1). The issue is whether the plaintiff performed its contractual obligation under cl 2.6(a) of Schedule 3 to the Share Sale Agreement. Whether a party’s performance fulfils its obligations is a mixed question of fact and law: Margaronis Navigation Agency Ltd v Henry W Peabody & Co of London Ltd [1965] 1 QB 300 at 318 (per Roskill J). The onus of proving breach is on the promisee: Hart v MacDonald (1910) 10 CLR 417 at 428. The parties must perform as and when promised, in precise compliance with the contract. An obligation is not discharged by ‘substantial performance’ unless the contract so provides: Nick Seddon and Rick Bigwood, Cheshire & Fifoot Law of Contract (11^th Australian ed, 2022, LexisNexis) at [9.5].

477. As to the legal question, the language of cl 2.6(a) is mandatory – “must” – and points to the plaintiff maximising Distributions by ensuring that the Company declares dividends “to the extent permitted by law." I repeat my observation at [457].

478. As to the factual question, I have the reports obtained from Rochford and KPMG, together with minutes of the Company's meetings at which it was resolved to increase the capital retention amount in light of these reports. Redactions to the board minutes of the Company on 31 January 2023 indicate that the Company likely had the benefit of legal advice when considering the Rochford report. The minutes of the board meeting certainly refer to each of the legal obligations relied on by the plaintiff in submissions, as well as the contractual obligation to distribute dividends to “the extent permitted by law.” The same references are repeated in the Company’s board minutes on 3 May 2023 and 4 July 2023.

474. But the consultants’ reports and minutes of meeting were drafted after this litigation was underway. That is, these documents were not created in circumstances “where parties do not expect the documents to surface in a trial" but rather, where the plaintiff may expect or hope that the documents will surface: Brookfield v Yevad Products at [416]. I repeat my concerns about the independence of the Rochford and KPMG reports.

475. In addition, I have the evidence of one lay witness, Ms Lock, who chaired the three Company meetings. For the reasons earlier given, I have deferred to the contemporaneous documents in preference to what Ms Lock may have said on the subject. I have also placed greater weight on the contemporaneous documents prepared before these proceedings were in view than the documents that have been prepared since.

476. I have a large number of contemporaneous business records, in particular, Ms Lock and Mr Szabo's emails from September 2018 on, complaining about the Buffer Amount. It is hardly surprising that the Buffer Amount was uncomfortable. Mr Defina's paper, describing how the NTA regulatory capital requirements were applied at Pepperstone, showed that the lowest “headroom" maintained by Pepperstone in the previous three years was $9.4 million. The Buffer Amount was set at the minimum level, presumably with a view to maximising loan repayments and, in due course, the sharing of 'super returns’. This was much less than the $44 million “headroom" maintained by Pepperstone in 2018. But that was the deal.

477. This became the source of discontent within days of the Share Sale Agreement being executed: see [308]. A sustained campaign followed to increase the Buffer Amount. The vendors did agree to change the Buffer Amount, but KWM's proposed amendments to the Share Sale Agreement to give effect to that agreement, together with “tidy ups" to the Uplift Payment provisions, prompted Ms Lock to recall her initial thoughts as to how those provisions worked. Ms Lock thought this presented an opportunity to buy-out the vendors at a low price.

478. To pursue that possibility, Ms Lock abandoned efforts to increase the Buffer Amount in favour of obtaining finance to fund a buy-out. In October 2020, Ms Lock told Mr Stevenson that she preferred to leave the transaction documents as they were. In December 2020, Ms Lock told Mr Stevenson that there was no urgency in changing the Buffer Amount. But Ms Lock was unable to secure finance, or to persuade the vendors to accept a ‘low-ball’ offer. Nor did Ms Lock re-engage with the agreement to increase the Buffer Amount, as that would have required her to relinquish the opportunity presented by the perceived drafting error.

479. Two years passed between when Ms Lock told Mr Stevenson that she no longer wanted to change the Buffer Amount and when the plaintiff commenced these proceedings. There was no attempt by Ms Lock, within a month following the end of the 2021 or 2022 financial years, to request to discuss, in good faith and acting reasonably, whether the Buffer Amount should be adjusted: cl 9.7, Share Sale Agreement. The plaintiff simply commissioned the Rochford report in conjunction with commencing legal proceedings. These actions were likely intended, in combination, to bring pressure to bear on the vendors to re–negotiate the arrangements between the parties or, as Ms Lock may have put it, “to have a chat across all issues".

480. As a matter of fact, I am satisfied on the balance of probabilities that the plaintiff has not performed its contractual obligation under cl 2.6(a) of Schedule 3 to the Share Sale Agreement. Ms Lock's proposal to increase the buffer to $50 million on the same day that these proceedings were commenced does, using Mr Davenport's words, appear “contrived". When subsequently resolving to increase the capital retention amount, Ms Lock had competing considerations: the plaintiff’s contractual obligation to maximise dividend distributions, on the one hand, and Pepperstone’s wish to retain more “headroom” on the other. In making that choice, I have no doubt that Ms Lock put the obligation to maximise dividends as the lowest priority.

481. In calculating what the total Uplift Payments would have been if the plaintiff complied with its ‘dividend sweep’ obligations, Ms Wright was asked to assume that the Company was required to hold cash equal to the greater of:

1. $16 million, being the amount of capital retention calculated by Mr Brown in his first report; or

2. Agreed Assets as defined in the Share Sale Agreement plus amounts referable to other buffers referred to in Pepperstone’s internal materials. (Pepperstone referred to a “UK reg cap” in respect of licences held by Pepperstone in the United Kingdom and “New licence reg cap & buffer” in respect of licences held by Pepperstone in other jurisdictions.)

487. The forensic accountants agreed that the total Uplift Payments calculated on this basis to May 2024 was $46.630 million. The parties asked for an opportunity to re-calculate the appropriate capital retention amount and monies payable to the vendors in light of my findings. I would be grateful for their assistance in this regard.

Further alternative claims

488. The vendors made further claims in the alternative, in the event that they did not succeed on construction or rectification. Each claim raised a number of complex issues, which I do not propose to address given the length of this judgment already. I have set out all relevant findings of fact, should it become necessary to consider any of these alternative claims in the future. I will record the issues raised on these claims and any additional observations.

Professional negligence

489. KWM did not dispute the retainer or duty owed. The issue was whether KWM breached their retainer or duty of care when drafting of the profit-sharing arrangement in the Share Sale Agreement. As matters presently stand – to use Mr Stevenson’s words – I have concluded that the “drafting is a bit clunky in parts” but “it still works.” I do not consider it appropriate to make findings in respect of professional negligence, given my conclusions thus far.

490. I do note that the transaction was complicated. So too were the documents which recorded it. This case focussed on a tiny sub-set of the provisions drafted. I also note that the multiplicity of emails and draft documents would have presented challenges to the lawyers on both sides in keeping track of comments, proposed amendments and the implications of both for the transaction at large. KWM appears to have done a thorough job in this regard, including printing off significant drafts and instructions, including in colour (where needed), and marking off, by hand, when each matter had been attended to, with comments on the views of those interested and thoughts as to how any change made was appropriate.

491. I note that, although there was no actual urgency, the Investor pushed this transaction at breakneck speed, in the interests of maintaining commercial momentum. The contemporaneous documents reveal that the parties’ advisors, both legal and tax, worked 24-7 – literally – to meet their clients’ demands. KWM sought no allowance on this account but noted this as a factual circumstance against which any breach of duty must be considered. I agree that, where KWM did not raise with the client that they considered that they were unable to perform their retainer to a reasonable standard given the demands being placed upon them, then KWM’s submission on this factor was appropriate.

492. As to causation, Mr Haddock said the interpretation of the Share Sale Agreement proffered by the plaintiff did not reflect the commercial terms that he discussed with Ms Lock, was inconsistent with the deal structure contained in the Heads of Agreement. It was not consistent with what was contained in the Gold Paper, or what he described to the Investment Committee or the members of the Investment Advisory Committee. He would not have agreed to a deal in those terms, which entirely undermined the ‘super return’ concept. I accept this.

493. The other side of the equation is whether Ms Lock would have signed a Share Sale Agreement which provided for ‘super returns’ as described in the Heads of Agreement. Before Ms Lock received the first draft of the Share Sale Agreement, Ms Lock had no notion of any departure from the commercial terms that had been agreed in the Heads of Agreement. Had the drafting error been corrected before execution of the documents, Ms Lock could not have (and would not have) resisted such an amendment.

494. As to what loss or damage the vendors suffered by reason of any breach, Mr Haddock said the difference between the deal recorded in the Heads of Agreement and that for which the plaintiff contended was some $100 million. The vendors also claimed their costs of these proceedings. In the event that the vendors were entitled to costs as damages, the vendors and KWM agreed that determination of the quantum of costs would be addressed as part of any future cost assessment and need not be determined by me. In the event that the vendors succeeded in respect of the proper construction of the Share Sale Agreement, then no costs were sought as damages from KWM. That was entirely sensible.

Fiduciary duty

495. The fiduciary relationship was said to arise from Ms Lock's employment and her role as a director representing the Investor on the Pepperstone board, while the Heads of Agreement and Share Sale Agreement were negotiated. There were three issues: did a fiduciary duty exist; did the vendors give their informed consent to Ms Lock acting in her own interests; and what remedy should be granted.

Misleading and deceptive conduct

496. The misleading and deceptive conduct claim which relied on the same facts as the fiduciary duty claim. There were several issues. First, did Ms Lock or the plaintiff engage in misleading or deceptive conduct by silence? Second, was this contravening conduct causative of loss, or was it the vendors’ (or KWM’s) failure to take reasonable care to protect their own interests? Third, if so, what if any loss did the vendors suffer? Fourth, should liability for the loss be apportioned as between the plaintiff and/or Ms Lock, on the one hand, and KWM on the other, pursuant to s 87CD of the Competition and Consumer Act 2010 (Cth)? Finally, should damages be reduced pursuant to s 137B of the Competition and Consumer Act 2010, or is the plaintiff and/or Ms Lock precluded from relying on this provision by intention or fraud.

Orders

497. The parties asked for an opportunity to confer and, if necessary, make further submissions on the appropriate capital retention amount in light of my findings. The plaintiff sought to be heard on the question of interest on any debt amount. The vendors sought to be heard on the form of orders to be made, including as to costs and interest. I will make directions to accommodate this.  For these reasons, I make the following orders:

1. Dismiss the Amended Summons filed on 2 November 2022.

2. Declare that, in respect of the Share Sale Agreement entered into between the plaintiff and the first to fourth defendants on 11 September 2018 (SSA):

1. any amount or consideration received (whether directly or indirectly) by the plaintiff, or any “Affiliate” (as defined in the SSA) of the plaintiff, in connection with FX Holdco Pty Ltd (or in connection with any Affiliate of FX Holdco Pty Ltd), including without limitation, any “Distribution” (as defined in the SSA), constitutes “Equity Proceeds” under and for the purposes of the SSA;

2. the notices provided by the plaintiff to the first to fourth defendants purportedly pursuant to cl 10.2 of the SSA contain incorrect calculations of the amount of Equity Proceeds received by the plaintiff and do not comply with cl 10.1(a) of the SSA; and

3. the certification provided by the plaintiff to the first to fourth defendants purportedly pursuant to cl 10.3 of the SSA contains incorrect calculations of the amount of Equity Proceeds received by the plaintiff and does not comply with cl 10.3 of the SSA.

3. Subject to making further directions and orders in respect of amounts to be paid by the plaintiff to the defendants under the SSA, interest and costs, otherwise dismiss the Further Amended Cross-Claim Cross-Summons filed on 20 April 2023.

4. Direct the parties to notify any errors or omissions within 14 days.

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Amendments

20 October 2025 - [441] Amendment to table

Typographical amendments

Decision last updated: 20 October 2025