Bikam OOD (a company incorporated under the laws of Bulgaria) and Another v Adria Cable S.A.R.L. (a company incorporated under the laws of Luxembourg)
| Jurisdiction | England & Wales |
| Judge | The Hon. Mr Justice Popplewell |
| Judgment Date | 12 July 2013 |
| Neutral Citation | [2013] EWHC 1985 (Comm) |
| Date | 12 July 2013 |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2011 FOLIO 888 |
[2013] EWHC 1985 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
7 Rolls Building, Fetter Lane
London, EC4A 1NL
The Hon. Mr Justice Popplewell
Case No: 2011 FOLIO 888
Chirag Karia QC, Ben Gardner and Emily McCrea-Theaker (instructed by Bryan Cave LLP) for the Claimants
Daniel Toledano QC and Adam Rushworth (instructed by Freshfield Bruckhaus Deringer LLP) for the Defendant
Hearing dates: 15-18, 22-25, 29-30 April 2013; 8-9 May 2013
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
By a Sale and Purchase Agreement dated 7 October 2009 ("the 2009 SPA"), the Defendant ("the Buyer"), purchased the majority shareholding of a Bulgarian satellite television company from the Claimants ("the Sellers") for a total price of €6,450,000. The price was payable in two tranches, €850,000 being payable (and paid) on completion and the balance at a later date contingent on various events. Under clause 3 of the 2009 SPA, the price potentially fell to be adjusted following a review of the net debt of the company by PricewaterhouseCooper ("PwC") which was to take place following completion. Following PwC's review, the parties agreed that the net debt adjustment should reduce the second tranche of the price by €1,406,000 to €4,194,000. Just over one year later, the Buyer sold its shareholding, and further shareholdings which it had also acquired, to a third party for less than €1. This sale triggered the Buyer's obligation to pay the second tranche of the price.
In this action, the Sellers bring a claim for the second tranche of the purchase price in the sum of €4,194,000. The Buyer defends the claim for the price, and counterclaims, on the basis of a number of alleged breaches of warranty. The main allegation is of breach by the Sellers of a warranty that the company had 80,000 "DTH subscribers" on completion. In addition to their claim for the second tranche of the price, the Sellers seek to undo the effect of the agreed net debt adjustment and claim back the €1,406,000 reduction in the price.
The company was called Interactive Technologies AD ("the Company"). It was founded in 2001 by two businesswomen, Ms Dimitrova and Ms Ivanova. It provided digital direct-to-home (DTH) satellite television services. It purchased television (and radio) content from various companies and broadcast the content via satellite directly to subscribers' homes. Although the Company had some other sources of income, its key revenue stream came from fees paid by subscribers, which amounted to between 70% and 80% of the Company's total revenue.
Prior to the sale, the First Claimant held a 13% shareholding and the Second Claimant a 61% shareholding in the Company. Ms Dimitrova is the majority shareholder of the First Claimant. Ms Ivanova is the majority shareholder of the Second Claimant. Prior to the sale, Ms Dimitrova was the Company's CEO. Its Commercial Director was Mr Sherbanov, who is Ms Dimitrova's brother. Its Marketing Manager was Mr Kanchev, who is Ms Dimitrova's son. Ms Ivanova worked at the Company, without any formal title, in the same office as Ms Dimitrova. All ceased to work for the Company immediately following the sale.
The Buyer is owned by Mid Europa Partners ("Mid Europa"), a private equity firm focused on the markets of Central and Eastern Europe. On 27 June 2007 Mid Europa had acquired a substantial controlling stake in Srpske kablovske mreze d.o.o., translated as Serbian Broadband ("SBB"), a leading cable and satellite television and internet service provider in Serbia.
The Company had been built up from scratch into one of the leading DTH satellite companies in Bulgaria, competing successfully at the higher end of the market. However, cash-flow difficulties and the credit crunch forced Ms. Dimitrova and Ms. Ivanova to find a buyer for the Company. They chose to sell the Sellers' shareholding to SBB in 2008, but the purchase fell through when SBB failed to obtain the necessary financing. However, Mid Europa remained interested in the Company and the Buyer eventually purchased it by the 2009 SPA on 7 October 2009.
The Company's DTH business operated as follows. Subscribers paid for a service consisting of individual conditional access to radio and television programs via digital satellite transmission. Subscriptions were typically monthly in advance, but were sometimes for longer periods as a result of promotions. In order to access the Company's content, subscribers required a smartcard to insert in a set-top box in their home which received the downlinked signal from the satellite. The subscriber did not need to use a set-top box provided by the Company, and the smartcards were not tied to a particular set-top box, address or even country; it was only necessary to have a set-top box which was compatible with the Company's encryption software.
Access to content was controlled by a conditional access system ("CAS"), which ensured that only those subscribers who had paid for the service could access the content. Subscribers had to pay at least monthly in advance. If they failed to pay in advance, their smartcards would be electronically de-activated in the CAS. Upon subsequent payment, the subscriber's smartcard would be re-activated. It was not uncommon for subscribers to fail to pay at the end of one month but do so only in the early part of the following month when they next wanted to watch the Company's content. It was therefore a feature of the Company's subscription base that at the beginning of the month a proportion of subscribers would be deactivated, who would then become reactivated over the early part of the month by renewing their monthly subscription. After 90 days in default of payment, subscriptions were cancelled. Therefore the Company recorded each subscription as "active", "deactivated" or "cancelled".
The Company contracted with television content providers for the supply of television channels, which the Company then packaged and sold to its subscribers. The Company offered a variety of economy and premium packages with different channel options, and paid the television content providers, usually on the basis of how many subscribers received that channel. A subscriber could take out more than one subscription, in which case the additional subscription would have an additional smartcard and its own channel content. The subscriptions would be billed, activated and de-activated independently of each other and could be used by different people, for example other family members, on different televisions.
Every package offered by the Company included the "economy" package of television channels, which was the minimum content for every subscription and came with every smartcard. There were a variety of different packages which included additional combinations of channels or " add-on" themes. To purchase such additional content, it was always necessary to have purchased a subscription to at least the lowest package of the Company; subscribers could not subscribe only to premium content.
The Company's subscribers paid their subscriptions through distributors, the Company's own shops and installers, and to a lesser extent by electronic payments. As at September 2009, 5% paid electronically, with cash payments to distributors and the Company's own sales network accounting for the remainder.
Separately from its customer subscription service, the Company also sold "uplink and transmission" services to television content providers. The Company acted as Eutelsat's distributor in the region. The Company would uplink content, which cable networks then redistributed via their cable lines to their own subscribers. The Company also offered subtitling and dubbing services. The Company charged television content providers for these uplinking services, bringing in revenue of about BGN 3.5m in 2009.
One category of subscription at the heart of the warranty dispute was a special promotional "package" called "Second Television". I have put "package" in inverted commas because it is controversial whether it should properly be descried as a package in the same sense as other packages offered by the Company. This "package", whose terms varied from time to time depending on the promotion, comprised a second subscription, available to existing subscribers only, at a cheaper price than the first subscription. The Second Television subscription came with a separate smartcard to which the subscriber could add premium content and which could be used independently and, I conclude on the evidence, in a separate location, from the first smartcard. Individuals who wanted more than one subscription could (and did) purchase additional first subscriptions to any package of the Company; they did not have to purchase the Second Television subscription as their second (or third etc.) subscription. Because of the terms of the promotions, however, the Second Television subscription proved popular.
Narrative
In 2008 the First and Second Claimants held 74% of the shares in the Company. The remaining 26% were held by Maxstone Services Ltd ("Maxstone"). In the early summer of 2008, Maxstone agreed to sell its shareholding to CableTEL. CableTEL then approached the Sellers with an offer of €40m for their 74% interest in the Company. In June 2008 negotiations started between SBB and the Sellers...
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