This case concerned a challenge by a departing Designated Member in an LLP of the valuation of  his interest. Questions arose in respect of the extent to which there were implied terms in the relevant agreements giving rise to an obligation on the LLP (and the continuing Members) to cooperate with and provide information to potential third party purchases of the relevant interest and whether a failure to do so amounted to a breach of contractual provisions on Members to show utmost good faith.

Mr Archer held a 20% interest in Nubuke Investments LLP. Further to a disagreement with regard to his departure from the LLP he was removed and expelled by resolution of the other Members.

This process triggered transfer provisions in the LLP agreement, which were subject to pre-emption rights. The relevant clause provided that the value of the Member’s interest would be either a sum matching a bona fide offer for the interest by an unconnected third party, or an amount determined by the auditors.

The business of the LLP had suffered due to developments in the world markets in 2008 – 2009 and the LLP was loss-making. Having considered the financial position of the LLP, the auditors issued a valuation of Mr Archer’s interest at GBP nil. Further to this and in accordance with the pre-emption rights in the agreement, Mr Archer’s interest was transferred to one of the other Designated Members with a value of just GBP 1.

Mr Archer sought to invalidate the valuation. He also made claims against the LLP and the other Designated Members for breach of implied terms, and breach of an express obligation on the Members to show utmost good faith.

The implied terms

Significant efforts had been made by Mr Archer to find a third party purchaser for his interest. Two expressions of interest resulted from this, though neither was an unconditional offer, as they were each subject to ‘due diligence’ being carried out on behalf of the prospective purchaser. The second of these was in any event irrelevant in fact because it arose too late in the day.

In relation to the first expression of interest, before the LLP was prepared to provide ‘due diligence’ information to the potential purchaser it asked for: a copy of the offer letter; information as to the identity of the offeror; and evidence that the offeror was able to complete the purchase at the level offered. This information was not provided and so the LLP did not provide the due diligence information requested.

Mr Archer submitted that there were implied terms that the Designated Members and the LLP would (1) permit the potential purchaser access to such information as was reasonably necessary to allow it to conduct due diligence and (2) do nothing to obstruct or prevent access to such information. It was submitted that these implied terms were necessary to give business efficacy to the LLP Agreement.

Mr Archer submitted that these implied terms had been breached because the potential purchasers had been denied information.

The judge considered the case of AG  of Belize v Belize Telecom [2009] 1 WLR 1988 on the test for implied terms: “There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean”. Having regard to the facts of this case and applying this test, he was not satisfied that it was appropriate to imply the terms suggested by Mr Archer.

The judge drew a distinction between due diligence in an M&A context and due diligence in a context such  as this. He highlighted in particular that in this case the information requested was in the hands of the LLP, who was not the potential vendor and had no financial interest in the outcome of the relevant transfer. He further noted that giving effect to an implied term would place a burden on the LLP by committing it to provide undelimited material and information to any third party who intimated a desire to carry out due diligence. He emphasised the risk that arose to the LLP in this context, as some of those third parties may be competitors.He did not consider that the risks could be ameliorated by (1) allowing the LLP to refuse requests that were unreasonable, as this simply gave rise to further questions as to what was reasonable and from whose point of view; (2) requiring the third party to sign confidentiality agreements, as this may well not serve to overcome legitimate doubts and concerns about the potential (ab)use of materials and information disclosed.

The express obligation to show utmost good faith

The LLP Agreement required the Members to show the utmost good faith to the LLP and each other “in all transactions relating to the business and affairs of the LLP.”

Mr Archer argued that this obligation had been breached because the third party purchasers had been denied access to due diligence material and information. However, the judge held that this was not covered by the language of the LLP Agreement. He held that the obligation of good faith was addressed to the fiduciary obligations which the members owed each other and to the LLP. A potential offer to purchase the interest of a Member was not related to this.

The full text of the judgment can be found at: cases/EWHC/Ch/2014/3425.html