Wednesday, October 20, 2010

The Sale of Liverpool Football Club

Last week, the English High Court of Justice considered a very interesting legal issue, also having great relevance for the football world. This concerned the sale of Liverpool Football Club [“Club”] to NESV, an American company which also owns the baseball team Red Sox.

The owners of the Club, Mr. Hicks and Mr. Gillett purchased the club in 2007, funded to the extent of 75% by the Royal Bank of Scotland [“RBS”]. The structure of the transaction was that the Club was owned by Kop Football Limited, which was owned by Kop Football (Holding) Ltd., which in turn was owned by Kop Football (Cayman) Ltd., in which Mr. Hicks and Mr. Gillett [“Owners”] had an indirect ownership of 50% each. As security for the financing, RBS had fixed and floating charges over the assets of the Club and the intermediate companies. The club got into financial trouble (alongwith footballing trouble), causing RBS to push for its sale. In April this year, RBS agreed to extend credit facilities till 15th October, on the condition that an agreement for sale would be entered into under Mr. Martin Broughton, who would be appointed Chairman of KFL and KF(H)L. Apart from the Owners, the other two members of the Boards would also be nominees of Mr. Broughton. An agreement titled Corporate Governance Side Letter [“CGSL”] forming part of the finance arrangements provided that there would be no representatives of the Owners on the boards, other than themselves, and that the Owners would not exercise their rights ‘as direct or indirect shareholders in the Company and its subsidiaries in a manner that would be contrary to the corporate governance arrangements contemplated by this letter’.

Inspite of the efforts of the newly constituted board, no sale could be finalised till 5th October. On this day, Mr. Broughton received a letter from the Owners along with Special Resolutions dismissing Mr. Broughton’s nominees from the Board and appointing two of their own. The Owners refused to attend subsequent meetings of the old Board, at which meetings, the sale of the Club to NESV was finalised. The SPA was scheduled to complete on 15th October, and RBS had also given its nod to the sale. One of the terms of the SPA was an undertaking by the seller (KF(H)L) to ‘commence appropriate legal proceedings and use all other reasonable endeavours to obtain a declaratory judgment confirming its ability to enter into this Agreement and consummate the transactions described herein’. Further, it provided that ‘This Agreement may be terminated and the Transaction abandoned at any time prior to Completion by either the Seller or the Purchaser if a declaratory judgment confirming the ability of the Seller to enter into this Agreement’ before 1st November, or such later date as the parties may agree. On an aside, had the club gone into administration on 15th October, it would have been docked 9 points in the English Premier League table, drastically affecting its prospects over the course of the season, and hence possibly prompting a rethink on the part of the prospective buyers.

It is against this factual backdrop that RBS approached the Court for an injunction restoring the composition of the old Boards on the ground that the new Board were constituted in breach of the CGSL. The Owners also approached the Court for an injunction restraining the sale to NESV. The Court granted the injunction sought by RBS, and denied the Owners’ claim. While this outcome seems quite unremarkable on the facts, the reasoning adopted by the Court in a couple of places merits mention.

The main defence of the Owners to the alleged breach of the CGSL was that they had been excluded from the sale negotiations, and by supporting the sale, RBS had acted in breach of the CGSL. Thus, they were entitled to repudiate the contract. However, the Court, on perusing their contentions, observed that the supposed exclusion from negotiations happened only after 5th October, which was the date on which the Owners were alleged to have breached the CGSL (¶¶ 32, 33). Thus, RBS was not responsible for any conduct which would entitle the Owners to repudiate the CGSL. What is more interesting however, is the question of whether RBS were entitled to an injunction. Now, what RBS was seeking was a mandatory injunction.* In the locus classicus on the issue of granting interim injunctions, the House of Lords in American Cyanamid v. Ethicon had held that an injunction can only be granted when a part makes out a serious arguable issue, the other party suffers no irreparable injury, and when the balance of convenience favours the applicant. However, very interestingly, the Court applies this test to the defence raised by the Owners, instead of the claim by RBS. In the words of Justice Floyd (¶ 26),

It is common ground that considerations of the balance of convenience do not arise where a party has a case to which no arguable defence can be mounted. This is entirely in conformity with the principles set out by the House of Lords in American Cyanamid v. Ethicon [1975] AC 396. There is simply no serious issue to be tried. The court is not concerned in such a case about whether its decision to grant or refuse an injunction might turn out later to be wrong. In that context, there is no need for the balancing exercise which is otherwise necessary to determine which course carries the least risk of injustice. In such a case there should not, therefore, be a two stage approach withholding relief from a party until a second hearing at which there is no prospect of a different result being achieved. Mr. Snowden put his case for the mandatory relief on this principle, without abandoning the alternative case based on the balance of convenience.

By the looks of it, the Court seems to have interpreted American Cyanamid as saying that unless the claim is debatable, due to persuasive arguments being made by the defence, one need not consider balance of convenience. This seems to be the complete opposite of what the case actually held- that the plaintiff must make out an arguable case, and then show the other two requirements. On facts however, Justice Floyd seems to have followed the dictum since he establishes that there is no irreparable injury caused to the Owners who anyway wished to sell the Club (¶ 47). Their only contention was that all bids had not been duly considered, but this contention was not sufficiently established on facts. On the other hand, the possibility of the club going into administration, the docking of points by the English Premier League, and the possibility of the sale agreement falling through established that consequences that the Club would suffer if an injunction were not granted.

In sum, the sale of Liverpool Football Club raised some interesting issues of conflicts between the shareholders and directors of a company. However, due to the existence of the CGSL, the resolution of this conflict did not require the application of company law principles. The other interesting issue was of the grounds for granting an injunction. While the judgment seems to be correct on facts, its understanding and application of American Cyanamid raises a few eyebrows.

* It is not clear whether this was an application for interim or final injunction. If it was for an interim injunction, which is not clear from the judgment, Cyanamid can be applied. However, if it was an application for a final injunction, then the serious issue test in Cyanamid is, with respect, not applicable.

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