By January 2016 the childcare business conducted under the business name Little Zaks had been operating since 2013, and the principals of that business, specifically Mr Maged Zaki, had been operating childcare centres since 1993. In early 2016 Mr Maged Zaki and his son Carlos decided to sell eight of the fifteen childcare centres. That eight later became nine. The specific parties within the 'Zaki Group' that owned the particular childcare centres being offered for sale are identified in cl 4 of the Term Sheet.
Pitcher Partners was retained by Little Zaks to broker that sale. An Information Memorandum was issued in mid-2016 and described as "prepared as of 17 May 2016". It announced itself as having been prepared "to provide a brief overview of Little Zaks' centres for the purpose of seeking expressions of interest for the acquisition of the eight centres". Appendix 1 briefly and not overly clearly describes the proposed sale process as involving three stages - (1) a period of 14 days for interested persons to "conduct a preliminary assessment to formulate an offer"; (2) the making of non-binding indicative offers and "exclusivity provided upon receipt of [a] reasonable NBIO and holding deposit"; and (3) "upon acceptance of offer [presumably the most favourable of the NBIOs], a 60 day due diligence period will be granted".
The financial information provided in the memorandum included a forecast of the consolidated net profit before tax (EBIT) of the nine centres for the calendar year ending 31 December 2016 (referred to as "FY16") of $9,618,526. As MindChamps recorded in its later expression of interest dated 24 August 2016, its purchase consideration of $60 million assuming a consolidated net profit before tax of $9,681,000 adopted a capitalisation multiple applied to EBIT of 6.2 times.
In early August Mr Johnson introduced Eden and Chiwayland as potential buyers, and written expressions of interest were received from each of them. Eden's expression of interest was not reproduced in the appeal books. It was represented by a broker, Chris Sacre. In early August it became plain that any offer from Eden "would be subject to a capital raise or finance". Initially, this caused Carlos Zaki to discount Eden as a realistic purchaser. Chiwayland's expression of interest, dated 15 August 2016, provided for an unconditional fully refundable deposit of $300,000, a non-exclusive final due diligence period of 30 days, and made an indicative offer of a "gross target purchase price of AUD$60 million" based on future maintainable earnings for the eight centres of AUD$9.68 million. Chiwayland proposed that it be given access to Little Zaks' electronic data room on 16 August 2016. Its due diligence adviser, who had been retained by this time, was KPMG Advisory.
MindChamps was introduced to Little Zaks by another selling broker, Mr Doug Lilley. On 17 August Mr Lilley indicated to Little Zaks that "his" purchaser was a Singaporean company who were "really keen" and had "financial backing and are ready to go". The officers of MindChamps involved in the discussions at this time included Mr Chiem, its chief executive officer, and Mr Teo, its chief financial officer. On 24 August 2016 MindChamps submitted its letter of intent, offering to pay $300,000 for a three-month exclusivity period during which Little Zaks was to agree "not [to] commence any discussion and information sharing regarding nor carry out any sale of the shares or assets of the Eight Centres with third parties … and if such discussions have commenced, they shall cease immediately". The proposed transaction was for a purchase consideration of $60 million, also based on a multiple of the FY16 forecast EBIT of $9.681 million. The $300,000 fee was to be applied in reduction of that price if the transaction proceeded.
As at 28 August Mr Johnson considered that Chiwayland were "incredibly serious" and would "up their offer significantly" if need be (J[131]). By the morning of 29 August Chiwayland had increased its indicative offer from $60 million to $65 million for the eight centres. On that morning, Mr Chiem of MindChamps communicated with Carlos Zaki by email and telephone. He had already been provided with a draft Term Sheet. Mr Zaki revealed that Chiwayland had increased its offer. At some stage there was a discussion with Mr Chiem about the inclusion of the Belrose centre. The outcome was that late on 29 August, MindChamps adjusted its indicative purchase price from $60 million to $68.5 million for nine centres, including Belrose, and amended the date of its proposed Term Sheet to 1 September 2016.
[2]
The Term Sheet
Although dated 1 September, the Term Sheet was only completed in its executed form at some time on 2 September. Notwithstanding that it recites that MindChamps has agreed to purchase the Businesses "on the terms set out", it makes clear by cl 1 that the parties' agreement extends to their "proposed course of dealing only" and that accordingly a number of the terms of the Term Sheet were "not intended to be legally binding upon them". Thus cl 1 provides:
1. Term Sheet
(a) The parties agree that the contents of this Term Sheet reflect their proposed course of dealing only and:
(i) other than any terms as to confidentiality (clause 18), Deposit (clause 10), Expert determination in the event of Deposit or Purchase Price dispute (clause 11) and exclusivity (clause 12), this Term Sheet is not intended to be legally binding upon them; and
(ii) no further legally binding obligations will be created between the parties unless and until formal legal documentation expressed to be legally binding is entered into between them.
(b) The parties will use their reasonable endeavours to enter a long form legally binding business sale agreement that more fully and precisely sets out the agreement reached in this Term Sheet (Long Form Agreement) on or before 14 October 2016.
The Term Sheet does not confer a call option upon MindChamps. Clause 12(a)(ii) imposes an obligation on Little Zaks to use all reasonable endeavours to ensure the execution of the Long Form Agreement. Having regard to its terms and the fact that in the event of any breach Little Zaks "must" return the deposit to MindChamps, that obligation is not one which was enforceable by an order for specific performance.
Focussing on the structure of the Term Sheet, it provides for the payment of a $500,000 deposit (cl 10(a)) in consideration for the promises in cl 12, which include to make available all information requested as part of the due diligence investigations, that are in turn the subject of cl 9(b). The non-binding provisions include that the purchase price is to be $68.5 million, as adjusted in accordance with cl 10, which is binding. That clause provides a timetable for the Buyer to undertake a calculation to be used to adjust the purchase price by reference to the forecast earnings for that calendar year (and referred to as the "2017 EBIT").
The Exclusivity Period commences on the date of the Term Sheet (cll 10(a), 12(a)) and ends at 5pm on 14 October 2016 (cl 12(a)). By no later than 30 September 2016 the Buyer is to notify the Sellers whether it intends to execute the Long Form Agreement. At the same time, cl 10 provides for the Buyer to undertake a 2017 EBIT forecast "using the Assumptions" and, in the absence of its doing so, that forecast is deemed to be $11.03 million (cll 10(e), 10(f)(i)). The Assumptions are the "historical information and assumptions" used to prepare the management accounts and contained in Annexure A to the Term Sheet (cl 10(d)). Adjustments are then to be made to the purchase price of $68.5 million depending upon whether the Buyer's forecast is higher or lower than $11.03 million. If there is a "dispute" as to the amount of that forecast, it is to be resolved by an expert determination (cl 11).
[3]
Breach of exclusivity provision (grounds 3 and 4 (particular (a))
[4]
The primary judge's unchallenged findings of fact
The primary judge found at J[285] that Mr Johnson had continued to talk to both Eden and Chiwayland during the period between 2 and 16 September when the Term Sheet was terminated. His Honour also made specific findings in relation to text and email communications in that period between Mr Carl Wang, representing Chiwayland, and Mr Johnson (J[273]-[280]).
His Honour held that this conduct constituted a breach of the "terms of clause 12(a)" within the meaning of cl 12(c). It remains to consider the two questions of construction raised by grounds 3 and 4.
[5]
The proper construction of cl 12(a)
The appellants contend that on its proper construction cl 12(a) did not require them to terminate discussions with Eden or Chiwayland or to "cease all further communication" with those parties because each had already given or made an expression of interest. It is said that the condition engaging the second part of the covenant ("if such discussions have commenced") refers only to discussions undertaken with the aim of seeking an expression of interest, so that once the prospective buyer has made an expression of interest, the obligation to "immediately notify" such a person that "those discussions are terminated" and to "cease all further communication" with that person does not apply unless the discussion is directed to the securing of a further expression of interest.
In the circumstances in which the Term Sheet was negotiated, this construction of the exclusivity provision would have the consequence that it would not apply to prevent continuing discussions and negotiations as between Little Zaks and each of Eden and Chiwayland, at least with respect to their existing, as distinct from any further, expression of interest. As the respondent submits, this is hardly a "businesslike interpretation" and does not give effect to the language of the provision, the commercial circumstances to which it is directed, or the objects that the clause is plainly intended to secure (cf McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65 at [22] per Gleeson CJ).
Clause 12(a) imposes two obligations on the Sellers during an Exclusivity Period ending on 14 October 2016. The first is "not [to] seek expressions of interest from any other person"; and the second, which only applies "if such discussions have commenced", is to "notify that other person that those discussions are terminated, and cease all further communication with that person". The condition upon which the second obligation is engaged ("if such discussions have commenced") and the content of that obligation ("cease all further communication") make clear the sense in which the phrase "seek expressions of interest" is used in describing the first obligation. It is to invite, and engage in, discussion with potential purchasers as part of a sale process which involves their submitting expressions of interest in the form of non-binding bids for the purchase of the childcare centres. As such it is a competitive process involving continuing discussions and negotiations in which a number of potential purchasers may be engaged.
In this context the second obligation is engaged "if such discussions have commenced" and irrespective of the stage that discussions with an interested purchaser may have reached. That condition was plainly satisfied in relation to each of Eden and Chiwayland.
This interpretation of the language produces a sensible and businesslike outcome and gives effect to the symmetry of the two limbs of the exclusivity provision which are directed to the one outcome, namely, that there should be no communication by the Sellers with any potential buyer other than MindChamps in relation to the sale of the Businesses during the Exclusivity Period.
[6]
The proper construction of cl 12(c)
Clause 12(c) describes two conditions which, if satisfied, have the result that Little Zaks "must return" the deposit. The first is that the "Sellers breach the terms of clause 12(a)". Notwithstanding the structure of cl 12(a) - a lengthy first sentence followed by a second commencing with the words "In particular" - its language describes and imposes four obligations on the Sellers, each introduced by the verb "must", which if not complied with would constitute a breach of a term of cl 12(a) so as to satisfy cl 12(c). That conclusion arises giving the language its ordinary meaning and is businesslike and sensible.
The introductory words "In particular" used in the second sentence of cl 12(a) are somewhat inapt because the subject matter of the separate obligations in paras (i) and (ii) of cl 12(a) is not exclusivity, and those obligations do not qualify or deal more specifically with any aspect of the earlier exclusivity obligations. The only matter which the two exclusivity obligations and two further obligations in paras (i) and (ii) have in common is that all are to be performed and adhered to during the Exclusivity Period. Accordingly, cl 12(a) contains covenants dealing with three different subjects which apply during the same period.
There is no warrant in the language of cl 12(a) or cl 12(c) to read the words "terms of clause 12(a)" as not including all of the terms in that sub-clause which are capable of being breached so as to engage the obligation to return the deposit. Most significantly, it would make no sense if that consequence was not attached to a breach of the exclusivity obligations in cl 12(a) in circumstances where the consideration for the benefit of those promises is expressed to be the payment of the deposit.
[7]
Conclusion
For these reasons the primary judge did not err in construing cl 12(a) and cl 12(c). Grounds 3 and 4 (particular (a)) must be rejected. It follows that the appeal should be dismissed with costs.
BRERETON JA: I agree with Meagher JA.
BASTEN AJA: I agree with Meagher JA.
[8]
Amendments
14 December 2022 - Formatting changed on coversheet.
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Decision last updated: 14 December 2022
Parties
Applicant/Plaintiff:
M & W Zaki Pty Ltd
Respondent/Defendant:
MindChamps Preschool Ltd
Cases Cited (3)
Judgment
MEAGHER JA: On 2 September 2016 the appellants (Little Zaks) as sellers of nine childcare centres entered into a Term Sheet in relation to their proposed purchase by the respondent (MindChamps). That Term Sheet was dated 1 September 2016. In consideration for the payment of a deposit of $500,000 Little Zaks granted MindChamps a form of exclusivity for the period up to 5pm on 14 October 2016 and, during that period, the opportunity to undertake due diligence investigations. MindChamps was entitled to the return of that deposit if Little Zaks was in breach of clause 12(a), which is set out in [3] below. On 16 September 2016 MindChamps' advisers notified Little Zaks that it had decided not to proceed with the purchase under the Term Sheet and demanded repayment of the deposit. The primary judge (Slattery J) held that Little Zaks was obliged to return the deposit (MindChamps Preschool Limited v M & W Zaki Pty Limited ATF the Zaki Group Trust & Ors [2022] NSWSC 881). Judgment was given in favour of MindChamps in an amount of $500,000. Little Zaks appeals from that judgment.