Oil and Gas M&A: No unfair prejudice to reduce sale price

In Albion Energy Ltd v Energy Investments Global BRL [2020] EWHC 301 (Comm) the Commercial Court refused to allow the buyer of a remaining minority equity interest in a company (when the buyer owned 80% of the company already) to withhold payment of the consideration for that sale on the basis of an unfair prejudice claim. This claim was founded on the fact that the target company had a potential separate right to claim monies from the selling shareholder (relating to monies allegedly due to the target company by the ultimate owner of the seller). To have set off the amounts claimed against the consideration on these grounds would have required specific contractual rights to do so in the share purchase agreement between the buyer and the seller.

Heritage Oil Limited (“Heritage”) is an oil production and exploration company, incorporated in Jersey, founded by Mr Buckingham. In 2014, Energy Investments Global BRL (“EIGL”) acquired 80% of the share capital in Heritage and took the company private. The remaining 20% continued to be owned by Albion Energy Limited (“Albion”), which was beneficially owned by Mr Buckingham. EIGL and Albion were parties to a Shareholders Agreement that allowed, pursuant to clause 8.3, any party “from time to time” to require an audit or review of Heritage.

In 2017, a well-known investigations and audit practice was commissioned to undertake such an audit. That audit had not reached its endpoint in January 2018. On 31 January 2018, Albion agreed a sale and purchase agreement to sell its remaining 20% interest in Heritage to EIGL for the sum of US$100 million (the “SPA”). Under the SPA, payment for the shares was to be in tranches. In addition to Albion and EIGL, Heritage, Mr Buckingham, a company called Albion Resources and a company called Sundance Investments Ltd were also parties to the SPA.

By Clause 8 of the SPA, Albion, as seller, was released and discharged from “Buyer Released Claims”, which was expressed to exclude from release and discharge “any Claim which relates to any matter reported by Alvarez and Marsal Disputes and Investigations LLP in relation to their audit of the business and affairs of the [Heritage] currently in progress on behalf of the [Albion] (pursuant to clause 8.3 of the Shareholders' Agreement)”.

Before the final payment under the SPA was paid, claims were made against Mr. Buckingham on behalf of Heritage following an audit. These related to a number of payments to Turkish and Nigerian companies, expenses relating to luxury items and services and costs relating to a Gulfstream jet not allocated to any specific project (together “disputed payments”). EIGL withheld part of the final payment due to Albion as consideration under the SPA.

Albion sought a summary judgment for the final payment due under the SPA. EIGL contended that Albion was not entitled to summary judgment because EIGL had a defence with a realistic prospect of success, namely an equitable set-off arising from EIGL’s claim for relief for unfair prejudice against Albion.

Unfair prejudice

Unfair prejudice is available under the Companies (Jersey) Law 1991. Article 141 of the 1991 Law provides that a member of a company may apply to the court for an order under Article 143:

“on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interest of its members generally or of some part of its members (including at least the member)”.

Article 143 provides that if the court is satisfied that the application is well-founded, “it may make such order as it thinks fit for giving relief in respect of the matters complained of”.

Articles 141 and 143 are substantially identical to those of sections 994 and 996 Companies Act 2006.

Decision

The Commercial Court was of the view that the circumstances of this case were very far removed from the “normal habitat of unfair prejudice petitions”. Specifically, (a) EIGL has owned 100% of Heritage for two years (albeit 20% of that interest is subject to a security interest which will continue for so long as EIGL refuses to pay the outstanding amount); (b) (necessarily) Albion has not been a shareholder of Heritage for two years; (c) reflecting that new reality, the Shareholders’ Agreement was terminated by consent some two years ago; (d) Mr Buckingham ceased to have any role in the management of Heritage and his advisory agreement was terminated by consent two years ago; and (e) Mr Atherton (also accused of wrongdoing) resigned from Heritage in December 2017 and Heritage is currently involved in litigation with him in Jersey.

In Re Legal Costs Negotiators Ltd [1999] BCC 547, the Court of Appeal decided:

“As Oliver LJ said in Re Bird Precision Bellows Ltd (1985) 1 BCC 99,467 at p.99, 471 … the very wide discretion conferred on the court to do what is considered fair and equitable is ‘in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of other shareholders of the company’. If the matters complained of have been put right and cured and cannot recur, it is hard to see how the court could properly give relief”.

The Court of Appeal also explained:

1. That prejudice will not be unfair to the petitioner’s interests where the petitioner has available to it a method of bringing that prejudicial state of affairs to an end.
2. On the facts of Re Legal Costs Negotiators Ltd the prejudice caused by the shareholder’s conduct could not be said to be continuing simply because he remained a shareholder because the retention of those shares is not conduct of the company’s affairs or an act or omission of the company.
3. That if the remedying of the unfairness was carried out in such a way that the objectionable conduct could not reoccur, then there is no scope for giving relief.

In the view of the Commercial Court, the points made by the Court of Appeal in Re Legal Costs Negotiators Ltd were fatal to EIGL’s claim for unfair prejudice. Throughout the period to which the disputed payments identified by the audit relate, EIGL was in control of Heritage and in a position to ensure that Heritage pursued whatever claims were open to it. That remained the position at the time of the court hearing. Neither Mr Buckingham or Mr Atherton had any ongoing role in the management company as a result of the agreements which EIGL chose to enter into in January 2018, or, in the case of Mr Atherton, his resignation some three years ago.

In addition:

1. Although there were cases in which the majority shareholder could bring an unfair prejudice petition (see Cool Seas (Seafoods) Limited v Interfish Limited [2018] 2038 (Ch)), the reason for allowing majority shareholders in such cases to bring unfair prejudice petitions was because the articles of association of the given company allowed the minority shareholders to prevent the company from bringing claims against its former directors for breach of their duties. This was not the case here. EIGL was always able to cause Heritage to pursue their claims against Mr Buckingham.
2. In relation to EIGL’s argument that they could have used the claims against Albion as leverage to gain a lower price in SPA, Heritage (and EIGL through its control of Heritage) retains any rights to bring a claim against Mr Buckingham. The suggestion that EIGL might somehow have negotiated a greater reduction in the purchase price than the value of the putative claims to be used as leverage was inherently improbable, and wholly speculative.
3. In circumstances in which it is clear that EIGL had substantial knowledge about the disputed payments before the SPA was signed, and it chose notwithstanding that knowledge to purchase the shares at the agreed price but preserve such claims as already existed from matters arising from the audit, there can be nothing unfair in EIGL being limited to such benefit as it can now derive from those preserved causes of action.

Comment

Ultimately, it was decided that EIGL was unable to bring their claim and should have gone through Heritage (for the of benefit for EIGL as its 100% shareholder) with a conventional claim against Mr Buckingham for the disputed payments identified by the audit.

In reality the unfair prejudice claim, which (in effect) sought to reduce the consideration due to Albion for claims against Mr Buckingham, was being used to seek to escape the fact that EIGL had not negotiated for itself in the SPA a clear mechanism by which the purchase price to be paid to Albion could, or would, have been reduced to reflect any claim Heritage may have against Mr Buckingham. The mechanics of such a mechanism may well been fairly complex and subject to substantial disagreement in negotiation. For example, any claim against Mr Buckingham was vested in Heritage (not EIGL, as its shareholder) such that if EIGL was to benefit from a reduction Albion/Buckingham would doubtless have sought a release from Heritage in relation to any claim it may otherwise have. Further, if the claims were disputed, it is not obvious why Albion or Mr Buckingham would have agreed to a reduction in the purchase price (or money being kept in escrow) pending the outcome of that dispute may be long and hard fought.

That said, in circumstances where the ultimate owner of the seller might be subject to claims by the takeover target, and there is a risk that the ultimate owner of the seller may not be able to satisfy sums awarded as a result of such claims, it may be necessary to consider a mechanism in the sale and purchase agreement by which the buyer may protect itself in the event that the target company cannot recover sums due to it from the ultimate owner of the seller.