Zayo Group International Ltd v Michael Ainger and Others
| Jurisdiction | England & Wales |
| Judge | Mr Simon Bryan |
| Judgment Date | 13 October 2017 |
| Neutral Citation | [2017] EWHC 2542 (Comm) |
| Docket Number | Case No: CL-2017-000050 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 13 October 2017 |
[2017] EWHC 2542 (Comm)
Simon Bryan QC (Sitting as a Deputy Judge of the High Court)
Case No: CL-2017-000050
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF
ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Rolls Building, Fetter Lane
London, EC4A 1NL
Hugh Norbury QC and Dan McCourt Fritz (instructed by Gibson, Dunn & Crutcher LLP) for the Claimant
James Aldridge QC (instructed by Hogan Lovells International LLP) for the Defendants
Hearing dates: 19 and 20 July 2017
Approved Judgment
Mr Simon Bryan QC (Sitting as a Deputy Judge of the High Court):
A. Introduction and Overview
The parties appear before the Court on the hearing of the application of the Defendants to strike out, and in the alternative for reverse summary judgment on, the claims brought against them by the Claimant Zayo Group International Limited ("Zayo"). Zayo resists such applications and also seeks permission to amend its Claim Form and its Particulars of Claim in response to certain criticisms made by the Defendants as to the measure of loss claimed in such statements of its case, which the Defendants assert are wrong in law as to the measure of loss allegedly recoverable.
The proceedings concern a share purchase agreement dated 15 May 2014 (the "SPA"), by which Zayo (which is a publicly traded company based in Colorado with European headquarters in London) purchased the entire issued share capital of Ego Holdings Limited ("the Company") and its subsidiaries including Geo Network Limited ("Geo") from the Defendants and a third party, Alchemy Partners Nominees Limited ("Alchemy") a private equity fund. Geo provides a fibre optic network in the UK. The seven individual Defendants were the management of the Company (holding around 18% of the shares). Around 2% of the shares were held by lower level managers and around 80% of the shares were held by Alchemy. Management warranties were given by the Defendants in the SPA, but not by the lower level managers or Alchemy.
In late 2013 Alchemy and the Defendants offered Geo for sale by way of a competitive auction process. To facilitate that process, a virtual data room ("VDR") was set up to host confidential documents relating to Geo's business. Zayo decided to bid for Geo, and after it emerged as the preferred bidder Zayo was provided with exclusivity until 16 May 2014. It is the evidence of Mr Yost (General Counsel at Zayo) on this application that the VDR " was limited in many respects. For example, significant agreements were missing and many other agreements were redacted. As a consequence, we relied heavily on summary explanatory notes provided for various sections of the due diligence". The VDR was not fixed and documents were continually uploaded until shortly before the SPA was executed. Mr Yost's evidence is that, " The opportunity to ask questions and raise queries about documents disclosed at the last minute became much more limited."
Having emerged as the preferred bidder, Zayo was provided with exclusivity until 16 May 2014. On 9 May 2014 Zayo met with the Defendants and Alchemy in order to agree the principal deal terms. The SPA was executed on 15 May 2014.
Zayo's claim in these proceedings comprises four management warranty claims (the "Management Warranty Claims") as defined in paragraph 1 of Schedule 6 to the SPA arising out of alleged breaches of management warranties (the "Management Warranties") by the Defendants. The relevant ones for present purposes being as to accounts (Clauses 6.3, 6.5 and Schedule 5 Part 3 para 2). Those warranties (unlike others) were not qualified by the state of knowledge of each of the Defendants, and so all were equally liable for any breach of the accounting warranties (Clause 6.3), although they were subject to a fair disclosure exception (whether that exception is engaged is no longer before the Court on the application under consideration).
In relation to the Management Warranties:-
(1) Clause 6.3 of the SPA provided that:
"Each Management Vendor warrants severally (but not jointly or jointly and severally) to the Purchaser so far as he is aware that each of the Management Warranties is true and accurate as at the date of this agreement…"
(2) Clause 6.5 of the SPA provided that:
"The Management Warranties:
6.5.1 are qualified by reference to those matters Fairly Disclosed; and
6.5.2 save for the Management Warranties in paragraphs 1.6.2 and 1.6.3 of part 3 and part 4 of schedule 5, apply to each of the Subsidiaries as well as to the Company as if the word "Company" was defined to mean each of the Subsidiaries and the Company."
The Management Warranties alleged to have been breached by the Defendants are those contained in paragraph 2.1.1.3 and paragraph 2.2 of Part 3 of Schedule 5 to the SPA. In this regard:-
(1) By paragraph 2.1, the Management Vendors warranted that:
"2.1.1 The Accounts and the consolidated audited accounts of the Group for each of the two preceding accounting periods:
2.1.1.1 comply with the requirements of Companies Legislation;
2.1.1.2 have been prepared in accordance with international accounting standards within the meaning of EC Regulation No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards adopted from time to time by the European Commission; and
2.1.1.3 show a true and fair view of the state of affairs of the Group at the Accounts Date and of its profit or loss for the financial year ended on that date."
(2) By paragraph 2.2, the Management Vendors warranted that:
"Having regard to the purpose for which the Management Accounts have been prepared, and after taking into account that the Management Accounts have been prepared in good faith with due care and attention and are not the subject of an independent audit, the Management Accounts do not materially overstate the assets or materially understate the liabilities and do not materially overstate the profits or materially understate the losses of the Group in respect of the period to which they relate."
The "Accounts" and "Management Accounts" referred to in paragraphs 7(1)–(2), above, were defined, respectively, as follows in the SPA:
"the consolidated audited accounts of the Group for the accounting reference period which ended on the Accounts Date as set out in folder 3.1 in the Data Room"
"the unaudited consolidated accounts of the Group for the three month period ending 31 March 2014 (comprising a consolidated income statement and consolidated balance sheet)"
The Management Warranty Claims asserted by Zayo consist of four claims (collectively the "Claims") and are referred to by the parties as (i) the NMC Claims, (ii) the Lift and Shift Claims, (iii) the H3G Claims and (iv) the Power Usage Overcharge Claims.
The SPA contained notification provisions requiring that any claims against the Defendants be notified to them within 18 months of the SPA (Schedule 6 para 3.2 to the SPA) i.e. by Sunday 15 November 2015. It is common ground between the parties that by virtue of various deeming provisions, the notifications had to be served by 5pm on Friday 13 November 2015. On that very day (i.e. the last day on which a notice could be served) Zayo attempted to serve each of the Defendants with a notice of claim dated 13 November 2015 (the "Notice of Claim"). It is common ground that Zayo managed to serve six of the Defendants by that time on that date. However, it is the Defendants' case that Zayo failed to serve Sheree Jaggard (the Fifth Defendant) within time, and that the consequence is not only that the claim against the Fifth Defendant was out of time with the result that the Fifth Defendant has no liability to Zayo, but also that none of the Defendants has any liability to Zayo in such circumstances.
The SPA also had a time limit for service of any proceedings which required them to be served within nine months of Notices of Claim (Schedule 6 paragraph 3.3) i.e. by Friday 12 August 2016. The present proceedings were issued on that day and were hand delivered to the Defendants' addresses for service later that day. There is an issue between the parties (which is not live on this application) as to whether Zayo complied with the requirement to serve within nine months in the context of the deeming provision in CPR 6.14 which would deem them served on Tuesday 16 August 2016.
As will be addressed in more detail in due course below, the notification provision in the SPA (Schedule 6 paragraph 3.2) required the notices of claim to "be in writing and state in reasonable detail the nature of the Management Warranty Claim (to the extent the Purchaser is aware of such detail) and a reasonable estimate of the amount claimed, with reasonably sufficient details in order to allow the Management Vendors the ability to exercise their other rights under this schedule 6." The proper construction of paragraph 3.2 of Schedule 6, and what is required of a notice of claim thereunder is very much in issue between the parties. The Defendants assert that the Notice of Claim (in their words), "fell woefully short of compliance with such requirements" and that as such no valid notice of claim was given, and any liability came to an end, on 13 November 2015.
The Management Warranty Claims asserted by Zayo in the Notice of Claim (i.e. the Claims) consist of the following four claims:-
(1) The NMC Claims: Claims relating to alleged inadequate accounting provision or reserves for two disputes between Geo and NMC. The loss alleged was the combined cost of settling that litigation in the sum of...
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