BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (KBD)
B e f o r e :
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CHOCOLATE CITY LIMITED |
Claimant |
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– and – |
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WEA INTERNATIONAL INC. |
Defendant |
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Tamara Oppenheimer KC and Gillian Hughes (instructed by Dentons UK and Middle East LLP) for the Defendant
Hearing date: 6 November 2023
Draft Judgment Circulated: 9 November 2023
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Crown Copyright ©
This judgment was handed down by the judge remotely by circulation to the parties' representatives by email and release to The National Archives. The date and time for hand-down is deemed to be Thursday 16 November 2023 at 10:30am.
The Honourable Mr Justice Foxton:
INTRODUCTION
The Facility
"Repayment of Loans
Subject to clause 7 (Conversion), the Borrower shall repay the Loans in full together with any interest accrued thereon on the Maturity Date."
(the Maturity Date being defined as "the date falling sixty (60) Months after Financial Close").
"CONVERSION
7.1 Conversion under Option Agreement
In the event that the Lender exercises the Option in accordance with the Option Agreement, the obligations of the Borrower in respect of repayment of the outstanding Loans and payment of any interest thereon (other than any outstanding default interest) under clauses 6.1 (Repayment of Loans) and 9.2 (Payment of interest) shall be discharged in their entirety on the Conversion Date.
7.2 Conversion in respect of Distribution Agreement
Without prejudice to any rights of the Lender under this Agreement in particular clauses 6 (Repayment) and 8 (Prepayment and Cancellation) and this clause 7, the Lender may (but is not obliged to) at any time on or before the Maturity Date enter into a discussion with the Borrower and ADA in respect of a possible conversion of all or a portion of the outstanding amount of the Loans at the Maturity Date into an unrecouped balance (i.e. recoupable against future amounts) under the Distribution Agreement and an extension of the term of exclusivity under the Distribution Agreement until such converted amount of the Loans into an unrecouped balance is recouped and paid in full, in each case on terms to be agreed between such parties.
7.3 Reborrowing
The Borrower may not reborrow any amount of the Loans reduced in accordance with this clause 7."
i) to convert the outstanding debt into equity in Chocolate City in accordance with the terms of an Option Agreement; and
ii) to convert the outstanding amount at the Maturity Date into a balance which could be recovered under the terms of an agreement providing for the distribution of Chocolate City's material ("the ADA Distribution Agreement").
I address those agreements below.
"PREPAYMENT AND CANCELLATION
8.1 Illegality
If, in any applicable jurisdiction, it becomes unlawful for the Lender to perform any of its obligations as contemplated by this Agreement or to fund or maintain its participation in any Loan or it will cause illegality to any Affiliate of the Lender for the Lender to do so:
(a) the Lender shall promptly notify the Borrower upon becoming aware of that event;
(b) upon the Lender identifying the Borrower, each Available Commitment will be immediately cancelled; and
(c) the Borrower shall repay the Loans (i) in their entirety immediately upon the Lender notifying the Borrower or such other date as may be specified by the Lender in the notice delivered to the Borrower or (ii) in such manner and at such time(s) as may be agreed between the Parties in writing.
8.2 Financial Close Long Stop Date
In the event that Financial Close [defined as 'the date on which the Lender gives the Borrower the notification under clause 4.1'] does not occur on or before the Financial Close Long Stop Date, each Commitment shall be cancelled in its entirety.
8.3 Restrictions
a) Any notice of cancellation or prepayment given by any Party under this clause 8 shall be irrevocable and, unless a contrary indication appears in this Agreement, shall specify the date or dates upon which the relevant cancellation or prepayment is to be made and the amount of that cancellation or prepayment.
b) Any prepayment under this Agreement shall be made together with accrued interest on the amount prepaid and, subject to any Break Costs, without premium or penalty.
c) The Borrower may not reborrow any part of a Facility which is prepaid.
d) The Borrower shall not repay or prepay all or any part of the Loans or cancel all or any part of the Commitment except at the times and in the manner expressly provided for in this Agreement.
e) No amount of the Commitments cancelled under this Agreement may be subsequently reinstated.
f) If all or part of a Loan is repaid or prepaid, an amount of the Commitment (equal to the amount which is repaid or prepaid) in respect of the relevant Facility will be deemed to be cancelled on the date of repayment or prepayment."
"the amount (if any) by which:
(a) the interest which the Lender should have received for the period from the date of receipt of all or any part of its participation in a Loan to the Maturity Date in respect of that Loan, had the principal amount received been paid on the Maturity Date;
exceeds:
(b) the amount which the Lender would be able to obtain by placing an amount equal to the principal amount received by it on deposit with a leading bank for a period starting on the Business Day following receipt or recovery and ending on the Maturity Date."
"Payment of interest
The Borrower shall pay all accrued interest on the Loans on the Maturity Date."
"Break Costs
The Borrower shall, within three Business Days of demand by the Lender, pay to the Lender its Break Costs attributable to all or any part of a Loan being paid by the Borrower on a day prior to the Maturity Date."
"(a) The Borrower shall, within 10 Business Days of demand, indemnify the Lender against any cost, loss or liability incurred by the Lender as a result of:
(iv) a Loan (or part of a Loan) not being prepaid in accordance with a notice of prepayment given by the Borrower."
The other transaction documents
The Option Agreement
i) Clause 3.1.1 granted "the Option", defined as WEA's "irrevocable discretion to convert Outstanding Obligations to Shares in the authorised capital of the Borrower, as granted in terms of clause 27" (a reference which is clearly a mistake – the Option Agreement contains 16 clauses). "Outstanding Obligations" were defined as all sums due and outstanding to the Lender under the Facility Agreement which remain unpaid by the Borrower as at the Option Exercise Date.
ii) Clause 3.1.2 provided that WEA's "ability to exercise the Option shall be unfettered and not be subject to any conflicting rights whatsoever (including any existing rights of pre-emption)."
iii) Clause 3.3 provided that WEA could "notify [Chocolate City] at any time from the date that is six (6) months prior to the Maturity Date of its consideration of the potential exercise of the Option", and, following service of such notification, WEA became entitled to information "for the purpose of making its consideration as to the exercise of the Option".
iv) Clause 3.5 provided that, following service of an Option Notice, Chocolate City was to issue shares to WEA "on the Maturity Date".
v) Clause 4.5 provided that, on the exercise of the Option and issuance of the shares, the obligations under the Facility were extinguished, and various security documents were to be released.
The ADA Distribution Agreement
i) In clause 1, the term of the ADA Distribution Agreement was stated to be "co-terminous with the Facility Agreement (i.e. the Term shall continue until the earlier of the Maturity Date … and any termination of the Facility Agreement pursuant to and in accordance with paragraph 17.21 of the Facility Agreement)".
ii) Clause 1 went on to provide that if, on the Maturity Date or "if earlier, the date of termination of the Facility Agreement" (which was clearly a reference to termination under clause 17.21 as referred to in the preceding sentence), there was a net deficit in Chocolate City's account, the term of the ADA Distribution Agreement would be extended until Chocolate City's account was "fully recouped."
iii) Clause 1 gave Chocolate City "the right to repay to ADA one hundred percent (100%) of the amount of Company's unrecouped balance at any time after the Maturity Date (or if earlier, the date of termination of the Facility Agreement)" (emphasis added), but no right to pay off the balance before those dates.
Events following the conclusion of the various transaction documents
THE APPLICABLE LEGAL PRINCIPLES
DOES CHOCOLATE CITY HAVE A RIGHT TO PREPAY THE FACILITY BEFORE THE MATURITY DATE?
The language of Clause 8.3(a)
i) Clauses 6.1 and 9.2 clearly provide for payment of principal and interest on the Maturity Date.
ii) Chocolate City argues that those provisions are qualified by a right under clause 8.3. That clause appears under the rather unpromising heading "Restrictions", although the Facility provides that "headings are for ease of reference only". More substantively, clause 8.3(a) pre-supposes the existence of a right to cancel or prepay which appears elsewhere ("any notice of cancellation or prepayment given by any Party under this clause 8 shall be irrevocable") rather than purporting to create one. It is accepted that this is the effect of clause 8.3(a) so far as cancellation is concerned (clauses 8.1(v) and 17.2.1(a) being the source of the right to cancel). While it might be said that clause 8.3(a) can both create the right to prepay "under this clause" and regulate the exercise of that right, that "meta-drafting" would be incongruous, and would give clause 8.3(a) a very different function so far as notices of cancellation and termination are concerned, even though the two are treated in the same manner.
iii) A similar problem arises with clause 8.3(d), which contains a prohibition on prepayment or cancellation "except at the times and in the manner expressly provided for in this Agreement". Whereas there are contractual provisions providing for when cancellation can be notified, Chocolate City are reduced to stating that, so far as prepayments are concerned, clause 8.3(d) simply requires it to repay in accordance with the date it has specified in its clause 8.3(a) notice, turning what is clearly intended to be a limitation on Chocolate City's rights into a self-certification scheme.
"by no means uncommon, including in professionally drafted contracts, to find provisions which are unnecessary and could, without disadvantage to either party, have been omitted."
i) The Option Agreement is described as granting WEA an "irrevocable discretion" to convert the amount outstanding as of the Option Exercise Date into equity, which right is "unfettered and not be subject to any conflicting rights whatsoever." Clauses 3.3.1 and 3.5 proceed on the basis that the right of conversion is to be exercised on the Maturity Date, with the ability to obtain information for the purpose of exercising the option becoming available 6 months before the Maturity Date. However, on Chocolate City's construction of the Facility, WEA's "irrevocable" and "unfettered" right can be extinguished before the Maturity Date by Chocolate City affecting prepayment, including in the period after notice of potential exercise of the option has been served.
ii) While Chocolate City can argue that it was inherent in the Option being defined by reference to "Outstanding Obligations" that it was subject to being extinguished through prepayment, the timing of exercise of the Option provided for in the Option Agreement, and the protected status of the Option, cohere better with WEA's construction. This is not simply as a matter of language but also from the perspective of business common sense. The scheme of the Option Agreement is that WEA is entitled to the information to decide whether its economic interests are better served by obtaining repayment of the debt, or acquiring an equity stake. The economic interests of Chocolate City and its shareholders are to the opposite effect. Giving Chocolate City the ability to defeat the option when the economic calculus would favour its exercise by making prepayment would substantially undermine the value of the Option.
iii) The ADA Distribution Agreement does not contemplate prepayment of the Facility Agreement before the Maturity Date save where it is terminated under clause 17.21. While it can fairly be said that this does not contemplate cancellation for illegality under clause 8.1, the fact that the interpretative exercise must swallow a gnat of drafting infelicity does not justify an interpretation which must accommodate a camel.
iv) There is no right to pay off any negative balance under the ADA Distribution Agreement before the Maturity Date or termination of the Facility (implicitly under clause 17.21). That is consistent with a transaction structure which embeds WEA's rights recognised in clause 7 of the Facility up to and including the Maturity Date, and presupposes that the Facility will only be terminated on the Maturity Date or pursuant to early termination under clause 17.21.
Commercial purpose
i) The LOI states that the proposal was for "WMG or its affiliate(s) to provide financing" to Chocolate City "in the form of a convertible note for an aggregate amount of $1,500,000 … which … shall be payable in full or convertible into 60% of the equity interests" of Chocolate City.
ii) In an email dated 27 September 2018, WMG explained the "convertible loan structure [the parties] have been discussing" as "the investor (WMG) loans money and at the end of the loan term (after 5 years), the investor (WMG) has the option of accepting a return in the form of (i) principal plus interest or (ii) equity in the company", to which Chocolate City responded "We are aligned", and "We are happy to move ahead with the deal".
iii) The Term Sheet states under "Proposed Transaction", for example, that this was an investment "by way of secured loan, convertible into equity in the Company at the Lender's option at the Maturity Date". "Loan Repayment" provides that "If WMG elects not to exercise the Option to convert the Loan into equity … at WMG's sole determination and option, all or a portion of the Loan … may be converted into an unrecouped balance under the Distribution Agreement".
Rectification for mistake
CONCLUSION