- In August 2011 a deal for the sale of MYOB Cayman Holdings Limited for $1.35 billion fell over, resulting in Federal Court proceedings brought by the company’s former shareholders. A formal agreement had not been executed, but a 'Final Offer' had been made.
- The Court found that, contrary to the allegations of the former shareholders who were seeking damages for breach of contract, the parties had not created a legally binding arrangement.
- This case contains important lessons for parties involved in share sale negotiations. An appeal is possible.
In June-July 2011, private equity firm Archer Capital (Archer) commenced an informal process for the sale of MYOB Cayman Holdings Limited (MYOB), the holding company of the MYOB Group.
Three private equity firms were selected as possible bidders. Sage, a trade bidder, also expressed interest in MYOB in late July, indicating in two 'offer' letters that it was prepared to pay $1.35 billion for 100% of the MYOB shares.
On 12 August 2011, representatives of the financial advisors of Sage and Archer decided on what the Court described as an 'extremely ambitious workplan' to agree a final form of the share sale agreement with Sage by 15 August 2011.
On 15 August 2011, following receipt by Archer of offers from other bidders, Sage sent a 'Final Offer' letter, addressed to the directors of MYOB. The letter was stated to be 'subject to contract' and conditional upon (a) Sage’s review of black box due diligence material, and (b) the parties reaching agreement on outstanding points in the draft share sale agreement (Final Offer).
The next day, after consideration of the various proposals put forward by the bidders, Archer appointed Sage as preferred bidder, and agreed that conversations with the alternative bidders would cease. Representatives of Archer, Sage and their advisors had a ‘handshake meeting’, and Sage was provided with black box due diligence material. Archer communicated to other bidders that Sage had been appointed as the 'preferred bidder'.
Two days later, Sage’s CEO informed Archer that Sage would not proceed with the purchase of the MYOB shares unless the price was reduced by $175 million.
Archer then engaged with Bain Capital, which agreed to purchase MYOB for a lesser price.
Federal Court proceedings
In Federal Court proceedings, the MYOB shareholders prior to the sale to Bain Capital (the applicants) claimed damages from Sage for breach of contract, misleading or deceptive conduct and based on an estoppel.
The applicants and the arrangements between them
The applicants in the proceedings were the shareholders of MYOB at the time of the sale process. They included funds advised by private equity firms Archer (the Archer Investors), HabourVest and Squadron Capital and members of MYOB’s management in 2011 or entities associated with them. One important feature of the arrangements between these shareholders prior to the sale was that the Shareholders Deed contained provisions which enabled the Archer Investors to sell their shares, and to require the other shareholders to sell shares by the exercise of 'drag along' rights or through implementation of exit proposals. A question that arose in the proceedings was whether the Shareholders Deed, either expressly or by implied terms, authorised Archer or its nominee directors, to act on behalf of non-Archer shareholders in relation to the sale or potential sale of their MYOB shares.
Did a contract exist with all shareholders? Could Archer contract for the other shareholders?
The applicants alleged that Sage had entered a binding (but 'interim') agreement that, subject to the satisfaction of certain conditions, Sage would enter into a share sale agreement for the purchase of MYOB.
The Court found that there was no contract between Sage and the applicants as a whole because neither Archer nor the Archer Investors had authority to bind the non-Archer shareholders to any agreement with Sage. This turned on the terms of the Shareholders Deed. The Court found that despite the existence of ‘drag along rights’ and exit provisions which enabled Archer to in effect compel the non-Archer shareholders to sell their shares on an exit, no express authority was given. The Court said:
"[The relevant clauses] effectively provide for the expropriation of non-Archer applicants’ shares at a time to suit the convenience of the Archer Investors. As expropriation provisions, they should be narrowly construed… these are significant investments and it is not a small thing to take away that property or to expose them to the risk of a damages claim."
Did a contract exist with, at least, Archer?
Her Honour found that there was no contract between Sage and Archer, for reasons including the following:
- The Offer was not addressed to Archer. Sage’s Final Offer was to MYOB, not to Archer or the Archer Investors. This view was supported by the fact that the letter was addressed to the Directors of MYOB and addressed the interests of all shareholders, not the Archer Investors only.
- The Offer did not indicate an intention to be bound. There were a number of indicators in Sage’s Final Offer that the objective intention was not to make an offer capable of acceptance to form a legally binding agreement. These indicators included that there was no clear method of acceptance, that the letter was marked 'subject to contract', it did not contain a governing law clause (in circumstances where the draft share sale agreement in circulation at the time had specific governing law and signing clauses), it did not contain a statement affirming an intention to be bound in principle, and it contained express words to the effect that an Appendix would be legally binding but that no other parts of the letter of offer would bind Sage nor create any obligations on the parties.
- The Offer did not deal with the allocation of regulatory risk. There was a risk, which Sage notified Archer of, that the transaction would fall into the category of a 'class 1' transaction requiring shareholder approval under the UK Listing Rules. Neither the Final Offer letter nor the email exchanges allegedly accepting the Final Offer dealt with this risk (although a warranty to address it was introduced into draft share sale agreement in circulation after it was raised by Sage). The Court considered these facts to be a powerful indication that the parties did not intend to be bound prior to executing the share sale agreement, bearing in mind that “commercially sophisticated participants with suitably expert advisors dealing with an entity subject to common and well-known regulatory requirements… would be expected to construct their arrangements so as to meet those requirements… If Sage was to assume the regulatory risk…it would be expected that any legally binding agreement… would deal with the issue”.
- There was no acceptance. The language of the email allegedly accepting the Final Offer, did not in fact constitute acceptance. It stated that Archer was 'prepared to proceed”, and had appointed Sage the 'preferred bidder' – the Court held that this did not reflect an intention to create a legal relationship.
- Archer simply appointed a preferred bidder. The Court accepted that the appointment of a preferred bidder could give rise to a contractual relationship in certain cases, even though such an appointment may 'dampen the enthusiasm'of other bidders. In this case, the parties used the term 'preferred bidder' to refer to a stage reached in the sale process at which Archer identified the bidder it would work with to close out remaining issues regarding the draft share sale agreement. The Court categorised the parties’ conduct as ‘an uncertain but short period of limited exclusivity had been entered into’.
- The reactions of the parties were 'telling'. The individuals involved in the negotiation process appeared to have held different beliefs as to the nature of the relationship between the parties, and the desire of the Archer partners to have the share sale agreement executed quickly was considered by the Court to strongly indicate that they did not perceive a binding agreement to be in place.
Her Honour also considered the parties’ handshake meeting to be no more than a “courtesy in recognition of Sage’s appointment as preferred bidder”.
Misleading or deceptive conduct and estoppel claims
It was alleged that Sage made various representations which were misleading or deceptive and that Archer relied on these representations by releasing the black box material and ceasing negotiations with other bidders.
The Court held that these claims were not made out, relying on similar facts and issues as arose in the contractual claim.
This decision highlights the potential dangers for parties participating in a sale through an informal process on tight timeframes. If the deal dissolves and the parties proceed to litigate, a Court looking back will carefully examine all of the conduct and communications of the parties at a level of detail that can easily be forgotten during the whirlwind of the transaction. While the transaction in this case ran for, in substance, 3 weeks, the dispute ran for almost four years, and could potentially continue for longer if an appeal is filed.
To the extent that the pace of the transaction allows, the following measures may provide a greater level of certainty:
- Seek to get clarity early on as to the correct parties to the transaction, ensure all relevant authorities are in place, and be consistent on this throughout the deal.
- If in doubt, seek clarity and agreement on the status of any offers. Time permitting, this may involve both (1) obtaining and considering legal advice on the effect of an offer; and (2) careful communication with other parties to ensure that expectations are aligned.
- Unless a risk-allocation has been expressly agreed between parties, don’t assume a regulatory risk is the other party’s issue.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020