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Articles | Tue 7th Jun, 2016
Lord Justice Longmore, sitting in the Court of Appeal, endorsed the approach of the High Court in interpreting the words “for the purpose of” inserted into the term of a contract, to mean the “dominant” purpose, rather than the “sole” purpose.
Interbrew were a Central and Eastern European alcohol brewing company who entered into a sale and purchase transaction with an investment vehicle called Starbev LP, of a structure created by a private equity firm called CVC Capital Partners, for the purpose of buying Interbrew. Starbev had a third party buyer lined up for Interbrew and hoped to make a substantial profit from buying it at a low price and selling it on a much higher one.
The price of the proposed sale between Starbev and Interbrew did not match Interbrew’s expectation or valuation of the company but the parties nevertheless wanted to do the deal. To make the deal the parties agreed that alongside the upfront price, Interbrew’s then-owners would be entitled to some of the profit (a contingent value right (‘CVR’)) made from the re-sale of Interbrew by Starbev at an unspecified future date (deferred consideration).
The CVR agreement was extremely complex and the value of the profit Interbrew’s former owners were entitled to receive was based on a number of contingencies called Investment Thresholds and Internal Rate of Return Thresholds that in essence meant that the earlier the onward sale the lower the amount Starbev would have to pay Interbrew’s former owners. In an attempt to protect themselves Interbrew insisted that an anti-avoidance provision was contained within the CVR to prevent Starbev manipulating the sale to take advantage of the thresholds contained within in order reduce their liability towards Interbrew’s former owners.
Starbev purchased Interbrew and the proceeded to quickly sell it on to their third party buyer. It purported to complete the sale of the Interbrew on a date that meant it only had to pay a reduced amount to Interbrew’s former owners. The structure of payment between Starbev and the third party was designed however by reference to a convertible note that Starbev only cashed in a year later. The consequence of this was that Interbrew’s former owners believed that Starbev had manipulated the structure of the sale, pretending it was quicker than it really was, to avoid paying them a higher fee and as such the anti-avoidance provision was triggered (this would result in a higher calculation of profit, calculated on the later date that the convertible note was realised).
The battleground at court was whether the anti-avoidance clause was activated; in particular whether the convertible note was a payment undertaken “with the purpose of reducing payments” from Interbrew’s former owners.
Starbev advanced submissions that the convertible note was not caught by the anti-avoidance clause because it was not set up with the sole purpose of reducing payments – there were other commercial advantages of structuring the transaction this way. To support their argument they invoked principles of English tax law and European abuse of rights law, where, it was submitted, the right principle was that a transaction which avoided tax would not be struck down by the courts as an artificial transaction if it had any proper commercial purpose (see UBS AG v Revenue and Customs Commissioners  UKSC 12 and Revenue and Customs Commissioners v Pendragon  UKSC 37).
The Court of Appeal rejected Starbev’s argument, finding instead that “the purpose of” did not mean “the sole purpose” but rather “the dominant purpose”, and as such agreed that the anti-avoidance clause was activated. It relied on the earlier Protection of Harassment Act 1997 case of Hayes v Willoughby  UKSC 17 where Lord Sumption argued that the meaning of the word “purpose” was almost to some extent mixed, and the ordinary principle is that the relevant purpose was a dominant one. Further, Starbev’s interpretation of “the purpose of” would allow it to subvert the aims of the clause, and thus could not be a plausible as the objective meaning in the contractual context.
In response to Starbev’s submission that similarities should be drawn to tax law, the Court of Appeal found that such a proposition was an imperfect and unpersuasive analogy. The reasoning for this was that as between the state and a resident in that state (at any rate in England) a resident is usually allowed to do anything except that which is expressly prohibited. Therefore, if any prohibition is defined by reference to a purpose, that purpose would be a “sole purpose”.
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