Australia, July 24 -- New South Wales Land and Environment Court issued text of the following judgement on June 24:

1. HER HONOUR: This case concerns whether the parties to a Share Sale Agreement are bound by an expert determination. Under the agreement, the plaintiff, Expert Group International Pty Ltd (the vendor), sold the issued shares in Experteq IT Services Pty Ltd (the Company) to the first defendant, TransAction Solutions Ltd (the purchaser or TAS) for $2 million plus deferred consideration based on the financial performance of the Company in the two years' post-completion, that is, an 'earn-out'. The earn-out formula provided for the earn-out payment (Additional Payment) in the second year to be calculated by multiplying the Company's earnings before interest and tax (EBIT) by higher multiples (being 4x, 4.5x or 5x) depending on whether the Company's EBIT met various 'hurdles'.

2. The parties executed a Variation Deed, amending the earn-out formula for the second year. As varied, the formula included the annual profits (Annualised Agreed Profits) for certain contracts with customers (Qualifying Managed Services Agreements). The parties later disputed whether the earn-out formula meant:

a) the Annualised Agreed Profits was added to EBIT for the purpose of clearing a 'hurdle' and accessing a higher multiple; or

b) the Annualised Agreed Profits was added to EBIT, and the relevant multiple applied to the sum.

3. The expert, being an experienced chartered accountant, determined that the latter construction was correct. He calculated that the purchaser was obliged to pay $9,663,200 to the vendor. The issues are:

a) whether the parties are bound by the expert's construction of the earn-out formula;

b) whether the correct application of the earn-out formula was a "Disputed Matter" which fell for determination by the expert at all, given that the issue was raised outside the timeframe prescribed by the expert determination clause;

c) whether the expert determination contains a "manifest error" (the purchaser posited five errors, including the suggested mis-application of the earn-out formula); and

d) in the event that the expert determination is not binding, and the expert's construction of the earn-out formula was wrong, is the vendor entitled to rectification of the Share Sale Agreement?

4. Much of what follows is concerned with the alternative rectification suit and, to a lesser extent, the commercial context against which the expert determination clause and the earn-out clause may be construed: Lepcanfin Pty Ltd v Lepfin Pty Ltd (2020) 102 NSWLR 627; [2020] NSWCA 155 at [79]-[94] (Bell P, Payne and McCallum JJA agreeing). Consideration of the first issue begins at [114].

Witnesses and inferences

5. The vendor relied on the evidence of its directors, being second defendant Frank Mulcahy and third defendant Mark Snell, together with the evidence of solicitor Felicity Healy. The purchaser relied on the evidence of chairperson Ashley Jennings and chief executive officer (CEO) Shane Baker. All but Ms Healy were cross examined.

6. Mr Mulcahy and Mr Snell were both straight forward and made reasonable concessions. Neither were lawyers or accountants. Neither appear to have understood, or focussed on, the intricacies of the drafting of documents at the time, but went along with the deal as they understood it to be and left the details to their solicitor.

7. The same observations can be made of Mr Baker, who said that he did not pay attention to the detail at the time. Mr Baker left the details to the purchaser's chief financial officer (CFO), Tony Greene. Mr Baker said that he did not intend that the Additional Payment would be the product of the multiple applied to the sum of the Agreed Annualised Profit and EBIT. He was less than emphatic in maintaining that position and put some distance between himself and the deal. I have deferred to the contemporaneous documents as to how he thought the varied earn-out formula would work, and I suspect that Mr Baker would be content with me doing so.

*Rest of the document can be viewed at: (https://www.caselaw.nsw.gov.au/decision/197381a654f24a9d88b6cabe)

Disclaimer: Curated by HT Syndication.