The Game Group Plc v The Electronic Boutique Incorporated & Anor

A change-of-control clause must be construed as a whole and in its commercial setting. Where it is triggered only if control passes from the persons exercising control at the relevant date, the court must first identify those persons by applying the contractual definition of control. A change in one indicium of control does not trigger termination if the same persons continue to exercise control through another defined indicium. The court should focus on the actual circumstances before it rather than hypothetical applications of imperfect drafting.

EBUK appealed from the decision of Mr Justice Peter Smith in the Chancery Division concerning the construction of clause 14 of a Services Agreement. The agreement permitted termination if control of the relevant company passed from the persons exercising control at the date of the agreement. Control was defined by reference either to ownership of more than 50 per cent of issued share capital or to the right to direct the company’s policies and affairs.

Following a restructuring, the Kim family’s beneficial ownership of the service provider fell below 50 per cent, but Mr Kim retained the right to direct its policies and affairs through the general partner. The central issue was whether the reduction in beneficial ownership alone triggered EBUK’s termination right.

1. Appeal dismissed. The change-of-control provision was construed by reference to its wording, contractual context and the known factual matrix, applying the approach in Reardon Smith Line Limited v Yngvar Hansen-Tangen [1976] 1WLR 989. Evidence of the parties’ actual subjective thinking was of doubtful relevance and did not assist construction.
2. The words requiring control to pass from the persons exercising control at the date of the agreement identify the original controllers before the court considers whether control has passed. The definite article indicates that those persons must be identified by applying the contractual definition of control.
3. For EBUK, the relevant controller was the general body of shareholders, because no single interest group held more than 50 per cent of the shares and no other person had the right to direct its policies. For the service provider, the Kim family controlled it initially and after the novation through the general partner’s continuing right to direct its policies and affairs.
4. The fall in the Kim family’s beneficial ownership below 50 per cent therefore did not constitute a passage of control. The statutory background in the Companies Act 1985 illustrated the distinction between ownership and management-control limbs, but the contractual wording remained determinative.
5. The court declined to speculate about hypothetical applications of imperfect drafting. There was no evidence that EBUK had been prejudiced, and allowing termination would have produced an unanticipated windfall. The order was made in accordance with the agreed draft.

• Court of Appeal (Civil Division) — unanimously dismissed the appeal from the decision of Mr Justice Peter Smith.
• Chancery Division — Mr Justice Peter Smith construed the clause in favour of the respondents.