The Game Group Plc and The Electronic Boutique Incorporated and Anr
| Jurisdiction | England & Wales |
| Judge | Mr Justice Peter Smith,Mr Justice |
| Judgment Date | 23 October 2002 |
| Neutral Citation | [2002] EWHC 2117 (Ch) |
| Docket Number | Case No: HC02C00791 |
| Court | Chancery Division |
| Date | 23 October 2002 |
[2002] EWHC 2117 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Peter Smith
Case No: HC02C00791
Mr M CRANE QC and Mr J POTTS (instructed by Speechly Bircham) for the CLAIMANT
Mr M TODD QC and Mr L KUSCHKE (instructed by Fladgate Fielder) for the DEFENDANTS
Hearing dates: 30 September 2002 to 3 October 2002
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.
Mr Justice : PETER SMITH
INTRODUCTION
This is a judgment on a trial of a Part 8 Claim by which the Claimant ("EBUK") seeks a declaration that in the events that have occurred it is entitled to terminate a services agreement ("the Services Agreement") dated 13 th October 1995 entered into between EBUK and the First Defendant ("EBI").
The issue over the right to terminate turns entirely on the construction of Clause 14 of the Services Agreement to which I shall make a more detailed reference later in this judgment. (At the time of the Services Agreement, EBUK was known and was referred to in the Services Agreement as "Rhino").
BACKGROUND
EBUK is a public company limited by shares incorporated in England and Wales. It is now and was at the time of the Services Agreement engaged in the business of retailing computer and video games related products. EBI is a corporation incorporated under the laws of the Commonwealth of Pennsylvania, USA. As at that date 13 th October 1995, it carried on the business of retailing computer video games and related products.
The Second Defendant EB Services Company LLP ("EBS") is a limited liability partnership formed in January 1997 pursuant to a limited liability partnership agreement under the laws of the Commonwealth of Pennsylvania, USA.
Behind the face of EBS is a complicated structure of ownership and control to which I shall make reference further in this judgment.
In early 1995 EBUK was experiencing trading and financial difficulties. In early 1995 following discussions between a Mr Firestone on behalf of EBI and a Mr Ripley on behalf of EBUK, a Mr James Kim ("Mr Kim"), the owner of EBI, decided to invest in EBUK. Accordingly he procured, in April 1995, that EBI subscribe for 25.2 million shares in EBUK representing 17.9% of its issued share capital being the shares not taken up in a rights issue made by EBUK. Thus EBUK was at that stage wholly dependant on Mr Kim self-evidently as he took up the rights issue. There were further instances of financial provision. For example, Mr Kim procured that EBI advance £5m on loan to EBUK. That sum remained outstanding for a number of years and was repaid earlier this year. Significantly, in my view, the repayment of that sum was not linked in any way to the Services Agreement and its continuation, nor was EBI's investment in EBUK linked in any way to the Services Agreement. Yet both of those are significant commercial commitments by Mr Kim. The relevance of this is in respect of Mr Crane QC's argument, on behalf of EBUK, that it had an incentive of a two-fold nature as regards Mr Kim. First, it wanted the benefit of his experience in the same business that it carried on and the operating system that he could make available. Second, he submitted that a significant factor which was relevant to the construction of the Services Agreement was that EBUK wished Mr Kim's finances and his money therefore, to be behind the provision of services under the Services Agreement at all times. As I said during the course of argument, the Services Agreement, if that was a wish, could have very easily included a provision to that effect. It does not expressly do so, as we shall see when we examine its terms. Equally, if the financial commitment of Mr Kim was so important, it is odd that there were no restrictions on his ability to deal in the shares in EBUK held by EBI, nor any attempt to link the loan facility to the continuation of the services. If there was any substance in Mr Crane's argument in this respect, I would have expected these other financial matters to have been similarly linked.
By the time of the Services Agreement EBI had acquired a further 17 million shares in EBUK, it had a total of 25.1% of EBUK. EBI was, as the parties agreed, the largest shareholder in EBUK at the time of the Services Agreement. It also had significant board representation although it did not have majority representation, having three out of seven before the Services Agreement and four out of nine after the Services Agreement. This non majority status as I understand it, was a Stock Exchange requirement.
Notwithstanding its large shareholding, as I have said, no attempt was made by agreement to lock in that shareholding in EBUK. By the time of the hearing EBI no longer had any shares in EBUK. Nevertheless it seems to me self evident that a disposal of that large shareholding would have created difficulties for EBUK if the shareholding was placed in a large amount at one time, for example.
EBI
As at 13 th October 1995 EBI was authorised to issue 5,000 shares of Class A $0.10 voting common stock, 25,000 Class B non-voting $0.10 common stock and 200,000 share of $100 Preferred Stock. The issued share capital of EBI was $2,290 divided into 1,900 voting Class A shares of $0.10 each and 21,000 non-voting Class B shares of $0.10 each, all of which were owned by the Kim family.
EBI's directors at the time were Mr Kim, his wife Agnes Kim, and his daughter Susan Kim. The officers of EBI were Mr Firestone, Jeff Griffiths and John Panichello (Mr Kim's son-in-law). As at 13 th October 1995 EBI was wholly owned and controlled by Mr Kim and his family interests.
Mr Kim is a very successful businessman. Even now, as set out in the figures produced by Mr Todd QC on behalf of the defendants, EBI's shareholding in Electronics Boutique Holdings Corporation ("EBHC") is worth a significant sum. As at 2 nd October 2002, the market capitalisation of EBHC was $635,060,790. Mr Kim and his family hold some 46% of that market capitalisation.
THE SERVICES AGREEMENT
The purpose of the Services Agreement was for EBI to provide the services set out in the schedule thereto to Rhino (EBUK). There is an element of illusion about the Services Agreement in that Mi Todd QC observed that EBUK regarded the Service Agreement as a deferred consideration payment for the provision of the expertise and know-how. No issue arises out of that nor does it have any impact on the matter on which I have to adjudicate.
The initial term as defined in Clause 1.1 of the Service Agreement, was a period from 1 st July 1995 to and including the accounting reference period ending on 31 st January 1996.
Thereafter the term of the Service Agreement set out in Clause 4 for an initial period expired on 31 st January 2006 and continuing until terminated by two years notice in writing, so that any time after 31 st January 2004 or until terminated in accordance with Clause 14. Thus the minimum period will be until 1 st February 2006 being the earliest date on which two years notice can be given after 31 st January 2004.
EBI obtained substantial funds for the provision of its services as set out in Clause 5. It was entitled to a flat rate fee of one percent of the turnover of EBUK and bonuses if a specified target is exceeded.
In addition EBI was entitled to a similar 1% during the initial term.
Substantial payments have been made under the Services Agreement. Mr Martin Long, the Deputy Chief Executive and Chief Financial Officer of EBUK, in his second witness statement (paragraph 14) shows that during the course of the Services Agreement, EBUK has made payments in excess of £16m. Although there were mutterings that less services are being provided now than were provided initially, it is accepted by EBUK that it has no cause for complaint in regard to the provision of the services. EBUK is now in a very healthy position and the reality is that it no longer needs the services and chooses not to ask for them. It would wish to rid itself of the services now if it could do so, as it has outgrown the need for such services. That is not of course a basis for terminating the Service Agreement.
There is a confidentiality clause (Clause 18) which imposes confidentiality on the parties. Significantly, it does not cover a position if a third party were to obtain control of either contracting party (a justification for Clause 14 put forward by the Defendants).
The agreement has an entire agreement clause (19) and there is a non-assignment clause without consent (20). The governing law is by Clause 26 stated to be English law and the parties submit to the non exclusive jurisdiction of the High Court of Justice in London for the purpose of hearing and determining any dispute arising out of the Services Agreement.
The major provision in dispute is Clause 14. I do not see that the other provisions afford any assistance in construing Clause 14.
CLAUSE 14
Clause 14 provides as follows:—
"14. Termination
This Agreement may be terminated:—
14.1 at any time by EBI by written notice if:—
(a) …..
(b) …..
(c) …..
(d) control of Rhino passes from the persons who at the date hereof exercise such control provided that for the purposes of this Clause control shall mean either ownership of more than fifty percent of the issued share capital of Rhino or any holding company of Rhino or the right to direct the policies and affairs of Rhino whether by statute, contract, governmental...
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Lessons From 2002 For Contract Negotiators and Draftsmen
...to ensure that they are workable in respect of the new party. In Game Group plc v Electronic Boutique Incorporated and Another [2002] EWHC 2117 (Ch), following the novation of a contract, a company was substituted by a limited liability partnership as a party to a contract. However, the cha......