England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MRS JUSTICE GLOSTER
[2011] EWHC 203 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/12/2011

Lord Justice Longmore:

Introduction

1. This appeal raises a comparatively technical question of construction of what have been called back to back sales of shares in and assets held by companies in the Card Tech Group which provide services to banks enabling those banks to process debit and credit card transactions by small rather than large computers. 5 individuals owned 5 companies in the Group which were to be sold to the buyer, Total Systems Services Inc. ("TSYS"). Relationships between the 5 owners (who do at least agree that they owned these valuable companies in equal proportions) were not entirely harmonious at the time of the sale to TSYS. None of the claimants wished to give to TSYS the warranties which a vendor would normally give to a purchaser of shares and which TSYS naturally required; the defendants were, however, keen for the sale to go through and they were prepared to give the relevant sale warranties on their own account. In the light of this a back to back agreement was made whereby the claimants sold their interests in the companies to the defendants and on the same day (11^th July 2006) the defendants sold the 5 companies to TSYS and gave to TSYS the relevant warranties. In the events that happened the agreed price payable by TSYS was $54.5 million of which $11.833 million (being somewhat more than one fifths of that amount) was then payable to each of the three personal claimants and has indeed now been paid. The defendants and certain of the Card Tech companies also received $3.17 million pursuant to three tax deeds of indemnity ("the Tax Deeds").
2. The claimants were in the circumstances anxious to ensure that they were entitled to receive no less than three fifths of whatever price was paid for the shares in and assets of the companies and that the defendants would receive no more than two fifths. In the sale agreements to the defendants, it was therefore warranted by the defendants to the claimants that the sum which would be received by the claimants amounted to three fifths or more of the sum which the defendants would receive. This was achieved by clause 6 of the agreements in respect of each of the 5 companies. The clauses are in slightly different terms but counsel agree that nothing turns on those differences of expression. It is, therefore, sufficient to set out the wording of clause 6 in the agreement for the sale of the company which has been called Research. It provides:-

"6.1 Each of the Purchasers warrants, represents and undertakes to the Sellers:

6.1.1 that the consideration price stated in Clause 3 above represents and amounts to three fifths or more of the sum which the Purchasers are to and will receive for the sale by the Purchasers of the entire issued share capital of the Company.

6.1.2 that the Purchasers will immediately after Completion provide to the Sellers' solicitors a certified copy of the agreement for the sale by the Purchasers of the entire issued share capital of the company.

6.1.3 that the sum to be received by the Purchaser for the sale by the Purchasers of the entire issued share capital of the Company is $21,000,000 (Twenty One Million United States Dollars."

3. Controversy has arisen because it was decided, as between the defendants and TSYS, that the sale agreement had to cover not merely the shares of the 5 companies in the Card Tech Group but instead a combination of shares and certain assets owned either by the companies or their owners. The result of the agreement applying to assets as well as shares was said to be that the vendors would incur not insubstantial tax liabilities and the defendants always made clear that they would be looking to TSYS to indemnify them in respect of such tax liabilities. TSYS were in principle happy to give such an indemnity and in June 2006 PricewaterhouseCoopers ("PwC") reported that such tax liabilities would indeed be incurred because the transactions were partly sales of assets. TSYS accordingly agreed that in addition to the $54.5 million they were prepared to pay for the shares and assets, they would also pay $3.17 million dollars by way of a tax indemnity to the defendants. The question is whether the defendants on receipt of those sums in addition to the sum of $54.5 million became in breach of clause 6 of the relevant agreements which they made with the claimants. If they are in breach they will then be accountable to the claimants for three fifths of this further sum. Gloster J decided that there was no breach because the sum paid by way of tax indemnity was not part of the "consideration price … receive[d] for the sale". The claimants now appeal to this court with the permission of Etherton LJ.

Background

4. Negotiations for the sale to TSYS began in March 2005. It was originally envisaged that it would be a straight forward share sale transaction. Even as envisaged, there would be tax liabilities which would fall on both the claimants and the defendants. These liabilities were by no means enormous and both the claimants and the defendants recognised that such liabilities would have to be paid and were able to take advice as to what the amount of those liabilities would be. On 2^nd June 2005 TSYS put forward a preliminary bid and said that it expected

"the transaction to be structured as an acquisition by TSYS of (1) all of the issued and outstanding stock of the companies or (2) all of the assets of the company."

It was at this stage recognised by both the claimants and the defendants (who made it clear also to TSYS) that a sale which included a sale of assets would give rise to different and more serious tax considerations from a sale of shares on its own. In August 2005 TSYS confirmed a bid of $54.5 million. In October 2005 the defendants made clear to TSYS that they would require an indemnity in respect of their increased tax liability. The claimants and the defendants had also discussed between themselves the principle that, if there was to be an asset sale, TSYS would have to indemnify the sellers for any increased tax liability.

5. At this stage, however, the negotiations were faltering because the claimants made it clear to the defendants that they (the claimants) were not prepared to give warranties to TSYS in any share sale agreement. It was for this reason that the back to back share sale agreement came in due course to be agreed as between the claimants and the defendants. TSYS themselves also lost a major client in the United States and for a time were unenthusiastic about any deal. But negotiations resumed in March 2006 with the price still being $54.5 million; the only matter which needed resolution was the tax indemnity. It was recognised that the figure for any tax indemnity would have to be independently verified.
6. By this stage it was only the defendants who were negotiating with TSYS and the defendants did not disclose to the claimants that they were negotiating for such an indemnity, nor what the terms of the indemnity were to be. The judge set out the reasons why no such disclosure was made but decided that the defendants' motives in taking such a course were not relevant to the true construction of the agreement ultimately made by the claimants and the defendants in July 2006. I agree.
7. In May 2006 the defendants took steps to procure the required independent verification of the increased tax liability. They instructed the Cyprus branch of PwC who produced a report comparing the tax consequences of a share sale on its own as originally envisaged and the tax consequences of the sale of a combination of shares and assets. They produced a report which concluded that there would be an additional tax liability of $3.17 million of which $150,000 would fall to be paid by the claimants and $3,020,000 would fall to be paid by the defendants together with the certain Card Tech companies being retained by the defendants. It was in those circumstances that TSYS made the July 2006 contracts with the defendants agreeing (1) a purchase price of $54.5 million for the share and asset sale of the Card Tech companies and (2) an additional sum of $3.17 million by way of indemnity pursuant to three Tax Deeds.
8. This is, I think, sufficient elaboration by way of introduction and statement of background to enable the dispute between the parties to be determined. Anyone wishing further elucidation can find it in paragraphs 1-62 of the judge's rightly much fuller judgment.

The submissions and the judgment

9. Mr Timothy Charlton QC for the claimants now accepts that the Tax Deeds were genuine transactions recording a genuine tax liability that had increased as a result of the structure chosen for the sale of the Card Tech companies. He submitted, however, that the sums paid pursuant to those deeds, were part of "the consideration price" which the defendants were to and did "receive" for the sale of the issued share capital and assets of the relevant companies. Mr Pushpinder Saini QC for the defendants submitted that the money paid pursuant to the Tax Deeds was no part of the price which was always $54.5 million but was a genuine prediction of the expense to which the relevant companies and the defendants would be put because the sale included a sale of assets. The judge said that she found it impossible to regard the sums received pursuant to the Tax Deeds as money "received for the sale of" the share capital of the business or the assets of the relevant company because they were received for a entirely different purpose

"namely to indemnify the defendants and the relevant Card Tech companies in respect of additional tax liabilities arising out of the restructuring of the deal."

Mr Saini submitted that that purpose described by the judge was a finding of fact which this court should not go behind and was determinative of the appeal. Mr Charlton countered by saying that that purpose was merely a description of the way in which the defendants intended to use part of the price which was paid and, as such, was irrelevant to the construction of clause 6.

Discussion

10. It seems to me that the key to the problem of construction lies not so much in the judge's finding of fact that the purpose of the tax deeds was to enable the defendants to pay the necessary tax but rather in her earlier finding (para 19) that, before the agreement was made, the claimants and the defendants had discussed among themselves the principle that if there was to be an asset sale, TSYS would indemnify the sellers for any increased tax liability. In circumstances in which it was already appreciated by the claimants and the defendants both that there was likely to be an increased liability for tax by reason of the way in which the sale of the companies was to be structured and that the buyers (TSYS) would indemnify the sellers against that liability, it does not make commercial sense for that indemnity against an admittedly genuine liability to be part of the price paid for the sale and to be received by the sellers. To treat the sum paid by way of indemnity as part of the price would be effectively to allow the claimants to pocket three-fifths of the tax indemnity as their share of the "price" while leaving the defendants to pay virtually the whole of the increased tax liability when they were only receiving two fifths of the sum paid to discharge that liability. In a situation in which the claimants could easily take their own tax advice (and indeed probably did) and could discover that their own increased tax liability was to be comparatively small while that of the defendants was to be enormous, it would be unfair to the defendants and a comparative windfall benefit to the claimants to construe the tax deeds of indemnity as part of the purchase price.
11. One could, of course, say as Mr Charlton submits, that the facts of this case merely disclose a situation where the sellers found that they were exposed to greater liabilities by reason of the sale covering assets as well as shares and so decided that there had to be an increase of price which TSYS then agreed to pay. But that would be to fly in the face of the manner in which the deal was constructed which was to calculate and verify the amount of increased tax payable and to indemnify the sellers against that liability to tax. The reason why the deal was structured in that way was to preserve the price which had already been agreed for many months. Both the claimants and the defendants were aware that there would be an extra tax liability and TSYS were prepared to discharge that liability provided it could be verified and quantified.
12. If the claimants had been as concerned as the defendants were about the increase in their liability to tax, they could easily have sought to share in the indemnity. The fact that they did not do so rather leads one to suppose that they were not concerned, no doubt because overall it was so small. It would not be right to transmute that lack of concern into a right to treat the sums received by the defendants (by way of discharging their much larger liability) as part of the price to three-fifths of which the claimants are to be entitled.
13. I wondered at one stage whether it was a matter of chance that the claimants had a minimal extra liability and the defendants a substantial one. Suppose it had been the other way round? The answer to my mind is that such a situation would never have arisen because the claimants would have ensured that they had the benefit of the indemnity as much as the defendants. That is the commercial reality of the situation; the construction for which the claimants contend does not lead to a commercially sensible result since the claimants would get a windfall of about $1.5-2 million (albeit having to find $150,000 to discharge their own liability) and the defendants would have to meet a substantial and uncovenanted tax liability. Even if the claimants had not been sufficiently astute to contract for an indemnity if the figures had been the other way round, it is by no means impossible that the relationship of co-ownership between the claimants and the defendants might in law have given rise to some obligation on the part of the defendants to account for that part of the sum received by them to discharge the liability to tax which the claimants would themselves have to pay. But no case of that kind has ever been mounted and since the extra tax payable by the claimants is so small in relation to the amounts they have already received, one well understands why no such claim has been pursued.
14. As so often the court is faced with two possible constructions of a commercial document. There is now the highest possible authority for the proposition that in such circumstances the more commercially sensible solution is to be preferred, particularly if it is already the solution which has commended itself to the Commercial Judge, see Rainy Sky S.A. v Kookmin [2011] 1 WLR 2900.
15. I would dismiss this appeal.

Lady Justice Black:

16. I agree.

Sir David Keene:

17. I also agree.