The Court of Appeal has recently dismissed an appeal in relation to the interpretation of a clause referring to "the purpose" of a transaction.
In Starbev GP Limited v Interbrew Central European Holdings,the Claimant argued that the clause should be interpreted as referring to the "sole" purpose of the transaction whereas the Defendant argued that it referred to "a" purpose of the transaction. The Court of Appeal confirmed that, in these circumstances, "the purpose" should be interpreted as meaning the "dominant" purpose of the transaction.
On 2 December 2009 Starbev's subsidiary purchased a brewing business in Central and Eastern Europe for €1.475 billion from ICEH, a Dutch subsidiary of the global brewer Anheuser Busch Inbev (ABI). Under the terms of a Contingent Value Right (CVR) agreed between the parties, ICEH/ABI was entitled to participate in any profit Starbev made from subsequently selling the business on to a third party.
Under the CVR, the amount payable by Starbev to ICEH/ABI would decrease the longer the sale took place after the original purchase. If the sale took place within two years of completion, Starbev was obliged to pay an amount to ICEH/ABI by reference to an "Investment Threshold" of 1.65 times the "Investment Amount". If the sale took place within the third year after completion, the Investment Threshold increased to 2.05 times the Investment Amount which meant the CVR was less valuable to ICEH/ABI. If the sale took place more than three years after completion, the Investment Threshold increased to 2.50 times the Investment Amount, meaning the CVR was even less valuable to ICEH/ABI.
On 15 June 2012, within the third year after completion, Starbev sold the business to an American brewer, Molson Coors. However, part of the consideration was a €500 million Convertible Note maturing on 31 December 2013 (with various options for earlier realisation if Molson Coors' share price increased by more than 15%). On 13 August 2013 Starbev exercised the early realisation option, receiving €466 million on 3 September 2013, which was more than three years after completion of the original sale by ICEH. Starbev therefore paid an amount to ICEH/ABI calculated by reference to the highest threshold of 2.50.
The €466 million comprised the Note's value of €510 million less €44 million which Molson Coors withheld as security in respect of certain warranty claims. This security was subsequently reduced and Molson Coors paid a further sum to Starbev on 14 January 2014. Starbev then paid a further sum to ICEH/ABI in respect of this receipt, again by reference to the highest threshold.
The idea that part of Molson Coors' consideration should comprise the Convertible Note came from a Mr Przemek Oblöj who was part of the deal team put together by CVC Capital Partners, the private equity firm behind Starbev. The deal team colloquially referred to the concept as "PIG", which appeared to be an acronym for "Przemek's Idea of Genius".
ICEH argued that the Convertible Note fell within the anti-avoidance provision in the CVR. This provided that any transaction, resulting in receipts by CVC, which was structured or undertaken "with the purpose of reducing payments due to ABI" was to be deemed an "Equity Return" for the purposes of determining whether the Investment Threshold had been exceeded and/or whether an Excess Return Payment (i.e. a payment from Starbev to ICEH/ABI) was required, albeit solely to the extent that the transaction reduced the amount of payments due under the CVR.
The High Court's decision
The High Court held that the reduction in payments due to ICEH/ABI had to be the "dominant" purpose and that, on the basis of the evidence available, reducing payments due to ICEH/ABI was indeed the dominant purpose of the transaction. Starbev had deliberately structured the sale, through the payment of the Convertible Note, to reduce any payments due to ICEH/ABI. The sum realisable from the Note could only become due more than 3 years after completion of the original sale and the dominant purpose of agreeing this was to ensure that the Investment Threshold would only be reached when 2.5 times the Investment Amount had been exceeded.
The High Court did accept that the purpose of the Note was partly to avoid a chunk of the purchase price being deferred as security for any claims by Molson Coors for breach of warranty and partly to enable Starbev to take advantage of any rise of more than 15% in Molson Coors' share price. However, the dominant purpose for structuring the deal so that the consideration included the Note was to reduce payments to ICEH/ABI.
The Convertible Note therefore fell within the anti-avoidance provision and the relevant Investment Threshold should therefore have been 2.05 times the Investment Amount (i.e. the relevant multiplier at the date of the sale of the business to Molson Coors), not 2.50. As a result, Starbev was obliged to pay ICEH/ABI an additional €129 million.
Starbev appealed the decision on the following three grounds:
- To engage the anti-avoidance provision, the reduction of the payments to ICEH/ABI had to be the "sole" purpose for structuring the receipts from Molson Coors by use of the Convertible Note.
- Even if the "dominant" purpose approach was correct, the judge had been wrong on the evidence to decide it was the "dominant" purpose.
- There was no Equity Return for the purpose of the anti-avoidance provision because without the Convertible Note no deal would have been done in the first place.
The Court of Appeal disagreed with Starbev's argument that, unlike a partnership or a trust (where the partners or trustees had to have regard to the interests of persons other than themselves), Starbev had complete freedom to regard only its own interests and could make an agreement that consideration was to be deferred for any reason. It was held that, to the extent that the anti-avoidance provision applied, Starbev's freedom to act solely in accordance with its own interests had been restricted.
Starbev referred to Revenue & Customs Commissioners v Pendragon (a decision relating to English tax law) and UBS AG v Revenue & Customs Commissioners (a European case on the abuse of rights) from which, it argued, one could derive a principle that a transaction which avoided tax would not be struck down by the courts as artificial if it had any proper commercial purpose. The Court of Appeal noted, however, that even if that was right and tax avoidance had to be the sole purpose of the arrangement for it to be struck out, such a proposition was an imperfect and unpersuasive analogy and it doubted the relevance of the law on the abuse of rights.
The Court of Appeal noted that in the operative part of its opinion in Pendragon, the Supreme Court had commented that there were two main difficulties with applying the principles of abuse of law to tax avoidance schemes, one of which "is that of concurrent purposes […] It is difficult to conceive of a scheme, other than a fraudulent one, which achieved absolutely nothing but a tax advantage. They are usually directed to achieving a commercial purpose […] The potential for abuse consists in the method chosen to achieve the commercial purpose." The judgment showed the difficulty with the concept of a "sole" purpose" as being the determinative factor and its references to the "principal aim" and the "essential aim" of the transaction, to a large extent, supported the High Court's decision that the purpose has to be the dominant purpose rather than the sole purpose.
Furthermore, in Hayes v Willoughby the Supreme Court had observed that "A person's purposes are almost always to some extent mixed, and the ordinary principle is that the relevant purpose is the dominant one". The High Court had been entitled to rely on this opinion to hold that the word "purpose" in the anti-avoidance provision was intended to be construed as the dominant purpose.
The Court of Appeal also commented that if the "purpose" was interpreted to mean "the sole purpose", it would be all too easy for the anti-avoidance provision to be subverted.
Separately, Starbev sought to rely on a clause which required disputes relating to the CVR to be submitted to accountants. It argued that an accountant could not be expected to resolve a dispute about the nature of the purpose required and whether it was the dominant purpose. However, the Court of Appeal gave this short shrift, noting that accountants have to resolve issues of fact in the course of their professional activities just as much as judges do.
Accordingly, the Court of Appeal held that the High Court had been correct to apply the "dominant" purpose test.
It also held that it was not relevant whether the deal would have been made without the Convertible Note. The whole point of the deeming provision was that it was intended that only an arithmetical exercise should take place.
- This decision provides helpful clarification of the meaning of "the purpose" in a commercial context, where it is likely to be interpreted as referring to the "dominant purpose".
- However, those drafting commercial contracts would be well advised to avoid any uncertainty and to specify whether the purpose is intended mean the "sole" purpose, the "dominant" purpose or even one of multiple purposes.