J.P. Morgan International Finance Ltd v Werealize.com Ltd

Hearing dates: 16 to 18 December 2024

Approved Judgment

This judgment was handed down remotely at 10.00am on Thursday 30 January 2025 by circulation to the parties or their representatives by e-mail and by release to the National Archives

Introduction

Viva Wallet Holdings Software Development S.A. (“Viva”) is a Greek fintech company jointly owned by J.P. Morgan International Finance Limited (“JPM”) and WEREALIZE.COM Limited (“WRL”). It carries on business directly and through its subsidiaries (together the “Group”) providing a range of financial and payment system solutions to business. The relationship between the shareholders is governed by a shareholders' agreement (the “SHA”). Under the terms of the SHA each party was granted call options to purchase the other's shares. The parties raised a number of preliminary issues, which were determined by Dame Clare Moulder DBE, after an expedited trial, in a judgment at [2024] EWHC 1437 (Comm), [2024] BCC 1250.

Unsurprisingly, the judge answered the formulated issues in the order in which they were raised. But I think that the order in which they were raised (and argued before us) needs a little modification in order to deal with them in a logical fashion.

The current appeals arise out of the terms of those options. Broadly, there are three main issues:

i) Is the option granted to JPM exercisable once only or once in each option period? This turns on what is meant by the word “exercised” and its cognates.

ii) To what extent should any appraisal of the open market value of the shares take into account restrictions on the business Viva is entitled to carry on in the US as a consequence of restrictions applicable to JPM by virtue of US legislation known as Regulation K?

iii) Was the judge entitled to make, and was it appropriate for her to make, a declaration reflecting some of her findings on US law?

The judge answered those questions as follows:

i) The option granted to JPM was only “exercised” if it resulted in the making of a binding contract for the sale of WRL's shares. Unless such a binding contract had come into existence during one of the option periods, the option remained exercisable in subsequent option periods.

ii) The open market value of the shares should be assessed without regard to any obligations, restrictions, and/or limitations under Regulation K, or similar, that were in fact applicable to WRL, JPM or Viva by reason of JPM having a shareholding in Viva.

iii) It was appropriate for the court, having heard expert evidence, to address the dispute under Regulation K, and to embody its findings in the form of a declaration even though enforcement of Regulation K was a matter for a foreign regulator, namely the US Federal Reserve.

The SHA is a lengthy document, running to 138 pages, and I have set out the relevant provisions of Schedule 1 to the SHA in an Appendix to this judgment. The Schedule contains a number of defined terms, which I will use in this judgment.

Background

WRL is the majority shareholder (currently, as to 51.49%) in Viva. JPM owns the remaining 48.51% of the shares in Viva, having purchased them pursuant to a share purchase agreement between (i) JPM (ii) WRL and (iii) other entities dated 24 January 2022 for a consideration of approximately €809 million (the “SPA”). The sale of shares pursuant to the SPA completed on 16 December 2022.

The terms governing the relationship between WRL and JPM as shareholders in Viva are set out in the SHA. The SHA describes JPM as an “Edge Act Corporation organized under Section 25A of the Federal Reserve Act of the United States of America”. Viva became a party to the SHA on 16 December 2022.

Clause 38.5 of the SHA provides that (with immaterial exceptions) a person who is not a party to the SHA has no right under the Contracts (Rights of Third Parties) Act 1999 or any other statutory provision to enforce any of its terms.

The SHA is expressly governed by English law and contains an exclusive jurisdiction clause in favour of the English Court.

The call option process in Schedule 1 of the SHA gives JPM the right to buy WRL's 51.49% shareholding in Viva at a price to be determined by an expert valuation process (the “JPM Call Option”).

The JPM Call Option is potentially exercisable in four periods at six-monthly intervals, beginning a year from the closing of the sale under the SPA. For the first three of these periods WRL is not required to accept the call option if the option price is less than a floor valuation of €5 billion for Viva as a whole (the “Reference Valuation”). If the JPM Call Option is exercised at a price equal to or above the Reference Valuation, WRL is automatically deemed to accept it. However, in the fourth period, which ends on 30 July 2025, the floor price and WRL's ability to reject the option are removed and WRL is automatically deemed to accept the call option if exercised by JPM and must sell its shares to JPM for the relevant percentage of the option price (irrespective of whether the valuation of Viva as a whole is below €5 billion).

If JPM does not exercise the JPM Call Option, WRL has the right to exercise its own call option (the “WRL Call Option”) at the same price. No floor price is applicable to the WRL Call Option.

The Edge Act 1919 is a US federal statute enacted to provide US banks with expanded powers to engage in banking and related activities outside the US. A corporation incorporated under that Act is known as an “Edge Act Corporation”. But at the same time the Edge Act seeks to ensure that US banks cannot use an Edge Act Corporation to carry out US domestic business and thus avoid the regulatory framework governing the domestic activities of US banks. As an Edge Act Corporation, JPM is subject to the rules of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) on international banking operations in Part 211 of Title 12 of the Code of Federal Regulations (“Regulation K”). Under Section 211.6 of Regulation K, Edge Act Corporations may only engage, directly or indirectly, in activities in the United States that are permitted by Section 25A (6) of the Federal Reserve Act and are incidental to its international or foreign business (the “US Activity Restrictions”). The phrase “directly or indirectly” is defined as including activities carried out through a subsidiary of an Edge Act Corporation. The expression “subsidiary” is itself defined by the statute. Section 211.6 (a) of Regulation K lists a number of activities that will ordinarily be considered as incidental to an Edge Act Corporation's international or foreign business; but the Federal Reserve has wide power to approve additional activities. Section 211.8 of Regulation K contains restrictions on the investments and activities of Edge Act Corporations outside the United States (the “Non-US Activity Restrictions”). The legislation may require an Edge Act Corporation to divest itself of investments or subsidiaries in relation to activities falling within section 211.8.

By the end of December 2023 it became clear that the parties disagreed about the basis of valuation for the purposes of both the WRL and the JPM Call Options. WRL, through its solicitors, took the view that Regulation K did not apply to Viva directly and that any valuation should be conducted on the basis that Viva's market activities could be lawfully conducted in the US without any restriction under Regulation K. JPM disagreed. In the meantime, each of the parties had instructed experts to carry out the valuation required for the purposes of the first Option Exercise Period. Because the two valuations were conducted on different bases, they were nearly €2 billion apart.

On 5 January 2024 JPM applied to the ICC to appoint a third valuation expert. WRL's position was that the ICC should refrain from making any appointment until disputes between the parties had been resolved.

At that point a further disagreement arose. JPM took the view that it was not required to exercise the JPM Call Option until such time as the Call Option Fair Market Value had been ascertained, if necessary by a third valuation expert. Nevertheless, in its letter of 29 January 2024 it stated:

“5. JPM's primary position is that, in these circumstances, the SHA on its true construction does not require JPM to exercise the JPM Call Option until a reasonable period after the Third Valuation Expert has issued their determination of the Call Option Fair Market Value in accordance with the SHA.

6. However, if it is ultimately determined by the Court that JPM's primary position is wrong, JPM hereby irrevocably exercises the JPM Call Option and this letter shall accordingly constitute the JPM Exercise Notice given on today's date, in each case for the purposes of paragraph 2.12 of Part A of Schedule 1 to the SHA.”

On 8 February 2024 WRL rejected JPM's exercise of the JPM Call...