OXC Bidco Pty Ltd v Dickson

Background

1. The proceedings arise out of the sale by Mr and Mrs Dickson to the plaintiffs of their shares in Dickson & Dickson Healthcare Limited and Dickson & Dickson Healthcare NZ Limited ("the Companies" or "Company" as appropriate) pursuant to a Share Sale Agreement ("the Agreement") dated 23 October 2015.
2. The business of the Companies is the sale and supply of medical compression garments and stockings, and equipment for hospital theatres in Australia, New Zealand, South Africa and the United States.
3. On completion of the Agreement on 24 November 2015, the plaintiffs paid out some $28.5 million, of which some $10 million was paid in cash to Mr and Mrs Dickson. The plaintiffs also procured that shares in a related company (with an agreed value of some $2.3 million) be transferred to Mr and Mrs Dickson and lent some $17.5 million to one of the Companies to enable that company to retire various debts.
4. In December 2015, shortly after completion of the Agreement, Fandola purchased a property in Newport for $4.95 million. That property is now the Dickson family home. There is no direct evidence of the funds used to fund that purchase, but the implication of the plaintiffs' submissions, and the probability is that the purchase was funded, in part at least, from the proceeds of the share sale.
5. The plaintiffs claim damages for breach of warranties contained in the Agreement and allege that the shares for which they, in effect, paid the $28.4 million, are now worthless.
6. The plaintiffs claim that, had they been aware of the breaches of warranties, they would have exercised their right under cl 5.1 of the Agreement to terminate it prior to completion.
7. The claim that the plaintiffs would have terminated the Agreement, had they known of the alleged breaches of warranties, is made in an affidavit sworn on behalf of the plaintiffs by one of its directors, Mr Jose Gonzalez, but was not, when the matter came before me on 7 July 2016, made in the pleadings.
8. On that occasion Mr Jackman SC, who appeared with Mr Foreman for the plaintiffs, stated that this was an oversight and that the pleadings would be amended accordingly. In those circumstances, Mr Ashhurst SC, who appeared with Mr Docker for Mr and Mrs Dickson and Fandola, stated that he was content to argue the question of variation of the freezing order on the assumption that the pleadings were so amended, and that the plaintiffs sought to make out a "no transaction" case in the proceedings.
9. I have since been provided with a form of proposed Amended Commercial List Statement and understand there is no opposition to it being filed.
10. It was common ground before me that a freezing order should only be made to a sum that does not exceed the sum which the plaintiffs "may be thought likely to recover" (for example, Frigo v Culhaci [1998] NSWCA 88; BC9803225 at 19 per Mason P, Sheller JA and Sheppard AJA; Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at 428; see also P Biscoe, Freezing and Search Orders: Mareva and Anton Piller Orders, (2nd ed 2008, LexisNexis Buttterworths) at [6.55]).
11. In the Agreement, Mr and Mrs Dickson warranted (amongst other things) that: 1. so far as they were aware, no "Target Entity" had received any notice of termination of any material contract to which it was a party; and 2. all "material contracts" (including contracts containing "exclusivity" provisions) had been disclosed in the "Disclosure Materials".
12. The plaintiffs allege a breach of those warranties in that Mr and Mrs Dickson knew but did not disclose that: 1. Ramsay Healthcare Investments Pty Ltd (allegedly one of the Companies' major customers) had on 23 September 2015 (that is a month before the Agreement was entered into) given notice of termination of two group purchasing agreements with a "Target Entity" (Prius Healthcare Solutions Pty Ltd; evidently a company related to one or both of the Companies); and 2. one of the Companies was a party to a Purchase of Goods Agreement with Rebelly Healthcare (Shanghai) Limited which contained an "exclusivity" provision which obliged that Company not to purchase any of the services set forth in that agreement from any other entity.
13. It was implicit from the way Mr Ashhurst conducted the argument before me that he accepted that, for the purposes of this application only, I should assume Mr and Mrs Dickson knew of, but did not disclose these matters. It may well be that there will be a contest about this at the final hearing. Any reference to "non-disclosure" in these reasons should be read in that light.

The Ramsay contract

1. In his affidavit, Mr Gonzalez deposed that had the Ramsay notices of termination been disclosed prior to execution of the Agreement, the plaintiffs would not have entered the Agreement, and had the notices been disclosed after execution of the Agreement, but before completion, the plaintiffs would have exercised their right under cl 5.1 of the Agreement to terminate.
2. Mr Gonzalez is one of a number of directors of the plaintiff. Although, as Mr Jackman pointed out, he led the "deal team" overseeing the acquisition of the Companies, his assertion as to what the plaintiffs would have done cannot, at this interlocutory stage, be seen as conclusive as to how that issue will be resolved at the final hearing of these proceedings.
3. It is clear from the manner in which the matter was argued before me that the proposition will be contested.
4. It may be that, at the final hearing of these proceedings, other directors or officers of the plaintiffs will give evidence pointing to the conclusion that what Mr Gonzales now asserts the plaintiffs would have done is, in fact, what they would have done; and that Mr and Mrs Dickson will seek to adduce evidence pointing to the improbability that the plaintiffs would have sought to withdraw from the transaction, had the alleged non-disclosure not occurred.
5. However, for the purpose of considering this application, I must make an assessment, at this very early stage of the proceedings, and on the basis of the evidence adduced thus far, of the plaintiffs' prospects of making out a "no transaction" case.
6. Of course, whatever assessment I make now of that matter may not be borne out by all the evidence, as ultimately adduced and tested at trial.
7. Mr Gonzalez said in his affidavit that Ramsay is the largest private hospital provider in Australia and, in the financial year ended 30 June 2015, was the Companies' largest customer by revenue and a "critical component" of the Companies' business.
8. However in April 2016 Mr Dickson, and perhaps more significantly, the Chief Operating Officer of the Companies, Mr Stuart Clark, asserted that the Ramsay contracts were "losing contracts".
9. Mr Gonzalez said he did not agree and that: "[B]ased on my review of trading with Ramsay as reflected in the records of [the Companies], is that they together contributed more than $1 million of gross contribution/margin in [the financial years ended 30 June 2015 and 30 June 2016] (on an annualised basis)."
10. Assuming the correctness of that proposition, Mr Ashhurst submitted: "The profit that is compensable as damages is gross margin less expenses because the expenses are incurred in making the gross margin. Schedule 5 of the Share Sale Agreement reveals that Prius contracts made a loss before tax of $1,569,000 on gross profit (or gross margin) of $6,134,000 in the year to 30 June 2015. Accordingly, the loss of profit is $Nil, just as Mr Clark and Mr Dickson asserted."
11. Mr Ashhurst then made the following further alternative submission: "Alternatively, if the group figures are used, profit after expenses in the year to 30 June 2015 was $2,030,000 on a gross margin of $18,235,000, being 11.1% of gross margin. Annual profit on this basis from the Ramsay contracts would be 11.1% of $1 million (gross margin), being $111,324.38. The loss of profit from not having the Ramsay contracts is no more than half the annual profit after expenses, being $55,662.19, as both Ramsay contracts are terminable on 6 months notice. In the further alternative, the purchase price for the contract was based in part on the business of D&D Australia and D&D New Zealand being valued at 5.8 times maintainable earnings (normalised EBITDA) for the period ending 30 June 2015 of $3.4 million. In Schedule 5 of the Share Sale Agreement EBITDA for the year ending 30 June 2015 was $4,005,000 on a gross margin of $18,235,000, being 22% of gross margin. Annual EBITDA on a gross margin of $1,000,000 per annum would be $220,000 and 5.8 times that figure is $1,276,000. This is the damages figure most generous to the plaintiffs."
12. Mr Jackman did not cavil with Mr Ashhurst's analysis but submitted that these were "quantitative" matters and that it was necessary also to have regard to "qualitative" matters such as Mr Gonzalez's evidence as follows: "Based on the due diligence process, I understood that [the Companies had] been supplying Ramsay for around 5 years. Given [the Companies] had been supplying Ramsay since 2009 and the [Ramsay contracts] were renewed in 2014, I believed Ramsay and [the Companies] had a good commercial relationship with reasonable prospect that the [Ramsay Contracts] would be renewed post 2017. It would also be important to me as an acquirer to understand that such a major operator as Ramsay had wanted to terminate its relationship with [the Companies]. That would suggest to me the potential for a broader concern than the Ramsay relationship itself."
13. I see a potential tension between that evidence and Mr Gonzales' assertion that, had Mr and Mrs Dickson disclosed the termination of the Ramsay contracts, the plaintiffs would have withdrawn from the transaction.
14. Had such disclosure been made, it seems likely that Mr Dickson and Mr Clark would have then contended (as they have since) that the Ramsay contracts were "losing contracts". The plaintiffs would have then had to consider that contention, and the likely financial impact on the Companies' financial performance whatever the result was of that consideration.
15. Had that occurred, and assuming that the plaintiffs' had reached the same conclusion as Mr Gonzales (at [26] above), then, on the material before me, it is likely, or at least possible, that the plaintiffs' analysis of the financial implications of that conclusion would have been along the lines outlined by Mr Ashhurst (see [27] and [28] above). As I have said, Mr Jackman did not dispute the soundness of that analysis.
16. If so, it seems likely, or at least possible that, rather than pull out of the deal altogether, the plaintiffs would have sought to negotiate a reduction in the purchase price.
17. It seems likely, as is implicit in Mr Gonzales' evidence at [29], that the plaintiffs would have wished to investigate the implications, so far as concerns the Companies' financial position, of Ramsay's decision. That may have involved inquiries both of Mr Dickson and of Ramsay itself. I can only speculate as to what the outcome of any such enquiries would have been.
18. Overall, it is by no means clear to me that the plaintiffs will establish, at final hearing, that they would have walked away from the deal, had there been disclosure of the Ramsay situation.

Rebelly

1. The position is even more problematic so far as concerns the Rebelly contract.
2. The agreement with Rebelly is dated 1 May 2014.
3. Once again, Mr Gonzalez asserted in his affidavit that had this agreement been disclosed, the plaintiffs would have withdrawn from the transaction (either by not entering the Agreement at all, or exercising their rights under cl 5.1 to terminate).
4. It is by no means clear from a reading of the agreement what work it is intended to do.
5. It obliges Rebelly to deliver "Goods" to the locations nominated by the relevant Company.
6. What those "Goods" are is not explained. "Goods" are simply defined to be "products" (a term which is not itself defined) of the kind notified by the Companies to Rebelly as being those that it requires. The agreement provides that Rebelly will earn "a minimum margin of 20% based on the manufacturers cost".
7. The "exclusivity" clause in the contract does not relate to the provision of goods by Rebelly to the Company but rather, of very broadly defined "Strategic Supply", "Demand Planning" and "Quality Control" services.
8. The agreement does not, in terms, impose on the Company any obligation to purchase any goods from Rebelly. It simply gives it the option to do so.
9. Further, the agreement does not oblige the Company to purchase any services from Rebelly, although it does provide that the Company may not acquire those services from another.
10. Evidently, although this is not clear to me from the agreement itself, Rebelly is what Mr Gonzalez calls "an intermediary" or "trading house" able to procure the supply of goods manufactured by others to the relevant Company.
11. I was not taken to any evidence to show that the Rebelly agreement constituted any burden on the relevant Company. As Mr Ashhurst submitted, the evidence shows no more than that for the year ended 30 June 2016, the relevant Company had made purchases of $4.37 million from, or through, Rebelly. It is not asserted that products were not delivered pursuant to these purchases or that such products were worth less, or sold for less than the amount for which they were purchased.
12. Again, Mr Jackman did not cavil with Mr Ashhurst's analysis but emphasised the "qualitative" aspects of the matter as revealed in the following paragraphs of Mr Gonzales' evidence: "Prior to the acquisition, it was important for the [plaintiffs] to be assured they were dealing with manufacturers directly rather than dealing through intermediaries or trading houses. In early August 2015, I recall having a conversation with Tim Spencer, Managing Partner of Fund 2 where we discussed the importance of not having any supplier arrangements dependant on use of trading house[s] or intermediaries. Mr Spencer said to me in effect that I must be confident that [the Companies] dealt with manufacturers directly and not through trading houses. I understood that the reason for this was because the plan was that ultimately [the plaintiffs' parent company] would be sold, and it was important to present [it] as an entity which had a dependable supply chain and was not dependent [on] middlemen for supply arrangements. Further, dealing with trading houses would reduce a company's ability to ensure that no fraud was committed as part of its purchases overseas. I recall having a discussion with Mr Dickson during the due diligence process advising Mr Dickson in effect that [the plaintiffs' parent company did] not want to deal with trading houses. Mr Dickson confirmed in effect that [the Companies] in all cases dealt directly with manufacturers and did not deal with trading houses or intermediaries."
13. These observations appear to be directed to the acquisition of goods, rather than services. Assuming that Rebelly is an "intermediary" or "trading house" through which the relevant Company, now owned by the plaintiffs, would not wish to purchase goods, the Rebelly agreement does not impose on the Company any obligation to do so.
14. I do not read Mr Gonzales' evidence as expressing any concern about the services able to be supplied by Rebelly under the agreement.
15. In all of those circumstances, once again, it is by no means clear to me that, at a final hearing, the plaintiffs will establish that, but for the alleged non-disclosure of the Rebelly agreement, they would have walked away from the transaction.

Are the shares in the Companies purchased by the plaintiffs worthless?

1. This question is relevant to Mr Jackman's submission that, even if the plaintiffs could not make out a "no transaction" case, they may be entitled to recover damages on what Mr Jackman described as a Potts v Miller basis ((1940) 64 CLR 282).
2. I took Mr Jackman to mean that the plaintiffs might make out a case in deceit or fraudulent misrepresentation and thereby be entitled to damages calculated by comparing what they paid for the shares compared to what they are now worth.
3. But the plaintiffs do not allege fraudulent misrepresentation. They do allege that the relevant warranties were "rendered misleading, false or deceptive by reason of Mr Dickson having acted fraudulently". But the only pleaded consequence of that allegation is that a damages limitation provision in the Agreement is inapplicable (List Statement at C62-65 and C93-95).
4. In his affidavit, Mr Gonzalez made the following statements, to which Mr Ashhurst objected and which, at this stage, I would only allow as a contention: "Obex Holdings acquired all of the shares in D&D and D&D NZ by outlaying $28,423,046.84 (in the form of cash and shares) (excluding deal costs). This was on the basis of a 'Management EBITDA' of $4 million in FY15, which I believed would be increased at Completion as a result of paying out the operating leases referred to at 38 above. … Based on my preliminary investigations, I believe D&D is currently generating EBITDA losses of well over $2 million per annum and, in FY15, it generated an EBITDA loss, rather than an EBITDA of $4 million reflected in Schedule 5 of the [Share Sale Agreement]. My present view is that there is an opportunity to turn around the business from loss making to a small profit making position and I am working with the officers and employees of D&D to restructure the business and improve its position. (Those opportunities would have been available in any event). I do not think there is an opportunity in the near term to get it to the level of EBITDA of $4 million or above."
5. I do not feel able to reach any conclusion as to the current worth of the shares in the Companies on the basis of that assertion, let alone that the shares are without any value.

Absent a "no transaction" case, what is the measure of the plaintiffs' damages claim?

1. In their written submissions (which were also before Rein J), Mr Jackman and Mr Foreman submitted that "the prima facie measure of damages for breach of warranty is the difference between the value of the assets as warranted and the actual value of the assets".
2. For that proposition, Mr Jackman and Mr Foreman cited the observations of Brereton J in Harris v Smith [2008] NSWSC 545 at [89].
3. In fact, in that case his Honour stated "for breach of warranty as distinct from misrepresentation, the measure of damages is the difference between the position in which the plaintiff would have been had the promise or warranty been correct, with that in which in fact the plaintiff is placed consequent on the breach". This is the conventional measure of damage in a case of breach of contractual representations, the object being to place the plaintiff in the same position as if the representations were true (for example, Gould v Vaggelas [1985] HCA 75; 157 CLR 215 at 265 per Dawson J).
4. As Mr Ashhurst submitted, if the warranties the plaintiffs allege were breached had been true: 1. there would have been no notices of termination from Ramsay; and 2. there would have been no Rebelly agreement.
5. In that event, the prima facie measure of damages available to the plaintiffs would be the difference between: 1. the position they are now in, being that Ramsay has issued the notices of termination and the Rebelly agreement exists; and 2. the position the plaintiffs would have been in if the warranties were true, that is had Ramsay not issued the termination notices and had there been no Rebelly agreement.
6. Mr Ashhurst's (unchallenged) "quantitative" analysis suggests that, on this basis, the plaintiff's damages may be in the order of $1.276 million in respect of the Ramsay contracts (see [28] above).
7. As to the Rebelly agreement, it is hard at this stage to see what damages the plaintiffs could establish unless they could show that the 20 per cent margin payable to Rebelly was in some way unreasonable and thus that the Companies had paid an excessive amount for whatever products Rebelly supplied or caused to be supplied. Mr Ashhurst submitted, and for present purposes I accept, that the recovery by the plaintiffs in this respect would unlikely be more than the amount by which the relevant Company's purchases from Rebelly were increased by reason of the 20 per cent margin percentage. My attention was drawn only to the sales from or through Rebelly for the financial year ended 30 June 2016 ($4.37 million: see [46] above). The component of that figure referable to the 20 per cent margin would be $728,000.
8. The figure proposed by Mr Ashhurst as the appropriate limit for the freezing order ($2.25 million) is greater than the sum of these two figures.
9. In those circumstances, and bearing in mind the difficulties I see lying in the way of the plaintiffs making out a "no transaction case" (at least on the evidence adduced to date), I am persuaded that I should vary the freezing order to reduce its limit to that figure.

Orders

1. I vary the freezing order made on 30 June 2016 by substituting the figure $2.25 million for the figure $28,423,046.84 in paragraphs 6(a) and 12(a)(i).
2. I will now invite submissions as to any further directions that should now be made (including as to the filing of the proposed Amended Commercial List Statement) pending the further listing of the matter on 5 August 2016.

Amendments 12 July 2016 - Coversheet amended 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: 12 July 2016