Alternative Citations [2009] EWCA Civ 368 

Hearing Date 7 May 2009 

Court of Appeal, Civil Division  

Judge Waller, Lloyd and Richards LJJ 

Representation

Summary  

The defendant was one of three shareholders of T (the company). The company had liabilities to its bank, B, which exceeded £5m; as well as hire purchase (HP) liabilities of about £700,000. All three shareholders, including H, the CEO of the company, entered into an agreement with the claimant under which the claimant agreed to assist in arranging a sale of those shares in the company. The agreement between the parties took the form of a letter from the claimant to the shareholders (the engagement letter). In the engagement letter, the claimant described the way in which it would operate a trade sale exercise, as well as setting out its 'thoughts on valuation and confirming details of' its fee arrangements (see [3] of the judgment). The letter then dealt with the claimant's fees. Apart from a non-refundable retainer and out of pocket expenses, the transaction fee was to be 1.65% of the consideration up to £13.5m and 5% thereafter, with a basic minimum fee of £200,000. That required a definition of consideration, for which the letter included the following paragraph: 'For the purposes of calculating the Transaction Fee, purchase consideration is defined as the gross amounts received by the shareholders in cash or in kind, including the settlement or assumption of any shareholder liabilities and bank loans and pre-acquisition dividends or other payments made to shareholders to extract cash from [the company] prior to disposal'. In the event, H did not sell his shares, but the defendant and the third shareholder, C, did. The sale of the shares held by the defendant and C (amounting to 77.5% of the shares) took effect under the share purchase agreement (SPA) dated 19 February 2007. The price paid by the purchasers was stated as £2,452,100 in the SPA, but after adjustment came to £2,110,864. £5,281,304 was payable to an associated company of C by way of the repayment of loans. The issue arose as to the commission to which the claimant was entitled, namely, what other sums were relevant for the purposes of the claimant's claim to commission aside from the figure of £2,110,864. Neither C nor the defendant disputed the claimant's assertion that it was entitled to commission by reference to £5,281,304; however, the defendant disputed that the claimant was entitled to commission by reference to any other sum apart from the cash received. The claimant claimed to be entitled to its transaction fee on the basis of consideration of £14.6m namely, the enterprise value, which was the starting point for the calculation under the actual sale. The defendant contended that the consideration consisted of the price payable for the share themselves, together with the amount payable for the C loan notes but not (a) the sum outstanding to B; (b) the HP liabilities; (c) £36,000 adjustment as regards the audit fee; or (d) the notional sum attributable to H's shares. The judge found for the claimant. The defendant appealed.  

It took issue with the inclusion of sums paid in settlement or assumption of the company's bank debts. Logically, if the B debt was excluded, it would have followed that the other items should be excluded as well, yet they had not been addressed in terms. Moreover, it submitted that, even if the amount of the bank debts was properly included, nevertheless the consideration was not to be equated with enterprise value. It submitted that although it had not been sated in terms, the point was to exclude the HP liabilities, the notional value of H's shares and the £36,000 adjustment in respect of the audit costs.   

The appeal would be allowed.  

The meaning for which the claimant contended of the definition of 'consideration', and which the judge had accepted, strained the words of the definition too far. The consequent frustration of the claimant's expectation, apparent from the tone and terms of the engagement letter, that it had a reasonable prospect of earning a fee at the rate of 5%, and in any event more than its minimum fee, was not a sufficiently powerful context to impose on the words of the definition a meaning which they could not reasonably bear. It was not possible to draw the judge's conclusion (that the consideration under the SPA, for the purposes of the transaction fee to which the claimant was entitled, was the enterprise value sum which was the basis of the purchaser's offer, on the cash free debt basis on which the offers were invited) from the definition of consideration or to reconcile it with the deliberate choice of the reference to amounts received by the shareholders, however widely one interpreted such receipts. The notional value of the H shares and the £36,000 extraordinary costs adjustments had not been received by anyone. The bank loans and the HP liabilities had not been received by any shareholder and had not been settled or assumed by anyone as part of the transaction in such a way as to count as a receipt by a shareholder (see [64]-[65] of the judgment).   

It followed that the claimant was entitled only to its minimum fee (see [66] of the judgment).  

Vanessa Higgins Barrister.