In Aymes International Ltd v. Nutrition4U BV,[1]the Court of Appeal held that the consideration paid by a purchaser for a call option should not be included in the calculation of the target company’s turnover on which the calculation of the purchase price was based.
The facts
Aymes International was the exclusive distributor of certain products manufactured by NutriMedical. NutriMedical was wholly owned by Nutrition4U. Aymes International and Nutrition4U entered into a call option agreement, under which Aymes International had the option to purchase shares in NutriMedical in exchange for the payment of an option consideration of 537,500 euros by Aymes International to Nutrition4U. During the term of the agreement, NutriMedical was not to apply its usual margin to the products it sold to Aymes International.
On the exercise of the option by Aymes International, a dispute arose between the parties as to the calculation of the purchase price for the shares. The price was based – in part – on ‘Turnover’ less various specified deductions, including sales to Aymes International. The term ‘Turnover’, despite being capitalised, was not defined.
Aymes International submitted that it was counterintuitive for the consideration paid for the grant of a share purchase option to be treated as part of the turnover of the company when calculating the price to be paid for that company’s shares. NutriMedical contended that turnover should include the option consideration, as it was, in effect, a payment in lieu of the margin NutriMedical would usually apply to the products. Further, if the parties had intended for it to be excluded, they easily could have made that explicit in the contract.
The High Court’s decision
The High Court held that the option consideration should be included in turnover. The judge was persuaded that if it was intended to be excluded, the parties would have made that explicit, that the payment of the option consideration was to compensate NutriMedical for the loss of margin, and that it, therefore, made commercial sense for it to be counted in NutriMedical’s turnover.
The Court of Appeal’s decision
The Court of Appeal allowed Aymes International to appeal, holding that the option consideration should not be included in turnover. Giving the sole substantive judgment, Lord Justice Arnold dismissed the inclusion of the option consideration as making ‘no commercial sense at all’. The judge set out seven separate reasons for excluding it:
- ‘Option Consideration’ was a defined term, and if the drafters had intended it to form part of the turnover, they could be expected to have expressly said so.
- The fact that option consideration was not expressly excluded was not persuasive – it was more pertinent that it was not expressly included.
- In the absence of a specific definition, turnover should be given its ordinary meaning, namely ‘the value of the goods and services that a company sells in a particular period of time; the amount of money received in sales in a given period’. The option consideration was none of those things.
- The option agreement was between Aymes International and Nutrition4U, but the option consideration was paid to NutriMedical. This meant the option consideration constituted a gift from a parent to a subsidiary, which was not turnover.
- Parties usually pay a price for a business that reflects its expected future earnings – a one-off payment by the buyer would not contribute to the future earnings in any way, so excluding it made ‘good commercial sense’.
- In contrast, including the option consideration in the calculation of the purchase price would only serve to inflate the price payable by Aymes International.
- The deductions from turnover that were specified ensured that Aymes International did not pay for the value of its own transactions with NutriMedical – it would be inconsistent with those deductions for Aymes International to pay for its option consideration payment.
The judge dismissed the argument that the option consideration was a payment in lieu of NutriMedical’s margin on the sales during the term of the option agreement. At most, it showed that Aymes International was willing – as part of the overall commercial deal – to pay a sum to prop up NutriMedical’s profits for the period covered by the option. That did not change the fact that there was nothing in the agreement that showed the option consideration should be included in the turnover calculation.
Takeaway
The judgment represents a triumph of commonsense: it was entirely nonsensical that the purchase price should be increased by the buyer’s own payment for an option. The fact that the judge at first instance concluded that option consideration should be included is a stark reminder of the dangers of sloppy drafting and the failure to specify the definition of all key terms.
[1] [2024] EWCA Civ 1259.
Contributors
Andrew Love