Acon Equity Management, L.L.C. v Apple Bidco Ltd
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Cockerill DBE |
| Judgment Date | 21 October 2019 |
| Neutral Citation | [2019] EWHC 2750 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 21 October 2019 |
| Docket Number | Case No: CL-2018-000206 |
[2019] EWHC 2750 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mrs Justice Cockerill DBE
Case No: CL-2018-000206
James Willan (instructed by PCB Litigation LLP) for the Claimant
Andrew Westwood (instructed by Enyo Law LLP) for the Defendant
Hearing dates: 17–20 September 2019
Approved Judgment
Introduction
In this case, the Claimant (“ACON”) is seeking payment of the sum of US$ 4 million (the “Condition Payment”), which it says is due to it from the Defendant (“Bidco”) pursuant to the terms of an agreement between ACON and Bidco contained in a letter dated 19 July 2017 (the “Letter Agreement”).
The sole issue between the parties is whether the condition which underpinned Bidco's obligation to make the Condition Payment has or has not been met. The Letter Agreement provided that the Payment was conditional upon receipt by APR Energy Limited (“APR”), a subsidiary of Bidco, of its audited financial statements for 2016 from its auditors in a form compliant with the Credit Agreement between it and its lenders (“the Lenders”) by 30 August 2017 or such later date on which such compliant financial statements for 2016 may be delivered and accepted by the Lenders “without default or penalty” (the “Condition”).
The question which I have to determine is simply this: was that Condition satisfied?
ACON contends that it was: financial statements were in due course accepted by the Lenders. Bidco disputes this, arguing that the reference to “default or penalty” (and specifically “penalty” in this context) includes:
i) Any sums charged by the Lenders as a penalty for the late delivery of the audited 2016 Accounts, regardless of whether it is imposed before or after the audited 2016 Accounts have been delivered and accepted; and
ii) Any payments, significant concessions or onerous obligations that the APR Group and/or its shareholders had to make or comply with in order for the Lenders to agree (i) the amendments to the Credit Agreement required for a clean audit opinion; and (ii) the repeated extensions of time for the delivery of the audited 2016 Accounts.
The Trial
The trial of this matter has taken place over the course of four days. Four witnesses were called. My impression was that all of them were genuinely trying to assist the Court.
ACON called Mr Aron Schwartz, who is the Managing Member and Executive Officer of ACON. He was involved in the negotiation of the Agreement. He was a careful but honest witness, with a clear grasp of his business.
Bidco called three witnesses. The first was Mr Benjamin See, who is APR's Treasurer. He represented APR throughout the negotiations with the Lenders, effectively leading the team of negotiators. He was a notably straightforward and sensible witness; my impression was that much of the credit in navigating a difficult round of discussions in good time was likely to have been down to him.
The second was Mr Christos Gazeas, who is an in-house lawyer at Fairfax (Bidco's largest shareholder). Mr Gazeas was to some extent involved in the negotiation of the Agreement, as well as the negotiations with the Lenders from late summer 2017, though it was clear from his evidence, and he was scrupulous to make clear, that he was not heavily involved in the detail of those negotiations. He was a more defensive witness and, perhaps as would be expected of a lawyer, was very careful not to answer questions where answers were not within his personal knowledge.
The final witness was Mr William Harvey, who is a consultant associated with Fairfax and who was retained briefly by APR (at Fairfax's suggestion) between September 2017 and January 2018 to assist APR's finance team. His brief evidence, which was given by video link, was substantially limited to what was said in a single telephone call with the Lenders. It was candid and clear evidence.
ACON urged me to take note of the fact that Bidco did not call any of APR's directors or its CFO, who they said would be the obvious people to give evidence about whether APR considered that it was obliged to pay a “penalty” to its Lenders (and, if so, why they approved financial statements recording the contrary). I was not persuaded that there was anything in this criticism, more particularly perhaps in the light of ACON's second criticism of Bidco's evidence, namely that there was very little relevant factual evidence to give and that Bidco's evidence strayed considerably into the realms of inadmissible evidence.
I have been much assisted by the hard work of counsel on both sides, including by Bidco's detailed skeleton argument, prepared by Ms Miriam Schmelzer before her departure from the case. I would also add that this has been a pleasant example of a case conducted with the utmost of courtesy on both sides.
Background Facts
The parties
ACON is, via the LP of which it is general partner (ACON Power LP: “ACON Power”), a private equity investor.
Bidco is a company incorporated in England and Wales. Bidco was used by a consortium of investors, including ACON Power, Albright Capital Management LLC and Fairfax Financial Holdings Ltd (“Fairfax”), to acquire shares in a company called APR Energy Plc in January 2016. Following its acquisition by Bidco, APR Energy Plc ceased to be listed on the London Stock Exchange and was renamed APR Energy Limited.
APR, together with its subsidiaries (the “APR Group”) builds, owns and operates rapidly deployable, large-scale power and fast track mobile power to under-served markets. It supplies two sorts of mobile power generator – mobile gensets with a 1–2MW output, and larger turbine type generators based around an aircraft engine. These are used both on infrastructure projects in areas where energy supply is lacking, or in cases of disaster. One example alluded to in the evidence was in Japan in 2011.
The Credit Agreement
APR's business requires financing. APR (as Parent) and APR Holdings Ltd (as Borrower) were and remain parties to a syndicated credit agreement for US$ 770 million with a consortium of Lenders led by Bank of America. The credit facility is comprised of a US$ 450 million revolving credit facility (the “Revolver”) and a US$ 320 million term loan (the “Term Loan”). It matured in August 2019.
At the relevant time, the credit agreement was contained in the Third Amended and Restated Credit Agreement dated 15 August 2014, as amended on 31 March and 25 October 2015 (the “Credit Agreement”).
The ability of the APR Group to operate as a going concern was dependent, inter alia, on the continued availability of the monies drawn under the Credit Agreement, which in turn was dependent on the APR Group not breaching its covenants, including financial covenants.
The relevant covenants are the information covenant at section 8.1(a) and the financial covenants at section 9.14 of the Credit Agreement.
Section 8.1 required APR to
“Deliver to the Administrative Agent [i.e. Bank of America], in form and detail satisfactory to the Administrative Agent (which shall promptly make such information available to the Lenders in accordance with its customary practice):
(a) Annual Financial Statements. As soon as practicable and in any event within 120 days (or, if earlier, on the date of any required public filing thereof) after the end of each Fiscal Year (commencing with the Fiscal Year ending December 31, 2014), an audited Consolidated balance sheet of the Restricted Companies as of the close of such Fiscal Year and audited Consolidated statements of income, retained earnings and cash flows including the notes thereto, … Such annual financial statements shall be audited by an independent certified public accounting firm … and accompanied by a report and opinion thereon …that is not subject to any “going concern” or similar qualification, exception or explanatory language or any qualification as to the scope of such audit … or with respect to accounting principles followed by any of the Restricted Companies not in accordance with IFRS. …”
The financial covenants at section 9.14 included a “Consolidated Total Net Leverage Ratio” (a maximum ratio of indebtedness to earnings/EBITDA), a “Consolidated Interest Coverage Ratio” (a minimum ratio of earnings to interest payments) and a “Minimum Liquidity Covenant” (a minimum US $20 million of unencumbered cash and unused revolving credit commitments). Breach of the covenants would be an event of default.
Section 10.1 of the Credit Agreement, the first part of the “Default and Remedies” section, dealt with “Events of Default”. It stated:
“Each of the following shall constitute an Event of Default:…
(d) Default in Performance of Certain Covenants. Any Credit Party shall default in the performance or observance of any agreement contained in Section 8.1 (other than Section 8.1(e), 8.2(a), 8.3(a), 8.4, 8.13, 8. 14 or 8.22 or Article IX.
(e) Default in Performance of Other Covenants and Conditions. Any of the Restricted Companies shall default in the performance or observance of any term, covenant, condition or agreement contained in this Agreement (other than Section 8.1(e) and as specifically provided for otherwise in this Section) or any other Loan Document and such default shall continue for a period of 30 days after the earlier of (i) the Administrative Agent's delivery of written notice thereof to the Borrower and (ii) a Responsible Officer having obtained knowledge thereof.”
Thus, a breach of section 8.1(a) would constitute an immediate Event of Default, whereas a breach of the financial covenants in section 9.14 would amount to an Event of Default if not cured within 30 days.
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