Georgi Velichkov Barbudev v (1) Eurocom Cable Management Bulgaria EOOD (ECM) (2) Warburg Pincus International LLC (3) FN Cable Holdings BV (2011) EWHC 1560 (QBD)
Barbudev had been the CEO and 40% shareholder in a Bulgarian cable television and internet company (X) acquired by ECMB which, along with the other defendants, was a Warburg Pincus company.
The pre-sale negotiations for X included a number of discussions as to Barbudev's continuing involvement in X after sale of his 40% stake. The essence of the discussions was that Barbudev would be entitled to take a 10% stake in the Purchaser for €1.65 million. It became clear during negotiations of the share purchase agreement (SPA) that the terms of the subsequent investment could not be agreed before the SPA was signed, so a side letter was prepared. The principal terms of the side letter were:
"In consideration for you agreeing to enter into the proposed transaction and to sign the Transaction Documents, the Purchaser [i.e. ECMB] hereby agrees that, as soon as reasonably practicable after the signing of the Agreement by all Parties, we shall offer you the opportunity to invest in the Purchaser on the terms to be agreed between us which shall be set out in the Investment Agreement and we agree to negotiate the Investment Agreement in good faith with you. Such terms shall include, without limitation, the following: you shall invest an aggregate amount of not less than €1.65 million in consideration for a combination of shareholder debt and registered shares which shall represent 10% of the registered share capital of the Purchaser on the date of the Investment Agreement...tag along and drag along provisions which are customary for a transaction of this nature shall be included in the Investment Agreement."
Subsequently, Barbudev entered into the SPA with ECMB and X was sold. Drafts of the investment agreement relating to Barbudev's 10% investment were exchanged and negotiated, but were never signed, partly because there were other issues arising from the deal which were given priority. In the end, Warburg Pincus sold X some 3 years after closing, without Barbudev having invested in ECMB.
Barbudev contended that the side letter constituted a legally enforceable contract. Warburg Pincus argued that it was merely an agreement to agree. There was a considerable body of evidence given by both sides, with Mr Barbudev claiming that WP has assured him that the side letter was legally binding – more particularly, it was given to him to persuade him to drop his insistence that closing of the SPA should be conditional on the investment and shareholders agreement (ISA) being entered into.
The High Court (Mr Justice Blair) found in favour of Warburg Pincus and held that the side letter did not constitute a legally enforceable contract.
- WP had argued that there were three questions to be answered, whether the side letter was intended to create legal relations, whether it was an agreement to agree and whether it was a sufficiently complete and certain contractual agreement. The Judge agreed that these were distinct questions, but in this case at least they were hard to disentangle from each other. The ultimate issue was whether the parties had reached an enforceable interim agreement or whether the side letter was no more than an agreement to agree, with the terms necessary for an enforceable agreement to be worked out by negotiation.
- The issue here commonly arises. Parties may reach a binding agreement as to essentials, on the basis that other terms are to be agreed later. Or, a letter of intent may simply mark a point in their negotiations on the understanding that it is not to be legally binding. The agreement may have been acted upon, or it may remain unperformed. English law adopts a pragmatic approach. It is intentions which matter. Where the agreement is reduced to writing, it is to the document that the courts must look to ascertain their intentions. What the parties believed they were agreeing is irrelevant.
- Intent to create legal relations. He held that the principal terms of the side letter showed that it was not intended to be legally binding and that only a concluded investment agreement was to be legally enforceable. There was no intention to create legal relations at this stage.
- Agreement to agreement. The agreement between the parties was to the effect that Barbudev was to have the opportunity to invest on terms to be agreed which would be set out in an investment and shareholders agreement which Warburg Pincus agreed to negotiate in good faith. The agreement to negotiate in good faith extended to the price to be paid by Mr Barbudev and the percentage to be acquired as well. Even on these key terms, therefore, although the parties had agreed in principle, there was no finality. At the time the SPA was signed, the parties were close to agreement, but they had not actually reached agreement. The side letter was therefore unenforceable as an agreement to agree.
- Certainty of terms. The side letter made it clear that the particular terms as to price and percentage were not comprehensive: "Such terms shall include, without limitation, the following". The parties were going to have to agree circumstances in which Mr Barbudev could be bought out, i.e. put and call options, the date of exercise of such options, the price payable, minority protection provisions, bad leaver provisions, restrictive covenants and right to appoint board members. In the absence of an ISA, Mr Barbudev could not invoke the side letter as a complete and enforceable agreement because essential terms for an ISA were not addressed by it.
In the past, the courts have tended to uphold agreements, even if all the terms were not agreed, but this is the second case in the last couple of months to go the other way (see Dhani v Crasnianski [2011] EWNC 926 (Comm)).
Ultimately, this case highlights the importance of ensuring that all the terms relating to a deal are agreed up front, clearly documented and set out in definitive agreements which are formally executed concurrently at completion. If that cannot be done, and a side letter is the best that can be achieved in the time, make sure that its legal status is set out – but bear in mind that an agreement which the parties wish to make legally binding will still be unenforceable if what remains outstanding is "not merely important but essential in the sense that without it the contract is too uncertain or incomplete to be enforced".
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