The Game Group Plc and The Electronic Boutique Incorporated and Anr
| Jurisdiction | England & Wales |
| Judge | Lord Justice Carnwath,Mr Justice Morland,Lord Justice Simon Brown |
| Judgment Date | 28 February 2003 |
| Neutral Citation | [2003] EWCA Civ 230 |
| Docket Number | Case No: A3/2002/2292 |
| Date | 28 February 2003 |
| Court | Court of Appeal (Civil Division) |
[2003] EWCA Civ 230
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR JUSTICE PETER SMITH
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Simon Brown
Lord Justice Carnwath and
Mr Justice Morland
Case No: A3/2002/2292
Mr Michael Crane QC and Mr James Potts (instructed by Speechly Bircham) for the Appellant
Mr Michael Briggs QC and Mr Leon Kuschke (instructed by Fladgate Fielder) for the Respondents
This appeal raises a short but difficult issue on the construction of one clause in a Services Agreement, made between the Claimant ("EBUK") and the First Defendant ("EBI"), dated 13 th October 1995. (I use the abbreviations adopted by the judge.)
Background Facts
EBUK is a public company limited by shares incorporated in England and Wales. EBI is a corporation incorporated under the laws of the Commonwealth of Pennsylvania, USA. They are and were both involved in the business of retailing computer video games and related products. The Second Defendant ("EBS") is a limited liability partnership formed in January 1997 pursuant to a limited liability partnership agreement under the laws of Pennsylvania, USA.
In early 1995, EBUK was experiencing trading and financial difficulties. Mr James 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. As the judge found, EBUK "was at that stage wholly dependent on Mr Kim…" Mr Kim also gave other financial assistance, including a £5m on loan from EBI to EBUK.
By the time of the Services Agreement EBI had acquired a further 17 million shares in EBUK, and had a total of 25.1% of EBUK. EBI thus became the largest shareholder in EBUK. It also had significant board representation, having three out of seven directors before the Services Agreement and four out of nine after the Services Agreement. This non-majority status was a Stock Exchange requirement.
The Judge made the following findings as to the ownership of EBI at the time of the services agreement:
"(9.) 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.
(10.) 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."
The structure of EBI at the time of the agreement is shown in diagrammatic form in a chart ("Structure Chart II"), which was agreed by the parties and is appended to this judgment.
The Services Agreement, according to the preamble, was intended to set out the terms on which EBI were to provide "certain management and other services" to EBUK, in connection with what were called Future Zone Stores. The services were set out in a schedule. They included the provision of such things as advice and assistance in the design of retail outlets, the training of staff, advertising and so on. There was an initial period from 1 st July 1995 to 31 st January 1996, following which the agreement was to continue for a period which at the earliest would end on 31 st January 200The nature of the services and the terms of the agreement generally are not material. It appears that whatever services were provided in the earlier stages, EBUK's position, as the Judge found, is that "it would wish to rid itself of the services now if it could do so, as it has outgrown the need for such services." During the course of the agreement payments have been made by EBUK in excess of £16m.
The termination clause
The issue before us relates solely to the construction of certain parts of Clause 14, which provides for termination. The relevant parts are as follows:
"14. Termination
This Agreement may be terminated:-
14.1 at any time by EBI by written notice if:-
….
(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 decree or regulation, ownership of voting capital or otherwise; or
……
14.2 at any time by Rhino by written notice if:-
…
(b) any analogous events to those described at 14.1 above occur under the law of the United States of America or any relevant State thereof in relation to EBI;…".
The Judge heard evidence and made certain findings about the thinking of the respective parties in relation to this clause. However, he concluded that this evidence was of doubtful relevance as a matter of law, and of little assistance in any event in construing the clause. I agree.
Changes in the EBI group
The circumstances on which EBUK now rely to justify terminating the agreement under this clause began with changes in the structure of Mr Kim's organisations made in 1997, apparently as part of a tax-saving scheme. This involved the formation of a limited liability partnership under Pennsylvania law. There was an agreed statement between Pennsylvania law experts as to the effect of these arrangements under that legal system. The new entity, as well as being a limited liability partnership, had characteristics similar to those of a limited partnership under English law. The Judge described the effect of the agreed statement as follows:
"(46.)…. The partnership in question is a limited liability partnership. That means that a limited partner is not liable solely by reason of being a limited partner for liabilities of any kind or for acts of any partner, agent or employee of the limited partnership. In contrast, a general partner in a limited partnership usually has the same rights and powers and is subject to the same liabilities as a partner in a General Partnership, which makes him liable for all obligations of the partnership incurred in the ordinary course of his business. However, a limited liability partnership reduces the general partner's exposure to liability for debts and obligations of the partnership that arise from negligent or wrongful acts of misconduct in which the general partner was not involved."
In this case the new entity, referred to in the judgment as "EBS", was formed in January 1997 under a limited liability partnership agreement. The parties to that agreement were the general partner ("EBS Corp") and various trustees of Kim family trusts as limited partners. 99% of the new entity was owned by the limited partners and 1% by the general partner. The sole shareholder of the general partner was and is Mr Kim. By an agreement dated 1 st February 1997 between EBI and EBS, EBI assigned to EBS the rights and obligations under a number of contracts including the service agreement in this case. The prior consent of EBUK was obtained to that assignment, and at the same time EBUK obtained a guarantee from EBI in respect of EBS's obligations. It was common ground that, under English law, the effect of the assignment was a novation of the Services Agreement, so as to take effect as a new agreement between EBUK and EBS, but otherwise subject to the same incidents.
There were further stages of re-organisation on the EBI side. The Judge summarised them as follows:
"(42.) By an agreement to consent to assignment and an assumption of partnership interest dated 13 July 1998 ('the EBS Assignment'), the ownership of EBS was re-organised in the following way. First, the Kim Trusts transferred their limited partner interests to EBHC and those limited partner interests were subsequently transferred to EB Investments Corp ('EB Invest') and finally to Electronic Boutiques of America Inc ('EBOA'). Second, the General Partner transferred 99% of its 1% General Partner interest also to EBHC and that interest was subsequently also transferred to EB Invest and EBOA.
(43.) Third, pursuant to the express terms of Section 9.3 of the LLP Agreement, EBHC did not become a general partner in connection with its acquisition of the 99% of the General Partner interest of the General Partner. Instead, the interest thereby acquired was transformed into a limited partner interest. Currently, EBS is owned as to 0.01% by the General Partner, and as to 99.99% by its sole...
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