Hawksford Trustees Jersey Ltd v Stella Global UK Ltd and another (No. 2)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Etherton,Lord Justice Rix |
| Judgment Date | 19 July 2012 |
| Neutral Citation | [2012] EWCA Civ 55,[2012] EWCA Civ 987 |
| Docket Number | Case No: A3/2011/1055 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 July 2012 |
[2012] EWCA Civ 55
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
His Honour Judge Stephen Davies
0MA30514
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Rix
Lord Justice Etherton
and
Lord Justice Patten
Case No: A3/2011/1055
Roger Stewart QC and Ben Elkington (instructed by Clifford Chance LLP) for the Appellants
Alan Gourgey QC (instructed by DLA Piper UK LLP) for the Respondent
Hearing date : 29 th November 2011
Approved Judgment
Introduction
This is an appeal by the defendants in this action against an order of His Honour Judge Stephen Davies (sitting as a deputy judge of the Chancery Division) dated 25 th March 2011. The judge acceded to a claim for the rectification of an amended and restated share purchase agreement dated 28 th February 2008 ("the Amended SPA") by ordering the amendment of the definition of "2007 EBITDA" in clause 1.1 of the agreement. The effect of this is to increase substantially the consideration payable to the claimant. The defendants now appeal against the order with the leave of the judge.
The claimant, Hawksford Trustees Jersey Limited ("Hawksford"), operates as a professional corporate trustee based in Jersey. At all times material to this appeal it acted as the sole trustee of the Bald Eagle Trust (the "Trust") which is a discretionary settlement set up in January 2003 for the benefit of Mr George Begg and members of his family.
Mr Begg was the founder of a company called The Global Travel Group plc ("Global") which operated a network of travel agencies and independent travel agents who were franchised to conduct business under the Global name. The majority of the shares in Global (amounting to 97.99% of the issued share capital) were at all material times owned by the Trust. The remaining shares were held by Mr Andrew Botterill who joined Global in 2000 and subsequently became its Chief Executive Officer.
On 27 th November 2007 Hawksford entered into a share purchase agreement ("the SPA") under which it and Mr Botterill agreed to sell their shares in Global to the first defendant, Stella Global UK Limited. The SPA was amended and re-stated on 28 th February 2008 and the second defendant has guaranteed the obligations of the first defendant under the amended agreement.
Under clause 3 of the Amended SPA the consideration for the sale of the shares was divided into three elements. An initial consideration of £5,041,904.10 was payable to the sellers on completion (which took place on 2 nd January 2008). Under clause 3.14 of the agreement Hawksford was to apply its share of this sum in reduction of an existing loan to Global by Barclays Bank.
The second element of the consideration (described in clause 3.1.2 as the Deferred Consideration) was made up of £500,000 payable to Hawksford on or before 31 st January 2008; £1m payable to Hawksford (on condition that there was then at least £1m of surplus cash within the company); £2.7m payable in six equal half-yearly instalments of £450,000 on 1 st July and 1 st January in each year beginning on 1 st July 2008; and an amount equal to a tax rebate due to be received by Global.
Finally (and most relevantly for the purposes of this appeal) clause 3.1.3 provided for payment of Earn Out Consideration calculated in accordance with clause 4 of the Amended SPA. Clause 4.1 provided that:
"4.1 The Earn Out Consideration shall be calculated as follows:
4.1.1 if no Exit has occurred before 31 December 2010, the Earn Out Consideration shall be six times the EBITDA shown in the Relevant 2010 Accounts less all sums paid by the Buyer pursuant to clause 3.1.2(c) provided always that if the product of such calculation is less than the Minimum Earn Out the amount payable to the Sellers in respect of the Earn Out Consideration shall be the Minimum Earn Out and for these purposes the provisions of this clause 4 shall apply mutatis mutandis with regard to the calculation of the 2007 EBITDA;
4.1.2 notwithstanding the provisions of clause 4.1.1, if the Company's EBITDA in the relevant 2010 Accounts is not at least 10% higher than EBITDA for the year ending 31 December 2009 there shall be deducted from the Earn Out Consideration calculated in accordance with clause 4.1.1 such sum as is equal to the aggregate of all sums paid by the Buyer pursuant to clause 3.1.2(c), the Worldchoice Consideration and the Initial Consideration, subject always to the Sellers being entitled to receive the Minimum Earn Out;
4.1.3 notwithstanding the provisions of clauses 4.1.1 and 4.1.2, if the Company's EBITDA in the relevant 2010 Accounts is greater than 10% higher but less than 15% higher than EBITDA for the year ending 31 December 2009, there shall be deducted from the Earn Out Consideration calculated in accordance with clause 4.1.1 such sum as equal to the aggregate of all sums paid by the Buyer pursuant to clause 3.1.2(c) and the Initial Consideration; subject always to the Sellers being entitled to receive their Minimum Earn Out;
4.1.4 notwithstanding the provisions of clauses 4.1.1, 4.1.2 and 4.1.3, if the Company's EBITDA in the relevant 2010 Accounts is equal to or greater than 15% higher than EBITDA for the year ending 31 December 2009 there shall be deducted from the Earn Out Consideration calculated in accordance with clause 4.1.1 such sum as is equal to the aggregate of all sums paid by the Buyer pursuant to clause 3.1.2(c) subject always to the Sellers being entitled to receive the Minimum Earn Out;
…"
"Exit" means a share sale or listing. Subject to that (which did not take place but would have given rise to an amended form of calculation under clause 4.1.5) the Earn Out Consideration is a multiple of the company's EBITDA as shown in the relevant accounts less any sums already paid as instalments of the £2.7m payable under clause 3.1.2(c). The payment can never be less than the Minimum Earn Out which is defined in clause 1.1 as:
"such sum as is equal to seven times the 2007 EBITDA less the Initial Consideration and such sums as are paid to the Sellers pursuant to clause 3.1.2(c)."
It is also subject to the deductions provided for in sub-clauses 4.1.2 to 4.1.4 based on a comparison between the company's performance in 2009 and its performance in 2010. But again the sellers are guaranteed the Minimum Earn Out as defined.
"2007 EBITDA" is defined in clause 1.1 to mean:
"the EBITDA (as defined in clause 4.7 but specially excluding all costs incurred by the Company in connection with any of the two jet planes, the helicopter, catamaran or the two cars which were transferred out of the Company in accordance with clause 8.1.4) of the Company for the year ended 31 December 2007."
The assets referred to were acquired by Global for the use of Mr Begg. I shall refer to them as the 2007 Assets. He was not a director of Global but acted as a consultant and advisor to the board under a written consultancy agreement dated 1 st February 2003. In the year ending 31 st December 2007 the consultancy fees under this agreement amounted to £708,800. In addition the company incurred costs of £228,100 in connection with the 2007 Assets. These costs are expressly excluded from the calculation of the 2007 EBITDA as defined in clause 1.1 but there is no similar exclusion in the definition for the consultancy fees.
EBITDA is relevant for the purposes of the calculation of the Earn Out Consideration and the Minimum Earn Out. It is defined in both clauses 4.7 and 4.8 of the Amended SPA as the consolidated earnings of Global before interest, taxation, depreciation and amortisation subject to certain specified disregards and before charging dividends and certain other payments. These include (under clause 4.8.1.1(h)): "any payment made pursuant to the Consultancy Agreement".
"Consultancy Agreement" is a defined term meaning: "the agreement to be entered into between George Begg and the Company in the agreed form": see clause 1.1. The judge held that this could not be construed so as to refer to the 2003 agreement under which the 2007 payments were made and there is no appeal against his decision on that point. The consequence of this is that the payments of consultancy fees in 2007 fall to be deducted from Global's earnings as part of the calculation of 2007 EBITDA and so reduce the amount of the Minimum Earn Out for the purposes of clause 4.1. The adding back of the 2007 consultancy fees paid to Mr Begg would therefore increase the Minimum Earn Out by about £5 million.
There are a number of disputes between the parties about the operation of the Amended SPA but on 30 th September 2010 the judge ordered an expedited trial of what is defined in the order as the 2007 Consultancy Payment Claim as set out in paragraphs 30–36 of the particulars of claim. The claimant's pleaded case was that although the definition of the Consultancy Agreement for the purposes of clause 4.8.1 referred, if literally construed, to a future agreement and therefore did not catch the payments made in 2007, it had been the parties' common expressed intention that all consultancy payments made to Mr Begg should be disregarded for purposes of calculating EBITDA under the agreement. This remained the parties' common intention both when they executed the SPA and subsequently on the execution of the Amended SPA.
The Amended SPA was prepared by the claimant's then solicitors...
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