A dispute between the Woolworths administrators and the BBC, born of the failure to agree an appropriate basis to value Woolworths' shares in a Joint Venture (JV), landed both parties in the High Court recently. The dispute itself regarded the validity of a provision contained in a Master Licence Agreement (MLA) and highlights potential problems that can arise when a JV shareholder licenses intellectual property rights to a JV.
This case involved a Joint Venture Agreement (JVA) setting up a company called 2 Entertain Limited (2e). 2e had a subsidiary, BBC Video Limited, which was the licensee under the MLA, which in turn was conditional upon the JVA. BBC Video Limited, which the MLA protected, was a subsidiary of the JV vehicle and the licence contributed substantially to its net worth.
The MLA terminated upon the happening of an ‘Insolvency Event’. If an Insolvency Event occurred within the Woolworths Group, BBC Worldwide could serve a notice in accordance with the JVA, requiring the Woolworths’ shareholder in 2e to sell its shares in 2e to BBC Worldwide; they did just this. The result was that the MLA had terminated and the valuation was to be determined on that basis. The effect of this provision was to allow the solvent JV partner to force the other partner to transfer its shares in the JV vehicle for a price that was discounted so as to reflect the loss of the licence.
Insolvency Deprivation Principle
This common law principle is the equivalent of s.107 of the Insolvency Act 1986 and r.4.181 of the Insolvency Rules 1986. Both sections ensure that the assets of an insolvent company are dispersed in line with the shareholders’ and creditor’s share of their interests in the company. It is against public policy to permit a company to contract out of this principle in order to favour one shareholder or creditor above all the others.
The High Court held that clauses in the MLA, which terminated the MLA upon the insolvency of a member of the licensee's group, were void as a matter of public policy because their effect was to deprive the creditors of the insolvent JV partner of the value of the licence upon the occurrence of an ‘Insolvency Event’. In doing so they expressly declined to follow the decision to the contrary in Perpetual Trustee Co Ltd v BNY Corporate Trustee Services and others.  EWHC 1912 (Ch).
Watch this space...
Mr Justice Peter Smith has granted permission to the Administrators to appeal and to BBC to cross-appeal in relation to the deprivation principle. Further, judgment was handed down in Perpetual Trustee Co Ltd (see above) on 28 July 2009. This case also involved the deprivation principle and has also been given permission for appeal by the Chancellor. Expect this to be a live issue over the coming months.