Butters & Ors v BBC Worldwide Ltd & Ors

A contractual provision may infringe the deprivation principle even where insolvency is not the immediate triggering event and the provision was negotiated in good faith. The court must examine the practical effect of the arrangement in the insolvency. A provision linked to an insolvency-triggered share acquisition was void to the extent that it enabled assets to be acquired at a value reduced by termination of a valuable licence. The offending linkage could, however, be severed, leaving the remainder of the contractual machinery operative. A later agreement may impliedly surrender and replace an earlier agreement where the parties knowingly enter into a new relationship. Common mistake does not avoid a contract which remains performable.

The joint administrators of two Woolworths companies sought directions concerning the valuation of a 40 per cent shareholding in 2 Entertain Ltd. The joint venture agreement gave BBC Worldwide Ltd an option to acquire the shares following an insolvency event. It linked that option to a master licence agreement under which BBC Video Ltd held valuable intellectual property rights. The licence purportedly terminated automatically when the option was exercised, thereby reducing the value of the shares.

The administrators challenged the validity of the contractual linkage under the deprivation principle. They also sought directions about matters which the independent investment bank should consider when determining fair value. A replacement licence had meanwhile been agreed. The court therefore considered both the effect of that later agreement and the validity and severability of the insolvency provisions.

1. Later licence. The master licence had been terminated by the parties’ implied surrender and the grant and acceptance of the replacement licence. The replacement agreement was intended to create a new contractual relationship, despite the parties’ knowledge that the original termination might later be challenged. There was no implied condition precedent that the original licence had validly terminated.
2. Mistake. The replacement licence was performable. The parties had taken the risk that entering into it would relinquish any argument that the master licence continued. There were therefore no grounds for setting the replacement licence aside for common mistake.
3. Deprivation principle. The court must examine the effect of the arrangement in the insolvency, rather than the parties’ intention or the form of the triggering event. The linked provisions enabled BBCW to acquire the shares at less than the value which would otherwise have applied because the master licence terminated on exercise of the insolvency option. That was a classic infringement of the deprivation principle. It was immaterial that the relevant insolvency event concerned another Woolworths company or that the licence provision appeared in an agreement to which Media was not a party.
4. The principle did not invalidate an ordinary provision permitting termination of a licence on insolvency, including insolvency elsewhere in the relevant group, where the termination was not linked to an acquisition at an insolvency-depressed value. The offending words linking termination to the share acquisition were therefore severed. The share acquisition and valuation machinery remained operative on the basis that the licence had terminated. The parties were also required to negotiate in good faith under the contractual severance provision to substitute a valid clause achieving the original commercial objective.
5. Fair value. The independent investment bank was to value the company and shares on the contractual assumption of a willing buyer and willing seller. It was not to take into account that BBCW was the actual purchaser or that BBCW was contractually obliged to purchase the shares. Those matters were excluded by the contractual valuation assumptions.

The relevant provisions were declared void to the necessary extent. The valuation procedure continued, but the administrators’ proposed factors concerning BBCW’s identity and purchase obligation were rejected.