Key points

  • If a party’s commercial intent is that the break fee will be payable in the event of certain contingencies, then the clause should be carefully drafted to account for these contingencies.
  • Care must be taken when drafting any trigger by reference to the ‘date of’ an event which may not occur.
  • The language used across the agreement should be consistent and unambiguous.  

The financial conditions of recent times have resulted in a higher incidence of transactions not completing. In this context, the careful drafting of break fee clauses can be critical.

The significant consequences of ambiguities in these clauses is evident from the New South Wales Supreme Court’s findings in a dispute between Healthscope and Symbion over the payment of a $19.575 million break fee. Earlier this month the New South Wales Supreme Court’s decision was upheld by the New South Wales Court of Appeal in Healthscope Ltd v Symbion Health Limited [2009] NSWCA 191.

Background

In October 2007 Healthscope and Symbion entered into a transaction implementation deed (Implementation Deed) pursuant to which they agreed that Healthscope would acquire Symbion’s diagnostics business in consideration for the issue of Healthscope shares to Symbion which Symbion would distribute to its shareholders pursuant to a reduction of capital and a dividend. Separately, Symbion agreed with another party to propose a scheme of arrangement pursuant to which that party would acquire all Symbion’s shares for cash.

Under the Implementation Deed, Healthscope was entitled to a $19.575 million break fee in certain specified circumstances. Those circumstances included if a ‘competing proposal’ was ‘announced prior to the date of’ the Symbion shareholders meeting and completed at any time prior to the first anniversary of the date of the Implementation Deed.

Symbion convened a shareholders meeting for 30 November 2007. On 27 November, Symbion announced that due to a tax pre-condition not being satisfied, the Healthscope transaction would not proceed. On the same date Healthscope and Symbion entered into a termination deed which effected termination of the Implementation Deed (such termination expressly saving certain provisions, including the break fee provision). The shareholder’s meeting convened for 30 November was therefore cancelled.

Meanwhile on 8 November 2007 Primary Health Care Ltd announced a cash offer for shares in Symbion. By February 2008 Primary had acquired a relevant interest in more than 50 per cent of Symbion shares and Healthscope claimed its break fee.

Healthscope’s entitlement to the fee turned on whether the words ‘announced prior to the date of the meeting’ were to be construed as meaning the date the meeting was held (as argued by Symbion) or the date for which it was convened (as argued by Healthscope).

Initial judgement

The trial judge held that no break fee was payable because the words ‘prior to the date of’ contemplated a meeting actually being held. As the meeting had been cancelled the obligation to pay the break fee had not been triggered.

Healthscope appealed the decision.

Decision on appeal

The appeal was unsuccessful. The court considered the trial judge’s interpretation that the clause required that a meeting take place, not merely be scheduled, to be consistent with the plain meaning of the words used, the words used elsewhere in the agreement and the intention of the parties.

The Court found it persuasive that, had the parties intended for the meaning argued by Healthscope, the clause could have been drafted to provide as such. Had the Implementation Deed provided that a proposal be announced prior to ‘the date on which the meeting is scheduled to be held’, then Healthscope would have been entitled to the break fee notwithstanding that the meeting had not taken place.

In the absence of specific drafting to account for the possibility the meeting would not be held, the court was left to interpret the words according to their natural meaning.

The court found that using the words ‘the date of’ rather than the words ‘date for’ most naturally referred to the date on which the meeting was held, rather than the date for which it was convened.

Conclusion

The case demonstrates the significant cost that can result when a break fee does not expressly cover all contingencies and possibilities and is left open to interpretation. The need for care to be taken with these clauses is enlarged by the circumstances in which they are usually negotiated.