England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand. London. WC2A 2LL
		24/06/2005

Mr Justice Warren:

Introduction

1. This is an application for summary judgment under CPR 24 by the defendant, Arney plc ("Arney"). The action concerns the shareholding in a company called MNN Holdings Ltd ("MNN"). Following negotiations between Arney and the shareholders of MNN, a sale and purchase agreement ("the SPA") was entered into on 26 June 2001, under which Arney acquired, initially, 51 % of the voting shares in MNN. The SPA also contains put and call options in relation to the remaining 49%. There is a formula for the ascertainment of the price payable on exercise of either of the options, with a £35m cap. In the action, the Claimants seek payment of £35m following the exercise of their put option. Arney seeks summary judgment dismissing the claim.
2. The issues in the case are, put shortly:

a. Whether the notice exercising the option was served. The Claimants say that it was sent, but Arney says it was not received in due time. This is an issue which depends on evidence and cannot be decided summarily (although if Arney is correct, it would be an end of the case). [Issue a.]

b. Whether the notice was valid. Arney says that the notice was given on behalf of some, only, of the shareholders concerned and is therefore invalid. This raises a short point on the construction of the notice in the context of the clause pursuant to which it was sent. [Issue b.]

c. Whether the mechanism for ascertaining the price (the formula and the cap), in the event of Arney making a loss (which happened) is, as Arney contends, inoperable as it stands or whether, as the Claimants contend, it results in a price of £35m. [Issue c.]

d. Whether, if it is inoperable, any term as to the price is to be implied (either into the formula or into the provision creating the option) or whether the option simply falls away. [Issue d.]

3. Issues b. and c. are issues of construction. Issue d. is an issue of mixed fact and law - the factual matrix giving rise to the alleged implied term and the legal principles on which such terms are to be implied.
4. In relation to Issue c. different judges might reasonably take different views: so that, in that sense, I cannot say that, were this matter to go to trial, the Claimants have no real prospect of succeeding on that Issue. However, I have received full argument on it, and consider that I am in as good a position as would be a trial judge to decide it. I have reached clear conclusions on it. Accordingly, whether or not Arney's application falls strictly within the terms of CPR 24.2, I propose to decide Issue c., if not pursuant to CPR 24.2 then as a preliminary issue pursuant to my case management powers. Issue b. is more straightforward. I have formed a view on that, for reasons appearing later in the judgment, in favour of the Claimants on which they, if they make formal application for it, should be entitled to judgment under CPR 24.2; alternatively, since I am in as good a position to decide the issue as would be a trial judge, I would use my case management powers to decide the Issue as a preliminary issue.
5. Issue d. is more problematical. I will consider how to deal with it after having dealt with Issues b. and c.

The SPA

6. The put and call options are found in Clause 13 of the SPA. Although it is the put option contained in Clause 13.2 which has been (at least purportedly) exercised, the provisions of the call option in Clause 13.1 may have some bearing on the question of the validity of the exercise. I accordingly quote Clauses 13.1 and 13.2 in full.

"13.1 Each of the Remaining Shareholders hereby grants to the Purchaser the right to require him or her, by notice in writing served on the Principal Vendors (copied to MNN) exercisable at any time during the 30 days following the signing of the audit certificate in respect of the 2003 Accounts, to sell to the Purchaser all (but not some only) of the Remaining Shares (together with all accrued benefits and rights attached thereto). If only one of the Principal Vendors (taken together with their respective permitted transferees, as referred to in clause 15.1) holds any Remaining Shares at the relevant time, the notice given by the Purchaser shall be given to that Principal Vendor only. If neither of the Principal Vendors or their permitted transferees holds any Remaining Shares at the relevant time, the notice given by the Purchaser shall be given to all holders of Remaining Shares. Once given, notice of exercise of the Call Option shall be irrevocable save with the agreement of the Remaining Shareholders.

13.2 The Purchaser hereby grants to the Remaining Shareholders the right to require the Purchaser, by notice in writing served by the Principal Vendors (copied to MNN) exercisable at any time during the 30 days following the expiry of the 30 days referred to in clause 13.1, to purchase all (but not some only) of the Remaining Shares (together with all accrued benefits and rights attached thereto). If only one of the Principal Vendors (taken together with their respective permitted transferees, as referred to in clause 15.1) holds any Remaining Shares at the relevant time, the notice to be given shall be given by that Principal Vendor only. If neither of the Principal Vendors or their permitted transferees holds any Remaining Shares at the relevant time, the notice to be given to the Purchaser shall be given by Remaining Shareholders who, between them, hold in excess of one half of the Remaining Shares. Once given, notice of exercise of the Put Option shall be irrevocable save with the agreement of the Purchaser"

7. The consideration for the Remaining Shares is set out in Clause 13.3 as follows:

"Subject to the provisions of clause 18.3, the consideration for the sale and purchase of the Remaining Shares shall be satisfied by:-

a) the issue to the Remaining Vendors of that number of Arney Shares as have an aggregate value (calculated in accordance with clause 13.6) equal to or, at the option of the Purchaser, Loan Notes having an aggregate nominal value equal to, 49 per cent of :- PAT x 60% x 3MC/3E

b)

where:-

"PAT" is the average of the 2001 Post-Tax Profits, the 2002 Post- Tax Profits and the 2003 Post Tax profits:

"3MC" is the mean of the market capitalisations of the Purchaser over the six months ending 31 December 2003 (or, if the ordinary share capital of the Purchaser should no longer be admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange on 31 December 2003, on the date on which the Arney Shares ceased to be so admitted), as derived from each Daily Official List of the London Stock Exchange published over such six month period:

"3E" is the Purchaser's consolidated post tax profits (excluding exceptional items and adjusted to add back (or deduct, as applicable) any tax attributable to any such exceptional items) as derived from the audited consolidated accounts of the Purchaser for the year ending 31 December 2003,

subject to a maximum of £35 million ................"

The possibility of deli sting (which had actually occurred by the time the put option came to be exercised) is dealt with in Clause 13.7 which provides for the consideration to be satisfied by Loan Notes rather than shares.

8. In order to understand the provisions just quoted, it is necessary to trace through a number of definitions.

a. The Principal Vendors are the first and second Claimants, and the Vendors include them and a list of persons set out in Schedule 1.

b. Remaining Shares means the issued shares in MNN (other than a certain class of deferred shares) held by the Remaining Shareholders at the date of the exercise of the put or call option.

c. Remaining Shareholders include (i) the Vendors (other than the trustees of an identified trust) and their permitted successors under Clause 15.2 and Schedule 8 (the details of which are not of relevance for present purposes) and (ii) the trustees of an Employee Benefit Trust to be set up pursuant to Clause 16 (the details of which are, again, not of relevance).

d. The 2001 Accounts are "the audited consolidated financial statements of [MNN and Crown] as at and for the twelve months ending on 31 December 2001" and there are similar definitions for later years.

e. Pre-Tax Profits means "the consolidated net revenue profits on ordinary activities of [MNN and Crown] (excluding, for the avoidance of doubt, profits and losses of a capital nature) for the period in question before tax, as drawn from the relevant Earn-Out Accounts and adjusted as necessary as provided in the Accounting Policies", the Earn-Out Accounts meaning the 2001 to 2005 Accounts as the context requires, and the Accounting Policies being set out in Schedule 5.

9. I should also mention Clause 28 of the SPA pursuant to which the parties acknowledge that the Principal Vendors are authorised to act on behalf of the Vendors and the Remaining Shareholders for the purpose (among others) of receiving and serving notices under Clause 13,

Commercial background

10. Arney was and is a business support specialist. As at June 2001, Arney's then management, the shareholders and management of MNN/Crown and the financial markets (including specialist analysts) all believed that Arney was and would remain a financially strong company which would for the foreseeable future generate increased earnings and profits. It had a widely perceived ability to secure very large contracts and it operated in what, at least at that time, was a high-growth environment. Its market capitalisation was then about £914m and had averaged over £lbn during the first 6 months of 2001.
11. Consistently with those expectations, Arney reported post-tax profits for the year-end 21 December 2000 of £20.098m. Unfortunately, there were (well-publicised) problems within Arney which resulted in severe financial difficulties with post-tax profits being restated in 2002 at £4.901m. Although not part of the background, I note here that losses were reported for the year-ends 31 December 2001,2002 and 2003 and that eventually a Spanish company, Ferrovial Servicios SA (a company with a market capitalisation of over €5,000m), purchased Arney in May 2003. Arney was then delisted.
12. In 2001, MNN was a holding company with one significant trading subsidiary, Crown Business Communications Ltd ("Crown") which was a media communications company. The first and second Claimants were the majority shareholders and the directors of MNN. Certain employees also had small shareholdings. Although Crown was due to report a loss for the 15 month period to 31 December 2000 of £ 1.46m it was forecast, by April 2001, to make profits of £lm for the year end 31 December 2001. It was a company with a bright future.
13. The synergistic advantages perceived by Arney and the shareholders in MNN are reflected in a Memorandum sent at the time of the SPA by the Group Chief Executive of Arney who wrote:

"Having worked closely with Crown over the last two years we are delighted with their acquisition. Forming part of Arney Technology Services they will be an excellent fit with our existing business solutions portfolio. We look forward to exploring the many opportunities that exist for cross selling services across both client bases."

An announcement to the Stock Exchange referred to earlier in that Memorandum spells this out at greater length.

Commercial purpose of the price formula in Clause 13.3

14. In the announcement to the Stock Exchange, the following passage appears:

"The consideration for the remaining 49% is based upon an incentivised earn-out agreement. The exact amount of the earn out is a function of Crown's performance as part of the Arney Group. Assuming Crown's business grows strongly by some 20% per annum within the current Arney environment a further consideration of some £15 million would become due. For the purposes of UK listing rules a cap has been inserted into the transaction such that if the business is extremely successful as part of the Group the arrangement may lead to a maximum additional consideration of up to £67.5 million. Arney and the vendors have set the cap at such a high level so that the vendors are fully incentivised, with extremely aggressive earnings required to maximise the consideration for this element."

15. It can be seen that one purpose of the price formula was to incentivise the Vendors who remained working in the business, to the greatest possible extent and who were subject to restrictions on disposal of the Arney shares forming the consideration for the sale of the initial 51 % of MNN voting shares. The Vendors would be incentivised by a formula which linked the consideration for the 49% holding to the profitability of the Crown business for which they continued to be largely responsible. Of course, there was also a linkage to Arney's own overall profits, a factor which could work for or against the Vendors depending on how those profits rose or fell; but this was an aspect which the parties clearly intended in the context of a group which it was never contemplated would show anything other than a strong profit.
16. Clause 13.3 contains a cap on the purchase price of £35m. Arney says that the cap was inserted to avoid problems with the Stock Exchange: in the absence of a cap, the transaction would have required shareholder approval. The Claimants say that, whilst this might have been the case, the figure was not simply plucked out of the air but was one which might have been reached even in the circumstances which the parties contemplated ie circumstances in which Arney would remain in substantial profit. I do not think that the genesis of the cap or the reason for its actual amount is relevant to the questions which I am asked to decide.

Exercise of the Put Option

17. On 11 June 2004, the first and second Claimants wrote a letter ("the Notice") to Arney purporting the exercise the put option contained in Clause 13.2 of the SPA as follows:

"We write pursuant to clause 13.2 of the [SPA]. Terms defined in the [SPA] bear the same meaning when used in this Notice.

We, the Principal Vendors, hereby give notice pursuant to clause 13.2 of the [SPA], on behalf of each of the Remaining Shareholders whose names are set out in Schedule 1 to this Notice, of the exercise by such Remaining Shareholders of the right to require you to purchase all of the Remaining Shares."

The Schedule contains the names of all of the individuals who then fell within the definition of "Remaining Shareholders". It did not, however, contain the name of the trustee of the EBT which had by then been constituted pursuant to Clause 16 of the SPA and which had become a shareholder.

18. Mr Nugee, for Arney, argues that the put option was exercised only on behalf of the shareholders named in the Schedule to the option notice; that there was no option to put some only of the shares onto Arney and that the Notice is therefore defective.
19. I reject that submission. The Notice must be construed against the provisions of the SPA. It is clear from the terms of Clauses 13.1, 13.2 and 28 that the first and second Claimants had actual authority to give the Notice on behalf of all the Remaining Shareholders who were parties to the SPA. However, the trustees of the EBT were not parties. There might be some doubt about whether the first and second Claimants had authority to service the Notice on behalf of them. Clearly it was envisaged that they would have such authority since the SPA provides for both (i) the transfer of shares to those trustees (thus constituting the EBT the Trustees within the definition of Remaining Shareholders) and (ii) the exercise by the first and second Claimants of the put option over the totality of the Remaining Shares. Further, Clause 16.2 provides a mechanism to bind persons who are granted options by the trustees as part of the EBT. It was not, in any case, suggested by Mr Nugee that, had the Notice been given expressly on behalf of the trustees too, the Notice would have been invalid because there was no actual authority for the first and second Claimants to do so.
20. Accordingly, in construing the Notice, I proceed on the basis, but without deciding that the first and second Claimants had actual authority to exercise the put option on behalf of the trustees. The put option, according to Clause 13.2 of the SPA can be exercised in relation to "all (but not some only) of the Remaining Shares". The Notice itself refers to Clause 13.2 in its first paragraph, a futile reference if the Notice was intended only to exercise an option over some only of the shares since no such option was ever granted. The second paragraph gives notice under Clause 13.2 and includes express words requiring Arney "to purchase all of the Remaining Shares" [my emphasis].
21. There are, as a matter of language, two possible readings of the words "on behalf of each of the Remaining Shareholders whose names are set out in Schedule 1 to this Notice" in the second paragraph of the Notice:

a. First, the exercise of the option is made on behalf of the Remaining Shareholders whoever they may be, the words "whose names are set out in the Schedule" being simply an incomplete description.

b. Secondly, the exercise of the option is made on behalf of those of the Remaining Shareholders whose names are set out in Schedule 1 and only those Remaining Shareholders.

22. In the absence of the words which follow " ..... this Notice" it might be that the second of those meanings is the more natural. However, that meaning is flatly inconsistent with the clear intention expressed in the final words which require the purchase of all of the Remaining Shares and not just the Remaining Shares held by the persons named in the Schedule. In contrast, the first meaning gives effect to that clearly expressed intention and adopts a construction of the language used which is, in my judgment, in no sense artificial or strained.
23. It is, I consider, no answer to that to say that the Remaining Shareholders, if restricted to those named in the Schedule, in fact have no right to exercise the option in relation to all of the Remaining Shares. That would be to misunderstand the reason for reaching the conclusions which I have reached. This is not a case where a notice has been given by a person (or his agent) mistakenly thinking that he is the option holder but where the notice-giver has no authority to serve the notice on behalf of the actual option holder. The point is that the persons who served the notice, the first and second Claimants, had actual authority to serve the Notice on behalf of the trustees. Where the choice lies between (i) on the one hand rejecting as invalid a notice which (a) could have been given expressly on behalf of the trustees by the persons who actually gave it and (b) expressly intends to bring about a result (the purchase of all the shares) which could only be achieved by a notice given on behalf of the trustees and (ii) on the other hand rejecting the Schedule as a complete and accurate description of the persons on whose behalf the Notice was served, I have no hesitation in adopting the latter.
24. I only add that the words "of the exercise by such Remaining Shareholders" are consistent with each of the meanings I have considered. They do not, I consider, favour one meaning above the other.

The meaning of the price formula

25. The main issue is the effect of 3E as the denominator in the fraction 3MC/3E in the formula in Clause 13(3)(a) when Arney has made a loss rather than a profit. Before considering that, there is a far less significant issue which, according to Mr Nugee, may have an impact on the main issue (and will have an actual impact if the put option is operable) and to which I now turn.

PAT

26. The first term in the formula is "PAT", defined as the average of the 2001 Post-Tax Profits, the 2002 Post-Tax Profits and the 2003 Post-Tax Profits. As a matter of fact, the 2001 and 2003 Post-Tax Profits were positive figures (£860,000 and £124,000); but in the period relevant to the 2002 Post-Tax Profits, MNN/Crown showed a loss (£306,000). Mr Nugee submits that the 2002 Post-Tax Profit is a negative figure equal to the loss for that year so that the average of the profits for the 3 years is £(860,000 - 306,000 + 124,000)/3 (= £226,000). Mr Boswood, for the Claimants, submitted that the 2002 Net Post-Tax Profits were nil, so that the average is £(860,000 + 0 + 124,000)/3 (= £328,000).
27. The purpose of the averaging in the definition of PAT is clearly to reflect the fact that profits fluctuate from year to year and that a single year may well not give a true picture of MNN/Crown's profitability. It would be very odd if that averaging did not take account of a loss made in one or more of the years over which the average is taken. I prefer a construction which avoids that result. It seems to me that the definition of Post Tax Profits adopts very much an accountancy approach; it refers to "net revenue profits" as excluding "profits and losses of a capital nature". It recognises, I consider, that a loss could result and that "net revenue profits" (and thus "Post-Tax Profits" for a year) could be a negative figure.
28. In my judgment, therefore, Mr Nugee's submissions are correct so that the loss in the middle year is brought into account and not is simply to be treated as a nil figure.

3MC

29. The factor 3MC (ie 2003 Market Capitalisation) does not cause a problem. Since Arney was delisted in June 2003, 3MC is the mean market capitalisation over the 6 months ending on that date. It is common ground that this figure is £69.7m.

3E

30. As a matter of fact, Arney made a loss in the year ending 31 December 2001. The loss, applying the provisions of the definition of 3E, is in the order of £22.235m. Mr Nugee has three, alternative, submissions on the meaning of3E and its effect in the formula.

a. First, ("the Primary Submission"), the Post-Tax Profit is a negative figure that is to say £-22.235m. A loss, Mr Nugee says, is the converse of a profit or, he might say, a loss is negative profit (although he seemed less happy with the formulation that a profit is simply a negative loss).

b. Secondly, ("the Secondary Submission"), even if a loss cannot be expressed, for the purposes of the formula, as a negative profit, there was in fact no profit. Whatever the position might be if there really was a precise outcome on profit and loss account of no loss and no profit, it is no more correct to describe a loss as nil profit than to describe a loss as a negative profit. Accordingly, the formula reveals a denominator of [blank]; since a key variable has no value assigned to it, the formula breaks down and does not yield a figure at all.

c. Thirdly, if it is correct that 3E does equal zero, the last factor in the formula, 3MC/3E, does not have a finite value; division by zero is not a meaningful operation in the real world. The underlying concept, Mr Nugee says, is that of a price/earnings ratio which is what 3MC/3E is designed to reflect. But a price/earnings ratio is a meaningless concept where there are no earnings. It is part of this third submission that the formula must be capable of producing a figure if Clause 13.3 is to apply: one cannot, says Mr Nugee, simply apply the cap of £35m. The cap is precisely that ie a maximum, but one has to know the figure which it is to cap if it is to be capable of applying.

31. Mr Boswood rejects all of Mr Nugee's submissions. He says that where there is a loss there is a zero profit and that the correct figure for 3E is zero (the consequences of which I will turn to in a moment). If a company makes a loss it makes no, or nil, profit: he says that as a matter of linguistics this is a perfectly tenable approach as compared with one which insists that "profits" must be a positive number.
32. He also submits that the £35m cap is part of the mechanism for ascertaining the purchase price: it is unnecessary, on this approach, to ascertain a figure given by the formula if one knows that it will exceed the cap. In that case, the purchase price is the cap, no more no less.
33. A mathematical Note was produced in support of the Claimants' case. It is, I think, important to remember that the Court is concerned to construe the meaning of what, on the face of it, is a simple formula the various components of which are defined by words having no mathematical dimension although perhaps having an accountancy dimension. In particular, the Court is concerned with the meaning of the fraction 3MC/3E when there is no profit, a task which involves at least examining the meaning of the definition of "3E" to see whether it results in a figure of zero or whether the fraction 3MC/3E in its context is a meaningless construct; and if 3MC/3E is a meaningful concept in cases of loss, the Court is concerned, as a matter of language rather than mathematics, to determine whether the cap applies. It is not, I consider, for a mathematical expert to answer those questions. Or, if there is any mathematics involved, I consider that I am up to the task without expert assistance.
34. The only issue of any mathematical difficulty is what happens where one has a fraction with a defined numerator (in the present case the market capitalisation of Arney) where the denominator gets progressively smaller. Take the graph plotted, on conventional x and y axes, of y = l/x. As x gets smaller, y gets progressively larger. As x approaches zero, y approaches what has been labelled infinity. One can say that when x equals zero, y equals infinity: but that is an intellectual construct over which one must take care. For instance, if one plots on the same graph, the curve y = l/x where x is a negative figure, one will find a reflection of the curve for l/x where x is positive. The results for y will all be negative, and, as x approaches zero from the negative side, y becomes an increasingly larger negative number. The corresponding intellectual construct as x approaches zero is of y approaching minus infinity. So, when x actually equals zero, there are two constructs giving an answer to y - infinity and minus infinity. No doubt mathematicians, number theoreticians and philosophers of mathematics can debate these concepts of infinity, and of different levels of infinity, at length (if not ad irifinitum). But these debates will not, I consider, help any judge to decide in the real world the meaning and effect of a formula which it is being attempted to apply in circumstances for which it was not designed and which it was never contemplated would arise for its application.
35. Mr Nugee, rightly or wrongly, understood the Claimants to be saying that the fraction 3MC/3E required division of a positive number, 3MC, by zero. Mr Boswood does not now, if he ever did, put his case that way. He, too, says that the concept of dividing by zero is meaningless: it simply cannot be done. What he says now, as I understand it, is that if one examines what happens to the formula PAT x 60% x 3MC/3E as 3E gets smaller and smaller, there comes a time when it reaches £35m. As it gets smaller still, that formula produces an ever increasing number, but the price is capped at £35m. It is a matter of indifference how big the figure which the formula produces provided that one knows the figure is higher than £35m. If he is correct, linguistically, in saying that a loss, as well as a case of genuine no profit/no loss is a profit of nil, then the formula produces a figure in all such cases greater than £35m. He does not need to be able to say how much greater. To put the same point (in my words, not his), since one can see what the formula, read with the cap, achieves where 3E is very small (ie a cap of £35m) one should apply the same result where 3E is nil.
36. The parties' legal approach to the construction of the formula and the cap are diametrically opposed. Mr Nugee starts with the proposition that the parties did not for a moment contemplate what would happen if Arney made a loss: such a possibility was simply not on their horizons. That is common ground. And it no doubt forms part of the factual matrix against which I should construe Clause 13.2. He says that it could never have been the parties' intentions that £35m could ever have become payable in circumstances where Arney was making a loss and had no earnings on which to found a price/earnings ratio.
37. Mr Nugee also submits that Mr Boswood's approach fails to give effect to one important purpose of the formula, namely to incentivise the claimants to achieve as large as possible a profit for MNN/Crown. Where the cap bites because 3E is nil (there being a loss), the profits of MNN/Crown become irrelevant to the price paid: the profits of MNN/Crown could be very much smaller than contemplated and yet the price would be the £35m cap. However that is a difficulty which Mr Nugee has to face even where the formula does work, that is to say when Arney does have a profit, albeit a very small one. I think Mr Nugee's point is really no more than another way of putting the point that no-one contemplated the operation of the formula in circumstances where Arney has made a loss (nor, for that matter, where it has made only a small profit, of an entirely different order from what was expected).
38. Against that approach, it is objected by Mr Boswood that the formula works in cases where Arney is in profit, even if very small profit. Indeed, when the profits are sufficiently small (so that 3E is very small) the figure produced by the formula exceeds the £35m cap which therefore applies to produce the purchase price. Why, it is asked, should the position be any different when the profits are precisely nil, or where there is a loss?
39. Mr Nugee responds with two answers. First, he says that if there had been a very small profit, with the result that the formula gives a very large figure so that the cap applies, he would have wished to formulate other arguments, based on frustration and the fact that the parties can have contemplated such a case no more than they contemplated a loss. Secondly, he says that even though the formula, strictly applied, does work even in the case of a very small figure for 3E, that is no reason for extending its application, in the interests of consistency, to cases where it does not even literally apply - there being no profit, or, as he would put it, a negative profit. One should not, he says, extrapolate from one absurd result (ie large figure resulting from a very small value for 3E) to another absurd result (ie infinite figure resulting from nil value for 3E).
40. Mr Boswood starts from a very different position. He says that what is of fundamental importance is what the parties intended, not what they contemplated. What they clearly intended, he submits, is that the Remaining Shares should be capable of being sold, that the put and call options should be capable of operation. Clause 13 was to provide a mechanism under which one party could compel the other to purchase the Remaining Shares whatever the circumstances. If the formula can sensibly be construed as providing for the price even in circumstances which the parties had not contemplated, it should be construed in that way rather than in a way which defeats the underlying intention that the put option should be effective.
41. He says (leaving aside issues of implied terms) there are therefore two candidates for the result of Clauses 13.2 and 13.3:

a. Clause 13.2 is disapplied - disapplied, at least, is the word he uses, although that is perhaps a use of a word which assumes the correctness of Mr Boswood's approach and I prefer simply to say that Clause 13.2 does not operate in the circumstances;

b. Clause 13.2 (read with Clause 13.3) provides for a consideration of £35m.

It is only the second of these results which gives effect to the underlying intention as he has identified it; what the parties intended was that the put option should give rise to a binding contract for the sale and purchase of the Remaining Shares at the price ascertained in accordance with the formula. The formula is capable of being construed in a way which makes the option/contract effective and should be construed in that way.

42. There is, of course, considerable force in that submission. However, its force would be considerably weakened if it were possible to imply a term fixing the price if the formula is incapable of operation. Even assuming that it was the intention of the parties that the put and call options should be capable of operation in all circumstances, it does not necessarily follow that the price has to be determined by the formula in Clause 13.3 even where the circumstances in which the put option is exercised were not contemplated. In effect, there is a third candidate which is that Clause 13.2 provides for some consideration ascertained in accordance with some appropriate valuation basis. The issue of implied terms has been argued before me and I will come to it in due course. For the moment, I proceed to consider the point of construction on the footing that, if Mr Nugee is correct, there could be no implied term (as indeed he submits is the case) thereby giving Mr Boswood's submissions on construction the most force.
43. The central issue is what is meant by "consolidated post-tax profits" in the definition of 3E construed in the context in which it is used, that is to say in Clause 13.3. Unlike the position in relation to the profits of MNN/Crown, there is no definition of post-tax profits in relation to Arney. Clearly, however, it is necessary to look at the audited consolidated accounts to ascertain the amount of Arney's "consolidated post-tax profits". Those accounts show, in the profit and loss account and in other statements of profit or loss, a figure which, for the year in question, is identified as a loss by being shown in a conventional way, that is to say as number with parentheses round it.
44. In considering the definition of PAT, I concluded that the loss for the middle year in which a loss was incurred is to be brought into account in ascertaining the average profit over the three year period. That does not, I consider, require me to apply the same approach to the meaning of "consolidated post-tax profits"; that is a different phrase from that relevant to the definition of PAT and is, significantly, found in the context of a definition which is being used for a very different purpose. In the end, I do not find words used in the definition of PAT of assistance in determining the effect of Clause 13.3.
45. What I do find helpful, in attempting to determine the meaning of the phrase, is to ask the question: "What are Arney's consolidated post-tax profits" where Arney has made a loss of £x. There are essentially three possible answers. The first answer is: "Arney's consolidated post-tax profits are a loss of £X"; the second answer is: "Arney does not have any consolidated post-tax profits: it has made a loss". The third answer is: "Arney's consolidated post-tax profits are nil".
46. The first answer draws no distinction between profits and losses, regarding them as a continuum. Since reference is made in the definition of 3E to the audited consolidated accounts from which the consolidated group profits are to be derived, there is much to be said for the view that the phrase "consolidated group profits" is be used as a reference to the result on the profit and loss account for the group even if that result is a loss. That conclusion is supported by the provision for exclusion of exceptional items and the adjustment for tax. For instance, the audited accounts might show a profit after excluding exceptional items which is converted into a loss when adjusted for tax; and conversely, the accounts might show a loss which is converted into a profit in the same way. It would be odd, in the latter case, if the adjusted figure did not fall within the definition of 3E since it is an ascertainable and positive figure; but if profits can only include positive profits, there would be no profits in the first place to adjust.
47. In further support of that answer, it is suggested that the word "profit" might be described, in a very basic way, as the excess of income over expenditure, expressed in the simple equation P = I - E; so that if expenditure, E, is greater than income, I, the resulting profit, P, is a negative figure. That simple equation, however, tells us nothing about the meaning of the ordinary word "profit": if one defines a term P as equal to (I -E) then of course, P can be negative. And if one states that P is to be called "Profit" then of course the result will be a negative figure for Profit. But that is to give the word "Profit" a special meaning; the word used in the ordinary world for this concept is not "Profit" but loss.
48. Further, although it may be that, in accountancy terms, a loss can be referred to as a negative profit, that is not in my judgment an ordinary use of the word profit; and even an accountant would not, I think, naturally describe a loss of £X as a profit of minus £X.
49. Moreover, the result of applying a concept of negative profit would be to give the fraction 3MC/3E a negative value in cases of loss. The consideration which the Remaining Shareholders are entitled to receive is, of course, obviously intended to be something of value - shares in Arney or loan notes. It cannot possibly be contended that the result of the formula is a negative amount which the Remaining Shareholders are obliged to pay to, rather than receive from, Arney. The formula gives a figure (a negative figure) which must clearly be rejected. To my mind this suggests that an approach to construction which leads to a result which cannot be applied is wrong and must be rejected.
50. For those reasons, I reject Mr Nugee's Principal Submission.
51. The third answer, however, even if it can be said to be literally correct, is incomplete and possibly misleading. There is a difference between saying "Arney did not make a profit" and "Arney made a profit of nil". The statement "Arney made a profit of nil" seems to me to contain two assertions: first, that Arney made a profit; and secondly that that profit was nil. Even if one accepts Mr Boswood's submission that it is correct to describe a position of exact balance (ie the simple equation P = I - E gives the result 0 because I = E) as a profit of nil, one cannot, consistently with rejecting the first answer, say that where there is in fact a loss there is nonetheless "a profit of nil": if Arney makes a loss it does not make a profit and therefore, in my judgment it is incorrect to say "Arney made a profit of nil". For that reason, I reject the third answer.
52. But I would not, in any case, accept the proposition that a position of exact balance is properly to be described as a profit of nil; or, at least, if it can be so described, it can equally well be described as a loss of nil, so that a position of exact balance is one of both profit and loss at the same time. As a matter of ordinary language, profit is to be contrasted with loss: it is not an accurate use of language to describe the special case of exact balance as both a profit and a loss of nil when the correct position is that there is neither profit nor loss at all (although I would add that, if the first answer is correct, the position of exact balance is correctly described as "profit" in the continuum just as a loss is properly described as a (negative) profit).
53. In my judgment, the second answer is the one which points to the meaning of the phrase "consolidated post-tax profits" in the definition of 3E. In a case of loss, there simply are no profits at all. Accordingly, the term 3E in the fraction 3MC/3E has no meaning and no value is assigned to it. On that basis, Mr Nugee says that the formula breaks down and does not yield a figure at all.
54. I return, then, to Mr Boswood's submission which, as I have said, focuses on the intention of the parties that Clause 13 was to be operative, not inoperative and that the Court should adopt a construction which, so far as possible, gives effect to that construction rather than frustrates it. He submits that the true effect of Clause 13.3 is to provide a consideration of £35m where Arney's consolidated audited accounts show a zero profit or a loss. His argument has as one critical element the proposition that the absence of profit (not only in the case of exact balance but also in the case of loss) can be described as a nil profit. For reasons I have already given, I have rejected that proposition in cases where there is a loss. Accordingly, Mr Boswood's argument does not get him home. But in case I am wrong in that, I deal with his argument further.
55. The result for which he contends is to be achieved by examining what figure the formula would give, taking progressively smaller figures for Arney's profits, moving to the limiting case of there being no profit and then moving into loss. It is not disputed that the effect of the formula (ignoring the cap) would be an ever increasing number as the figure for profit decreases; nor could it be disputed that, if a corresponding exercise were carried out for losses, an ever increasing figure for loss (or negative profit as Mr Nugee would have it) would arise. Mr Boswood then points out that, as soon as one gets to the point where the figure for profits produces an amount greater than £35m, the cap of £35m comes into effect. It makes no difference how small the profit becomes below that figure: the formula will always give more than £35m which is therefore the price which has to be paid.
56. Although Mr Boswood accepts, indeed asserts, that the concept of division by zero is meaningless, he says that division by a very small number has no conceptual difficulty and that what we do know for sure is, that as the profits approach zero, the formula gives an ever-increasing figure which approaches infinity. We therefore know that when profits actually equal nil, the figure, whilst not capable of calculation, is larger than £35m. The £35m cap is part of the mechanism for ascertaining the price and is therefore the amount which Arney has to pay.
57. In my judgment, Mr Boswood's submission would be correct if his premise were correct. If (contrary to my judgment) it is correct to describe a position of exact balance as a profit of zero, it would, I consider, be a seriously anomalous result if the very tiniest profit resulted in a consideration of £35m but a position of exact balance did not (because of difficulties over the concept of infinity or dividing by zero). I reject Mr Nugee's third submission that the formula has to be capable of providing a certain answer before the cap can apply: it is enough that we know that the figure is larger than the cap which, applying any sensible approach to the concept, infinity is. Since on this approach, a loss, too, is (again contrary to my judgment) to be described as a zero profit, the same result would apply.
58. My conclusion on this issue is therefore that Mr Nugee's Secondary Submission is correct. The definition of 3E breaks down in the case where Arney makes a loss since it cannot be said that the "consolidated post-tax profits" of Arney are zero where Arney in fact makes a loss (whatever the position might be where there is an exact balance).

Implied term

59. Mr Boswood asserts two alternative implied terms should the mechanism under Clause 13.3 fail to deliver a price (as I have held to be the case);

a. The first implied term is to ascribe to the fraction 3MC/3E a value determined by reference to what would have been a reasonable price/earnings ratio when the parties entered into the SPA. Such ratio is a matter for expert evidence.

b. The second, alternative, implied term is that the consideration under the put option falls to be determined by reference to what would have been a reasonable price for those shares by reference to the information available to the parties at the date the parties entered into the SPA.

60. The question of implied terms has also been argued, but not, I think, as fully as it might be. For reasons which I give in a moment, I do not, on the one hand, think that Mr Nugee is able to establish a case which is so strong that the Claimants have no real prospect of establishing an implied term; but, on the other hand, nor do I think that Mr Boswood's arguments are so strong that I can say that Arney has no real prospect of successfully resisting the implication of any term. Nor, for reasons which I will come to, do I think that I am in as good a position as would be a trial judge to determine the issue.
61. The legal requirements for the implication of terms are, in general terms, well established, essentially to give business efficacy to the contract. Terms will be implied where the court can infer, from the language of the contract and the circumstances under which it was entered into, that the parties must have intended the stipulation in question. The test is a strong one: the court is not able to rewrite contracts by inventing reasonable terms when the parties have not done so for themselves but can only articulate that which they must be presumed to have necessarily intended themselves.
62. On this ground. Mr Nugee says that the first implied term for which Mr Boswood contends cannot possibly be correct. Even if the parties might have adopted some other price/earnings ratio, one cannot possibly say what one. The Claimants pick Arney's price/earning ratio at the time of the SPA. Mr Nugee says that it is impossible to say that this is the one which would have been agreed (one which, as it happens, would be very favourable to the Claimants). Other candidates would have been Arney's price/earnings ratio at the most recent date on which it had one; or its average price/earnings ratio over a period of years; or average ratios for the sector; or the parties might have applied a default figure or made some other provision. Without deciding the point, I see considerable force in those submissions and consider that they may well be correct.
63. Mr Nugee also says that there is nothing in the second, alternative, implied term. He says that it suffers from the same problems as the first suggested implied term, namely that it is impossible to say what the parties would have intended had they appreciated that the formula did not cater for the case where Arney made a loss. There are, he says, additional difficulties. Although the court can substitute an obligation to pay a fair and reasonable price where an inessential contractual machinery breaks down (see Sudbrook Trading Estates v Eggleton [1983] 1 AC 444), this can be done only where the machinery is seen to be inessential. Where the particular mode of ascertaining the price is both specified in the contract and, as a matter of construction, is an essential term of the contract, then the Court has no power to substitute any other method of ascertaining the price because this is not to implement the parties' bargain but to make a different one. He relies on Gillatt v Sky Television Ltd [2000] 1 All ER (Comm) 461, particularly at pp 467-9 per Mummery LJ.
64. I do not think that Mr Boswood really challenges those general propositions. But the present case is clearly not like Sudbrook. In that case, the House of Lords held that the sale was to be at a fair and reasonable price by the application of objective standards, and that the machinery (which had broken down) for ascertaining that price was inessential.
65. But nor is the present case like Gillatt. In that case, the payment for a block of shares was to be "55 per cent of the open market value of such shares ..... as determined by an independent chartered accountant". It was held that the expression "as determined by an independent chartered accountant" was an integral and essential part of the definition of the payment which was to be made. It was accepted by the parties, by the time of the appeal, that it was too late for a reference to an independent chartered accountant to be made: there had been no breakdown of the machinery for the determination of the value; and this was not because the parties had failed to perform their obligations or because a nominated individual had declined to act, but because the party claiming payment had failed to take the necessary contractual steps to ascertain entitlement to payment. In these circumstances, the Court was not entitled to substitute something different, such as its own opinion on open market value, in place of that which had been contractually agreed.
66. Gillatt is not a case about implied terms; it concerns a point of construction about a particular provision in relation to which the court held that the determination by an independent chartered accountant of the value was an essential ingredient and where it was too late for reference to such an accountant to be made. It is wholly distinguishable (subject to one aspect which I shall come to) from the present case where the formula for ascertaining the price does not apply, being incapable of operation in the case of a loss made by Arney.
67. It must be remembered that the put and call options form part of a larger contract. Part of the mutual consideration for the sale of the initial 51 % holding of voting shares in MNN was the put and call options. To hold that the put option has, in the events which have happened, become inoperable would be to render worthless part of the consideration which the parties intended should pass. In those circumstances, it is, I think, easy for the court to say that the parties must have intended that some price should be payable. But whether it can do so in a way which is sufficiently certain is more difficult. It is in that context that the other aspect of Gillatt needs to be mentioned.
68. At p470 a-d Mummery LJ says this:

"(c) I do not accept the submission that the reference in c1 6.1 to 'open market value' of the shares in T AS would provide the court with adequate objective criteria in this case for the court to determine the value of the T AS shares. I recognise that the concept of open market value is objective in the sense that expert valuers called by the parties would be able to offer to the court reasoned opinions on the value of the T AS shares. The real difficulty for the experts and the court, however, would be that the T AS agreement does not contain any definition of 'open market value' or any indication of the basis on which it is to be ascertained, otherwise than by reference to the opinion of the independent accountant. As Mr Rosen QC pointed out on behalf of Sky and as Mr Choo Choy recognised, there is more than one possible approach to such a valuation of shares in a private company: an earnings basis, an assets basis, a discounted cash flow basis, or a combination of these approaches. The fact is that in this case the parties expressly recognised that such a valuation is pre-eminently a matter of judgment for the independent accountant entrusted with the task by the parties. The T AS agreement did not prescribe for him any detail of the basis on which he was to approach the determination of open market value. It was treated as a matter of judgment entrusted to his decision which the parties agreed to accept as final and binding. It is the duty of the court to give effect to the parties' agreement on ascertainment of entitlement to the final payment and to payment for the T AS shares. It is not the function of the court to modify c1 6.1 of the TAS agreement so as to enable it to intervene and make its own valuation. "

69. That passage suggests that, quite apart from the circumstances of that case where the parties had expressly provided for the question of valuation to be referred to an independent chartered accountant, the concept of "open market value" would not be sufficiently certain for the court to give effect to it. Certainly, that passage presents Mr Boswood with problems. However, he does not seek to imply a term that an "open market value" should be paid. Rather, he seeks to imply a term that a "reasonable price" should be paid which, it seems to me, is something very different from "an open market value". And whilst there may be different ways of producing a "reasonable price", the court should, with expert assistance, be able to ascertain the reasonable amount. The court should lean in favour of doing something (ie implying a term) to give effect to the parties' intentions that the put option should be operable in the context where the put option forms, as I have said, part of a larger transaction.
70. Mr Nugee cannot, I consider, establish that Mr Boswood's argument has no real prospect of succeeding at trial. My own inclination, indeed, is to think that the argument is a good one. However, it is not appropriate for me to deal with it finally on this application. Although the point was argued, it did not receive the detailed attention which the other arguments received. Mr Nugee may wish to deploy other arguments to defeat the implication of a term. For instance, it is well established that a term cannot be implied where it is in conflict with an express term. I can see difficulties in implying a "reasonable price" term into Clause 13.2 of the SPA given that the price payable (£35m) when Arney's profits are very low (and when MNN's profits could also be very low) would not be reasonable. Further, if Mr Nugee has an argument with any reasonable prospect of success that the provisions of Clause 13.2 and 13.3 are inoperable, not as a matter of construction but for some other reason, when Arney's profits are very low, that may have an impact on whether a term as to "reasonable price" can be implied.
71. In all the circumstances, I consider that I am not in as good a position as would be a trial judge and consider that Issue d, should proceed to trial. I decline to deal with it summarily or, on this application, as a preliminary point pursuant to my case management powers.

Conclusion

72. Accordingly, I rule as follows:

a. The Notice was in its terms valid but I say nothing about whether it was properly served, and do not decide whether the first and second Claimants in fact had authority to serve it on behalf of the trustees of the EBT

b. The term "PAT" should be ascertained taking into account the loss in the middle year and not treating that loss as a zero profit.

c. As a matter of construction, Clause 13.3 does not provide the purchase price payable under Clause 13.2 on the exercise of the put option in the events which have happened. This is subject to the possible implication of a term that the fraction 3MC/3E should be replaced by some other fraction or figure.