Kilometre Capital Management Cayman v. Shanda Games Ltd

HCA 2009/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2009 OF 2014

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RESONS FOR DECISION

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Background

1.In these proceedings, Kilometre claims a total sum of US$44,925,847.32 comprising a fee, described in the agreement between the parties as a “Total Consulting Fee”, payable in instalments, as a “Success Fee”, on the occurrence of certain events.  By Order 14 proceedings, Kilometre says that it is now entitled to judgment in the sum of US$39,229,944.32, being part of that fee.

2.Having heard Mr Smith for Kilometre, I did not call upon Mr Wong and gave unconditional leave to Shanda to defend the proceedings. These are my reasons for that decision.

3.There is little dispute about the underlying facts, although the inferences and conclusions to be drawn from those facts and the interpretation of the contract in the light of those facts are very much in dispute.

The parties

4.Kilometre is a company which specialises in buyouts and private equity advice and in particular what is known as a “taking-private transaction” where Kilometre advises on the privatisation or buyouts of large public companies. 

5.Shanda is a NASDAQ listed Chinese online gaming company, incorporated in the Cayman Islands.  At the relevant time Mr Chen Tian Qiao held approximately 76.3% of the shares in Shanda, with the rest having been publicly floated.  Mr Chen held around 97% of the voting control in the company, as the ordinary B Class shares in Shanda, which he held, carried voting rights of 10 votes per share, while the remainder of the shareholders in Shanda held ordinary A Class shares which carried voting rights of one vote per share.

The agreement

6.On 18 December 2013, Kilometre and Shanda entered into an agreement pursuant to which Shanda engaged Kilometre as its advisor for a proposed “taking-private transaction”, whereby Shanda would ultimately be sold to private buyers and delisted from the NASDAQ exchange.  The letter constituting the Agreement commenced with the following:

“This letter agreement (the ‘Agreement’) sets forth the terms and parameters by which Shanda Games Ltd (the ‘Company’) hereby retains Kilometre Capital Management Cayman (‘Kilometre’) as Strategic Execution Consultant (the ‘Advisor’) to the Company in connection with a possible minority, majority, or change-of-control strategic transaction involving the sale of some, all, or substantially all of the assets or stock of the Company (the ‘Transaction’) in a project referred to as ‘Project Firebat’.”

The letter went on to provide for the scope of services of Kilometre in the following terms:

“The parties agree that the primary purpose of the Advisor’s role in connection with the Transaction will be to facilitate execution of any transaction and to coordinate and manage parties or prospective parties involved in the Transaction.”

The clause goes on to describe various services that Kilometre is to provide.

7.Provision is made in clause 5(a) of the letter for the payment of expenses if no success fee was paid to the Advisor, that is, in a situation where no transaction proceeded.  But clause 5(b) provided for a consulting fee in the event of a successful transaction in the following terms:

“Consulting Fee and Incentive in a Change of Control: In the event of a change of control Transaction where 60% or more of the outstanding equity interests of the Company are sold or transferred to non-affiliated third parties (‘Change of Control’) the Company will pay consulting fees in cash (each a ‘Consulting Fee’ and in aggregate the ‘Total Consulting Fee’) to the Advisor according to the following parameters and formulas:

…”

The clause set out thereafter various rates of fees based upon the “Final Transaction Price”, an expression defined in the agreement.  A similar clause, 5(c), made provision for the rates of fees payable in respect of a non-change of control transaction.

8.The method by which the fees, having been calculated under clause 5(b) or (c), would be paid is dealt with under clause 6 in the following terms:

“Payment of Success Fees.

The Total Consulting Fee will be promptly and irrevocably paid in fractions (each instalment, a ‘Success Fee’) based on the following terms and the following two successive milestones (each comprising and defining an event of ‘Success’):

1) Stage 1 Success Fee: 50% (fifty percent) of the Total Consulting Fee will be due and payable by the Company to the Adviser upon definitive documentation of the Transaction (such as a definitive merger agreement or a definitive sales and purchase agreement) being agreed and executed by the Company or the Company’s Board of Directors with a buyer or buyer group and, as applicable.

2)  Stage 2 Success Fee: the balance of the 50% (fifty percent) of the Total Consulting Fee will be due and payable by the Company to the Adviser upon the successful funding of the Transaction.”

9.The contract contains a clause, apparently known in the trade as a “tail gunner” clause, designed to protect Kilometre in the event of termination. Termination of the contract is dealt with in clause 7 which provides that the initial term of the contract will be for 9 months or successful completion, but that either side should have the right to terminate the agreement at any time upon 15 days written notice.  The clause goes on to say:

“(Shanda) acknowledges and agrees that Clause 5 and Clause 6 (Payment of Success Fees) survives any termination of this Agreement for a period of 15 months (after any such termination of this Agreement), such that in the event a Transaction (other than a taking-private transaction initiated and completed by (Shanda’s) current controlling shareholder) is successfully closed within such period, (Shanda) must pay any applicable obligations under Clause 5 (Expenses and Compensation) and Clause 6 (Payment of Success Fees).”

10.The contract provided for an “Upward Adjustment” in the fees if there was any increase in the aggregate purchase price paid to the Company’s controlling shareholders.

11.It is appropriate to note that the appointment of Kilometre is non‑exclusive on the part of Shanda in that the agreement specifically provided that the agreement did not prevent Shanda from appointing other agents to perform similar services.  Equally Kilometre was not exclusively engaged to Shanda and was free to take other engagements.

12.On 27 January 2014, a shareholder in Shanda, Shanda SDG Investment Ltd, a BVI company, (Shanda SDG), entered into an agreement with Primavera Capital Ltd (Primavera), for the sale and purchase of 28,959,276 Class A ordinary shares in Shanda for US$80 million, (the Primavera SPA).  At the same time, Shanda Interactive Entertainment Ltd, a Cayman company, (Shanda Interactive), which directly and wholly owned Shanda SDG, and Primavera entered into a “Consortium Agreement” under which they proposed to form a consortium to undertake an acquisition transaction to acquire Shanda.

13.In the Statement of Claim, Kilometre pleads:

“18. The Primavera SPA formed part of the Taking-Private transaction and constituted a within the definition supplied by the Agreement.”

Shanda in response to that plea says:

“Paragraph 18 is admitted only to the extent that the Primavera SPA was a ‘Transaction’ for the purposes of the Agreement. Specifically, it was a non-change of control Transaction. Paragraph 18 is otherwise denied. It is further averred that the Primavera Transaction was the only Transaction for which Kilometre was entitled to a fee pursuant to the Agreement.”

The side letter

14.On 6 March 2014, the parties entered into a side letter entitled “Binding Letter Agreement”.  I have not found it necessary to refer to the side letter in reaching a decision in this matter.  Following the signing of the side letter, a Total Consulting Fee of US$640,000, in respect of the Primavera SPA, was paid by Shanda to Kilometre.

The subsequent transactions achieved

15.From late April onwards a number of further transactions took place.  On 18 April 2014, Perfect World Company Ltd (Perfect World) concluded an Adherence Agreement with Primavera and Shanda Interactive and as a result became a party to the Consortium Agreement and a member of the consortium.  On 21 April 2014, Perfect World concluded a share purchase agreement with Shanda SDG to acquire 30,326,605 Class A ordinary shares in Shanda for a sum of US$100 million. 

16.Although those agreements are admitted by Shanda, it is denied that this purchase was substantially in similar form and function to the structure and mechanism for the Primavera transaction, and it is denied that transaction formed part of a taking-private transaction for the purposes of the Agreement. It is further denied by Shanda that Kilometre had any part in the transaction. It is denied that the Perfect World transaction was a Transaction for which Kilometre had any entitlement under the Agreement to be paid.

17.On 31 August 2014, Orient Finance Holdings (Hong Kong) Ltd (Orient Finance) concluded a share purchase agreement to purchase 123,522,669 shares in Shanda from Shanda SDG.  Although the transaction is admitted, Shanda denies that the transaction formed part of the taking-private transaction for the purposes of the Agreement.

18.In late August and early September, both Primavera and Perfect World sold their shareholdings in Shanda and exited the consortium.  At this point, the only investors, according to Shanda, introduced under the Agreement by Kilometre, were no longer part of the Transaction.

19.On 1 September 2014, Shanghai Buyout Fund LP (Shanghai Buyout) and Ningxia Zhongyincashmere International Group Company Ltd (Ningxia) and Orient each concluded Adherence Agreements with Shanda Interactive and Primavera thereby becoming parties to the Consortium Agreement.  Primavera then exited the Consortium Agreement.  Shanghai Buyout and Ningxia each concluded separate share purchase agreements with Shanda SDG Investments for, respectively, 107,438,129 and 80,577,828 shares, (the Consortium SPA’s).

20.The project was then described as “Project Donghai”.

21.Again, whilst the agreements themselves are admitted, it is asserted by Shanda that Kilometre was not involved in the transactions at all.  In particular, it is asserted that the only investor introduced by Kilometre, (Primavera) had sold its investment and withdrawn from the Consortium.  It is denied that the Consortium SPA’s constituted Transactions under the Agreement.

22.In late November, Zongrong Shengda Investments Holdings (Hong Kong) Co Ltd ( Zongrong) and Yili Shengda Investment Holdings (Hong Kong) Co Ltd (Yili) concluded separate share purchase agreements with Shanda SDG for the purchase of 97,518,374 Class B shares in Shanda for consideration of US$500 million and joined the consortium, (the November Consortium Transactions and the November Consortium SPA’s).

23.Shanda admits these transactions, but denies that they were substantially similar in form and function to the structure and mechanism conceived or designed by Kilometre for the Primavera SPA.  Shanda further denies that the November Consortium Transactions constituted Transactions for which Kilometre was entitled to payment under the Agreement. 

24.In particular, it is asserted that the November Consortium Transactions and the November Consortium SPA’s constituted the introduction of new investors, and became a new project, because of the withdrawal of all existing investors including Primavera.

Order 14 principles

25.The relevant legal principles are well known and need not be repeated, other than to say that O 14 is for clear cases where there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question which is capable of being decided summarily.  It is not necessary for a defendant to show a complete defence, merely that there is a triable issue or question.

The interpretation of the contract

26.There was no dispute between the parties as to the core principles of contractual interpretation, in particular those arising from Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 per Lord Hoffmann at 912‑913.  I note in particular the importance in the interpretation of a contract of the factual matrix which includes anything a reasonable man would have regarded as relevant and which would have affected the way in which he would have understood the language of the document and which would reasonably have been available to the parties.

Two similar decisions

27.Mr Smith placed considerable reliance upon two decisions of the High Court in England where summary judgment had been granted to financial advisers on a successful outcome, in terms of contracts between the parties.  Both were cases which involved success fees.  Just as summary judgment was granted in those cases, so, Mr Smith said, I should grant summary judgment in this case.

28.In Seymour Pierce Ltd v Grandtop Holdings Ltd [2010] EWHC 676, the contract was between Seymour Pierce, a financial adviser and Grandtop, comprising Hong Kong interests who were seeking to acquire Birmingham City Football Club.  The essence of the argument for Grandtop was, as it is here, that the financial adviser was not involved in the final transaction.

29.By 5 June 2007, heads of terms had been formulated between Grandtop and the Club.  On 25 June 2007, an engagement letter was signed between Grandtop and Seymour Pierce.  The term governing remuneration and expenses provided for a success fee of £2.2 million on the offer being made by Grandtop being declared unconditional as to acceptances.  Like the contract in the present case, the contract contained a tail gunner clause, which required payment of the success fee in the following terms:

“In the event the engagement pursuant to this letter of engagement is terminated by the Company and an Offer for the Target is declared or becomes wholly unconditional as a result of any offer made by or in association with the Company within a period of 12 months after the effective date of termination the company shall pay to Seymour Pierce Success Fee in full.”

30.Although a recommended takeover offer was originally envisaged, Grandtop subsequently decided to conduct a two stage acquisition, whereby it would privately purchase 29.9% of the shares of Birmingham City Football Club, to be followed within six months by a public offer for the remainder.  The agreement with Seymour Pierce was terminated before the second and final stage of the acquisition, and Seymour Pierce sued for its success fee.

31.Mr Smith relied particularly on the following passage:

“Mr Goldsmith has drawn my attention to a number of authorities dealing with contractual provisions in different contexts where the notion of ‘effective cause’ is relevant. These authorities are, in my judgment, largely by the way because the matter comes down to a question of interpreting the particular contractual provisions now before the court. That relating to a success fee is concerned with a situation in which an acquisition occurs within 12 months after the termination of the retainer. It is not in my view ambiguous. This is plainly permits the payment of a success fee in circumstances in which Seymour Pierce has not been ‘the or an effective cause’ of a later acquisition. To qualify the right to a success fee by reference to any such requirement is clearly not a matter of business efficacy. Mr Goldsmith asks rhetorically: ‘If the deal which the parties were contemplating failed, why should any Success Fee be payable?’ It is because the contract expressly so provided. Moreover, I would not accept his argument that this involves a ‘mechanistically literal…interpretation of [Seymour Pierce’s] own ambiguous contract.’” (Mr Smith’s emphasis)

32.It is, as Eady J said in that case, a question of interpreting the particular contractual provisions now before the court.  Mr Wong, in his skeleton reminds me of the following matters of distinction:

(i)  In Seymour Pierce, the heads of agreement, (the “transaction”) had been agreed and publicly announced, and the takeover bid was already on its way to becoming unconditional when Seymour Pierce was engaged.  In the present case Kilometre was engaged by Shanda to look for and procure a private equity sponsor to form a consortium with the controlling shareholder to start a taking-private project.  In Seymour Pierce there was no element of introducing counterparties to enter into the contract with the principle.

(ii)  In the present case, at the time the Agreement was reached, the parties had not contemplated any specific structure for the taking-private transaction.  In Seymour Pierce the structure was already in place.

(iii)   The argument that Seymour Pierce must have been “the or an effective cause” of the success was rejected, principally because of the terms of the clause set out in §29 above, and in particular the reference to “any offer”.  Mr Wong says that the Agreement in the present case refers to an actual taking-private transaction introduced by Kilometre, and not to any taking-private transaction.  There is a serious dispute of fact, he says, as to whether the subsequent transactions, (which appear to have ultimately resulted in Shanda being de-listed form the NASDAQ board), following the withdrawal of both Primavera and Perfect World, formed part of the taking-private transaction envisaged by the fees entitlement provisions of the Agreement.

(iv)   Mr Wong argues further that the event to trigger payment of the Consulting Fee is “the Transaction” as defined in the agreement.  The termination clause in the Agreement refers to “a Transaction” which he says is a transaction corresponding to Project Firebat, as defined in the Agreement.  He submits that in either case it is not “any” transaction, as was the case in Seymour Pierce. 

33.I accept that these matters are arguable.  They are not matters of moonshine. 

34.In Edmond De Rothschild securities (UK) Ltd v Exillon Energy plc [2014] EWHC 2165, the question of a success fee again arose.  In January 2013, Exillon had a dissatisfied shareholder, Worldview Capital Management.  Rothschild was retained to “develop and implement a strategy to persuade Worldview to agree to withdraw from activism against Exillon”.

35.Rothschild was to be paid a retainer for its services at the rate of US$50,000 per month together with a success fee of US$500,000 (less any monthly payments received) if certain events occurred, (the Transaction), one of which was that Worldview reduced its shareholding in Exillon to below 5%.  Rothschild provided services in early 2013, including the preparation of some shareholder circulars.  At an EGM on 19 March 2013, Worldview’s motions were resoundingly defeated.  Rothschild continued to provide some services but ceased to carry out any work in about May 2013.  It had been paid four months retainer, US$200,000. 

36.In the autumn of 2013, takeover bids were made for Exillon and during a formal auction process, around 18 November 2013, Worldview sold its shareholding, (thereby reducing the shareholding to below 5%) to one of the potential bidders, and made a public announcement that had done so.

37.Rothschild contended that on a true construction of its engagement letter it was entitled to the success fee, less the retainer, regardless of whether it was any effective cause of the sale of Worldview’s shareholding.

38.Once again, there was a tail gunner clause entitling Rothschild to its fee if Exillon completed the Transaction within 18 months of termination[1]. The contract had defined the “Transaction” to include Worldview ceasing to be a significant shareholder in Exillon.  The success fee provision was in the following terms:

“b) a success fee of $500,000, net of the retainers paid under (a) if a resolution to the issues posed by Worldview’s requisition has been achieved, such achievement being assessed because one or more of the following has occurred:

…

iii  Worldview has reduced its shareholding in (Exillon) below 5%;”

39.A particular argument advanced for Exillon in opposition to the payment of the success fee was that the letter of engagement was a contract of agency.  Males J rejected that argument, saying that it was preferable to focus on the terms of the contract rather than to debate what label should be attached to it.  He found it to be a contract to provide strategic and financial advice, which did not contemplate, as a typical agency contract would, that Rothschild would introduce or seek to introduce counterparties who will enter into contracts with Exillon.

40.Immediately, the factual situation may be distinguished from the present case.  It must be open to argument that in the present case the Agreement contemplates that Kilometre will seek to introduce counterparties to enter into contracts with the sellers of shares in Shanda.  That is precisely what happened with Primavera.  The judge accepted that it was a general principle that an agent’s right to commission is dependent upon the agent being an effective cause, subject to any special terms or other indications in the contract.  Rothschild was entitled to its fee on the occurrence of an event, that event being described by the judge as being expressed in the passive voice, plainly not requiring any active input by Rothschild.

41.There is a real question as to the extent of Kilometre’s involvement in the transactions that occurred after the Private World transaction, after which both Primavera and Private World withdrew from the consortiums.  If, as Mr Wong would argue, Kilometre is an agent, as well as providing strategic and financial advice, then the issue as to whether or not Kilometre was an agent or a mere advisor is a matter for trial.  If found to be an agent, the extent to which Kilometre was an effective cause in the subsequent transactions is an issue for trial.

42.To a large extent the answer to these issues of contractual interpretation will depend upon the factual matrix.  Although the fundamental facts of the actual agreements do not appear to be in dispute, the circumstances surrounding the agreements, the involvement of Kilometre, and the conclusions to be drawn from the sequences of events that occurred must be a matter for trial.

43.It must be a matter for the interpretation of the particular contract in the light of the factual matrix whether or not the contract is a contract of agency.  I accept that it is arguable, by looking at the terms of the contract alone, that the agreement is one of agency in which Kilometre will be entitled to fees in respect of the participants it introduces to the transaction.  It is arguable that the entitlement to the Total Consulting Fee rises from the active introduction by Kilometre, and that the mere, or passive, joinder to a transaction by other parties do not constitute any event giving right to a fee.

44.Mr Smith sought to distinguish a third similar case, Cavendish Corporate Manse LLP v KIMS Property Company Ltd [2014] EWCH 1282 (Ch). There, the judge interpreted the expression, “successful fund raising from the Cavendish exercise” to mean that the success fee was payable if Cavendish’s work was an effective cause of the deal.  The claim for a success fee failed.

45.Mr Wong makes the following points in respect of Cavendish:

(i)   As in Kilometre’s case, the financial advisor’s role is essentially to find an investor.  This element of engagement was absent in both Seymour Pierce and Rothschild.

(ii)   In Cavendish, the fees payable were commensurate with the amount of finance could be procured by Cavendish’s efforts.  In the present case the fee ranges between 0.75% to 2%, depending on the transaction prices procured.  In both Seymour Pierce and Rothschild fixed sums comprised the fees, in Seymour Pierce upon the offer being declared unconditional, and in Rothschild on the occurrence of a specified event.

46.Mr Smith has mounted an attractive and powerful argument, but in the complex factual matrix of the present case, and having regard to the particular terms of the Agreement, I am unable to say that the matters raised by Mr Wong are unarguable to the extent that summary judgment should be entered. 

47.A number of other matters were raised by Mr Wong.  It is unnecessary for me to go into those, they are best left for trial.

Conclusion

48.I accordingly concluded that the application for summary judgment must fail, and that the matter must go ahead to trial.  Shanda was given unconditional leave to defend. 

49.Having heard counsel, I made an order nisi that costs on the application for summary judgment to be in the cause.  In the event that Shanda ultimately succeeds there will be a certificate for two counsel.

Mr Clifford Smith SC, instructed by Freshfields Bruckhaus Deringer, for the plaintiff

Mr Wong Yan Lung SC, leading Ms Sarah Tong, instructed by Davis Polk & Wardwell, for the defendant