The UK High Court in Porton Capital Technology Funds v 3M UK Holdings Ltd & 3M Company  EWHC 2895 (Comm) recently considered the meaning of the phrase "which shall not be unreasonably withheld" in the context of a requirement to obtain a party's consent in a Share Purchase Agreement (SPA).
In this case, the judge held that the principles derived from landlord and tenant law also apply to commercial agreements in determining whether or not a party has unreasonably withheld its consent.
In 2007, 3M agreed to buy the entire shareholding of Acolyte Biomedica Ltd under an SPA. The claimants were some, but not all, of the shareholder vendors representing a total of 60.4% of the shares sold to 3M (the vendors). The consideration for the sale of the shares was £10.4m in cash and an additional (earn out) payment based on net sales in 2009 (up to a maximum of £41m). Acolyte's only commercial product was BacLite MRSA, a diagnostic assay used to detect MRSA, a harmful bacteria often found in hospitals. Under the SPA, 3M undertook to procure that: "(i) without the written consent of the vendors, which shall not be unreasonably withheld, (i) [Acolyte] shall not...cease to carry on its business or the business of the development and marketing of the Earn Out [Acolyte] Products..." Acolyte's business was unfortunately unsuccessful. By letters dated July and August 2008, 3M wrote to the vendors requesting their consent to the cessation of the development and marketing of the Acolyte Products, and offering compensation of $US1.07 million based on its estimate of sales for 2009. The vendors declined to provide such consent, or to accept the compensation offered. 3M's case was that such consent was unreasonably withheld by the vendors, and that it was therefore released from its obligations under the SPA, or alternatively that the vendors thereby repudiated the SPA, which repudiation it accepted. The claimants' case was that the vendors were entitled to withhold their consent, that they did not repudiate the SPA and that the SPA was repudiated by 3M. In December 2008, 3M announced that it was terminating the Acolyte business.
The claimants alleged that the failure and termination of the business involved breaches of contract on the part of 3M, and that they had lost their 60.4% share of the net sales which should have been achieved, which they claimed would have been in the region of £32m.
3M claimed that they had always acted in good faith and in accordance with the SPA. They were entitled to terminate the business in circumstances where they had requested consent and offered compensation and the vendors reacted unreasonably. In 3M's view, the reasons that no additional payment became payable were the failings of the Acolyte product itself, and the fact that "the market moved against" that product. 3M's position therefore was that only very low net sales could have been achieved. The Decision The judge found, as Colman J did in British Gas Trading Ltd v Eastern Electricity, The Times, 29 November 1996, that the principles derived from landlord and tenant cases provided some assistance in determining whether consent had been unreasonably withheld in the context of a commercial agreement. In particular he agreed with the claimants that the following principles, derived from the landlord and tenant authorities, were of particular importance in this case:
- First, the burden was upon 3M to show that the claimants' refusal to consent to the cessation of the Acolyte business was unreasonable.
- Second, it was not for the claimants to show that their refusal of consent was right or justified, simply that it was reasonable in the circumstances.
- Third, in determining what was reasonable, the claimants were entitled to have regard to their own interests in earning as large an earn out payment as possible.
- Fourth, the claimants were not required to balance their own interests with those of 3M, or to have any regard to the costs that 3M might be incurring in connection with the ongoing business of Acolyte.
The judge went on to hold that, on the facts, the vendors' consent was not unreasonably withheld. He found that, in particular:
- The request for consent had to be considered against the mutual estimate of sales for 2009, which were around £22m when made in November 2006, and which reflected a mutual belief in the strong commercial prospects for the Acolyte business.
- The additional (earn out) payment, based on net sales in 2009, was contemplated by the parties as being the principal return to be made by the vendors from their sale of Acolyte.
- The vendors had little knowledge of and no involvement in the business following 3M's acquisition of Acolyte.
- Against the above background, the suggestion that the business had effectively failed, and that sales of no more than US$1.07m would be made, reasonably caused considerable surprise to the vendors, and reasonably justified their scepticism.
- While a considerable amount of information was provided by 3M to the vendors, it was reasonable for them not to be satisfied thereby. It was reasonable for the vendors not to accept all the explanations given at face value and to consider that further inquiry and investigation was required. It was also reasonable for them to suspect that the failure of the business had been contributed to by 3M's own breaches of the SPA.
- It was reasonable for the vendors to consider that more than the US$1.07m being offered would be earned if the business continued, and that more would have been earned if the SPA had been performed according to its terms.
The Court held that the claimants were therefore entitled to damages, to be calculated on a loss of profit basis. It concluded that the total net sales which would have been achieved, if 3M had not breached the SPA and the Acolyte business had continued throughout 2009, was US$2,152,000. The damages recoverable by the claimants were 60.4% of that figure, being US$1,299,808.
While decisions of the UK Courts are not binding on the Irish Courts, they are frequently cited before such Courts and are often regarded as persuasive precedent. So far as we are aware, there has been no recent reported decision of the Irish Courts in a commercial context (such as an SPA) dealing with the issue of what constitutes grounds for reasonably withholding consent to something, despite the fact that the phrase "such consent not to be unreasonably withheld" (or delayed) is very commonly used (and relied on) in commercial agreements in this jurisdiction.
This case therefore offers some very interesting guidance on the principles to be applied in determining whether or not a party to a commercial agreement has acted reasonably in refusing consent to a request from the other party, where the agreement requires that such consent should not be unreasonably withheld.
Whereas including the phrase "consent not to be unreasonably withheld" might often appear to be a panacea for balancing the interests of both parties on a particular point in a commercial deal, this case usefully highlights the reality of the meaning behind these words for the party seeking consent. If one lesson is to be learned from the case, it is that, if consent is withheld and a dispute arises, the party seeking consent may face significant hurdles in challenging any withholding of consent.
In particular, if the Porton case is followed here, it may come as a surprise to some parties to learn that, if they include the words in an agreement, a Court may require the first party to show that the party which refused to give its consent was acting unreasonably in doing so, rather than requiring the refusing party to show that it was acting reasonably in withholding that consent. In addition, it may be regarded as somewhat unfair that the party refusing to give its consent does not have to balance its interests with those of the other party, and can look to its own interests exclusively. Parties drafting commercial agreements may therefore wish to consider whether including such words as "such consent not to be unreasonably withheld" are sufficient or appropriate to deal with the issue of the giving or withholding of consent in any particular situation. For a link to the judgment, please click here.