Philip Morris Products Inc & Anor v Rothmans International Enterprises Ltd & Anor

Contractual change-of-control provisions incorporating the City Code must be construed according to their wording and structure. Where one limb addresses acquisition of direct control and another expressly addresses acquisition of indirect control, the limbs should not be amalgamated.

Under clause 14.4.1, acquiring direct control of a company may constitute a change of control even where the acquirer previously had indirect control through an intermediate company. Separately, a composite transaction may involve persons acting in concert where they actively co-operate to obtain or consolidate control. The court should assess the transaction commercially and should not divide one composite arrangement into artificial separate events.

Philip Morris granted the Rothmans partnership an exclusive licence to manufacture and sell Marlboro cigarettes. The licence permitted termination if there was a change in control of the partnership. The Master Agreement deemed that event to occur upon a change of control of Rothmans, using the meanings and construction of the City Code on Takeovers and Mergers.

Before British American Tobacco plc acquired Rothmans International BV, a special share was issued to Richemont SA giving it 70.1 per cent of the voting rights in Rothmans International Enterprises Ltd, while the Rothmans group retained the economic interest. The issue was intended to prevent the later acquisition from producing a change of control. The Chancery Division held that there had been a change of control. Rothmans appealed.

The central questions were whether clause 14.4.1 concerned direct control, whether the special-share arrangements themselves effected a change of control, and whether BAT and Richemont acted in concert.

1. Appeal dismissed. The declarations that there had been a change of control of Rothmans International Enterprises Ltd and of the partnership were confirmed. The costs order was confirmed, with detailed assessment on the standard basis.
2. Clause 14.4.1 and clause 14.4.2 establish distinct tests. Clause 14.4.1 addresses acquisition of direct control of the target company. Clause 14.4.2 addresses acquisition of control of a person who controls the target, including cases involving indirect control through a chain of intermediate companies.
3. Richemont SA had indirect control of Rothmans International Enterprises Ltd before the special share was issued, but it did not have direct control. The special share gave it direct control. Accordingly, the issue of the special share constituted a change of control under clause 14.4.1. The fact that Richemont previously had indirect control did not prevent the acquisition of a different, direct form of control.
4. The alternative analysis also supported the result. BAT and Richemont were persons acting in concert in relation to the special-share issue and the acquisition of Rothmans International BV. They actively co-operated in a composite transaction intended to secure control of the target company. On completion, they formed a group having control which, as a group, had not previously possessed it.
5. The court did not decide whether the contractual arrangements were overridden by an equitable interest in the special share. That issue was unnecessary once the construction of clause 14.4 established a change of control.
6. The court rejected an artificial analysis which separated the special-share issue and the acquisition into independent transactions. The arrangements had to be considered in their commercial context.

• Court of Appeal (Civil Division): appeal from the order of Mr Justice Evans-Lombe dated 19 July 2000 dismissed; declarations of change of control confirmed.