Symrise AG and Another v Baker & McKenzie (A Firm)and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Burton |
| Judgment Date | 31 March 2015 |
| Neutral Citation | [2015] EWHC 912 (Comm) |
| Docket Number | Case No: 2011 Folio 1407 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 31 March 2015 |
[2015] EWHC 912 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Burton
Case No: 2011 Folio 1407
William Godwin and Helen Pugh (instructed by Holman Fenwick Willan LLP) for the Claimants
Lawrence Cohen QC, Sebastian AllenandJessica Elliott (instructed by Triton Global t/a Robin Simon) for the Defendants
Hearing dates: 11, 12, 16, 17, 18, 19, 23, 24, 25, 26 February and 2, 3, 9 and 10 March 2015
This claim was brought by Symrise AG ("Symrise") and, in the alternative, Symrise S.r.l ("Symrise Mexico"), its Mexican sub-subsidiary, against Baker & McKenzie LLP and its predecessor firm ("BMcK" or "the Defendant"), arising from legal services provided by the Defendant to a predecessor in title of Symrise, Dragoco Gerberding & Co AG ("Dragoco"), in connection with steps taken following the acquisition in 2002 of Haarmann & Reimer GmbH ("H&R") and its subsidiaries. H&R and Dragoco were the German parents of two groups of companies operating worldwide in the production of flavours and fragrances. The claim is for breach by BMcK of its duty as solicitors to Dragoco, which Symrise has claimed the entitlement to enforce. Mr William Godwin and Ms Helen Pugh have appeared for Symrise and Mr Lawrence Cohen QC, Mr Sebastian Allen and Ms Jessica Elliott have appeared for the Defendant.
Symrise was formed in 2003 following the merger of Dragoco and H&R, which effectively took the form of the acquisition of H&R by Dragoco through a German vehicle owned by the majority shareholder in Dragoco, Mr Gerberding, and a private equity firm called EQT Northern Europe Private Equity Funds ("EQT"). The driving force behind the structure of the merger was Dr Martin Wolf, who became CFO of Dragoco in 2002.
The structure of the merger was complicated and was intended, with legal and accountancy advice, to achieve the most tax efficient methodology. The cash to be paid at closing would be obtained by means of term loan facilities granted by a syndicate of banks. It was a highly leveraged acquisition with a purchase price of approximately €1,500,000,000, of which just over €1,000,000,000 was debt: such borrowing was primarily not by the purchasing vehicle, but by the target companies being acquired. Owing to the lack of tax capacity in the German subsidiaries of H&R and Dragoco, a key part of the tax planning for the transaction was the ' pushdown' of debt to subsidiaries in other jurisdictions, in which they could obtain the tax relief available on interest payments in those jurisdictions. It is admitted that this was an aggressive tax mitigation strategy. One such jurisdiction was Mexico.
The Defendant was initially retained in July 2002 by EQT to advise on the acquisitions, and part of its role was to advise on various post-acquisition restructuring plans, including pushdown in several countries, Mexico among them. In Mexico, this resulted in a total of €124,990,000 being pushed down into the Mexican business, which sum represented the entirety of the valuation, as carried out by Ernst & Young, of the equity value in that Mexican business. In its global advice (" Tax Memorandum: International Structure") dated 30 September 2002, the Defendant set out the steps required to achieve the pushdown, which would culminate in a single surviving Mexican entity which was to bear the debt and claim tax relief on the interest payments.
Following the closure of the acquisition of H&R on 1 October 2002, the Defendant was retained by Dragoco, on the terms of engagement letters dated 5 and 12 November 2002, to provide legal services in relation to the post-closure integration of the Dragoco and H&R groups apart from Germany: part of the proposed closure integration was the debt pushdown scheme. The legal services included carrying out a substantial global tax due diligence exercise in 15 different jurisdictions, using local advisers from both within and, in the case of South Africa, outside the BMcK global network, where appropriate, in close co-operation with the other advisers at the time, including Ernst & Young, Deloitte & Touche and Poellath & Partners, a German law firm.
In Mexico, a key step in the series of transactions by which the surviving Mexican entity would acquire the debt to be pushed down was execution of an Intercompany Loan Agreement ("ICLA"). This was entered into on 20 June 2003 as part of the implementation of the pushdown. Advice had been sought by the Defendant from the local BMcK office, a Mexican civil law partnership ("BMcK Mexico") in September 2002, and again, by reference to the draft ICLA in its final form, in June 2003, and the relevant tax lawyers in that office gave their approval to it prior to its execution. There were the following material terms of the ICLA, which was, by clause 11, to be governed by English law (I underline the parts significant to this judgment):
"(i) 3. Repayment
The amount drawn and outstanding under the Loan, together with all interest and other sums payable in respect of the Loan will be due from Mexico Holdco to the Initial Lender 7 years from the date of this Agreement or at any other time as otherwise agreed between Mexico Holdeo and the Initial Lender or on the Initial Lender's demand.
(ii) By clause 12.1, which referred to the Intercreditor Deed as defined in the ICLA (being dated 26 September 2002 ("the ICD")
12.1 The Loan is a Non HY Intra-Group Liability ( as defined in the [ICD]) for the purposes of the [ICD] and [the parties] recognise that this Agreement and the Loan and any amounts payable or action which may be taken in connection with this Agreement are subject to the provisions of the [ICD] and in the event of any conflict, the provisions of the [ICD] shall prevail".
The debt pushdown in Mexico was completed in January 2004 with the formation of Symrise Mexico. As referred to above, the amount that was pushed down into the entities that became Symrise Mexico was approximately 100% of their equity value, which meant that they were burdened with debt equal to that of their pre- pushdown value, resulting in an inevitable equity value for the entity post- pushdown of zero. There was in the event little disagreement that this had the following effect on the Mexican business:
(i) Whereas the position pre-merger on 30 September 2003 was that the net worth of the entities comprising Symrise Mexico was 432,778,323 Mexican pesos ("MXN$"), being 201% of its liabilities of MXN $214,992,618, post-merger on 30 November 2003 the net worth had decreased to a negative value of MXN $221,929,697, with liabilities of MXN $2,003,487,589:
(ii) By comparison of the financial position before the merger on 30 September 2003 and after the merger on 30 November 2003, the liabilities of Symrise Mexico had increased by 832%, while its net worth had decreased by 151%:
(iii) By comparison of the earnings of the business pre-merger (1 January-31 October 2003) and of the period 1 January-31 November 2003, the pre-tax profits/losses had reduced from a pre-tax profit of MXN $81,037,783 to a pre-tax loss of MXN 985,393.
This was however in the event only the start, because, notwithstanding an optimistic profit forecast for the future of the merged Mexican business, there was a dramatic fall in its performance, caused by a combination of (i) radical deterioration of the value of the MXN$, with the result that not only was there an exchange loss requiring to be recognised and charged against the profit and loss, but the amount of euros required for interest payments represented a greater number of MXN$, and (ii) a substantial fall off in the performance of the business, so that the debt was not sustainable as a result of the poor income level that the business was capable of generating. Thus a previously profitable (and tax-paying) business was turned into a business that was not profit-making (and thus paying no tax at all). By 11 November 2008, Mr Wolf Henning-Berners, the new Head of Corporate Accounts at Symrise, was speaking of a possible bankruptcy of Symrise Mexico and apparently canvassing with Mr Markus Sattler, the Corporate Vice-President of Symrise, an asset-strip of Symrise Mexico. In his oral evidence before me Mr Sattler accepted that the performance of the Mexican business was poor, and he agreed that it fell " wildly short of the expectations" at the time of the acquisition (Transcript Day 4/99), while Mr Gerberding, the former Chairman of Dragoco, who became Chairman of the Management Board of Symrise, agreed in evidence (Transcript Day 8/75) that the Mexican company was a disaster post-merger, and that it was a " very sad and disastrous performance".
In March 2005 the Mexican Tax Authorities ("MTA") commenced enquiries into the tax treatment of Symrise Mexico's interest payments with regard to the 2003 tax year, even before they had seen the terms of the ICLA; clearly this was the result of the fact that the amount of interest off-set more than eliminated any profit, and hence any tax payment. The MTA subsequently began investigations into the 2004 tax year (on 28 September 2006) and the 2005 tax year (in June 2008). As a result of these investigations, the MTA issued demands on Symrise Mexico for the tax years 2003 (MXN $25,921,525) and 2004 (MXN $101,998,130). They regarded the interest payments made by Symrise Mexico as in reality dividends, and therefore not eligible for the tax relief available to interest payments.
The MTA in the event challenged the pushdown on three different grounds:
(i) By reference to Article 92(1) of the Mexican Income Tax Law ("ITL"), which provides that:
" In cases of interest deriving from credits granted to...
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