Introduction

In the recent case of Porton Capital Technology Funds v 3M UK Holdings Ltd & 3M Company [2011] EWHC 2895 (Comm), the English High Court considered the meaning of the commonly used phrase “subject to consent, consent not to be unreasonably withheld”.

Used by lawyers to temper the veracity of a negative pledge subject to consent, its inclusion is often viewed as an innocuous concession that demonstrates the reasonability of the party, and the lawyer, agreeing to its inclusion.  However, as the Porton Capital case demonstrates, an ill-considered inclusion may have dramatic consequences.

While decisions from other jurisdictions are not binding on the Courts of Ireland, they are frequently cited and are often regarded as persuasive precedent, particularly in the case of English judgments. Although the phrase "such consent not to be unreasonably withheld" (or delayed) is very commonly used in commercial contracts in Ireland, we are unaware of a similar consideration of the issue in this jurisdiction.   As such, the Porton Capital case is of significance in the Irish context.

Background

The case concerned the acquisition by the defendants (“3m”) of an entity called Acolyte Biomedica Limited (“ABL”) from a group of entities including the claimants (the “Vendors”) under a share purchase agreement in February 2007.  The consideration for the shares was £10.4m in cash and an “earn-out” payment to be based on net sales for the calendar year 2009.  The maximum amount which could be received under this provision was approximately £41m.

ABL manufactured only one commercial product, BacLite MRSA, a diagnostic tool used to detect MRSA. However, ABL’s business was not successful and after the acquisition, 3M approached the Vendors with an offer to have ABL cease trading on the payment by 3M of US$1.07m to the Vendors, by way of compensation for the loss of potential revenue arising from the “earn-out” clause. 

Notwithstanding the compensation offer, the claimants felt ceasing operations was not in their interest, notwithstanding that continuing to trade would cost 3M money (apart from the “earn-out” mechanism).  Therefore, the Vendors refused to consent to the cessation, unless they received the full potential earn-out amount of £41m.

3M refused to meet this demand and unilaterally terminated the business in December 2008. There were therefore no net sales in 2009 and the Vendors, including the claimants, were not entitled to an earn-out payment as set out in the share purchase agreement.

3M claimed that under the terms of the share purchase agreement they were entitled to terminate the business in circumstances where (i) they had requested consent; (ii) offered compensation; and (iii) where the Vendors acted unreasonably. They contended that reasons that no earn-out became payable were the failings of BacLite MRSA itself and the fact that the market moved against that product, rather than the winding up of the business by 3M.

In analyzing the commerciality surrounding the business, the Court noted that net sales in 2009 could only ever have been at a very low level (c. $2m) and certainly not up to the maximum amount of £41m provided for in the initial sale agreement.

While the Court was asked to consider a number of points relating to the termination of the business and the quantum of compensation to which the claimants may have been entitled to, this article will focus on one question that was central to the case:

Did the vendors act unreasonably in withholding consent from the Defendants to terminate the Acolyte business in late 2008?

In answering this question, the Court gave detailed consideration to the meaning of the phrase itself and where the onus lies in proving whether withholding consent was reasonable.

Hamblen J. confirmed that principles developed in landlord and tenant cases are applicable to commercial situations and in particular the Judge focused on the confirmation of this principle as set out in British Gas Trading v. Eastern Electricity, The Times, 29 November 1996.

In considering the issue, the Judge agreed with the claimants who had highlighted the following principles:

  1. the onus is on the party claiming that a refusal is unreasonable to demonstrate its unreasonableness;
  2. it is not for the party who may withhold consent to demonstrate that it was right or justified, merely that it was reasonable in the circumstances;
  3. in determining what is reasonable, the person granting/withholding consent are entitled to have regard to their own interests; and
  4. there is no requirement on the person granting/withholding consent to balance their interests with the other party or to have any regard to the costliness withholding consent may have, unless the balance is completely disproportionate.

In other words, the party requesting consent must show that the other party's refusal is unreasonable, which is a question of fact. The refusing party is not obliged to show that its refusal is right, simply that it was reasonable in light of the surrounding facts. It is not required to balance its own interests with those of the other party, unless the balance is completely disproportionate.

On the facts, the Court found that the claimants were reasonable in withholding their consent to 3M shutting the ABL operation down.  In light of the evidence brought before the Court, the Judge found that the claimants were entitled to damages, which were calculated at a level which at approximately $2m was twice that of the original 3M compensation offer.

Conclusion

On the basis of general principles, it is likely that the question of reasonableness will be one of fact to be decided by a Court objectively in each individual circumstance, but with regard to the position that the onus is on the party seeking consent to demonstrate the unreasonableness of the decision.  This may be more difficult in some case than others.