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    On the proper construction of a “get-out” clause contained in a shareholders agreement, “company refinancing”, as defined by the agreement, had not occurred, and one of the company’s shareholders was, accordingly, contractually obliged to transfer her shares in the company to a third party in accordance with the other shareholder’s wishes.

    The claimant (J) sought relief in respect of a contractual obligation for the defendant (X) to transfer her shares in a company to a third party under a so-called get-out clause contained in a shareholders agreement. X had wished to acquire a company (E) as a vehicle for owning an industrial site with development potential. A holding company (H) was incorporated for the purpose of E’s acquisition. As X did not have enough money to capitalise H, she entered into an agreement with J under which they each acquired shares. J and X were also the sole directors. The agreement provided for each of them to make a director’s loan to H which was repayable in full on any transfer by J or X respectively of his or her total shareholding. Subject to that, neither loan was to be repayable until “company refinancing” had taken place, after which the loans became repayable on demand. Clause 3(g) of the agreement defined “company refinancing” as meaning that H was able to repay a further loan made to it in full “which fact shall be taken to be conclusively proven by either shareholder producing an unconditional offer from a commercial lender of a loan to the company equal to that then outstanding under the (further) loan upon reasonable commercial terms at the time such offer is made”. Clause 7 of the agreement permitted both J and X to sell their shares by serving a transfer notice on the board offering to sell such shares to a person nominated by the board. Clause 9 of the agreement, entitled “Get out clause”, which was inserted for J’s benefit alone, provided that if, at any time before company refinancing, J served a transfer notice in respect of all his shares, and X was unable or unwilling to purchase those shares, and J found a third party purchaser for them, then he would be entitled, by notice served on X, to require her to transfer all her shares in K to that third party purchaser. J and X later entered into negotiations with a bank to raise a loan to repay J. Outline terms and conditions for a loan to E, subject to final credit approval, due diligence and contract, were produced, but E did not proceed with the loan and relations between the parties deteriorated. J subsequently served a transfer notice on H and X pursuant to cl.7 stating that he wished to sell his shares, and X nominated herself as the purchaser. She was unable to obtain funding, however, within the prescribed time limit and J exercised his right to find a third party purchaser and purported to give her notice that she would be required to transfer all her shares. X resisted the transfer on the basis that conditions for the company refinancing had been met, so that J had no rights under cl.9. It fell to be determined whether (i) there had been company refinancing within the terms of cl.3(g), which was dependant on whether H was able to repay the further loan and, in particular, whether the conditions for conclusive proof of such ability to repay prescribed by that clause had been met; (ii) J had given a notice valid for the purposes of cl.9.

    HELD: (1) The words of a contract should be interpreted in their grammatical and ordinary sense, unless it was necessary to construe them differently in order to avoid, some absurdity, inconsistency or repugnancy. Clause 3(g) provided a straightforward means of demonstrating conclusive proof of ability by H to repay J’s loan. If such proof was to be demonstrated the terms of cl.3(g) had to be strictly adhered to. Conclusive proof of the ability to repay meant the ability of H and a loan to E for the purpose of repaying J’s loan did not qualify as a loan to H. In any event, until any firm offer of a loan was made it could not be said that there was an unconditional offer within cl.3(g). The bank’s preconditions for lending, which were more than mere administrative matters, had not been fulfilled. There was, therefore, no unconditional offer constituting conclusive proof of ability to repay for the purposes of cl.3(g). (2) J had given valid notice for the purposes of cl.9 of the agreement, and therefore succeeded on liability.

    Judgment for claimant

    [2010] EWHC 679 (Ch)

    Ch D (Proudman J) 29/3/2010

    “Lawtel”: 12.4.2010