GTV Holdings Ltd v Harris and Jones as Trustees of the Delargey Trust

• Jurisdiction: New Zealand
• Judge: Kós P
• Judgment Date: 08 May 2018
• Neutral Citation: [2018] NZCA 95
• Docket Number: CA53/2017
• Court: Court of Appeal
• Date: 08 May 2018

Between

GTV Holdings Limited

First Appellant

Michael Alan Heinrich Cordell

Second Appellant

Nicholas Harvey Murray

Third Appellant

Greenstone TV Limited

Fourth Appellant

and

John Evan Harris and Sarah

Louise Jones as Trustees of the Delargey Trust

First Respondent

John Evan Harris

Second Respondent

[2018] NZCA 95

Court:

Kós P, Courtney and Toogood JJ

CA53/2017

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Contract — Appeal against a High Court (“HC”) decision which held that no adjustment was required in the purchase price of a company, so that the deferred portion was payable, with interest, from the date it fell due — the HC also rejected warranty counterclaims — whether the episodes were sold “under” the Programme Acquisition Agreement — whether the HC had erred in rejecting the appellant's warranty claims.

Counsel:

A J Horne and A E Simkiss for Appellants

N R Campbell QC and M A E Sullivan for Respondents

• A The appeal is dismissed.

• B The appellants are jointly and severally liable to pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Kós P)

1 Shares in a production company specialising in reality television shows were sold, with nearly 20 per cent of the purchase price deferred. Payment of the deferred portion was subject to an adjustment formula. If full adjustment must be made, as the appellant purchasers contend, the purchase price reduces by $554,720. The respondent vendors say no adjustment should be made.

2 In a claim brought by the respondents for the deferred portion, Heath J held no adjustment was required, so that the deferred portion was payable, with interest, from the date it fell due. 1 He also rejected warranty counterclaims made by the appellants. 2

Background

3 The facts are set out in detail in the judgment appealed. 3 We summarise them here.

4 Greenstone TV Ltd (Greenstone) produces and licenses reality television programmes, most of which show police and customs officers undertaking their duties. It was owned by the respondents. GTV Holdings Ltd (GTV), the principal appellant, was incorporated for the purpose of acquiring Greenstone. Its parent, Cordell Jigsaw Zapruder Productions Pty Ltd, produces similar shows to Greenstone in Australia.

5 The parties entered into negotiations for the purchase and sale of the shares in Greenstone. Late in those negotiations an issue arose about the entitlement of each party to benefits Greenstone expected to obtain from the licensing of a second series of Highway Cops ( Highway Cops 2) to the Australian Seven Network (Operations) Ltd (Seven). That licensing deal had not been formalised. The series was in production during negotiations between Greenstone and Seven. Estimated income from licensing that series to Seven was included in projections for the 2014 financial year.

6 The respondents took the view GTV should pay for the value of the expected licence. GTV however did not want to overpay in case Seven backed away, either altogether or if it deferred the licence income from the 2014 financial year. The parties agreed to insert a clause specifying the way that licence income would be treated.

7 To deal with this, the share purchase agreement (the Agreement) provided a purchase price of $6,050,000 with payment in two instalments. The initial payment of $4,800,000 was to be paid on completion of the sale and purchase of Greenstone's shares. The balance of $1,250,000 was payable no later than six months from the date of completion. However the deferred portion was subject to an adjustment that depended upon when and whether Greenstone licensed Highway Cops 2 to Seven. If the adjustment applied in full, it would have the effect of reducing the amount payable by $544,720. Functionally, it allocated the risk Seven might not enter the licensing agreement before the end of Greenstone's nominated 2014 financial year (30 June 2014). If it did proceed, the respondents expected to get the benefit by way of the full adjustment amount because Greenstone (now owned by GTV) would get the licensing income. GTV however assumed any consideration from Seven for a licence would not manifest before the end of the 2014 financial year, so they would not need to pay the full adjustment amount.

8 The Agreement was signed on 13 November 2013. Greenstone licensed Seven to show Highway Cops 2 on 9 December 2013 (the HC2 Licence). The licence term was for four years with a licence start date of 15 February 2014. Greenstone, now under the appellants' ownership, invoiced Seven for the full licence fee of AUD 360,000 (20 episodes at a rate of $18,000 per episode) on 15 June 2014, and received the remaining payment for the HC2 Licence on 17 July 2014. The respondents say they are entitled to the entirety of the deferred portion, while GTV says they entitled to none.

9 Heath J found for the respondents. On appeal GTV seeks findings on liability only. Any issue of quantum remains for the High Court.

Contractual framework

10 The Agreement provides for two payment tranches:

4. Purchase Price

4.1 Amount

• (a) the Purchase Price for the Shares is:

  • (i) the Initial Purchase Price, plus

  • (ii) the Deferred Payment Amount,

  subject to adjustment under clause 4.3.

• (b) Subject to Completion occurring, title to, possession of, property in and the benefit and risk of the Shares until Completion remains solely with the Vendors, and passes to the Purchaser on and from Completion.

…

4.4 Payment of the Initial Purchase Price

The Purchaser must pay the Initial Purchase Price on Completion in accordance with clause 7.3(a).

4.5 Payment of Deferred Payment Amount

The Purchaser must pay the Vendors the Deferred Payment Amount in accordance with clause 9.

The Initial Purchase Price is defined as meaning “$4,800,000” and the Deferred Payment Amount as:

9.1 Deferred Payment Amount

• (a) The Deferred Payment Amount is $1,250,000 less the Highway Cops 2 Adjustment Amount.

• (b) The Purchaser must pay the Vendors the Deferred Payment Amount and the Deferred Payment Interest Amount on (or before) the date that is six months from the Completion Date.

11 A formula is provided to determine the adjustment (HC2 Adjustment):

Highway Cops 2 Adjustment Amount means the amount determined in accordance with the following formula:

2 x ((20 – a) x $13,868),

where a equals the Episodes Acquired.

To state the mathematically obvious, if “a” equals 20, the HC2 Adjustment Amount is zero and the full $1,250,000 would be payable by GTV to the respondents. But if “a” is equal to only 10, for example, the adjustment is $277,360 and GTV would be required to pay only $972,640 under cl 9.1(a). To put it another way, the Agreement incentivised the vendors to achieve 20 “Episodes Acquired”.

12 Under cl 1.1 “Episodes Acquired” means:

the number of Highway Cops 2 episodes acquired by Seven … as a full price First Run New Series or First Run Existing Series under the Program Acquisition Agreement on or before the date that is six months from the Completion Date and which acquisition has a licence period start date on or before 30 June 2014.

The reference to the Programme Acquisition Agreement is to an agreement between Greenstone and Seven (the PAA). The italicised terms are defined in the PAA as follows:

Licensed Programs:

• • First Run Existing Series – first run series of Serious Crash Unit (NZ) or an alternative program to be reasonably agreed by the parties if Serious Crash Unit (NZ) is not produced, Border Patrol and Coastwatch (NZ), namely series produced after Border Patrol Series Five and Coastwatch (NZ) Series Five.

• • First Run New Series – first run series of any new television series (excluding dramas and any series commissioned by Seven) produced by [Greenstone] and made available to Seven for licence by it in [Australia] in each year of the term.

13 The following “caretaker” warranty provisions in the Agreement are relevant to the counterclaim brought by the appellants: 4

5.4 Prohibited actions

Without limiting clause 5.1, except as expressly contemplated in this agreement, the Vendors must ensure that the Company does not before

Completion without the prior written consent of the Purchaser (not to be unreasonably withheld):

…

(c) enter into any abnormal or unusual transaction which materially adversely affects the Business;

(d) enter into any commitment (or series of commitments) for capital expenditure in excess of $50,000;

(e) enter into any contract with a value of $50,000 or more;

…

And sch 8 of the Agreement relevantly contained the following warranties:

Warranty 6 — The Accounts

…

6.2 Since the Accounts Date:

…

(c) the Company has carried on the Business in the ordinary and usual course and has not entered into any contracts or arrangements other than in the ordinary and usual course of carrying on business of the Business;

…

(e) the Company has not acquired or disposed of or dealt with any assets, nor has it entered into any agreement or option to acquire or dispose of any assets other than in the normal course of business for full market value;

…

Warranty 8 — Commitments

8.1 As far as the Vendors are aware, there are no agreements, arrangements or understandings affecting the Company or the Business that:

…

(b) are outside the ordinary and proper course of business of the Business or otherwise contain any unusual, abnormal or onerous provisions;

14 The following “information” warranty provisions are likewise relevant:

Warranty 20 — Information

20.1 The Vendors have disclosed to the Purchaser all material information relating to the Company and the Business or otherwise in relation to the subject matter of this agreement which might, if disclosed, reasonable be expected to affect the decision of a prospective purchaser to enter into this agreement,

...