The Supreme Court of Queensland recently provided practical guidance as to when a refusal to grant consent in the context of a control transaction may be ‘unreasonable’. Given this issue arises often, this article summaries the key takeaways.
Key takeaways
- A party must not withhold or refuse consent in order to obtain a collateral advantage or acquire rights or benefits to which it was not entitled under the agreement - to do so would give it a benefit or advantage for which it had not bargained
- In considering a request for change of control consent, a person may request information that is reasonably necessary to enable it to make an informed decision and to protect its legitimate interests. The type and scope of this relevant information will depend on the facts and circumstances of the underlying contractual relationship, and the person seeking consent need not provide information outside this scope
Context
Commercial contracts often include a requirement that a party undergoing a change of control needs to obtain the consent of the other party(ies) prior to the change occurring, otherwise certain rights may be triggered (termination rights, rights to receive certain payments, etc).
At its core, this is to provide the parties with certainty over who they’re in business with – one may be forgiven for not wanting to continue a contractual relationship with an incoming owner who doesn’t have the expertise to support the business in the same way the original owner did, or worse – is a competitor.
But what happens when a party acts unreasonably in withholding their consent? These issues were explored in Impact Healthcare Pty Ltd & Anor v St Vincent’s Private Hospitals Ltd [2024] QSC 62.
Factual matrix
The first Applicant, Impact Healthcare Pty Ltd (Impact) manages and operates an Emergency Centre at a private hospital owned by St Vincent’s Private Hospitals Ltd (SVPH) under a service agreement entered into in 2001 (the Agreement). The second Applicant, Dr Phillip John Kay, was the sole director and shareholder of Impact.
In December 2023, Dr Kay requested SVPH’s consent to sell 70% of his shares in Impact to Private Emergency Health Australia Holding Co Pty Ltd (PEHA) or its nominee. The Agreement provided that Dr Kay would not sell his shares in Impact (or cease to be a director of Impact or manage the Emergency Centre) without SVPH’s informed consent, not to be unreasonably withheld.
Over the following few months, the parties met and corresponded on numerous occasions to discuss the transaction and the requested consent – in the course of those discussions the following became apparent:
- SVPH wanted to take the opportunity to amend or ‘modernise’ the Agreement – on 1 February 2024, in an exchange SVPH’s CFO told Dr Kay words to the effect that its consent was conditional on the Agreement being ‘modernised’. Despite attempts by SVPH’s lawyers to walk this back, SVPH continued to link the issue of consent to the amendment of the Agreement.
- SVPH requested extensive information on PEHA, including detailed financial information and a copy of the sale agreement, and stated that until all information was provided it would not be in a position to give its consent – while PEHA provided the information it considered appropriate and relevant (including information setting out its key personnel and experience in operating private emergency departments, organisational structure, corporate values and shareholding), Dr Kay, Impact and PEHA declined to provide further information, in particular the detailed financial information, on the basis that it was not reasonably required in the circumstances.
- Dr Kay provided comfort to SVPH that the change of control would not impact the operation of the Emergency Centre - he would continue to hold a substantial equity stake in Impact, would remain as CEO of the business and had commercially agreed with PEHA that Dr Kay would continue to operate the business autonomously and that there were no proposed changes to the existing operating model or disruption to the primary points of contact with SVPH.
Impact served a notice of dispute under the Agreement and sought to engage in mediation with SVPH in respect of the change of control consent; SVPH made clear that it would not attend a mediation which did not address both the consent issue and the Agreement amendment issue. On 21 March 2024, Impact and Dr Kay initiated proceedings against SVPH and sought a declaration that SVPH had unreasonably delayed and withheld consent.
The decision: was SVPH unreasonable in witholding its consent?
The Queensland Supreme Court held that SVPH had acted unreasonably in delaying and withholding its approval in the circumstances. Specifically, the Court found that:
- Attempts to amend the Agreement: SVPH had treated the request for consent as an opportunity to renegotiate a new commercial agreement with terms more favourable to SVPH. The reason for withholding consent must be to protect a legitimate interest that the provision for consent is intended to protect. A party must not withhold or refuse consent in order to acquire rights or benefits to which it was not entitled under the agreement. To do so would give it a benefit or advantage for which it had not bargained. In using and delaying the consent process for this purpose, SVPH had acted unreasonably.
- Requests for information: SVPH had been given sufficient information about PEHA and the nature of its business, and had sufficient time to satisfy itself about the nature of PEHA’s business and its values, reputation and character. When determining the type of information and level of detail that a party may reasonably request about a potential new shareholder of a contractual counterparty, the nature of the underlying contract is important. The financial capacity of an incoming entity may be relevant in the context of a change of control of a tenant under a lease (as the tenant needs to pay rent) or in a capital-intensive industry (where shareholder financial support is likely to be needed). However, here it is SVPH which pays Impact, and the business itself was profitable and had never required capital injections from Dr Kay in the past. The information requested was unnecessary for SVPH to make an informed decision about the approval that was sought as it related to matters that were not relevant to Impact’s continuing performance of its obligations under the Agreement, and the additional information about PEHA’s financial affairs was not reasonably required. SVPH unreasonably delayed in making a decision about the requested approval.
Accordingly, his Honour held that Impact was entitled to a declaration that SVPH unreasonably withheld consent.
