Legal Updates

Commercial Law – Sale of Shares – Written Agreement – Oral Assurance – Put Option

The recent case of Beagle Equities Ltd v Tatanaki [2008], involved a dispute arising over the purchase of shares. In September 2002 the parties in this case entered into a written share purchase agreement (“the Agreement”). The terms of the Agreement stipulated that the claimant in this case was to purchase shares in L Ltd from the defendant. The consideration which was to be provided in exchange for the shares was the sum of $3.5m.

It should be noted that the Agreement contemplated that the shares might subsequently be converted into shares in an associated company, L SA, at a discounted price. Therefore, the Agreement had included in it a clause to the effect that:

“…In the event that the contemplated conversion had not taken place by the 31st of May 2003, the claimant had the option to sell the shares in L Ltd back to the defendant for the original consideration plus interest thereon.” (“the Put Option)

The negotiations which took place prior to the Agreement were conducted by A on the claimant's behalf. No conversion of the shares had taken place by the date as stipulated in the Agreement, and the claimant in this case gave notice of exercise of the Put Option in June 2003.

The defendant did not purchase the shares. Furthermore, the defendant did not pay the sums due under the Put Option. Subsequently, the claimant issued proceedings for the payment of the $3.5m plus interest owed.

The defendant elected to defend the claim against him on the grounds that he had received an oral assurance from A that the Put Option would not be enforced. He further alleged that A had stated that the Put Option had only been included in the agreement to appease the principals for whom A acted. In such circumstances the defendant submitted that the claimant in this case was estopped from enforcing the Put Option. As a result of this argument, the claimant made an application for summary judgment in respect of the claim.

The issue that fell to be determined by the court was whether the proposed defence had a realistic prospect of being successful.

The application was allowed.

It was held that on the evidence as presented to the court, the proposed defence as raised could legitimately be described as fanciful. The court was of the opinion that it was highly unlikely that a right-thinking businessman would execute a document giving rise to such potential liability solely upon the basis of an oral assurance. A right-thinking businessman would typically be expected to execute a side letter or some other form of written record of the assurance.

Even if the defence as raised by the defendant was to be accepted, the court held that it was of no benefit to him. On his own account, the defendant had been party to a deception of the claimant regarding the true nature of the Agreement. The court held that in such circumstances, the claimant should not be estopped from exercising the Put Option. This had the result that the case would be decided in favour of the claimant in the sum of $3.5m plus interest owed.

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© RT COOPERS, 2009. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.

 

 

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