Legal Updates

Commercial Law – Contract Construction – Admission of Pre-Contract Negotiations - Shareholders Agreement - Option Deed – Corporate Law – Offshore Companies – Convertible Loan – Shareholders Loan

The case of Great Hill Partners II LP v Novator One LP and Others [2007] concerned the interpretation of a clause in an option deed dated March 2005 made between the claimant and the defendants. At the time the deed was executed the claimant was bidding against the other parties to take over “QXL”. QXL was a listed company whose principal business was to run an internet auction website.

The claimant's vehicle in the bid was “TAC”, whilst the other parties' vehicle was the third defendant, “Florissant”. When TAC's bid was announced in November 2004, the fourth and fifth defendants tried to find a financial backer. They negotiated with the company Novator Ltd, which was an investment company. Novator Ltd set up a fund, which became the first defendant in this case: “Novator One”.

Two agreements were concluded in December 2004:

§   Firstly, the Florissant subscription and shareholders agreement (“Florissant SSA”); and

§   Secondly, an agreement between Florissant and the Polish parties who had claimed to have acquired 92% of QXL's Polish subsidiaries (“the Edelmira Agreement”). The ownership of the 92% by the Polish parties was in dispute in Poland.

The Florissant SSA was made in contemplation of an offer by Florissant for QXL. It regulated what the investors could and could not do in respect of the making and conduct of the offer. Clause 4.1 provided that if the offer went unconditional, Florissant would issue a number of preferred shares.

The Edelmira Agreement provided that if Florissant's contemplated bid succeeded, the dispute over the ownership of QXL Poland would be settled on pre-determined terms. Then, in January 2005 Florissant announced a bid. The following month TAC announced an increased bid.

Following negotiations, the option deed was executed in March 2005. Under clause 2.1, the claimant was granted an option, exercisable at any time during the option period, to require each of the three defendants to sell a specified number of preferred shares in Florissant (“the Option Shares”). The Option Shares were to be 23% of each seller's holding of Florissant preferred shares.

The claimant agreed by clause 4.5 that it would ensure that the TAC offer was not revised or extended and would be allowed to lapse. This case concerned clause 6.5(b) which provided that each of the defendants:

“…Warrant and under take to the [claimant] and agree that until expiry of the Option Period or completion of the sale and purchase of all the Option Shares pursuant to the exercise of the Option in accordance with this Deed, whichever is the earlier - (a) ... (b) the Grantee shall have rights of pre-emption in respect of new issues of shares for cash by Florissant and in respect of any new shareholder loans so that the Grantee shall be entitled to its pro rata share to obtain and maintain a 23 per cent (subject to adjustment to take into account the Grantee not taking up any rights of pre-emption under this clause (b)) interest in the issued Preferred Shares upon the exercise of the Option and be offered any such new shares or shareholder loans at the same price and on such other terms as are offered to other shareholders”.

After the deed was executed, Florissant began buying QXL shares in the market below the then Florissant bid price. It managed to acquire about 28%, paid for by a loan from a BVI company, Keaton, which was ultimately owned by the same person as Novator Ltd. The loan was paid in three instalments, and no loan agreement was ever executed.

The QXL price began to rise, and it was believed that the Florissant bid would fail. The claimant then announced that it wanted to participate in the 'Novator shareholder loan', a reference to clause 6.5(b). It wanted to do so because the Florissant bid might fail, yet the value of the Florissant holding of QXL shares might rise and the claimant considered that the loan would be repaid by an issue of shares in Florissant.

However, the defendants denied that the claimant had a right to participate in the Keaton loan under clause 6.5(b). In April 2005 it was announced that the Florissant bid had lapsed. The Keaton loan was repaid with money raised from certain defendants subscribing for preferred shares in Florissant under an amendment to the Florissant SSA.

In September 2005, Novator One paid over £6.2m to Keaton in respect of the increase in the value of the QXL shares acquired by Florissant with the Keaton loan. The claimant subsequently issued proceedings.

The claimant contended the following:

  • Firstly, that the Keaton loan was a convertible loan and was a 'new shareholder loan' for the purposes of clause 6.5(b);
  • Secondly, and alternatively, the issue of shares in Florissant SSA was a 'new issue of shares for cash by Florissant' under clause 6.5(b); and
  • Thirdly, clause 6.5(b) entitled the claimant to participate in the loan or the issue of shares.

In the case, the issue arose as to the admissibility of evidence concerning the pre-contractual negotiations, what the parties had discussed and what the parties had expected prior to entering into the option deed.

According to the claimant, boundaries to the exclusionary principle were not rigidly fixed and it was open to the court to hold that negotiations between the parties, as well as the draft head of terms, were admissible.

The court decided that while the Court of Appeal had recognised the possibility that the boundaries of the exclusionary principle might be redrawn in the future, it had not changed the law on the admissibility of pre-contract negotiations as an aid to the construction of a written contract intended to contain all of the agreed terms.

Evidence of pre-contract negotiations was admissible if it was contended on proper grounds that the parties:

  • Negotiated on an agreed basis;
  • Were subject to an estoppel by convention; or
  • Wanted the contract to be rectified.

On its true construction, the rights conferred by clause 6.5 were conditional on the claimant exercising the option. Clause 6.5(b) was intended to protect the 23% stake against direct dilution resulting from the issue of new preferred shares, and from indirect dilution resulting from the issue of ordinary shares or the making of shareholders' loans. The court decided that that being the sole purpose of the sub-clause, it followed that the rights it conferred were conditional on the claimant exercising the option, which in turn was conditional on the Florissant bid succeeding. The court felt that as the Florissant bid had failed and the option was therefore not exercised, the claim would be dismissed.

Please contact us for more information on assessing damages due under termination of a contract at


© RT COOPERS, 2007. 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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