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You are here: BAILII >> Databases >> Danbywiske & anor -v- Donegal Investment Group Plc  IEHC 126 (16 January 2015)
Cite as:  IEHC 126
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Neutral Citation:  IEHC 126
THE HIGH COURT
 3558 P]
[2014 No. 47 COM]
DANBYWISKE AND THE GENERAL PARTNERS OF THE WILSON LIMITED PARTNERSHIP 1
DONEGAL INVESTMENT GROUP PLC.
DONEGAL INVESTMENT GROUP PLC.
ELST AND MONAGHAN MIDDLEBROOK MUSHROOMS
JUDGMENT of Mr. Justice Brian J. McGovern delivered on the 16th day of January 2015
1. The plaintiffs seek to enforce an option granted to them by the defendant to purchase 5% of the defendant’s shareholding in a company called ESLT (“the Company”). The option is to be found in written Heads of Agreement (“HOA”) made on 10th May 2007. The defendant claims that the option is unenforceable.
2. In a counterclaim, the defendant claims that certain sums are due to it in respect of dividends, and claims that in the event of the plaintiffs being entitled to exercise their option, that dividends which ought to have been paid in respect of the option shares must now be paid.
3. The first named plaintiff and the defendant were previously shareholders in a company called Monaghan Middlebrook Mushrooms Ltd. (“Monaghan”). Following a restructuring, the Company became the ultimate parent of Monaghan and the shareholders in Monaghan were granted shares in the Company in proportion to the shares which they had previously held in Monaghan. The rights and obligations of the shareholders in Monaghan were governed by a Share Exchange and Shareholders Agreement (“the SESA”) which was made on 1st June 2004.
4. After incorporation of the Company in 2010, the terms of the SESA applied mutatis mutandis to the shareholders’ rights and obligations in respect of their shareholding in the Company.
5. The SESA came about as a consequence of a merger between Monaghan and Carbury Mushrooms Ltd. (“Carbury”). Carbury had been jointly owned by Donegal and Connacht Gold Co-Operative Society Ltd. (“Connacht Gold”). Following the merger of Carbury with Monaghan, the shareholding in Monaghan was held:
(b) 23% by Donegal;
(c) 17% by Connacht Gold and
(d) the remaining 0.4% was held in trust by National Irish Bank Nominees Ltd.
(b) If so, what were the conditions for the exercise of the option?
(c) Were the conditions for the exercise of the option fulfilled?
Did the HOA Constitute a Legally Binding Agreement?
(b) There was a common intention (and the plaintiffs represented) that a new shareholders’ agreement would be executed and that the measures in the HOA were to be performed as a package. The defendant claims that in reliance on this representation, it signed the HOA and would not have done so if it knew that the plaintiffs would neither execute a new shareholders’ agreement nor give effect to para. 3 of the HOA (which concerned the basis on which directors would be appointed and the appointment of an independent chairman). Accordingly, the defendant argued that the plaintiffs are estopped from enforcing any option contained in the HOA.
10. For its part, the plaintiffs argue that they did exercise their option within the time period and that they called on the defendant to complete the Share Transfer Form and they were not obliged to pay over the money until that form was completed. But they had done all that they were required to do within the prescribed period.
11. The plaintiffs also argued that there were only two preconditions to the exercise of the option and that both those conditions were satisfied.
12. The HOA has many indicia of an agreement. Its very title ‘Heads of Agreement’ indicates a consensus, and in the first paragraph it states “In connection with the proposed purchase of the investment held in Monaghan Middlebrook Mushrooms Ltd. by Connacht Gold by Donegal Creameries plc., the following agreement has been reached by Danbywiske and Donegal Creameries plc.” [Emphasis added]. Clause 5 of the document states what is to happen “on completion of this agreement . . .” and in para. 6 there is a definition of “profit before tax, for the purposes of this agreement . . .”
13. It is worth noting that in the defence and counterclaim, the defendant did not plead in terms that the HOA did not constitute a legally binding agreement, but rather, sought to plead that the terms of the agreement which would permit the plaintiffs to exercise the option had not been complied with.
14. The HOA was not drafted by lawyers but did reflect what was agreed between the parties and was signed by a representative of the parties. The agreement is not one which requires being in writing for it to be binding. Undoubtedly, further steps were to be taken on foot of the HOA and as a consequence of it, but I have no doubt, on the evidence, that negotiations had taken place to find a mechanism to effect a direct sale of Connacht Gold shares to the defendant, notwithstanding the pre-emption rights in the Articles of Association of Monaghan, and that the HOA facilitated that direct sale of the Connacht Gold shares to the defendant. That is the stated purpose of the HOA in the first paragraph of the document. The parties had made a bargain and agreed that further steps should be taken, all of which are set out in the document. All of the provisions provided for in the HOA have been implemented with the exception of the transfer of Gateforth Assets referred to in clause 5, and the transfer of the option shares as provided for in clause 6. The fact that some of these terms were to be effected by the execution of other formal documents does not mean that the HOA was not, of itself, a binding contract. It is not recorded anywhere in the HOA that it is necessary to record the terms in a further formal contract.
15. The Court was referred to the case of Rossiter & Ors. v. Miller [1874-80] All ER Rep. 465, where the House of Lords confirmed that a contract has been concluded if the parties have reached agreement on all of the essential terms. Simply because the parties envisage recording those terms in a subsequent formal document does not render the concluded agreement or bargain unenforceable. This decision was adopted in the High Court by Kenny J. in Law & Ors. v. Robert Roberts & Co.  I.R. 292. This judgment was upheld on appeal.
16. The Novation Agreement of 18th August 2010 makes a number of references to the obligations contained in, and the binding nature of, both the SESA and the Heads of Terms. In fact, the Heads of Terms are attached at Schedule 1 to the Novation Agreement. The document is couched in terms which clearly indicate that the parties understood that the HOA was a binding agreement. The Novation Agreement was signed by two directors on behalf of Donegal as well as all the other parties to the Novation Agreement.
17. Mr. Ronald Wilson, in the course of his evidence, was quite clear that the HOA was a binding agreement. I found Mr. Ian Ireland’s evidence to be somewhat evasive on the issue, although he did state that the HOA had to be honoured in full. That was in the context of his assertion that the terms were not in fact honoured by the plaintiffs in a way which would entitle them to exercise the option to purchase shares.
18. Another indication that the HOA did constitute a binding agreement is to be found in the financial statements of Donegal for each year since 31st December 2007, where it is recorded that:
19. In short, the wording of the HOA itself, the circumstances under which it was made, and the documents I have referred to above, all point to a binding agreement. Therefore, on the first legal issue, I hold that the HOA constituted a legally binding agreement.
What were the Conditions for the Exercise of the Option?
Within a 2-year timeframe, commencing on 1 January 2012 and ending on 1 January 2014, Danbywiske will have the option to purchase 5% of the share capital of the company from Donegal Creameries plc. for €350,000 provided both the following criteria have been met:
21. By letter dated 11th December 2013, the plaintiff exercised the Option and called on the defendant to execute and return a Share Transfer Form in respect of the Option shares. As the Novation Agreement had provided for the transfer of the Option from Danbywiske to the Wilson Partnership, the Partnership also notified the defendant at that time that in the event that Donegal objected to Danbywiske exercising the option, that the Partnership was doing so in the alternative.
22. The defendant claimed that the plaintiffs have failed to comply with their obligations under the Option agreement on the basis that the Option was subject to further conditions which have not been met.
23. The first of these further conditions is that the parties would enter into a new shareholders’ agreement which would replace the SESA.
24. In the HOA, there is no mention of a new shareholders’ agreement. Specifically, there is no condition expressed therein that the option can only be exercised once the parties have entered into such an agreement. The Court was referred to a number of well-known decisions on the interpretation of contracts including Reardon-Smith Line Ltd. v. Hansen-Tangem  1 WLR 989, Investors Compensation Scheme v. West Bromwich Building Society  1 WLR 896, UMP Kymmele Corporation v. BWG Ltd. (Unreported, High Court, Laffoy J. 11th June 1999) and Ryanair Ltd. v. An Bord Pleanála  IEHC 1. The jurisprudence is clear. To ascertain the parties’ intentions, the Court does not enquire into the parties’ subjective states of mind, but makes an objective judgment based on the meaning of the document as conveyed to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the making of the contract. The Court adopts an objective rather than a subjective approach and thus the courts will not admit evidence of prior negotiations where it is interpreting a written document.
25. There was no evidence before the Court of any representation having been made by the plaintiffs to the effect that the terms of the HOA were dependent upon a new shareholders’ agreement being entered into by the parties. Mr. Ireland gave evidence that such a representation was to be implied but I cannot accept that that is so. There is nothing to be found in any correspondence or exchange of emails on the subject prior to the conclusion of the HOA.
26. Neither the clear terms of the HOA itself nor the surrounding evidence supports the defendant’s contention that the conclusion of a new shareholders’ agreement was a precondition to the exercise of the Option, and accordingly I reject that argument.
27. The defendant raised a further argument based on the Novation Agreement, Recital C of which provides as follows:
29. There is nothing ambiguous about the Option clause in the HOA that would permit the courts to interpret it by reference to Recitals in the Novation Agreement or any other document.
30. Having considered the Option clause in the HOA, I am satisfied that it was subject to the two conditions referred to in para. 21 above and the exercise of the Option within a two-year timeframe between 1st January 2012 and 1st January 2014. The Option was not subject to any further conditions.
Were the Conditions for the Exercise of the Option Fulfilled?
34. The plaintiff in the counterclaim claims that the sum of €807,000 is due to it in respect of dividends which should have been declared or, if they were not declared, should have accrued.
35. It was a matter for the Board to recommend to shareholders whether a dividend be paid. Clause 11.1.2 of the SESA states:
36. Clause 11.3 of the SESA provides that no dividends would be paid unless the Carbury fixed amount was discharged in full. This did not occur until September 2013, and therefore no dividends could have been declared prior to that date.
37. Mr. Wilson, in his replying witness statement dated 28th November 2014, stated that on 4th November 2011, a facility agreement was entered into between the second named counterclaim defendant and the Bank of Ireland which specifies the circumstances in which a dividend can be paid by Monaghan. This arises where the payment of a dividend by Monaghan of a maximum aggregate amount in any financial year equal to 20% of PAT for that financial year is (i) made when no default is continuing or would occur immediately after the making of the payment and (ii) Adjusted Leverage is less than 2:1. The Adjusted Leverage as of 28th November 2014 was 3:1 and consequently neither of the counterclaim defendants could declare a dividend without being in breach of the facility agreement. Mr. Wilson adopted his statement as his evidence and repeated that evidence to the Court when he stated that:
38. The burden of proving the counterclaim lies on the defendant. The defendant has failed to establish that a dividend should have been declared and that it is entitled to the sum claimed or any sum. I accept the evidence of Mr. Wilson that in the circumstances which obtained, no dividend was payable.