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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Fin Soft Holding SA v Rowil Interim Management BV & Ors  EWHC 1433 (Comm) (25 June 2003)
Cite as:  EWHC 1433 (Comm)
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QUEENS BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| FIN SOFT HOLDING SA
|- and -
|ROWIL INTERIM MANAGEMENT BV
FORTIS BANK (formerly known as
CREDIT LYONNAIS BANK NEDERLAND N.V.)
Jonathan Nash (instructed by Messrs White and Case) for the Defendants
Hearing dates : 30 April, 1 and 6 May 2003.
Crown Copyright ©
Mr Justice Tomlinson:
Under the NBC Agreement, the following principal terms were agreed:
1. Prior to closing (being the date on which the definitive share purchase agreement and other related agreements were to be executed and which the parties envisaged would take place on 30th September 1993), Credit Lyonnais (being CLBN and Rowil jointly) would procure that (subject to a few defined exceptions) any outstanding liabilities of Shoelanco and Super Channel to Credit Lyonnais, the Marcuccis and Finsoft be converted into equity so that immediately prior to Closing Shoelanco would own 75% of the issued share capital of Super Channel (clause 1);
2. At Closing, Credit Lyonnais would cause Finsoft to sell to NBC or an NBC affiliate 75% of the issued share capital in Shoelanco for US$22,950,000 and would itself provide an equity contribution to Shoelanco of US$7,650,000 which would be used by Shoelanco to subscribe to new shares in Super Channel (clause 2(a) and (b));
3. After Closing, NBC and Credit Lyonnais would provide additional funds to Shoelanco as the needs of Super Channel's business required (clause 3). NBC was to provide 75% of the additional funds and Credit Lyonnais the balance of 25%.
4. In addition, the NBC Agreement contained (in clause 4) put and call options exercisable during the period commencing on the ninth anniversary of the NBC Agreement and ending one year later under which:
5. Credit Lyonnais had the right to require NBC to purchase the remaining shares in Shoelanco at fair market value less 10%;
6. NBC had the right to require Credit Lyonnais to sell to it or to an NBC affiliate the remaining shares in Shoelanco at fair market value (with no percentage reduction).
7. By clause 6 the Marcuccis and Finsoft gave various representations, warranties and indemnities concerning the financial statements prepared for Shoelanco and Super Channel subject to the proviso that they would not be liable to make any contribution or payment more than two years after Closing.
8. Finally, it should be noted that by virtue of clause 22, the NBC Agreement was a binding legal agreement which would govern the parties' rights and obligations in the event of the definitive agreements not being agreed by 30th September 1993.
The principal terms of the July Agreement were as follows:
1. Finsoft and the Marcuccis (who for the purposes of this agreement include Guelfo Marcucci) consented to the execution of the NBC Agreement and undertook to execute all such documents that might be required to enable CLBN to perform its obligations under the NBC Agreement (clause1);
2. Finsoft and the Marcuccis undertook to procure that the companies controlled by them would transfer all the shareholders loans and other advances to Super Channel in the aggregate amount of £18 million to Shoelanco for a consideration of £1 (clause 2);
3. Finsoft and the Marcuccis undertook to procure that Shoelanco would convert those loans into share capital of Super Channel (clause 4);
4. Rowil would at the date of Closing exercise its first put option under the Subscription Agreement (clause 5(a)); this would leave Finsoft with 80% of the share capital of Shoelanco and Rowil with 20% thereof.
5. Finsoft would then sell 75% of the share capital of Shoelanco to NBC for a price of US$22.95 million which would be paid by NBC to CLBN and then applied by CLBN in the discharge of the various debts identified in clause 5(e) of the July Letter Agreement (which included the monies due to Rowil on the exercise of the put option and all debts owed by Guelfo Marcucci under the Credit Agreement): clauses 5(c) and (e).
6. I should set out clause 6 in its entirety:-
" Taking into consideration the terms of the settlement as defined in this letter and, in particular, the converting of the Loans and the Advances into capital of Shoelanco, Finsoft shall sell the remaining 5% of the share capital of Shoelanco to Rowil for a purchase price as determined hereafter and, subject to section 8 hereof, such purchase price shall be payable in the manner set out below:
(i) USD 2.5 million, which shall be paid by Rowil on the Closing;
(ii) USD 5 million upon the expiry of the two year warranty period set forth in section 6 of the NBC Agreement; and
(iii) the greater of USD 2.5 million and 25% of the net profits realised by Rowil upon the sale by Rowil of all of its 25% interest in the share capital of Shoelanco pursuant to the terms and conditions of the NBC proposal. The calculation of the net profits shall take into account the future investments to be made in Shoelanco or Super Channel by CLBN (or Rowil) subject to the maximum amount of USD 17 million (but excluding commercial loans made by CLBN to Shoelanco or Super Channel) and the accrued interest incurred by CLBN with respect to its investment in Shoelanco or Super Channel (at a rate of LIBOR plus 0.5per annum compounded annually on the capital so invested). Such payment shall be made on the earlier of (x) nine (9) years from the date of the Closing and (y) the date on which Rowil sells all of its shareholding in Shoelanco to an outside investor but in any event not earlier than the expiry of the warranty period as set forth in section 6 of the NBC Agreement."
7. By clause 7 CLBN guaranteed the payment of the purchase price by Rowil to Finsoft.
8. By clause 8.2 the Marcuccis and Finsoft agreed that for a period of two years from the Closing they would indemnify CLBN and hold it harmless from and against any liabilities arising under the NBC Agreement.
9. Clause 8.3 provided:-
" The Marcucci family and Finsoft shall provide to CLBN as security for their obligations under section 8.2 (a) a charge over the right to receive the payments referred to in sections 6(ii) and (iii) above; (b) a first demand guarantee issued jointly by each member of the Marcucci family in favour of CLBN for an amount equal to USD2.5 million in excess of the payments referred to in sections (ii) and (iii) and (c) an assignment as security of the amounts to be received by CLBN under section 6(ii) and 6(iii) above provided that the aggregate liability under this clause 8.3 shall not exceed $10 million. If for any reason whatsoever the security interest set forth in section 8.3 (a) and 8.3 (c) is considered unenforceable or null and void then the guarantee set forth in this section 8.3(b) shall be increased to US$10 million."
10. Finally I must set out clause 11: -
" Upon the expiry of the two years guarantee or warranty period as set forth in section 6 of the NBC Agreement, and subject to section 8 hereof CLBN is willing to discount the amount of USD 2.5 million to be received by Finsoft pursuant to section 6 (iii) above at the applicable market discount rate for dollars."
" (i) the number of Shoelanco shares to be sold by Finsoft to NBC shall be the number provided in the Share Purchase Agreement, which shall be sold as provided therein;
(ii) Rowil will purchase from Finsoft 950,045 ordinary shares of £1 each in the capital of Shoelanco (the "Shoelanco Shares"), constituting all of Finsoft's remaining holding of Shoelanco Shares;
(iii) the first put option set forth in the Subscription Agreement (as defined in the Letter) shall be cancelled; and
(iv) Rowil shall pay Finsoft the following sums:
(a) US$2.5 million on Closing of the Share Purchase Agreement;
(b) US$5 million on the day following that on which the Marcucci Parties' liabilities under the Share Purchase Agreement lapse pursuant to Section 11(e) thereof (other than by reason of clause (i) of that Section) provided that if at the end of the Survival Period any Claim is pending or any Tax return or filing of the type referred to in section 11(a) of the Share Purchase Agreement has not been agreed with all appropriate taxing authorities and NBC has irrevocably agreed, to the satisfaction of CLBN, the maximum liability of the Marcucci Parties in respect of all of such claims and/or the Taxes payable in respect of the periods covered by the said returns or filings, the balance of such US$5 million in excess of such maximum shall be released to Finsoft;
(c) the amount referred to in paragraph 6(iii) of the Letter shall be payable on the day following the earlier of completion of the Put Option or the Call Option (as defined in the Shareholders' Agreement referred to in the Share Purchase Agreement), as the case may be, and the date on which Rowil sells all of its shareholding in Shoelanco; "
1. Immediately before the Closing Finsoft held 60 shares in Shoelanco and Rowil 40 shares.
2. The various amounts owed by Super Channel to Finsoft, the Marcuccis and related parties were then assigned to Shoelanco for their face value in consideration of which Shoelanco issued fully paid up shares of £1 each in Shoelanco. The total value of the loans and interest assigned was £18,175,000 and the total number of new shares issued to Finsoft was 18,175,000 (inclusive of one non-voting share).
3. Finsoft then held 18,175,000 shares and Rowil 40.
4. Finsoft tranferred 17,424,714 shares (including one non-voting share) to NBC under the Share Purchase Agreement. This left Finsoft with 750,346 shares (i.e. 18,175,060 less 17,424,714).
5. At the same time as the transfer to NBC, Finsoft transferred the balance of 750,346 shares to Rowil pursuant to the July Letter Agreement as varied by the Variation Letter. (It is from this that it is deduced that the number 950,045 in the Variation Letter is an error).
6. Immediately after that transfer, NBC held 17,424,714 shares and Rowil 750,080 shares (i.e. 750,036 plus the original 40).
7. In addition to receiving shares in Shoelanco from Finsoft, Rowil had also made an equity contribution of US$ 7,650,000 in return for which it received 5,057,852 shares bringing its total shareholding in Shoelanco to 5,808,238.
8. At that stage, the total share capital of Shoelanco was 23,232,952 (i.e. NBC's 17,424,714 plus Rowil's 5,808,238). NBC held 75% of the total share capital and Rowil 25%.
9. As a result, NBC invested US$22,950,000 into Shoelanco and Rowil US$7,650,000 making a total investment of US$30,600,000. These investments were made in the same proportions as their shareholdings namely 75:25.
" 9 (a) General. Rowil and the CLBN Transferees shall have the right (the "Put"), during the period commencing at 17:00 hours London time on July 15, 2002 and ending at 17:00 hours London time on July 16, 2003 (the "Call Period") to require NBC or the NBC Transferees, as provided in section 11 below, to purchase all, but not less than all, of the Securities held by Rowil, CLBN or any CLBN Controlled Entity which were originally acquired pursuant to Sections 3 or 5 of this Agreement or any Securities originally issued on or with respect to such Securities, whether or not the Entity holding the Put and Call Securities at the time of the Put and Call originally acquired them (collectively, the Put and Call Securities")."
Clause 10(a) which deals with NBC's Call Right likewise refers to the "Put and Call Securities." The argument is that only 5,057,852 shares can be regarded as originally acquired pursuant to Sections 3 or 5 of the Agreement.
Section 3 provides: -
" 3(a) Rowil Investment. In reliance on the representations, warranties and covenants contained herein and subject to the terms and conditions hereof, on the Closing Date, Rowil shall contribute or cause to be contributed to Shoelanco as an equity contribution U.S. $7,650,000 (the "Rowil Investment).
3(b) Payment. The Rowil Investment shall be paid by Rowil to Shoelanco by a direct bank transfer to Shoelanco to such account with CLBN as Shoelanco shall notify Rowil at least 24 hours prior to the Closing.
Section 5 deals with the further funding obligation in the ratio NBC 75%/Rowil 25% to which I have already referred.
Finsoft is not a party to the Shareholders' Agreement and did not participate in its drafting and negotiation. No reference to it is made in the preamble to the Variation Letter. It would therefore be surprising if a provision in the Shareholders' Agreement had an impact upon Finsoft's substantive rights, notwithstanding one of the triggers provided in clause (iv) (c) of the Variation Letter can only be understood by reference to it. On the face of it, that is a clause dealing with a timing mechanism for performance of an obligation rather than with the essential nature of the obligation itself. It is clear to me that, when considering Finsoft's position, clauses 3,5 and 9 of the Shareholders' Agreement cannot be looked at in isolation. The corresponding Put and Call provisions in the NBC Agreement of 15 July 1993, at clause 4, embrace all of the Credit Lyonnais shares as there defined, which amounts to the 25% expected to remain in Rowil after sale by Finsoft to NBC of 75%. It is not easy to discern any reason why the different capitalisation route in the event adopted should lead to an alteration in this obligation, bearing in mind that the ultimate goal as between NBC and CLBN was divestment by CLBN of its interest in Shoelanco, and thus in Super Channel.
Clause 3(d) of the Share Purchase Agreement, to which Finsoft is party, provides as follows: -
" 3(d) No Other Agreements. Neither the Marcucci Parties, Shoelanco nor Super Channel has any legal obligation, absolute or contingent, to any person or firm to (i) sell any shares or any capital stock of Shoelanco or Super Channel, (ii) sell any assets of Shoelanco or Super Channel (other then sales in the ordinary course of business) or (iii) effect any merger, consolidation or other reorganisation of Shoelanco or Super Channel, or to enter into any agreement with respect to the foregoing."
This is superficially surprising, because Finsoft had an obligation pursuant to the Variation Letter to sell 950,045 (but in fact 750,346) shares to Rowil. Reverting to the Shareholders' Agreement, it is plain from Recitals (a) and (g) thereto that it proceeds upon two assumptions. The first assumption is that on completion all of the outstanding share capital of Shoelanco will be held by NBC and Rowil. The second assumption is that there is no transaction beyond the Share Purchase Agreement required to bring about the result that Rowil holds 5,808,237 (in fact 5,808,238) shares in Shoelanco. However this result was in fact brought about by the requirement generated by the Variation Letter that Rowil purchase 750,346 shares from Finsoft. It is I think plain that this agreement proceeds upon the assumption that NBC and Rowil will between them have acquired all of the shares in Shoelanco, in the relative proportions 75/25, by reason of their respective investments in the same proportion, US$22,950,000 and US$7,650,000. It was however a matter of indifference as between NBC and Rowil how Rowil came to own its 25% share. Thus clause 9(a) of the Shareholders' Agreement simply refers, compendiously, to the shares acquired by Rowil by reason of its equity contribution of 25%. It would be most surprising if the shares acquired by reason of such contribution were properly to be regarded as less than 25% by value, since that would involve that Rowil and NBC were acquiring their shares at a differential price. Clause 3(d) of the Share Purchase Agreement ought strictly to have referred to the obligation of Finsoft to sell 750, 346 shares to Rowil. That it did not is consistent only with an assumption or understanding that that sale took place as part and parcel of completion, in other words that the securities acquired by Rowil by reason of its equity investment include those acquired from Finsoft. I think that it is clear that the parties' assumption when the Shareholders' Agreement was executed was that either the Put or the Call option would be exercised – hence the Sealed Bid procedure in clause 11 does not deal with the possibility that neither would be exercised. This it was envisaged would be the mechanism whereby CLBN/Rowil finally divested itself of its interest in Super Channel. Against that background and for the reasons I have already given it simply makes no sense to regard part of Rowil's shareholding as not subject to the Put and Call procedures, when those shares were an integral part of what Rowil had acquired by reason of its equity investment.
" It is not in issue that the price agreed for Finsoft's shares was a minimum of US$10 million; the statement of Finsoft's witnesses to this effect are not controversial. However, this has nothing to do with the question of when and in what circumstances Finsoft was entitled to receive the whole of this sum."
In essence, the thrust of the Defendants' case is that the variation agreed in September achieved the result that the Defendants could unilaterally bring about a situation in which the Claimants would only receive US$7.5 million for their shares. It is to my mind inconceivable that the parties intended to achieve this result. I should stress that I derive that conclusion simply from the terms of the documents themselves and from the inherent probabilities. It is I think a contradiction in terms to speak of an agreed minimum price which may never be payable. On the Defendants' case the agreed minimum price was US$7.5 million not US$10 million. It is clear that the agreement in July was for a minimum of US$10 million, since it was an agreement for payment of, respectively, US$2.5 million, US$ 5 million and US$2.5 million on definite and ascertainable dates. There is no hint in the documents of any intention to reduce the agreed price, and I can think of no reason why Finsoft should have agreed a reduction, bearing in mind that there is no suggestion that it was ever asked to accept a reduction or that closing of the deal was contingent upon its accepting a reduction. The witness evidence, if admissible on the question of construction or whether a term should be implied, is all one way. All of Finsoft's witnesses are clear and adamant that a variation to the minimum payment was never discussed and that the deal never changed. I regard it as highly significant that the Defendants have put in no evidence whatever dealing with the parties' intention as at July and September 1993. I derive the clear impression that the Defendants and those currently dealing with the matter on their behalf either know or suspect that were they to contact those who dealt with the matter at the time they would obtain confirmation of what the Claimants have asserted. Hence the limp assertion in the Witness Statement of Mr Yardley that all those persons have either moved jobs or retired. It is not suggested that their whereabouts are unknown, nor is it suggested that any attempt has been made to contact any of them. The reality is that the Defendant bank is attempting to cling on to a windfall as the result of the falling out of events in a manner which was not within the parties' reasonable contemplation at the time, viz, that the bank has not in the event divested itself of all of its shares in Shoelanco as part and parcel of divesting itself of its interest in Super Channel. I find frank and compelling the following passage in the evidence of Mr Mills, the Claimant's then solicitor: -
" Although my memory is not as clear as I would have liked, I believe that the substitution of the date certain in the July Letter Agreement with a date ascertainable only when the option was actually exercised (within the option period) made perfect sense to me at the time since everyone was proceeding on the basis that Rowil would definitely divest itself of its shares in Shoelanco at the latest during the option period. I understand that the final documents can be interpreted as having the effect that the tranche will, in the event of the Put and Call options either ceasing to be exercisable or not being exercised, never become payable. I have to say that I missed the point, but I do not believe I was the only one of the lawyers who did so; I believe the anomaly crept in by an error which none of us noticed, and that none of the other parties involved turned their minds to it. Had I not missed it, or had there been any overt suggestion made to me or my clients that in contrast to the clear provision in the July Letter agreement they were being required to take a risk that the trigger for the payment of the last tranche might never occur, I would straightaway have rejected such a suggestion and made sure that the uncertainty was removed."
" The courts' usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.
There are of course contracts into which terms are routinely and unquestioningly implied. If a surgeon undertakes to operate on a patient a term will be implied into a contract that he exercise reasonable care and skill in doing so. It is inconceivable that any patient would in any imaginable circumstance commit his bodily well-being to the ministrations of a surgeon who did not undertake that obligation, or that a surgeon could hope to remain in practice without professing to discharge it. Again, quite apart from statute, the courts would not ordinarily hesitate to imply into a contract for the sale of unseen goods that they should be of merchantable quality and answer to their description and conform with sample. It is hard to imagine trade conducted, in the absence of express agreement, on any other terms.
But the difficulties increase the further one moves away from these paradigm examples. In the first case, it is probably unlikely that any terms will have been expressly agreed, except perhaps the nature of the operation, the fee, and the time and the place of operation. In the second case, the need for implication usually arises where the contract terms have not been spelled out in detail or by reference to written conditions. It is much more difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully-drafted contract but have omitted to make provision for the matter in issue. Given the rules which restrict evidence of the parties' intention when negotiating a contract, it may well be doubtful whether the omission was the result of the parties' oversight or of their deliberate decision; if the parties' appreciate that they are unlikely to agree on what is to happen in a certain not impossible eventuality, they may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur.
The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong. For, as Scrutton LJ said in Reigate v. Union Manufacturing Co (Ramsbottom) Limited  1 KB 592 at 605,A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said to the parties, 'What will happen in such a case,' they would both have replied, 'Of course, so and so will happen; we did not trouble to say that; it is too clear.' Unless the Court comes to some such conclusion as that, it ought not to imply a term which the parties themselves have not expressed…
In the familiar cases already mentioned there could be little room for doubt what the parties' joint answer would have been had the question been raised at the outset. There would, almost literally, have been only one possible answer. But this may not be so where a contract is novel, known to involve more than ordinary risk and known to be more than ordinarily uncertain in its outcome. And it is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred: Trollope & Colls Limited v. North West Metropolitan Regional Hospital Board  2 All ER 260,  1 WLR 601 at 609-10,613-14."
" On September 30, 1993 the company purchased 5% of the outstanding share capital of Shoelanco 912 Ltd. for a total consideration of US$10,000,000 payable as follows:
- US$ 2.500,000 at the closing
- US$ 5.000,000 on September 30,1995
- US$ 2.500,000 including 25% of the net profits realised on the sale of the securities after 9 years or upon the sale."
Leaving aside the obvious error as to inclusion of 25% of net profits, from this it is apparent that neither Rowil nor Coopers & Lybrand perceived the variation as affecting the essential terms of the deal as between Rowil and Finsoft since they summarised it in its unamended form.