In the recent case of Porton Capital Technology Funds &
Ors v 3M UK Holdings Ltd & Anor1 the
English High Court considered the relevant principles to be applied
where a Share Purchase Agreement ("SPA")
provided that the purchaser of the business could not cease to
carry on the business without the vendor's consent, such
consent "not to be unreasonably withheld".
The case provides useful guidance on the meaning to be applied to
this phrase in a commercial context.
Background
The defendant purchased Acolyte Biomedica Limited
("Acolyte") under a SPA in February
2007. The consideration consisted of £10.4m in cash and
an earn-out payment based on net sales for the year 2009, capped at
£41m. The claimants represented 60% of the shareholder
vendors. Acolyte's product was a product used in
detecting MRSA called BacLite. The business subsequently
failed and it ceased in December 2008. There were therefore
no sales in 2009, to form the basis of the earn-out
payment.
The claimants alleged that the defendant breached the SPA in
ceasing to carry on the business. The defendants argued that
they were entitled to terminate the business in circumstances where
they had requested consent and offered compensation to the
claimants in the sum of US$1.07m calculated on the basis of
estimated sales for 2009. The defendant argued that the
claimant acted unreasonably in withholding their consent to cease
business in late 2008.
The claimants also alleged that the defendant was in breach of its
obligation to diligently seek regulatory approval for and to
actively market BacLite, and that the claimants lost 60% of the net
sales which should have been in the region of
£32m.
Decision
The SPA provided that the defendant "without the
written consent of the vendors, which shall not be unreasonably
withheld, shall not...cease to carry on its
business...". By letters dated 14 July and 15 August
2008, the defendant invited the claimants to consent to the
cessation of the business. The claimants refused to provide
this consent. Unusually, the claimants relied on principles
which have been developed in landlord and tenant cases, such as
International Drilling Fluids Ltd v Louisville Investments
(Uxbridge) Ltd2. The Court agreed with the
claimant's approach and found that the following principles
apply in determining whether consent has been unreasonably withheld
in a commercial context:
1. The burden is on the party that requested consent (the defendant) to show that the claimants' refusal to consent to the cessation of the business was unreasonable;
2. What is reasonable will depend on the facts of each case, here the claimants were entitled to have regard to their own interests in earning as large an earn-out payment as possible; and
3. The claimants
were not required to balance their own interests with those of the
defendants, or to have any regard to the costs that the defendant
might be incurring in connection with the ongoing business of
Acolyte.
On the facts, the Court found that it was reasonable for the
claimants to consider the fact that more would have be earned if
the business continued and therefore the claimants' consent had
not been unreasonably withheld.
Furthermore, the defendant's cessation of the business in
December 2008 was a repudiation of the SPA. On the basis that
worldwide net sales would have been in the region of US$2,152,000,
the Court awarded the claimants US$1,299,808.
In relation to the earn-out payments, the SPA provided that the
"payment is contingent upon the future performance of the
company and therefore is not guaranteed". However, the
SPA also imposed express obligations on the defendant in respect of
regulatory approval and marketing. The Court found that the
defendant was in breach of its obligation to seek regulatory
approval and actively market BacLite.
Implications
Irish landlord and tenant case law contains many of the
principles enunciated above. However these principles have not
to date applied to Irish contract law generally.
While the decision in Porton Capital is not binding upon the Irish courts, it will be interesting to see if the Irish courts are persuaded to follow this precedent.
Footnotes1 [2011] EWHC 2895
2 [1986] 1 Ch 513
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