Talal El Makdessi v Cavendish Square Holdings Bv (Respondent/ 1st Claimant) Team Y&r Holdings Hong Kong Ltd (2nd Claimant)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Christopher Clarke,Lord Justice Tomlinson,lord Justice Patten |
| Judgment Date | 26 November 2013 |
| Neutral Citation | [2013] EWCA Civ 1539 |
| Docket Number | Case No: A3/2013/0144 |
| Court | Court of Appeal (Civil Division) |
| Date | 26 November 2013 |
[2013] EWCA Civ 1539
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE BURTON
[2012] EWHC 3582 (COMMERCIAL)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Patten
Lord Justice Tomlinson
and
Lord Justice Christopher Clarke
Case No: A3/2013/0144
Michael Bloch QC and Camilla Bingham QC (instructed by Clifford Chance LLP) for the Appellant
Joanna Smith QC and Richard Leiper (instructed by Squire Saunders (UK) LLP) for the Respondent
The issue in this appeal is whether two clauses in an agreement for the sale of shares are unenforceable on the ground that they are penalties.
The facts
By 2008 Mr Talal El Makdessi ("Mr Makdessi") was a key figure in the advertising and marketing world of the Middle East. He had founded a Group which became the largest advertising and marketing communications group in that region. It operated in more than 15 countries via a network of around 20 companies with more than 30 offices. Mr Makdessi was one of the most influential business leaders in the Lebanon and his name was identified with the business of the Group. He had very strong relationships with clients of the Group and with senior employees.
In 2008 the holding company of the Group was Team Y&R Holdings Hong Kong Ltd, the second claimant/respondent ("the Company"), which was a new holding company formed for the purposes of the acquisition. The shareholders were Mr Makdessi and Mr Joseph Ghossoub ("Mr Ghossoub"). In 2008 Young & Rubicam International Group B.V. ("Y & RIG"), a company in the WPP group of companies, held 12.6% of the shares in the Company.
By an agreement dated 28 February 2008 ("the Agreement") Mr Makdessi and Mr Ghossoub (together "the Sellers") agreed to sell to Y & RIG 474 shares in the company, being 47.4 % of its shares then in issue. Y & RIG transferred its shares in the Company to Cavendish Square Holdings B.V. ("Cavendish"), the first claimant, and by a novation agreement of 29 February 2008 Cavendish was substituted for Y & RIG as a party to the Agreement. Cavendish is a holding company within the WPP group, which is the world's largest market communications services group. Thus Cavendish came to hold 60% of the Company and the Sellers retained 40%.
The Agreement had been the subject of extensive negotiations over six months between the Sellers and Cavendish. Both were represented by highly experienced lawyers — Allen & Overy in the case of Cavendish and Lewis Silkin in respect of the Sellers.
The price payable to the Sellers, pursuant to the Agreement and a First Amendment deed of 11 June 2008, for the 474 shares was to be paid in instalments as follows:
i) $ 34,000,000 in cash on completion ("the Completion Payment");
ii) $ 31,500,000 to be paid into escrow on completion which was to be released in 4 instalments ("the Second Payment");
iii) An Interim Payment, to be satisfied on its Due Date i.e. 30 days after agreement of the OPAT for 2007–9, in the amount of (8 x Average 2007–9 OPAT x 47.4%) minus $ 63,000,000 (being the sum of the earlier payments less $ 2.5 million representing interest);
iv) A Final Payment, to be satisfied on its Due Date i.e. 30 days after agreement of the OPAT for 2007–2011, in the amount of (M x Average 2007–11 OPAT x 47.4%) minus $ 63,000,000 and the Interim Payment.
The price was payable in the proportions 53.88% for Mr Makdessi and 46.12% for Mr Ghossoub. Mr Makdessi has been paid his proportion of the first two payments, together with some additional interest.
OPAT was the subject of an elaborate definition. It was, in essence, the relevant audited consolidated operating profit after tax. The "M" figure for the final payment was to vary between 7 and 10 according to the extent of the compound annual growth rate in profits in respect of the period 2006 to 2011. The Agreement provided — by clause 3.3 — that the maximum of all payments would be $ 147,500,000.
Clause 3.2 of the Agreement provided that if the Interim Payment and/or the Final Payment turned out to be a negative figure then it/they should be treated as zero, but there was to be no claw back of the earlier payments
The Sellers warranted that the Net Asset Value ("NAV") of the Company at 31 December 2007 was $ 69,744,340. It is apparent from the figures:
a) that Cavendish was liable to pay a very sizeable amount for goodwill, being at its highest (assuming no decrease in NAV) some $ 114.44 million ($ 147,500,000–$ 33,058,817, being $ 69,744,340 x 47.4%), on which footing goodwill would form some 77 % of the consideration; and
b) that payment of the Completion and the Second Payment would themselves include a substantial amount for goodwill. Those payments total $ 65,500,000 and were for 47.4% of the equity. 47.4% of the 2007 NAV was $ 33,085,817 (see above). So more than half of these two payments was attributable to goodwill.
Clause 11 provided as follows:
11. PROTECTION OF GOODWILL
11.1. Each Seller recognises the importance of the goodwill of the Group to the Purchaser and the WPP Group which is reflected in the price to be paid by the Purchaser for the Sale Shares. Accordingly, each Seller commits as set out in this Clause 11 to ensure that the interest of each of the Purchaser and the WPP Group in that goodwill is properly protected."
Clause 11.2 of the Agreement then contained a number of restrictive covenants, which the learned judge helpfully set out, incorporating the relevant definitions taken from Schedule 12 to the Agreement as follows:
"11.2. Until the date 24 months after the Relevant Date [being the later of the date of termination of employment by the Group (not relevant in the case of the Defendant), the date that he no longer holds any Shares or the date of payment of the final instalment of the Option Price pursuant to Clause 15.5(b) — see below], no Seller will directly or indirectly without the Purchaser's prior consent:
(a) carry on or be engaged, concerned or interested in competition with the Group, in the Restricted Activities [being the provision of products and/or services of a competitive nature to the products and/or services provided by the Group Companies in the twelve months prior to the date of the alleged breach of Clause 11.2] within the Prohibited Area [being any countries in which the Group Companies have carried on the business of marketing communications and ancillary services at any time in the period of twelve months prior to the date of the alleged breach];
(b) solicit or knowingly accept any orders, enquiries or business in respect of the Restricted Activities in the Prohibited Area from any Client [being a client or potential client of any Group Company which has placed any order in connection with the Restricted Activities during the twelve months prior to the date of the alleged breach or which was in discussions with any Group Company in relation to such provision in such period];
c) divert away from any Group Company any orders, enquiries or business in respect of the Restricted Activities from any Client; or
(d) employ, solicit or entice away from or endeavour to employ, solicit or entice away from any Group Company any senior employee or consultant employed or engaged by that Group Company."
By Clause 7.5 ("the Carat Clause") the Sellers agreed that within four months after completion they would dispose of any shares held by them in Carat Middle East S.a.r.l ("Carat"), and procure that a joint venture agreement of 19 December 2003 to which Group Carat (Nederland) BV and Aegis International B.V, on the one hand and Mr Makdessi, on the other, were parties, would be terminated. Carat was a joint venture company established under this agreement, of which Mr Makdessi was to have 245 shares (i.e. 49%) and the other parties were to have 255 (i.e. 51%). Carat is defined on its website as " the world's leading independent media planning and buying specialist…Owned by global media group Aegis Group Plc… [with] more than five thousand people in seventy countries worldwide". It is admittedly a competitor of the Claimants.
Clause 11.7 contained a further covenant restrictive of the Purchaser:
" The Purchaser recognises the importance of the Group to the Sellers and to the value of the Interim Payment and the Final Payment. Accordingly, the Purchaser commits as set out below to ensure that the interest of each Seller in that goodwill is properly protected.
The Purchaser will not (and will procure that no other member of the WPP Group will) at any time until the end of the last financial period relevant to the calculation of the Consideration without the Sellers' prior written consent other than within the Group Companies, trade in any of [twenty three identified] countries…using [specified] names."
The learned judge held that the restrictions in clause 11.2 were not in unreasonable restraint of trade, and there is no appeal from that decision.
Clause 5
Clause 5 is headed "Default". Clause 5.1. provides:
"If a Seller becomes a Defaulting Shareholder he shall not be entitled to receive the Interim Payment and/or the Final Payment which would other than for his having become a Defaulting Shareholder have been paid to him and the Purchaser's obligations to make such payment shall cease".
The definition of Defaulting Shareholder includes " a Seller who is in breach of clause 11.2".
Clause 5.6 provides:
" 5.6. Each...
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Lecture
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Case Note
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