Lessons to be learned from this family business dispute

A family dispute concerning the ownership and control of Kennedy Watches & Jewellery Pty Ltd ("the Business"), a well-known distributor of luxury watches with franchise agreements with prestigious brands like Rolex, Patek Phillippe, and Omega, was dealt with in the Supreme Court of New South Wales in June 2024. The case, Kennedy v MJJK Investments Pty Ltd & Ors [2024] NSWSC 722, involved family members and their conflicting interpretations of a Heads of Agreement that was intended to restructure the ownership of the Business.

Factual Background

The dispute primarily involved Mrs. Martha Kennedy and her two sons, James and Justin Kennedy. The Business was originally owned through holding companies MJJK Investments Pty Ltd, MJJK Investments No. 2 Pty Ltd, and MJJK Investments No. 3 Pty Ltd, as trustees for three family trusts, all controlled by Martha. The beneficiaries of these trusts were Martha, James, and Justin.

In May 2021, James proposed a change in the shareholding arrangement, which resulted in the execution of the Heads of Agreement on 5 June 2021. This document was legally binding, despite the absence of the "long form" documentation the parties agreed to work towards.

The Heads of Agreement aimed to restructure the Business so that James would become the owner of 80% of it, with the remaining 20% held by the MJJK Interests. However, the core of the dispute was whether the Heads of Agreement conferred an option on James to purchase the shares of his family members, which James contended was granted under Clause 8 of the Heads of Agreement.

James sought a declaration from the Court that Clause 8(d) entitled him to exercise an option to purchase the shares held by his family members, subject to a valuation process. On 20 February 2024, James issued a notice purporting to exercise that option. The other family members disputed James's interpretation of the agreement, leading to the subject legal proceedings.

The Issues

The primary issue before the Court was whether Clause 8(d) of the Heads of Agreement conferred an option on James to purchase the shares of the other family members. James contended that Clause 8(a), when read in conjunction with Clause 8(d), gave him the right to buy out the MJJK Interests. The MJJK Interests disputed this interpretation, arguing that the Heads of Agreement did not impose any such obligation on them.

The Court's Consideration

The Court carefully examined the language of the Heads of Agreement and considered the parties' intentions, as reflected in the text and the surrounding circumstances. The Court reiterated the established principles of contractual interpretation, emphasising that the meaning of contractual provisions must be determined objectively by reference to the text, context, and purpose of the agreement. The key question was what a reasonable business person in the position of the parties would have understood the relevant terms to mean.

1. Clause 8(a): Facilitation of a Sale to an Investor The Court first considered Clause 8(a), which allowed James to introduce an investor and retain at least 51% of the Business. The clause provided that the MJJK Interests’ shares would be available for sale to the investor, subject to an acceptable commercial valuation. The Court found that this clause was concerned only with facilitating a sale to an external investor and did not confer any rights on James to purchase the shares of the MJJK Interests.

2. Clause 8(d): Independent Business Valuation James relied heavily on Clause 8(d), which provided for an independent valuation in the event of a sale to him. However, the Court noted that this clause did not contain any language of obligation. Unlike other provisions of the Heads of Agreement that explicitly imposed obligations on the MJJK Interests (e.g., “we agree to sell”), Clause 8(d) was silent on whether the MJJK Interests were required to sell their shares to James.

   The Court rejected James’s argument that Clause 8(a) should be read distributively to impose an obligation on the MJJK Interests to sell their shares to him. The Court found that Clause 8(a) was concerned solely with sales to external investors and did not extend to sales to James.

3. Clause 8(f): Restrictions on Sale of Shares The Court also considered Clause 8(f), which restricted the MJJK Interests from selling their shares except as contemplated by the Heads of Agreement. The Court concluded that this clause only prevented the MJJK Interests from selling their shares to third parties without James’s involvement. It did not impose an obligation on the MJJK Interests to sell their shares to James.

Decision

After a detailed analysis of the Heads of Agreement, the Court found that it did not confer on James an option to purchase the shares of the MJJK Interests. The Court declined to make the declaration sought by James and held that the Heads of Agreement did not impose any obligation on the MJJK Interests to sell their shares to him.

The Court emphasized that the Heads of Agreement was designed to facilitate a sell-down of the MJJK Interests’ shareholding from 100% to 20%, with James acquiring an 80% interest. However, there was no indication that the parties intended for James to have a mandatory right to purchase the remaining 20%.

The Court also noted that the staged nature of the shareholding restructuring—dependent on James fulfilling certain obligations, such as the discharge of mortgages and payment of sums to Martha—was inconsistent with the idea that James could immediately exercise an option to purchase the shares. Granting James such an option would deprive the MJJK Interests of their rights under the "clawback" provisions in the agreement, which allowed them to reclaim shares if James failed to meet his obligations.

Conclusion

The Court’s decision underscores the importance of clear and precise drafting in family business agreements. While the Heads of Agreement in this case facilitated a staged restructuring of the Business, it did not confer on James the option to purchase the shares of his family members.

This case also serves as a reminder of the need for careful consideration of the language used in agreements, particularly when it comes to provisions relating to the sale of shares and the transfer of ownership in family businesses. Parties should ensure that their intentions are clearly expressed in legally binding documents to avoid costly disputes down the road.