In Astor Management AG & Anor v Atalaya Mining Plc & Ors  EWHC 425 (Comm), the Commercial Court considered whether the payment of deferred consideration was due in an M&A transaction. Alternatively, whether the buyer had failed to use the required “all reasonable endeavours” to achieve a condition to making the deferred consideration payable. The Commercial Court found that the deferred consideration was not due and there had been no breach of the “all reasonable endeavours” obligation, even though the commercial purpose underlying the deferral of the consideration seemed to have been achieved. The dispute arose between participants to a copper ore mining project, but its lessons are relevant to M&A transactions in the oil and gas industry.
Astor Management AG (“Astor”) and Atalaya Mining Plc (“Atalaya”) entered into an agreement in September 2008 relating to the ownership and exploitation of copper ore at a mining project in southern Spain (the “Master Agreement”). Under the terms of the Master Agreement, Atalaya acquired Astor’s minority interest in the mining project for EUR 63m; the majority interest being owned by another company in Atalaya’s group. The copper mine was dormant at the time the parties entered into the Master Agreement but was potentially very valuable, with 123m tonnes of proven and probable reserves.
As Atalaya would not have sufficient resources to buy out Astor’s remaining interest until such time as mining restarted, payment of the consideration was mostly deferred and payable by Atalaya in three tranches on the occurrence of certain trigger events:
- First payment:
within 30 business days of the date on which: (a) the regional government granted permits for the restart of mining activities; (b) Atalaya secured senior debt finance for a sum sufficient for the restart of mining operations at the project (“Senior Debt Facility”); and (c) Atalaya could effectively draw down on the Senior Debt Facility.
- Second payment: within 20 business days of the first anniversary of the restart of mining activities.
- Third payment: within 20 business days of the second anniversary of the restart of mining activities.
Atalaya undertook to use “all reasonable endeavours” to obtain the Senior Debt Facility and to procure the restart of mining activities at the project on or before 31 December 2010 (the “Target Date”).
Atalaya ultimately failed to secure the Senior Debt Facility by the Target Date; although by June 2015 it had instead raised finance through equity and intra-group loans. The permits necessary for the restart of mining activities were issued in July 2015 and mining re-commenced before the end of that month.
Astor advanced the claim before the Commercial Court that payment of the deferred consideration was triggered on the restart of mining activities in July 2015. Astor made the primary case that, when the mining operations were restarted without the need for a Senior Debt Facility, the requirement to obtain such a facility fell away (it being “futile”) and the obligation was triggered by the grant of the permits alone. In the alternative, Astor contended that the finance secured to restart mining operations constituted “senior debt finance” within the meaning of that term in the Master Agreement.
Also alternatively, Astor argued that if the deferred consideration was not triggered, this is because Atalaya was in breach of the agreement to use “all reasonable endeavours” to secure the Senior Debt Facility.
Atalaya argued that payment of the deferred consideration had not been triggered and, given the events that unfolded, it never would be triggered. Atalaya contended that the first tranche was not payable until such time as a Senior Debt Facility was obtained; no such facility was obtained by Atalaya, and the finance raised to restart mining operations did not constitute “senior debt finance” within the meaning of the Master Agreement. Further, it had satisfied the “all reasonable endeavours” obligation.
The court rejected Astor’s argument that, as Atalaya’s obligation to secure a Senior Debt Facility had fallen away and the obligation to pay the deferred consideration had been triggered. The court made clear that there is no legal doctrine that a precondition need not be satisfied where such satisfaction would be “futile”, even in circumstances where such a precondition did not serve any useful purpose. Leggett J decided:
“Whether a contractual obligation has arisen in any given case in principle depends on what the particular contract says, interpreted in accordance with the ordinary rules of contract interpretation. There is, in my opinion, no principle of law or even interpretive presumption which enables a contractual precondition to the accrual of a right or obligation to be disapplied just because complying with it is considered by the court to serve no useful purpose.”
Leggatt J. similarly rejected Astor’s claim that the finance raised by Atalaya constituted a Senior Debt Facility, noting that “senior debt finance” contemplated finance obtained from outside of Atalaya’s company group and would rank in priority to an unsecured intra-group loan.
In relation to whether the requirement for Atalaya to use “all reasonable endeavours” to obtain a Senior Debt Facility was a legally enforceable obligation, Leggatt J. decided that it should “almost always be possible” to give sensible content to an undertaking to use reasonable endeavours to enter into an agreement with a third party and that:
“Where the parties have adopted a test of "reasonableness" […] it seems to me that they are deliberately inviting the court to make a value judgment which sets a limit to their freedom of action.”
It followed that the provision was enforceable. The content of “all reasonable endeavours” would depend upon the nature and terms of the transaction in question. In this case, it would not have required the Senior Debt Facility to be sought if mining was uncommercial.
Astor's case that the Atalaya was in breach of the “all reasonable endeavours” obligation ultimately boiled down to the contention that the sum of US$95m it raised through equity and intra-group loans in May/June 2015 could – and would if all reasonable endeavours had been used – have been obtained in the form of a Senior Debt Facility provided by one or more of the shareholders. On the evidence, however, this case was not made out. Of the three main shareholders, Trafigura made it expressly clear at the time when funding was being discussed that it was not prepared to provide finance in a form that would trigger payment of the deferred consideration.
The outcome was that Atalaya avoided paying the deferred consideration, as it had not yet fallen due under the terms of the Master Agreement. Further, it had not breached its obligation to use all reasonable endeavours to trigger the deferred consideration.
Deferred consideration is a familiar concept in oil and gas M&A transactions. It seems likely that the parties, when negotiating the Master Agreement, envisaged a process under which a specific type of funding would be obtained, and the mining permits put in place, following which mining activities would re-commence. The seller did not anticipate that, should the buyer fail to secure the specific type of funding envisaged, alternative funding might be obtained elsewhere and the mining then recommenced.
It may even be that the reason for the Senior Debt Facility and permits being the trigger for payment of the deferred consideration was that Astor, as seller, wished to ensure that its deferred consideration was extracted from funds paid under the Senior Debt Facility, before the costs of mining activities were incurred and paid out of the Senior Debt Facility.
While the approach taken by the court in Astor might seem uncommercial, the judge noted that the agreement had “all the hallmarks of a professionally drafted contract made by sophisticated commercial parties” and the wording in the deferred consideration clause was “plainly a deliberate choice”. It was not for the court to look behind the terms of the contract and second-guess what the parties might have had in contemplation at the time of signing.
As a consequence, parties drafting a deferred consideration clause should think carefully about how events might unfold, and the implications for the obligation to pay deferred consideration.
As the courts move away from a ‘commercial’ approach to interpreting contracts towards one based more on the natural and ordinary meaning of the words in the contract, M&A practitioners should consider the importance of using clear drafting in constructing deferred consideration clauses and also bear in mind the consequences of events not unfolding as originally anticipated.