Inner House finds share purchase agreement price calculation did not include assets of wholly owned subsidiary

About this case:

• Citation:
  [2022] CSIH 33
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Carloway

Angelline (Scotland) Ltd argued that the terms of the share purchase agreement entered into with the respondent and original pursuer, Kieron Paterson, only permitted the inclusion of the net assets of his company, Keir Pharmacy Ltd, and not those of its wholly owned subsidiary, AD Healthcare Ltd. It had been the pursuer’s case that the assets of ADHL, which were significantly greater than KPL’s, were to be included in calculations.

The appeal was heard by the Lord President, Lord Carloway, sitting with Lord Woolman and Lord Pentland. Dean of Faculty, Roddy Dunlop QC, appeared for the reclaimers and MacLean, advocate, for the respondent.

Adjusted consideration 

The pursuer was the former director of KPL and owned 95 per cent of its shares. In May 2019 he agreed non-binding Heads of Terms with the reclaimers, including a total price of £6.4 million for the KPL shares. The share purchase agreement was executed on 5 July 2019, which provided for a payment of £5.2 million on completion and then an “initial deferred consideration” of £500,000 about 7 days following. The agreement provided for the IDC to be adjusted if the amount of the actual net current assets exceeded or fell under that figure.

It was the pursuer’s position that the IDC adjustment was to take into account the assets of both KPL and its subsidiary ADHL, which on its own possessed £619,914 worth of assets while KPL possessed only £229,682. The result of basing the SPA solely on KPL’s assets would be that the pursuer would require to pay the difference of £282,904 back to the reclaimers rather than receive an additional £119,914.

The pursuer maintained that there had been no prior discussion or even a suggestion that the net assets of ADHL ought not to have been considered. However revisions to the SPA suggested by the reclaimers’ solicitors that defined “the Company” as solely KPL were incorporated into the principal deed on 3 July 2019.

The commercial judge determined that the pursuer was entitled to a proof and had pled a relevant case for an implied term that ADHL’s assets ought to be included. She found that subject to proof the court was faced with a patent mistake in the drafting of the SPA and a construction that excluded a major portion of the business’ net current assets was inconsistent with its purpose.

Counsel for the reclaimers submitted that the definitions in the SPA were clear, and it was not open to the courts to construe them in a manner contrary to their natural meaning even if the outcome could be considered commercially improbable. The pursuer had not averred a relevant case based on implied term as the test of necessity had not been met and an implied term could not run counter to express terms included in the contract.

Effective contract

Lord Carloway, delivering the opinion of the court, observed: “The construction of the contract in the present case is straightforward. The crucial parts of the Share Purchase Agreement are not ambiguous. Part of the price was to be the Initial Deferred Consideration, as a payment to account, subject to adjustment if the Actual Net Current Assets were lower than the £500,000 already paid. Critically, the references to current assets and liabilities are to those of ‘the Company’, which is defined as Keir Pharmacy Limited.”

He continued: “There being no ambiguity, the pursuer’s construction is rejected. It would involve rewriting the contract. The court cannot bolt on to the definition of ‘the Company’ the words ‘and AD Healthcare Limited’. That is impermissible. Prior negotiations and post execution conduct are irrelevant in these circumstances.”

Examining the requirements for implying a term into a contract, Lord Carloway said: “Five conditions are required before a term will be implied into a contract. One is that it must be necessary to give business efficacy to the contract. No term will be implied where the contract is effective without it. The term sought to be implied by the pursuer falls foul of this condition. The contract is effective as it is; the changes from the earlier versions simply reduces the price and that by an amount which is relatively small in the context of a £6 million plus agreement.”

He concluded: “The only evidence of the parties’ intention at the time when the SPA was executed is the negotiated draft which was in circulation on 3 July 2019. This defined current assets as those of the Company (KPL) only. That being so, it is of no assistance to look at prior drafts when these had been superseded in writing after review by the parties, or at least their agents. That precludes rectification.”

The court therefore recalled the interlocutor of the commercial judge and granted decree for payment by the pursuer to the reclaimers of £282,904.