Court of Appeal Rules on Controversial Share Option Deal

Posted Thursday 28th November 2024

In Aymes International Ltd v. Nutrition4U BV,[1] the Court of Appeal held that the consideration paid by a buyer 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 (Aymes) was the exclusive distributor of certain products manufactured by NutriMedical (NM).
• NutriMedical was wholly owned by Nutrition4U (N4U).
• Aymes and N4U entered into a call option agreement (Agreement), under which Aymes had the option to purchase shares in NM in exchange for the payment of an option consideration of 537,500 euros by Aymes to N4U. During the term of the agreement, a restriction was placed on NM such that it was not to apply its usual margin to the products it sold to Aymes.
• On the exercise of the option by Aymes 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 a number of specified deductions, including any sales to Aymes. The term ‘Turnover’, however was not defined in the Agreement despite it being a capitalised term.
• Aymes view:
  • When calculating the price to be paid for that company’s shares, the consideration paid for the grant of a share purchase option should not be treated as part of the turnover of the company
• NM’s view
  • Turnover should include the option consideration, as it was, in effect, a payment in lieu of the margin NM would usually apply to the products.

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 in the Agreement, that the payment of the option consideration was to compensate NM for the loss of margin.

The Court of Appeal’s decision

The Court of Appeal allowed Aymes to appeal, holding that the option consideration should not be included in turnover. Giving the sole substantive judgment,  the judge dismissed the inclusion of the option consideration and set out his reasons for excluding it, including the following:

1. ‘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.
2. 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 defined to be none of those things.
3. The Agreement was between Aymes and N4U, but the option consideration was paid to NM. This meant the option consideration constituted a gift from a parent to a subsidiary, which was not turnover.

Conclusion

The Court of Appeal judgment represents a triumph for commonsense: it would not make practical sense for the purchase price to increased by the buyer’s own payment for an option. The case is a key reminder of the dangers of unclear drafting and the impact of not specifying the definition of all key (and capitalised) terms.

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This article is for reference purposes only. It does 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 or deciding not to take any action.

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