Co-authored by Wil Kim
Sheffield United FC (SUFC) recently returned to the top-flight of English football for the first time since the 2006/2007 season, but a messy ownership dispute has marred the smooth running of the club in recent years.
In 2013, Kevin McCabe, the owner and director of the commercial enterprise operating SUFC, Sheffield United Limited (SUL), began the process of selling a 50% share in the club. SUL entered into an Investment and Shareholders’ Agreement (ISA) in August 2013 with UTB LLC (UTB), a company owned by HRH Prince Abdullah bin Mosaad bin Abdulaziz al Saud (Prince Abdullah), which gave Prince Abdullah a 50% stake in the club in return for a nominal £1, on the basis that a further £10 million would be invested over two years.
One of the causal factors for the dispute was the discrepancies between the deal sheet and the ISA. The deal sheet provided that either party, SUL or UTB, could inject further cash in return for equity after the two year period, with the other party maintaining the right to match the contribution, until one party held 75% of the fully diluted share capital or if the club achieved promotion to the Premier League. It also stipulated that Prince Abdullah would have call options on SUL shares between the third and seventh year post ISA if the club failed to reach the Premier League, and that he would be obliged to acquire the club’s freehold and property assets if he were to amass 75% or more of SUFC’s share capital or in the event of promotion to the Premier League.
The ISA, on the other hand, provided that SUFC was to exercise property call options in the event that a shareholder surpassed the 75% threshold. It also provided both shareholders with options to acquire one another’s shares between the fourth and eighth year post ISA. It neither stipulated the requirement to exercise property call options following promotion nor did it confer an obligation to match each other’s equity contributions; it merely gave each shareholder a right to subscribe for more shares. The underlying effect of these differences were that the ISA obfuscated: (1) the timing implications as to when UTB would acquire SUL’s shares; and (2) who would fund annual losses post 2014/15 season if the club failed to achieve promotion.
With SUL adamant that the ISA created a quasi-partnership relationship, whereby UTB and SUL owed each other an implied duty of good faith, the uncertainties above led to SUL making assumptions as to how and when Prince Abdullah would inject further cash for increased ownership in gradually taking full ownership of the club. As it became increasingly clear that McCabe and Prince Abdullah had differing interpretations of the ISA and the implications of it on SUL and UTB’s corporate relationship, exacerbated by the combined loss of £17.6 million in the three years up to 30 June 2017, McCabe issued notice of his intention to buy back Prince Abdullah’s 50% stake for £5 million on 29 December 2017.
However, this had the effect of activating a “Russian Roulette” clause in the ISA leaving Prince Abdullah with two options: to sell his 50% stake for £5 million or make a counter-offer to buy McCabe’s shares at the same price. If Prince Abdullah opted for the second option, a further clause in the ISA would be triggered whereby any party holding a 75% stake in the club would be obliged to purchase, at market value, SUFC’s property assets amounting to around £40 million. In an attempt to avoid triggering this clause, Prince Abdullah incorporated a sister company, UTB 2018 LLC (UTB 2018), and transferred 80% of his stake in SUFC (40% of SUFC’s share capital) to this entity. As a result, McCabe refused to sanction Prince Abdullah’s share transfer and UTB initiated legal proceedings against SUL for repudiatory breach of contract on the grounds of conspiracy and dereliction of the implied obligation to act in good faith.
Decision and comment
The Court held that McCabe’s 50% stake in the club must be sold to Prince Abdullah for £5 million, while SUL’s counterclaim that Prince Abdullah had conducted business in a prejudicial manner was dismissed.
In his judgment, Fancourt J held that:
- SUFC (under its new ownership of Prince Abdullah) must acquire the property assets by July 2020;
- UTB was in repudiatory breach of the ISA for refusing to abide by property call option notices; however, SUL will not incur any losses as SUFC agreed in April 2019 to exercise property call options by July 2020;
- the ISA is not subject to implied terms of good faith and, in any case, such implied terms do not exist in the event where one shareholder serves a call option notice;
- no conduct by UTB was majorly and unfairly prejudicial to SUL prior to the counter-notice; and
- any allegations of conspiracy are dismissed.
It is worth exploring further Fancourt J’s extensive comments on whether a duty of good faith should be implied into the ISA. One of SUL’s arguments to establish obligations of good faith relied on proving the ISA to be a “relational” contract. The current legal position is that a term will not be implied into a contract unless, at the time the contract was entered into, a reasonable individual would view the implied term as so obvious as to go without saying or necessary for business efficacy. However, Fancourt J also needed to consider the judgment of Leggatt J in which it was made clear that certain types of joint venture agreements may require a term of good faith to be implied.
Fancourt J adopted the following approach: would a reasonable reader of the contract consider that an obligation of good faith was obviously meant or necessary to the proper working of the contract? In other words, would a reasonable person reading the ISA at the time it was entered into, with knowledge of the parties and circumstances of the transaction, consider it obvious that UTB had to act in good faith in all dealings with SUL, or whether such an obligation would be necessary to give effect to the ISA.
In reaching the decision that no implied duty of good faith existed in the ISA, Fancourt J made the following points clear:
- the ISA and associated contractual documents were extremely detailed and professionally drafted, thereby making it more difficult to infer a term on the basis that the parties have given due consideration to all of the terms in the agreement;
- in two specific clauses, the ISA expressly specifies the duty of good faith owed by the parties and implying a general duty of good faith would be inconsistent with these two clauses;
- the right in the deadlock clause for a party to exit the ISA at will after a certain period of time made it hard to justify why it would be necessary for each party to act on the basis of mutual trust; and
- both parties to the ISA appeared to have conflicting interests, and therefore an implied duty of good faith was not required to give business efficacy to the ISA.
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