Withholding Consent In A Commercial Context - What's Reasonable?

Author:Mr John O'Connor, Yvonne Cunnane and Andreas Carney
Profession:Matheson Ormsby Prentice
 
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In the recent case of Porton Capital Technology Funds & Ors v 3M UK Holdings Ltd & Anor1 the English High Court considered the relevant principles to be applied where a Share Purchase Agreement ("SPA") provided that the purchaser of the business could not cease to carry on the business without the vendor's consent, such consent "not to be unreasonably withheld". The case provides useful guidance on the meaning to be applied to this phrase in a commercial context. Background The defendant purchased Acolyte Biomedica Limited ("Acolyte") under a SPA in February 2007. The consideration consisted of £10.4m in cash and an earn-out payment based on net sales for the year 2009, capped at £41m. The claimants represented 60% of the shareholder vendors. Acolyte's product was a product used in detecting MRSA called BacLite. The business subsequently failed and it ceased in December 2008. There were therefore no sales in 2009, to form the basis of the earn-out payment. The claimants alleged that the defendant breached the SPA in ceasing to carry on the business. The defendants argued that they were entitled to terminate the business in circumstances where they had requested consent and offered compensation to the claimants in the sum of US$1.07m calculated on the basis of estimated sales for 2009. The defendant argued that the claimant acted unreasonably in withholding their consent to cease business in late 2008. The claimants also alleged that the defendant was in breach of its obligation to diligently seek regulatory approval for and to actively market BacLite, and that the claimants lost 60% of the net sales which should have been in the region of £32m. Decision The SPA provided that the defendant "without the written consent of the vendors, which shall not be unreasonably withheld, shall not...cease to carry on its business...". By letters dated 14 July and 15 August 2008, the defendant invited the claimants to consent to the cessation of the business. The claimants refused to provide this consent. Unusually, the claimants relied on principles which have been developed in landlord and tenant cases, such as International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd2. The Court agreed with the claimant's approach and found that the following principles apply in determining whether consent has been unreasonably withheld in a commercial context:

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