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

“You changed the business I sold you so you could underpay me!”

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By deed P sold their shares in an online retail business to D.P was to receive $20M, some shares in D, and the Earn Out Amount (“EOM”): [3]

According to the deed, the EOM was the Base EOM of $10M plus the Additional EOM: [6]

The Additional EOM was the rounded difference between the Base EOM (I.e. $10M) and “Earnings”: [7]

“Earnings” meant EBITDA over the relevant year. The deed contained a mechanism for D send a proposed Earnings calculation (as part of a P and L), for P to make a reply including setting out “Contested Matters”, for the parties to negotiate the contested matters in good faith, and for the matter to be referred to an expert if negotiations failed: [10] - [14]

D sent a P and L suggesting Earnings were ~$6M (making the Additional EOM zero): [16]

P sent a reply calculating Earnings at ~$15M (taking the Additional EOM to its maximum possible figure) and raising Contested Matters: [17]

Following unsuccessful good faith negotiations, the matter was referred to an expert: [18]

How was the expert to calculate Earnings?: [19]

Cll 2.1 and 2.2 of the deed required Earnings to be calc’d disregarding revenues or expenses not part of the Co’s ordinary business including: costs relating to the share sale, restructure costs, certain related party transactions, and the costs of kicking off any new business: [21]

Cl 2.3 of the deed noted the parties’ agreement that Earnings were to be calc’d as if the Co’s business were run the same way post-purchase as it had been pre-purchase; and that D would not make big changes to the Co’s business (or, if D did make big changes, the EOM would be normalised to exclude those changes’ impact): [21]

P sued, seeking declarations that the expert determine Earnings in accordance with all of the above. D resisted: [25] - [27]

The Court found for the P: [28]

The well-known principles regarding contractual interpretation were (respectfully) helpfully restated at [29] - [33]

The Court noted the parties’ explicit agreement on the mandatory language in Cl 2.3; that Earnings *must* be calculated that way: [48] - [50]

The proper construction was found to be on that basis: [54]

P’s pressed for their Contested Matters to be referred to the expert.P said Earnings had to be adjusted due to D failing to implement a new website, leading to lower website traffic. The Court accepted this Contested Matter was appropriately dealt with by the expert: [63] - [77]

Similarly: P’s complaint regarding D’s failure to implement P’s logistics proposal was to be properly dealt with by the expert: [78] - [82]

Again similarly: P’s complaint that D’s marketing efforts wrongly focussed on conversion rather than branding was properly dealt with by the expert: [83] - [86]

The expert was required to value Earnings as P proposed, and to deal with P’s Contested Matters: [87]

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