A buyer has abandoned a $68.5 mil acquisition of nine childcare centres because the seller continued to field interest from other interested parties despite an exclusivity clause in the contract.
Singapore-based MindChamps paid a $500k deposit when it signed a terms sheet for the buy of the child care business on 1 September 2016 – subject to due diligence – by which the parties agreed to “use their reasonable endeavours to enter a long form legally binding business sale agreement by 14 October”.
The payment of the deposit – which was to become non-refundable on 14 October – also secured “exclusivity” for the buyer.
On 16 September the buyer notified it was withdrawing from the deal – not on the basis of any adverse due diligence finding – but because of the seller’s conduct.
The NSW seller of the Little Zak’s franchise forfeited the deposit prompting MindChamps to sue for its return and for recovery of some $17k in travel expenses incurred for carrying out due diligence following entry into the terms sheet.
The buyer’s major complaint concerned the seller continuing – contrary to an exclusivity provision – to discuss a potential sale with other parties.
The terms sheet included non-binding provisions but those concerning the deposit, due diligence and “exclusivity” were said to be binding.
The seller agreed – by virtue of the latter – that neither it nor its advisers would seek expressions of interest from any other party as to the sale and to “immediately notify” other parties with whom it had been in discussion, that same were terminated.
While the seller’s directors Maged Zaki and Carlos Zaki had no such discussions, their broker – Simon Johnson of Pitcher Partners in Sydney – did, with what he thought, was the Zakis’ tacit consent.
Johnson’s interest in continuing conversations with a competitor buyer was – in the view of Justice Michael Slattery – “unsurprising” given his success fee was $610k plus 10% of the proportion of the sale price above $48 mil.
“The structure of his success fee made it particularly attractive to continue to promote to [the competitor] a possible contract value of $75 mil, in case the MindChamps transaction fell over”.
His Honour found that the absence of an immediate communication to the competitors that their discussions “were terminated” was itself a breach. And the failure to “cease all further communication” counted as a further breach.
The seller contended though that, regardless, MindChamps suffered no loss by them having kept other potential buyers motivated.
“Not so,” ruled the judge.
“For a potentially non-refundable $500k, MindChamps was entitled to have the seller solely focused on its sale without others waiting in the wings”, he observed.
That was enough to secure a win for MindChamps in having the deposit returned.
The court also found for the buyer by concluding that the seller’s failure to produce all the documents it would have expected to receive for DD, was a further breach.
A misleading conduct claim concerning the lack of preparedness of a data room was however rejected. MindChamps claimed to have relied on representations by the seller that the data room – in which all DD documents were to be electronically produced for inspection – was “fully ready”.
Justice Slattery noted that the word “ready” could convey several meanings and without context or qualification the term “fully ready” could not amount to “a representation of any factual situation the truth of which could ever be objectively verified”.
On that basis there were no grounds to award damages for the wasted travel costs and that part of the claim was dismissed.
MindChamps Preschool Limited v M & W Zaki Pty Limited ATF the Zaki Group Trust & Ors [2022] NSWSC 881 Slattery J, 1 July 2022 Read case
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