In the recent case of Porton Capital Technology Funds & Ors v 3M UK Holdings Ltd & Anor 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.
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.
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) Ltd. 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:
- 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;
- 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
- 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.
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.