10 min
Flynn v PPK Mining Equipment Pty Ltd (No 2) [2022] NSWSC 1640 Coffee and a Case Note
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- Education
“We amended the contract, now give me my bonus!”
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P agreed to sell their shares in SubjectCo to D for: cash, shares in D, and (if further earnout conditions were met) further shares in D: [1]
P sued D for those shares and unpaid dividends, saying the conditions were met: [2]
SubjectCo made hazardous area electrical equipment for mining machinery: [11]
D was a listed business whose strategy included buying smaller mining equipment firms: [17]
D bought SubjectCo to complement its existing holdings: [22]
In 2014 SubjectCo was in a difficult financial position, possibly insolvent. Evidence suggested P’s were engineering and product design, not finance: [28], [30]
The sale went ahead after P fired their lawyers and proposed no changes to D’s proposed share sale documents: [36]
The contract included the earnout bonus based on profit, with oral variation prohibited: [38] - [40]
P became an employee of D and began operating SubjectCo as part of D’s business: [41]
In around 2015 the coal market slumped. D’s senior E’ees took paycuts. P continued to cause SubjectCo to charge “full freight” for SubjectCo’s work to other parts of D’s business: [50] - [54]
To manage this, the CEO discussed P’s earnout criteria being varied to revenue, from profit. There were subsequent emails reflecting this: [57], [61] - [65]
P was moved from a business role to a more ideas-focused innovation role; a “good deal” for P: [99]
The CEO P left D, and D’s new leaders were unaware of the purported “revenue earnout” change: [77] - [79]
On the anniversary of the purchase, D issued a statement based on profit, not revenue. This (due in large part to the mining downturn) was an unhappy figure that missed the earnout criteria: [80]
Written notices were exchanged by D and P putting their positions, with arguments about the attribution of a “new” business introduced to D after P joined: [81] - [87]
D resisted the suggestion that the profit / revenue amendment had been made; and said even if it had P would not have met them as the “new” business was not P’s: [90]
The Court agreed the CEO and P has effectively varied the agreement to $1m revenue from $250K profit: [103]
There was extensive consideration of the “new” business and whether indeed P had brought it in: [166] - [187]
P was unable to prove it undertook the “new” work before the sale and so it should form part of P’s earnout criteria: [185]
Noting the above, revenue was less than $1m, and the earnout criteria were not met: [197]
P succeeded in proving the agreement was varied - “a legal question on which the principles were clear”. This success “counted for nought” where the Ps did not meet the earnout criteria, which should have been apparent at the time. As a result, the Court ordered that P pay 80% of the Ds’ costs: [198]
“We amended the contract, now give me my bonus!”
___
P agreed to sell their shares in SubjectCo to D for: cash, shares in D, and (if further earnout conditions were met) further shares in D: [1]
P sued D for those shares and unpaid dividends, saying the conditions were met: [2]
SubjectCo made hazardous area electrical equipment for mining machinery: [11]
D was a listed business whose strategy included buying smaller mining equipment firms: [17]
D bought SubjectCo to complement its existing holdings: [22]
In 2014 SubjectCo was in a difficult financial position, possibly insolvent. Evidence suggested P’s were engineering and product design, not finance: [28], [30]
The sale went ahead after P fired their lawyers and proposed no changes to D’s proposed share sale documents: [36]
The contract included the earnout bonus based on profit, with oral variation prohibited: [38] - [40]
P became an employee of D and began operating SubjectCo as part of D’s business: [41]
In around 2015 the coal market slumped. D’s senior E’ees took paycuts. P continued to cause SubjectCo to charge “full freight” for SubjectCo’s work to other parts of D’s business: [50] - [54]
To manage this, the CEO discussed P’s earnout criteria being varied to revenue, from profit. There were subsequent emails reflecting this: [57], [61] - [65]
P was moved from a business role to a more ideas-focused innovation role; a “good deal” for P: [99]
The CEO P left D, and D’s new leaders were unaware of the purported “revenue earnout” change: [77] - [79]
On the anniversary of the purchase, D issued a statement based on profit, not revenue. This (due in large part to the mining downturn) was an unhappy figure that missed the earnout criteria: [80]
Written notices were exchanged by D and P putting their positions, with arguments about the attribution of a “new” business introduced to D after P joined: [81] - [87]
D resisted the suggestion that the profit / revenue amendment had been made; and said even if it had P would not have met them as the “new” business was not P’s: [90]
The Court agreed the CEO and P has effectively varied the agreement to $1m revenue from $250K profit: [103]
There was extensive consideration of the “new” business and whether indeed P had brought it in: [166] - [187]
P was unable to prove it undertook the “new” work before the sale and so it should form part of P’s earnout criteria: [185]
Noting the above, revenue was less than $1m, and the earnout criteria were not met: [197]
P succeeded in proving the agreement was varied - “a legal question on which the principles were clear”. This success “counted for nought” where the Ps did not meet the earnout criteria, which should have been apparent at the time. As a result, the Court ordered that P pay 80% of the Ds’ costs: [198]
10 min