Anti-embarrassment clauses – what is the meaning of the purpose?

August 2014

Rating system:

Reading time (1-10 minutes): 3

Sophistication level (1 (idiot) – 10 (expert)): 6

Entertainment value (1 (turgid) – 10 (side-splitting)): 5

No, really, what is the meaning of ‘the purpose’? This isn’t a deep philosophical question. It is an important question if it appears in an elephant clause in a non-embarrassment agreement, as in this recent case. Does ‘the purpose’ mean the sole purpose? The most important purpose? Any one of the purposes? Or something else?

Background

Some business sale agreements contain what is known as (amongst other things) an ‘anti-embarrassment clause’. They are designed to stop the seller looking too stupid if the buyer sells the business at a massive mark-up shortly after buying the business. A seller might particularly look to include such an agreement if it suspects the buyer might be trying to put together a back-to-back deal with another buyer lying in the wings. But it can also be worth including if no-one is really too sure of the right value for the business, or if the seller simply wants to share in any possible future unusual uplift in the business value. I’ve dealt with several recently, for example in one case a shareholder selling his shares to the other shareholder for £500k included an anti-embarrassment clause saying that if the shares were resold within 3 years for more than that the buyer would pay the seller a proportion of the uplift (the proportion decreasing over the 3 year period).

It can be quite difficult to word such clauses to anticipate and cover all possible circumstances which might occur in the future in which you think the clause should or shouldn’t apply. Many contracts therefore have a generally worded clause (which might be called a ‘non-circumvention’ or ‘anti-avoidance’ clause) broadly trying to apply an ‘elephant’ rule ie one which says that if something happens which in hindsight was obviously really intended to be covered by the non-embarrassment clause, then that something should be taken into account when applying the clause. It’s called an ‘elephant’ rule because if you haven’t seen an elephant it can be hard to describe, but you definitely know you’ve encountered one when it sits on you! But this kind of clause still needs to be worded clearly enough so that a court can make a decision based on it.

Case

In this recent case (Starbev GP Ltd v Interbrew Central European Holding), a Starbev company bought ICEH’s European brewing business in December 2009. As part of the deal, they entered into a form of non-embarrassment agreement which they called a ‘Contingent Value Right Agreement’ (‘CVR Agreement’). This gave ICEH the right to receive additional deferred consideration received within the next three years on any subsequent sale of the business.

In June 2012 Starbev entered into an agreement to sell the business to the US brewer Molson Coors. The consideration included a cash sum and also a ‘Note’ for a deferred sum. Because of the way the CVR Agreement was worded, on the face of it ICEH wasn’t entitled to share in the Note element because it was only payable after December 2012, ie after the three year period.

For some reason, the ‘elephant’ clause used in the CVR Agreement was expressed to cover: “…any […] transaction that […] results in payments to […]  [Starbev], with the purpose of reducing payments due to [ICEH]…”. This begged a number of questions.

There was a bit of argument as to whether the Note agreement was itself a ‘transaction’ for this purpose. Starbev said it wasn’t, as it was simply a consideration for the sale transaction (albeit structured in such a way as to try to avoid payments to ICEH under the CVR Agreement). The court held that whilst the latter was obviously true, it was also a ‘transaction’, as within it there were obligations on both parties.

There was also an argument over what ‘the purpose’ meant. Should it mean ‘the sole purpose’ (as Starbev argued)? Or ‘any one of the purposes’ (as ICEH argued)? Or ‘the dominant purpose’, ie more important than any (one or more?) of the others (as ICEH argued should be the case if its first choice argument was turned down)? Or any other variation of the above?!

On the face of it, you would have thought (wouldn’t you?) that the word ‘the’ in ‘the purpose’ is a definite article, and should therefore limit the number of purposes to one. In which case if there was even the slightest other reason for structuring the transaction like this the CVR Agreement wouldn’t apply. And indeed there were other in fact other commercial reasons; for example, the way the Note worked meant that Starbev could earn considerably more if Molson Coors’ share price went up over the deferred period.

Court decision

As with so many of these cases, the court faces a struggle to decide what is fair and then to justify its decision by wrapping it in appropriate legal reasoning. Here, the court thought it would be fair to rule that the CVR Agreement did apply.

So the judge found a previous Supreme Court case ( Hayes v Willoughby, which was about the meaning of the words ‘the purpose’ in the Protection from Harassment Act 1997), which the judge said was authority for the proposition that “the ordinary principle is that the relevant purpose is the dominant one”. Applying this principle, the judge concluded that while there were legitimate commercial purposes for structuring the later sale transaction in the manner that it had been, on the facts of this case these purposes were subsidiary to the dominant purpose of reducing the payments under the CVR Agreement.

So, the judge found for ICEH on this issue, holding that the Note did fall within the anti-avoidance provision in the CVR Agreement.

Advice

• Be careful how you word things. Try not to have to rely on general principles of interpretation which you really can’t be too sure a judge will or won’t apply if it ever gets to court.
• Try to word things clearly enough so that you won’t have to go to court later to argue over what you meant!

Case: Starbev GP Ltd v Interbrew Central European Holding BV1 [2014] EWHC 1311 (Comm).