Bonham-Carter v Situ Ventures Limited [2012] EWHC 230 [Ch]
This case involves the interpretation of certain provisions of a share sale and purchase agreement (SPA) and is one of a number of related proceedings in connection with issues arising under the SPA.
Background
The SPA covered the sale of shares in Harbour Estates Limited (HEL), an estate agent specialising in properties in Chelsea Harbour. HEL was owned by the vendors (who were the vendors under the SPA and also Directors of HEL). The vendors sold their shares in HEL to the purchaser (Situ Ventures) a company set up by a Mr Hammond (H) for the acquisition. The parties of the SPA were the vendors (as vendors), the purchaser Company and H. The purchase price was £800,000 which was payable by instalments over five years. The relevant clauses which fell to be considered by the Court were:
- clause 4.2: "Until all of the Purchase Price has been paid to the Vendors, the Director Vendors shall remain as Directors of [HEL] in a non executive capacity unless otherwise agreed and/or requested by the Purchaser." And
- clause 6 which provided for the payment of the purchase price by instalments, with later sub clauses providing protection for the vendors in the event that the purchase price was not paid in full or the instalments were not met on date due – creation of a charge over the shares and relinquishing 50% of the shares to the vendors until full payment was made.
The full purchase price was not paid. In due course, the purchaser served notice under cl 4.2 requesting the resignation of the vendors as vendor directors. Amongst other issues, the Court had to consider whether cl 4.2 required the vendors to resign as directors.
The High Court (Richard Sheldon QC) held that the vendors were not obliged to resign as directors.
The interpretation of clause 4.2 principally turned determining whose benefit it was for. The vendors contended that the clause entitled them to remain on the board of HEL as non-executive directors until the entire purchase price had been paid (i.e. it was for their benefit and protection until the purchase price had been paid in full); whereas the purchaser contended that the clause placed the vendors under an obligation, prior to payment of the entire purchase price, to remain as non-executive directors for as long as the purchaser wished and entitled the purchaser to require that the vendors ceased to be directors.
The Court said that "unless otherwise agreed" shed little light on the meaning of the clause because it was always open for parties to make a later agreement. The main difficulty was in the words "unless otherwise... requested by the Purchaser". If the clause were intended to be for the benefit of the vendors (i.e. giving them the right to remain as directors until the purchase price were paid) it would be odd to provide for the purchaser to request otherwise. Usually, it was for the person for whose benefit or protection the provision is included to have the ability to decide that benefit or protection is no longer required. On that basis, and on the natural meaning of the words, in clause 4.2 was included for the benefit of the purchaser. Indeed, this seemed to be supported when looking at other terms of the SPA. Clause 4.1 (which obliged the vendors to provide internal assistance to the purchaser in the ongoing business of HEL) was clearly included for the benefit of the purchaser. Likewise, clause 5 contained a restrictive covenant and the wording contemplated the vendors being "removed" as Directors prior to the final payment date, resulting in a potentially shortened period of restraint. Finally, if clause 4.2 had been inserted for the protection of the vendors, one would have expected to see it in clause 6 where the other vendor protections appeared in the SPA.
Having found that clause 4.2 placed the vendors under an obligation to remain as directors after the sale, the Court had to consider the consequences of a request by the purchaser under clause 4.2. Once such a request was made, the vendors were no longer under any obligation to remain as directors, but that left open the position if, as was the case here, the vendors wished to remain as directors.
The Court said that if the words "unless otherwise...notified by the Purchaser" had been used, it would be clear that the obligation to remain as directors of HEL would have been lifted and the directors removal would have been left to be determined by the relevant provisions of the CA206 and/or HEL's articles of association. The purchaser submitted that use of the word "requested" meant something more. The Court did not accept this. It said that whilst, the natural meaning of the words meant the vendor's obligation to remain as directors came to an end when a request was made by the purchaser, the language did not mean they were required to cease to be directors by resigning. The Court said had this been the parties' intention, it would have expected this to have been spelt out in clear language in the SPA.
Had the SPA been performed in accordance with its terms, the purchaser, as sole and/or controlling the shareholder in HEL would have been in a position to pass the requisite resolution to remove the vendors as directors if they did not accede to the request to cease to be directors by resigning. However, as the purchaser was in default in paying the purchase price, the vendors had been able to exercise their rights under clause 6.9 (giving them 50% voting rights) and thereby removing the ability of the purchaser to remove them as directors against their will. It would be odd to hold that the purchaser could require the vendors to resign in circumstances where it had been in default and had only 50% of the voting rights.
Judgment was therefore given for the vendors and it was held that the notice did not require them to resign as directors of HEL. Instead, the termination of their directorships was a matter to be governed by the operation of the provisions in the CA 2006 and in HEL's articles of association. Given the vendors had exercised their rights under clause 6.9 and therefore held 50% of the voting rights in HEL until such time as the purchase price had been paid in full, any resolution to remove the vendors as directors could only be passed with their concurrence.
Comment
One might think that this is a rather harsh interpretation of the words "unless otherwise... requested" and that, whilst the Court's initial findings that the natural meaning of the words in clause 4.2 were for the benefit of the purchaser was a sensible interpretation of the clause, the Court appeared to then interpret this finding to suit the particular facts. However, whatever the lawyers might have thought when drafting the words, the fact remains that imposing an obligation to resign would have been at odds with the protection elsewhere for both parties. The case serves as yet another reminder to take care when drafting provisions not usually regarded as standard and to spell out as clear and concisely as possible the parties' intentions.
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