Aberdeen Bear Pty Ltd v MJJK Investments Pty Ltd

HEADNOTE [This headnote is not to be read as part of the judgment] The Kennedy family own and run a business selling luxury goods. The family members involved are Martha Kennedy, and her two sons, James and Justin. Until 2021, the shares in the business were owned in equal proportions by three companies, each holding the shares in trust for family trusts of which Martha, James and Justin were beneficiaries. In 2021, Martha, James and Justin, and the relevant trustee/holding companies re-negotiated the ownership of the business through a document entitled "Heads of Agreement" (HOA). The parties to the agreement were James (including his nominated entity - together, James), the three trust companies, Martha and Justin (together, the MJJK Interests) and the business and its holding company (together, the Business). The HOA is thinly drafted and was intended to be an interim document, albeit a legally binding one. The terms outlined a "staged decrease" in equity, eventually granting 80% ownership of the Business to James and the remaining 20% to the MJJK Interests. In return for James' increased equity, the MJJK Interests received amongst other things, significant income streams. James commenced proceedings in the Supreme Court, arguing that point 8 of the HOA gave him an option or entitlement to purchase the remaining 20% shareholding not controlled by him. The primary judge, Stevenson J, held that it did not. James sought leave to appeal from that decision. The Court held (Kirk JA, Ward P and Gleeson JA agreeing), granting leave to appeal and dismissing the appeal: (1) Point 8 of the HOA does not grant to James a right to purchase the MJJK Interests' shareholding. There is no obligation on the MJJK Interests, in point 8 or elsewhere, to sell their shareholding to James: [10]. It is unreasonable to construe the terms of the agreement by isolating particular words from the context in which they appear: [13]. Properly construed, the various paragraphs of point 8 separately address different situations in which shares in the Business might be sold: [12]-[20]. (2) Point 8(a) and 8(d) of the HOA are not otiose. That an agreement is legally binding does not mean that all promises contained within an agreement must be construed to create directly enforceable legal rights. Partial agreements are capable of serving a useful purpose: [22]. Point 8(a) is a promise by the MJJK Interests that if James finds a minority investor, they will be prepared to sell their shares at a price and in proportions to be agreed. While this was unenforceable absent agreement on price and proportions, there is practical significance in a partial promise of that kind, especially in the context of a family business: [23]. Point 8(d) contains an agreed pricing mechanism if James were to buy shares from the MJJK Interests. There is utility in having an agreed pricing mechanism for a sale of a minority shareholding in an unlisted company. That is especially so within a family business: [24].

Analysis

Point 8 is in the following terms: a) To facilitate the potential for You to introduce an investor and retain not less than 51% yourself (You), our (We) shares are available for sale based on an acceptable commercial valuation at the time. It is assumed that a sell down would be considered pari-passu as a percentage holding of shares available for sale (I.e., assuming an ownership split of 80:20, You have a maximum of 29% available for sell down, We 20%). b) If a decision was made by You to bona fide sell an equity interest in the Business, We agree to participate (at your (You) request) in such a sale on a proportionate basis of 1:1.45 (i.e. for every 1.45% You sell down, We agree to participate (at your (You) request) for 1%) on the same terms that You sell your equity interest. c) In the event We participate in a full sell down (sell out) for the avoidance of doubt, all monies relating to Mortgage discharges (see point 2(b) above), $5.6m sum staged payments (see point 2(c) above) and 750k x 3 (see point 4 above) would still be due and payable, however the top-up dividend (or any dividend) (see point 6 above) would not apply after a complete sell down and any dividend on a partial sell down would not be 'topped up' it would be a board approved dividend proportionate to the shareholding. d) Where a sale is undertaken to You (i.e. not to an external party), an independent business valuation by two first or second tier accounting firms, each to appoint one, with mid-point valuation to be taken. e) Where You wish to bona fide sell 100% of the Business, We agree to sell any equity in the Business held by us at the relevant time to the person You are selling to, and on the same terms and condition as You are selling your equity in the Business. f) We agree not to dispose of, deal with, or grant any security over, any equity interest in the Business other than as contemplated in this Heads of Agreement.
James argues that the combined effect of point 8(a) and (d) is to give him or his nominated entity a contractual right to call for and purchase the shares held by the three trustee companies. He asserts that the primary judge erred in concluding to the contrary. It was not said that his Honour erred in his understanding of the principles applicable to contractual construction (note J [11]-[14]) but rather the dispute centred on their application. James' argument suffers from three cascading problems.
First, the grant of a right to James to call on and purchase some or all the shares of the MJJK Interests is a distinct, important topic affecting the interests of the parties. Exercise of such a right would, for example, affect the ongoing guaranteed income stream of the MJJK Interests for which the HOA provided. If such an important right were to be granted, the natural expectation would be that the topic was addressed in terms. Yet neither in point 8(d) nor anywhere else in the HOA is such a right set out. Where point 8(d) addresses the MJJK Interests selling shares to James it employs no language of obligation; the HOA simply acknowledges that if that scenario occurs, it specifies the price-setting mechanism to be employed.
It is perhaps unfair to suggest that the HOA is poorly drafted. We do not know how it came to be in its final form, who were the drafters, or how much input lawyers had in the task (although the Solicitors accepted that they were "involved" in the drafting). It is more accurate to say that it is thinly drafted. It was intended to be an interim document - albeit a legally binding one - with the details to be filled out "as soon as practicable" following execution in subsequent "long form documentation". The HOA does not attempt to spell out how all the arrangements will work in practice. No doubt much detail was intended to be addressed in the long form document. The nature of the HOA and its drafting reduces the force of close textual analysis and reinforces the significance of purposive and commercial considerations. It does not mean, however, that the text is not significant. The Court will seek to give such legal effect to the document as can reasonably be given. It will not redraft the contract, nor fill in material gaps.
James sought to fill the identified gap in creation of the claimed right by reference to the words "our … shares are available for sale" in the first sentence of point 8(a). James characterised those words as a general offer by the MJJK Interests to sell some or all of their shares, where the terms of the sale are then spelt out for different possibilities or "pathways" in pars (b)-(e). That leads to the second problem. The argument takes those words entirely out of their context.
To begin with, it ignores the remainder of par (a). The first half of the first sentence identifies a purpose: "To facilitate the potential for You to introduce an investor and retain not less than 51% yourself". It is to implement that purpose that the shares are said to be available for sale "based on an acceptable commercial valuation at the time". The second sentence of the paragraph is itself addressed to a presumptively mutual part-sale of the shares to an outside investor, as it says that it is "assumed that a sell down would be considered pari-passu as a percentage holding of shares available for sale". The second half of the first sentence, being the words "our … shares are available for sale", cannot be divorced from what comes immediately before and after it. That phrase cannot reasonably be regarded as a standing offer of sale by the MJJK Interests, giving James a right to purchase.
James argued that buying out the MJJK Interests' shares might encourage a new investor concerned about an existing hostile minority shareholder, and in that way the introductory words in point 8(a) would allow for James' acquisition of the shares to address the concerns of a potential investor. Even if that rather tenuous argument was accepted, James' construction involves him being able to buy that shareholding regardless of whether there is a potential investor in the wings. His construction operates as a right at large.
More generally, James' argument mischaracterises the context of point 8 as a whole. As the primary judge explained, pars (a)-(e) of point 8 address different situations in which shares in the Business might be sold by the MJJK Interests. The first, addressed by (a), is where James wishes to sell a minority interest in the Business to an outside investor, presumptively (although not necessarily) including some of his own shares. If taken as being distinct from par (b), the agreement in (a) does not create directly enforceable promises. The MJJK Interests agree that their shares are available for sale but "based on an acceptable commercial valuation at the time". The notion of the valuation being "acceptable" indicates that it was up to the MJJK Interests to agree that some proffered price was acceptable. Further, the reference in the second sentence to what was "assumed" as to what proportion of each side's shares would be sold itself indicates the need for further agreement.
Those issues would be resolved if pars (a) and (b) were read as operating together. The relative proportions are identified in par (b) in clear terms, and the terms of sale for the MJJK Interests are to be those agreed to by James for the sale of his own shares. On this view the "acceptable commercial valuation" is what is determined by James' assessment in agreeing to sell some of his own shares. There is some attraction to reading the two paragraphs in this way. Yet there are factors militating the other way: 1. That construction would mean that point 8 addresses the situation where a minority interest in the Business was to be sold to an outside investor, or where 100% of the shares were to be sold (to which par (e) is directed), but not a situation where a majority interest was to be sold to a third party. There is no apparent reason why that intermediate situation should have been excluded. 2. There is some tension between the broad language of "acceptable commercial valuation" in par (a) and the simple imposition of James' own agreement in par (b). 3. Although par (a) manifests a presumption that James would also sell some of his shares to the prospective minority investor, it does not exclude the possibility that James might find a potential investor willing to buy the 20% shareholding of the MJJK Interests in circumstances where he wanted to retain all or most of his own 80% shareholding. What was "assumed" as to a pari-passu sell-down would then not apply. This possibility is not encompassed by (b), which sets a strict ratio by which both sides were to sell down. It is unsurprising, incidentally, that in such a case where the pari-passu assumption was not to apply, the MJJK Interests would wish to retain the right to a commercial valuation acceptable to them.
Given these points, the better understanding is that par (a) is directed to sale of a minority interest of up to 49% of the shareholding of the Business; par (b) is directed to the different issue of sale of an interest in the Business greater than 49%; and par (e) is directed to sale of 100% of the shares in the Business. In that regard, par (e) provides that if James wishes to sell 100% of the Business then the MJJK Interests agree to sell their shares, on the same terms and conditions as James. As the primary judge explained at J [50] and [56], pars (b) and (e) involve the MJJK Interests promising to sell some or all of their shares relying on James' self-interest to negotiate appropriate terms of sale, because he would be selling his own shares either proportionately (under par (b)) or in their entirety (under par (e)). If a minority interest was to be sold (under par (a)) then the relative proportions of shares to be sold and the price at which they were to be sold were matters for agreement at the time.
Even if a contrary view were taken, and pars (a) and (b) were read as operating together, that would not render (a) superfluous. It would serve to identify the circumstances in which (b) was to operate (the sale of a minority interest); par (b) would build upon par (a). Thus the possible alternative construction of pars (a) and (b) does not require that the second half of the first sentence be read out of context so as to provide for a standing offer of sale.
Paragraph (c) addresses how a sale of all or some of the shares of the MJJK Interests would affect certain accrued rights relating to payments that had been agreed to be made to the MJJK Interests.
This structure of point 8, where pars (a)-(e) address different share sale situations, serves to reinforce that par (a) "is not concerned with any sale by the MJJK Interests of their shares to James" (J [47]).
To answer all these arguments, the ultimate foundation of James' case was that unless his construction was adopted, parts of the HOA would be otiose. In particular, he argued par (d) has no work to do and is superfluous, which cannot have been intended. As senior counsel for James put it, "[o]ur construction is really the only plausible explanation for why it is in the agreement at all, otherwise we say it serves no useful purpose". A similar argument was made by James in relation to the second half of the first sentence of par (a). Those assertions face the third, fatal problem for James' construction: the claim is unpersuasive.
The implicit premise in the argument is that given the HOA was agreed to be legally binding, all promises contained within it should be construed so far as possible to create directly enforceable legal rights. Yet point 8(a) illustrates that promises may be made which are contingent on future agreement as to some important aspects of what is to occur. That does not mean that the promise serves no useful purpose. Nor is it merely an agreement to agree. It represents a partial agreement.
Relevantly, par (a) is a promise by the MJJK Interests that if James finds a minority investor then they will be prepared to sell some of their shares to that investor, at a price and in proportions to be agreed. True, that need for further agreement means James ultimately could not enforce the partial promise absent agreement on price and proportions. Contrary to James' submission, however, that does not mean that point 8(a) would, but for his construction, "do no more than replicate the promise in point 8(f) whereby the MJJK Interests agreed not to deal with their shares" outside of the means contemplated in the HOA. In any such future negotiations it would still in practice have some significance for James to be able to say: "I've found a minority investor, now let's negotiate in good faith to agree on an acceptable commercial valuation and on relative proportions". Moreover, the fact that the HOA is an agreement involving members of a family is significant here. A prior written promise between family members could be expected to have particular practical weight, even if one of limited, if any, enforceability in a court.
As regards par (d), that contains an agreed pricing mechanism if James were to buy some or all of the shares of the MJJK Interests. There are commonly difficulties in assessing the value of a minority shareholding in an unlisted company. Paragraph (d) has practical importance in identifying an agreed valuation mechanism. That it would only operate if the MJJK Interests also agreed that they wished to sell some of their shares does not mean the agreement on the valuation mechanism serves no useful purpose. For example, if James wished to buy the shares, Martha may well say to him: "I'm tired of hearing you complain about how badly the Business is going; I am prepared to sell out on the terms we have already agreed, and I don't want to hear another word about it". Or James could say in response to some offer to sell: "I'll buy you out; but I'm not going to pay what you've asked because we've already agreed the pricing mechanism and we should stick to the deal". In any context, but particularly within a family business, such statements would have negotiating utility. And that is an entirely plausible explanation for par (d).
The paragraph has further potential utility. The effect of point 8(f) is that the MJJK Interests are unable to deal with their shares other than as contemplated in the HOA. They thus could not sell their shares unless James introduced an investor or bought the shares himself. They are locked in. Ultimately, if relationships (further) deteriorate, there is the potential for an oppression suit to be brought pursuant to Pt 2F.1 of the Corporations Act 2001 (Cth). A potential remedy in such a case is an order that one shareholder buy out another: s 233(1)(d). The court has a broad discretion in setting the price: United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWSC 910; (2003) 47 ACSR 514 at [34]-[38]; Crawley v Short (No 2) [2010] NSWCA 97 at [9]. A prior agreement on a price-setting mechanism would be an important consideration in the exercise of the court's discretion.
As par (d) does have practical utility according to its terms, there is no justification for torturing the language and structure of point 8 in such a way as to construe it to contain a standing promise by the MJJK Interests to sell their shares on demand from James where no such promise is expressed.
These matters suffice to reject the construction advocated by James. It is not necessary to address the additional reasons given by the primary judge.

At a glance

Court

Decision date

Before

Source

Judgment (6 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (3)