Aberdeen Bear Pty Ltd v MJJK Investments Pty Ltd; MJJK Investments Pty Ltd v Calvert

Decision

1. The Heads of Agreement do not confer on James an option to purchase. I decline to make the declaration.

Some background

1. Until the parties entered into the Heads of Agreement, the Business was owned, through a holding company, by the first to third defendants, MJJK Investments Pty Ltd, MJJK Investments No. 2 Pty Ltd and MJJK Investments No. 3 Pty Ltd (together, "the MJJK Interests") as trustees for three family trusts, the beneficiaries of which were Martha, James, and Justin. Martha controlled those trusts and thus, in effect, the Business.
2. On 6 May 2021, James made a proposal to alter the shareholding arrangements. That proposal led to the Heads of Agreement. Although in that document the parties agreed to work towards "long form documentation", they agreed that the Heads of Agreement was legally binding. No long form documentation was entered.
3. The effect of the Heads of Agreement was to achieve a restructure of the Business whereby, on the happening of specified events, James was to become the owner of 80% of the Business and the MJJK Interests the remaining 20%. [1]
4. The critical clause in the Heads of Agreement is cl 8. As I discuss below, there are other clauses which also require consideration.

Principles

1. There is no dispute as to the relevant principles.
2. A court in interpreting a provision of a document has regard to its words, its context, and the purpose of the document as a whole. The leading modern statement on the importance of context and purpose is found in the reasons of French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd: [2] "The rights and liabilities of parties under a provision of a contract are determined objectively, [3] by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. [4] … Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. [5] However, sometimes, recourse to events, circumstances and things external to the contract is necessary."
3. The question is what a reasonable business person in the position of the parties would have understood the relevant terms to mean; an objective task involving identification of the imputed intention of the parties by reference to the contractual text, construed in the light of its context and purpose. [6]
4. Further, as has also been correctly stated: [7] "… the only relevant meaning is that which the text conveys. This follows from the need to ascertain the intention expressed in the document. Although ... context and purpose are relevant, ultimately the court must attribute meaning to the words actually used." (Emphasis in original.)

Clause 8

1. The Heads of Agreement define "we" as meaning the MJJK Interests as well as Martha and Justin themselves, and define "you" as James.
2. Clause 8 is in these 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 (as 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." (Emphasis in original.)
3. It is James's contention that subcl 8(d), when read with subcl 8(a), confers on him an option to purchase the MJJK Interests' share in the Business.
4. On 20 February 2024, James issued a notice to the MJJK Interests purporting to exercise that option.

Subclause 8(f)

1. It is convenient first to deal with subcl 8(f).
2. By this subclause, the MJJK Interests agree not, relevantly, to dispose of any equity in the Business "other than as contemplated in this Heads of Agreement".
3. As I will set out below, the effect of this is that the MJJK Interests cannot dispose of their shares in the Business otherwise than: 1. to an investor introduced by James, pursuant to subcl 8(a); 2. by sale of any equity interest in the Business initiated by James, pursuant to subcl 8(b); 3. by sale of 100% of the Business initiated by James, pursuant to subcl 8(e); or 4. to James himself, pursuant to subcl 8(d).
4. That is, by reason of subcl 8(f), the MJJK Interests are not free to sell their shares in the Business to a third party.

Subclause 8(a)

1. Debate before me focused on this subclause.
2. It is James's contention that subcl 8(a) provides what the parties described as the "link" to subcl 8(d), which James contends bespeaks the parties' intention that he has an option to purchase the shares of the MJJK Interests in the Business.
3. The first thing to note is that subcl 8(d), to which I will return, does not in terms contain any language of obligation. James's contention that such obligation is implicit in the words of subcl 8(d) arises from his contention that subcl 8(a) must be read distributively, so that it governs each of subcll 8(b), 8(d) and 8(e).

"To facilitate"

1. The opening words of subcl 8(a) state that its purpose is "[t]o facilitate the potential for [James] to introduce an investor and retain not less than 51% [shares in the Business]".
2. Mr McLure SC, who appeared with Ms Petch for James, submitted that this showed that subcl 8(a) was intended to be "facilitative" not only of what follows in subcl 8(a) itself but "of what the balance of cl 8 provides".
3. I cannot see how subcl 8(a) can be read this way. The "facilitation" offered by the MJJK Interests is for the "availab[ility] for sale" of their shares were James to "introduce an investor" in the particular circumstances set out in subcl 8(a); and not otherwise.
4. I cannot see how, in these circumstances, subcl 8(a) has anything to say about what follows in cl 8.

"Investor"

1. The word "investor", taken alone, might be read to include an entity seeking to loan funds to the Business, as well as one intending to acquire equity in the Business.
2. However, the opening words of subcl 8(a) contemplate the possible introduction by James of an "investor" in circumstances where James would thereafter "retain not less than 51%" of his shareholding in the Business. This suggests that the "investor" contemplated by the parties is one who is to acquire a shareholding in the Business; not a mere lender.
3. That conclusion is reinforced by the use, twice, of the words "sell down" in the subclause, suggesting a sale by the existing shareholders of the Business of some of their shares to the "investor".
4. Further, the example posited at the conclusion of the subclause as to what shares James and the MJJK Interests would "have available for sell down" suggests that shares are to be "available for sale" to the "investor".
5. For those reasons, my conclusion is that when the parties refer to an "investor" they intend to refer to a party intending to take up equity in the Business, not to a mere lender.

"Available for sale"

1. Subclause 8(a) recites that the MJJK Interests' shares "are available for sale" to "facilitate the potential" for James to introduce an "investor".
2. As a matter of language, the "sale" for which subcl 8(a) contemplates the shares of the MJJK Interests "are available" is a sale to the "investor", and not to James.
3. Thus, the reference to the MJJK interests' shares being "available for sale" appears immediately after the words referring to the possibility of James introducing an "investor". I cannot see how the availability of the MJJK Interests' shares for sale to James could facilitate the introduction of an "investor".
4. Further, the proposed "sale" is stated to be prefaced on the assumption referred to in the second sentence of subcl 8(a), namely a pari-passu "sell down", which bespeaks an intention that James will be a participant in that sell down, and not the purchaser.
5. Subclause 8(a) is thus directed to an "availab[ility] for sale" of the MJJK Interests' shares to a prospective investor, and not to James.
6. The language used in subcl 8(a) is that the shares of the MJJK Interests "are available for sale". That is not the language of obligation. It stands in contrast to the language of subcl 8(b) "we agree to participate", subcl 8(e) "we agree to sell", and subcl 8(f) "we agree to not dispose of".
7. The parties must have intended to achieve a different result by the use of the language chosen in subcl 8(a).
8. The statement by the MJJK Interests that their shares "are available for sale" does not, in terms, suggest an agreement or promise to do anything.
9. Further, the "availability" is expressed to be "based on an acceptable commercial valuation at the time"; that is, a commercial valuation that is acceptable to the MJJK Interests. Thus the "availabil[ity] for sale" of the shares of the MJJK Interests is subject to their subjective satisfaction with the price offered by the "investor".
10. Further, the "availability" is prefaced on the assumptions to which I have referred, suggesting no present agreement to sell.
11. In those circumstances, in my opinion, the effect of subcl 8(a) is that the MJJK Interests confirm, consistently with their obligation under subcl 8(f), that their shares "are available for sale", that is the shares will not be sold to a third party, in the event that James were to introduce an "investor".
12. Thus, subcl 8(a) contemplates a circumstance where James introduces an "investor" who wishes to acquire up to a 49% interest in the Business; up to 29% from James and up to 20% from the MJJK Interests. In that event, the MJJK Interests agree that their shares are available for sale, subject to their satisfaction as to price.
13. However, the subclause is not concerned with any sale by the MJJK Interests of their shares to James.

Subclause 8(b)

1. This subclause is directed to a circumstance where James decides to sell any part, and possibly all, of his shareholding: that is, without retaining the 51% contemplated by subcl 8(a).
2. In that event, the MJJK Interests "agree to participate ... in such a sale", clearly the language of obligation, in the proportionate basis of 1:1.45.
3. In the circumstances contemplated by subcl 8(b), MJJK Interests agree to sell their interests on the same terms, including as to price, as James sells; thus relying on James's self-interest in negotiating a sale of his own shares at the best available price.
4. To some extent, subcl 8(b) is duplicative of subcl 8(a) in that the "bona fide [sale of] an equity interest in the Business" contemplated by subcl 8(b) could be to an "investor" such as is contemplated by subcl 8(a).
5. However, the subclause is not concerned with any sale by the MJJK Interests of their shares to James.

Subclause 8(c)

1. This subclause deals with matters consequential on a "full sell down". That is one of the possible results of a sale under subcl 8(b).
2. No party suggested that this subclause casts any light on the relevant question.

Subclause 8(e)

1. This subclause is concerned with a situation where James wishes to "sell 100% of the Business"; that is, all of his shares and all of the shares of the MJJK Interests.
2. In that event, the MJJK Interests "agree to sell any equity in the Business held by us ... on the same terms and condition[s]" as James selling his share; again relying on James's self-interest in obtaining the best possible price for his shareholding in that circumstance.

Subclause 8(d)

1. Turning then to subcl 8(d), in contrast to subcll 8(b), 8(e) and 8(f), it contains no language of obligation.
2. Subclause 8(d) can only be read as imposing on the MJJK Interests an obligation if, as Mr McLure and Ms Petch submitted, subcl 8(a) were to be read distributively and thereby somehow to impose on the MJJK Interests an obligation to sell.
3. As I have said above, I do not read subcl 8(a) that way.
4. For these reasons, my conclusion is that the Heads of Agreement do not impose any obligation on the MJJK Interests to sell their shares to James. I do not see that as a commercially strange result. The object of the Heads of Agreement was to achieve a sell down whereby the MJJK Interests in the Business would reduce from 100% to 20% and James would acquire the concomitant 80% interest. I see no reason, looking at the language used by the parties, to conclude that they intended or anticipated any further mandatory sell down by the MJJK Interests.
5. I do not agree with Mr McLure's and Ms Petch's submission that the effect of this conclusion is that subcl 8(d) has no useful function and provides no more than a pricing mechanism should the MJJK Interests choose to sell their shares.
6. First, subcl 8(d) does impose an obligation on the MJJK Interests; that is, if they did choose to sell their shares in the Business to James it would have to be at the midpoint of the two "independent business valuations" contemplated by the subclause.
7. Second, as was emphasised by Mr Mitchell, who appeared with Mr Birrell for the cross-defendants, [8] subcl 8(d) provides an important protective function to both the MJJK Interests and to James.
8. As to the MJJK Interests, the effect of subcl 8(f) is that, absent an investor or take over offer introduced by James, James is the only prospective purchaser of the shares of the MJJK Interests in the Business. Were the MJJK Interests minded to sell their shares, subcl 8(d) protects them from the possibility of James, as the only prospective purchaser in this hypothetical situation, seeking to take advantage of that fact and endeavouring to negotiate a sale at undervalue.
9. On the other hand, were James inclined to acquire the MJJK Interests' in the Business, the effect of subcl 8(d) would be to prevent the MJJK Interests from insisting on sale at an overvalue.
10. Either way, subcl 8(d) has important work to do.

Conclusion as to clause 8

1. For those reasons, having regard to the language that the parties used in cl 8 of the Heads of Agreement, my conclusion is that it does not confer on James an option to purchase the interests of the MJJK Interests.

Wider context within the Heads of Agreement

1. Leaving aside the text of cl 8, there are further reasons for concluding that the parties did not intend that cl 8 confer on James an option to purchase.
2. Clause 2 of the Heads of Agreement is in these terms: "Staged decrease of our (We) equity in The Business and increase of your (You) equity in The Business as follows: Stage/Conditions a) Refinance NAB/Longreach - Following the execution of this [H]eads of [A]greement, the Business will borrow funds from Longreach, which will fund the repayment of the existing NAB debt in the Business. As part of such repayment, NAB will release the existing personal guarantees. We will not be required to provide a personal guarantee to Longreach. You will be issued equity in the Business, such that the equity holdings in the Business will be: (We 49%, You 51%) b) Procurement of discharge of NAB mortgages of Rose Bay, Southport and Bondi Beach (as Tax Free Capital) - On or Before 30/06/23 You will repay and discharge these mortgages held by Martha and Justin (provided Martha and Justin must not directly increase the amount owed under such mortgages and ensure all mortgage payments are paid when due. You will not be required to pay more than the amount owed as at the date of this agreement). c) Procurement of $5.6m sum as Tax Free capital - You will make each of the following payments for the benefit of Martha, on or before the corresponding dates set out below: i. $3,000,000 - 30/6/24 ii. $866,666 - 30/6/25 iii. $866,666 - 30/6/26 iv. $866,666 - 30/6/27 d) Following the payments in 2(b) and 2(c), You will hold an equity interest in the Business, such that the equity holdings in the Business will be: (We 20%, You 80%)" (Emphasis in original.)
3. These clauses set out how the "staged decrease" of the interests of the MJJK Interests in the Business and the "staged increase" of James's interests in the Business contemplated by the Heads of Agreement would occur.
4. This was to be done by the three stages set out in subcll 2(a), 2(b), and 2(c).
5. The first stage, set out in subcl 2(a), was a refinance of the existing facility of the Business with the National Australia Bank ("NAB") such that the "existing personal guarantees" were discharged, [9] at which stage the shareholding in the Business was to be adjusted so that James held a controlling interest of 51% and the MJJK Interests held 49%.
6. The second stage, set out in subcl 2(b), was the procurement, inferentially by James, of the discharge by 30 June 2023 of mortgages over three identified properties, evidently owned by Martha and/or Justin and securing personal and not Business obligations. [10]
7. The third stage, set out in subcl 2(c), was the procurement of four payments "for the benefit of Martha", totalling a fraction under $5.6 million, to be made annually and commencing on 30 June 2024.
8. The shareholding consequences of these matters are set out in cl 3: "The equity position contemplated in Stage 2(b) and 2(c) will be implemented 'immediately' after execution of this agreement and satisfaction of 2(a). If any payment required under Stage 2(b) and 2(c) is not made by You, We are entitled to interest on the $3m sum (see point 2(c)(i)) at 5% per annum from 1/7/24 until paid and to clawback from You any equity interest in excess of 51%."
9. Those consequences were, first, that the shareholding in the Business was to be adjusted "immediately" so that James held 80% and the MJJK Interests held 20%.
10. However, and vitally, this was subject to the entitlement of the MJJK Interests to "clawback ... any equity interest in excess of 51%", that is 29% of the shares in the Business, leaving James with 51% and the MJJK interests with 49%. This would occur in the event that "any" of the payments contemplated by subcll 2(b) and 2(c) were not made.
11. Thus, the shareholding, immediately after execution of the Heads of Agreement, and after the MJJK Interests were released from their obligations as guarantors to the NAB as contemplated by subcl 2(a), would be 80:20. But this would be conditional on James performing all of his obligations under subcll 2(b) and 2(c), including making each of the four payments listed in subcl 2(c), the final one of which is due on 30 June 2027. That final, unconditional state of shareholding could not be knowable until 30 June 2027.
12. If, as James contends, James can now call, and presumably could at any time have called, on the MJJK Interests to transfer all their shares to him, this would deprive the MJJK Interests of their benefit of the "clawback" provision in cl 3 in the event that James did not comply with subcll 2(b) and 2(c).
13. It may be that James has now complied with subcl 2(b) but, presumably, he has not yet complied with his obligation to make the four payments listed in subcl 2(c).
14. It is unlikely that it was the intention of the parties to deprive the MJJK Interests of this important protection.
15. Further, cl 4 of the Heads of Agreement is in the following terms: "a) Subject to point 11 below, our (We) income stream years 1 - 3 (for the period commencing 1/7/21 and ending 30/6/24) of $750,000 annually by fully franked dividend from the Business or equivalent will be topped up by You (to the extent necessary) such that the $750,000 is tax free. b) The income stream payments (see point 4(a)) are paid monthly on account on the 15th of each month at $62,500 per month. c) The top up payment required by You in respect of each year will be made within 14 days of issue of the audited accounts of the Business in respect of that year." (Emphasis in original.)
16. By this provision, evidently as a corollary to the payments James was obliged to make to Martha under subcl 2(c) commencing on 30 June 2024, cl 4 obliged James annually from 1 July 2021 to procure an annual "tax free" "income stream" of $750,000 for the MJJK Interests.
17. Clause 11 of the Heads of Agreement provided: "In default of any of Stage/condition 2(b) or 2(c) or failure to meet the income stream payments (see point 4(b)), following written notice to remedy within seven days. We are entitled to clawback from You any equity in excess of 51%."
18. To some extent cl 11 is duplicative of cl 3 but, for present purposes, it provides that if the "income stream" contemplated by cl 4 were not maintained, the MJJK parties could exercise a "clawback" equivalent to that in cl 3.
19. Whilst it is true that the period referred to in cl 4, being 1 July 2021 to 30 June 2024, is almost concluded, were James's construction of the Heads of Agreement correct, such that he could exercise an option to purchase the interests of the MJJK Interests, he would have been able to exercise that right at any time, including between 1 July 2021 and 30 June 2024, and thus deprive the MJJK Interests of the security for the payment to them of the "income stream" constituted by the "clawback" entitlement under cl 11.
20. Again, it is unlikely that the parties intended this consequence.
21. For completeness, I should add that cl 6 of the Heads of Agreement provides guaranteed minimum dividends to the MJJK Interests following the period the subject of cl 4. But that entitlement is expressed to be "only while We have not partaken in a partial or full sell down" and thus does not raise the issues that I have discussed in the preceding paragraphs.

Conclusion

1. For those reasons, analysis of the text of the Heads of Agreement compels the conclusion that the Heads of Agreement do not provide James with an option to purchase the shares on the MJJK Interests in the Business. I decline to make the declaration sought by the plaintiffs.
2. In those circumstances, it is not necessary to consider whether James's letter of proposal of 6 May 2021 is receivable to cast any light on what the Heads of Agreement mean.
3. I will now invite submissions as to what further steps should be taken in the proceedings.

Endnotes

1. James's interest was to be held by an associated company, the first plaintiff, Aberdeen Bear Pty Ltd. For convenience, I will refer to the majority interest being held by James. Further, by reason of share distributions made since the Heads of Agreement, and which are not relevant to the issues before me, the current shareholding is James, 86.86%, and the MJJK parties the remaining 13.14%. Again for convenience, I will adopt the convention adopted by the parties and refer to the 80:20 split.
2. (2015) 256 CLR 104; [2015] HCA 37 at [46], [48]-[49].
3. Citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656; [2014] HCA 7 at [35] (French CJ, Hayne, Crennan and Kiefel JJ).
4. Citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 350, 352 (Mason J); [1982] HCA 24; Reardon Smith Line Ltd v Hansen-Tangen; Hansen-Tangen v Sanko Steamship Co [1976] 1 WLR 989 at 995; [1976] 3 All ER 570 at 574 (Lord Wilberforce).
5. Citing Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (supra) at 352 (Mason J).
6. Miles v Luneburger Franchising Pty Ltd [2021] NSWCA 248 at [32] (Gleeson JA, Macfarlan JA and Simpson AJA agreeing), citing Electricity Generation Corporation v Woodside Energy Ltd (supra) at [35] French CJ, Hayne, Crennan and Kiefel JJ); Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd supra) at [46]-[51], [108]-[109] (French CJ, Nettle and Gordon JJ); Victoria v Tatts Group Ltd [2016] HCA 5 at [51]-[75] (French CJ, Kiefel, Bell, Keane and Gordon JJ); Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16] (Kiefel, Bell and Gordon JJ); Simic V New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18] (French CJ).
7. P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters) at [19.60].
8. The cross-defendants are the solicitors who drafted the Heads of Agreement. They have been joined by the MJJK Interests as cross-defendants against the possibility that the Heads of Agreement be construed as James contends. With the agreement of all parties, the cross-defendants participated in the debate before me as to the proper construction of the Heads of Agreement.
9. Evidently, of Martha.
10. Hence the condition that Martha and Justin not increase debt and ensure that all payments are made. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 June 2024