The True Value Of Beer

Following the sale of Tuatara Brewery in 2017, the Court of Appeal has determined a dispute between the historic shareholders as to the application of a contractual mechanism for determining the value of shares in Tuatara.

Background

The craft beer industry in New Zealand has been booming in recent times.  Off the back of that success the major breweries have been wanting to get a slice of the action.  Following Lion New Zealand’s acquisition of Emerson’s Brewery and Panhead Brewery, the founding shareholders of Tuatara Brewing Company Limited (Tuatara), The Malthouse Limited (TML), were keen to structure Tuatara to make it an attractive purchase for one of the major brewing companies.

To achieve this, they introduced a private equity firm, Rangatira Limited (Rangatira), in 2013 to provide management expertise and the capital needed for the expansion.  Rangatira acquired a 35% shareholding in Tuatara under an investment agreement dated 30 June 2013 (Agreement). 

The issue in this case stemmed back to the value of Tuatara at the time Rangatira acquired its 35% shareholding.  At that time the original shareholders, TML, believed the company was worth $12 million and wanted Rangatira to pay $4.5 million for its stake.  However, Rangatira’s view was that Tuatara was not worth any more than $10 million and it sought to pay $3.5 million for its stake.  In order to avoid an impasse, the parties agreed on a contractual mechanism under which Rangatira would pay the lesser sum of $3.5 million on settlement, but pay the additional $1 million later if Tuatara proved to be worth $12 million. 

Under the Agreement, the requirement to pay the top up was triggered by one of two events occurring:

1. Tuatara achieving, before a sunset date of 30 December 2015, earnings that implicitly valued the company at $12 million.  That target was earnings before interest, tax, depreciation and amortisation (EBITDA) of $2 million over any period of 12 consecutive months (EBITDA Clause); or

2. Tuatara sold for a price exceeding $12 million (Sale Clause).

It was accepted by both parties that Tuatara’s earnings never reached $2 million over a period of 12 consecutive months prior to the sunset date of 30 December 2015, so the EBITDA Clause was not in dispute.  However, on 31 January 2017, Tuatara sold to Dominion Breweries for a price far in excess of $12 million.  As a result, under the Sale Clause, TML sought the additional $1 million from Rangatira. 

​Rangatira refused to make the payment as it said that the sale also had to occur prior to the sunset date, despite the fact that the Sale Clause made no reference to the sunset date applying to it.  As a result, TML issued proceedings against Rangatira in the High Court seeking payment of the $1 million.  Rangatira defended the claim on the basis that on the proper interpretation of the Agreement the sunset date also applied to the Sale Clause and that, in the alternative, it was an implied term of the Agreement that the Sale Clause was subject to the sunset date.

The High Court dismissed TML’s claim finding that it was intended by the parties that the Sale Clause was subject to the sunset date and that the parties only intended the Sale Clause to operate if Tuatara was acquired before the EBITDA Clause was triggered.  TML appealed the decision of the High Court to the Court of Appeal in The Malthouse Limited v Rangatira Limited [2018] NZCA 621.

Court of Appeal Decision

The Court of Appeal overturned the decision of the High Court and found that the Sale Clause was not subject to the sunset date.  As a result, Rangatira was obliged to pay the additional $1 million to TML as provided for in the Agreement.  The Court reached this decision for the following reasons:

1. There was evidence amongst the various parties that there had been conversations at the time the Agreement was drafted about the application of the Sale Clause, but the Court found that there was nothing in the evidence that indicated the conversations specifically addressed whether or not the Sale Clause would be limited to the same timeframe as the EBITDA Clause.

2. On the plain reading of the Sale Clause there was no temporal limit.

3. In stark contrast to the EBITDA Clause, there was no reference to the sunset date.  The Court specifically noted that the parties had clearly turned their mind to this temporal limit in relation to the EBITDA Clause, and equally could have (but did not do so) in respect of the Sale Clause.

4. Rangatira argued that the Sale Clause did not specifically refer to the sunset date because it was “bolted on” to the agreement after the rest of the provisions had been drafted.  Even so, the Court found that when the Sale Clause was interpreted in the context of its surrounding provisions, it was clear that it was intended to operate independently.

5. Rangatira also raised a number of arguments around the background to the drafting of the clauses, but the Court ultimately held that that background evidence simply helped to explain the rationale behind the EBITDA Clause, not the Sale Clause.

6. Reference was also made to a drafting note in relation to the Sale Clause which stated “Drafting note: not anticipated, but inserted for completeness”.  The Court disagreed with the High Court’s interpretation that the drafting note referred to the likelihood of a sale occurring before the EBITDA Clause being triggered.   It found that the obvious explanation for it was that Tuatara expected to reach the EBITDA threshold, so it would not expect to need to rely on what became the Sale Clause.

7. Rangatira argued that the Sale Clause had no time limit on it whatsoever and that it did not make commercial sense that it would apply without limitation into the future.  The Court stressed that only in very clear cases should a court depart from the plain meaning of a closely negotiated commercial contract to achieve a commercial purpose.  The Court disagreed that it was appropriate to do so in this case.  Although the Sale Clause was open-ended, the Court noted that the longer it took for a sale to arise, the lower the cost (in real terms) of the $1 million contingent payment that Rangatira would have to pay, because the payment was not adjusted for use of money.  In addition, as both parties expected that Tuatara would be sold and that was the ultimate objective of the Agreement, there was a natural life to the Sale Clause despite being open-ended.

8. Finally, Rangatira argued that a term should be implied into the Sale Clause to make it subject to the sunset date.  The Court refused to do this stating that to imply a term into the Agreement to make the Sale Clause subject to the sunset date would change the balance of the bargain that the parties had struck.  Furthermore, it said that there is no need for additional terms, such as the implied term sought by Rangatira, in order to make the Sale Clause efficacious.

Conclusion

While the Court accepted there are times where it may look outside the plain and ordinary meaning of the words of a contract, or even imply terms into a contract, it will generally be reluctant to do so.  This is particularly so where the plain and ordinary meaning of the words in the contract make sense and the parties that have drafted it are commercial parties.  As the Court stated “only in a very clear case should a Court depart from the plain meaning of a closely negotiated commercial contract to achieve commercial purpose”.

This case highlights the need for parties to carefully consider each contractual term that is inserted into a bespoke agreement.  It is important to think about what the intent of the clause is, whether the clause as drafted has achieved its intended purpose and whether the clause makes sense in the context of the entire agreement.  All too often parties insert ambiguous clauses into contracts thinking that they are adding clarity to it when they may in fact be doing exactly the opposite.  This case also serves as a reminder that it is much more cost effective to obtain legal advice from a specialist commercial lawyer at the time of entering into a contract in order to ensure it reflects your intentions, rather than having to deal with the fallout later on.

The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstances.