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2018 MarsdenLR 3264
HIGH COURT MALAYA KUALA LUMPUR
MFL INTERNATIONAL SDN BHD – Appellant
Versus
BAHAROM HAMZAH – Respondent
[Originating Summons No: WA-24NCC-270-05-2018]
The legal principle established is that profit warranty interpretations in contracts must reflect the parties' intent and the actual economic performance of the group, not solely accounting figures.
Headnote:In this case, the court examined the construction of a profit warranty clause in a Shareholders' Agreement. The core issue concerned the interpretation of '(consolidated) profits after tax.' The court determined that the proper interpretation included the net profits of all companies involved. The court ruled based on the intention behind the warranty and the principles of contract construction, emphasizing that the figures to be considered should reflect the group’s profits correctly, not merely those recorded post-acquisition. The final outcome was a declaration that the warranty had been breached, entitling MFL to certain shares.
| Table of Content |
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| 1. understanding the backgrounds of shareholder agreements and intended clauses. (Para 1 , 4 , 6 , 12 , 13) |
| 2. defendant's contention regarding profit calculations. (Para 16 , 18) |
| 3. defendant's arguments against profit calculations. (Para 17 , 19 , 21) |
| 4. construction of the profit warranty clause. (Para 23 , 25 , 46) |
| 5. court's interpretation of profit warranty clause. (Para 26) |
| 6. inferencing terms in contracts for business efficacy. (Para 28 , 56) |
| 7. importance of business context in contract interpretation. (Para 29 , 32 , 47) |
| 8. final determination on the call option shares. (Para 52) |
| 9. final ruling and its implications for profit warranty enforcement. (Para 53) |
[1] The plaintiff, MFL International Sdn Bhd, is an investment vehicle of a private equity investor. It invested in Romstar Group Holdings Sdn Bhd (the "company"). The defendant, Baharom Hamzah, is the Chief Executive of the company. The plaintiff (referred to here as "MFL") sought to enforce the terms of a profit warranty contained in a shareholders' agreement dated 9 November 2015 (the "Shareholders' Agreement") entered into between it and certain other shareholders.
[2] I allowed the application in part. MFL has now appealed against this decision.
[3] The key determination in this case centred around the proper construction of a profit warranty clause, specifically the meaning of the expression "(consolidated) profits after tax" as used in the Shareholders' Agreement. There was a dispute as to the meaning of this phrase because the company only acquired the shares in its operating subsidiaries on 7 December 2015, whereas the profit warranty was operated in respect of the financial years of 2014 to 2016. The consolidated net profits of the company for the financial year 2015, as set out in its audited financial statements, only took into account profits attained by the subsidiaries from the date they were acquired. This figure was, not unexpectedly, appreciably lower than the sum of the net profits of all the three companies put together.
Material Background Facts
[4] The company holds the entire issued and paid up share capital in three other companies: Romstar Polymer Sdn Bhd, Romstar Sdn Bhd and Romstar Research and Development Sdn Bhd. These companies are engaged in the oil and gas industry. Their business relates primarily to specialised equipment used for the inspection of multi-fuel pipelines.
[5] The shares in the three companies were originally held by the defendant, Norizan Ibrahim, Nur Ashikin Ibrahim, Suzanna Baharom and Adam Harith Baharom. An internal restructuring was carried out to interpose the company as a holding company of the three companies. The shareholders in the three companies executed share swap agreements by which they sold their shares in the various three subsidiaries to the company, in return for which they acquired shares in the company. (Norizan, Nur Ashikin, Suzana and Adam are referred to collectively as the "Other Shareholders")
[6] Concurrently with this internal restructuring, the plaintiff entered into the following agreements:
(a) a Subscription Agreement was entered into between the company, plaintiff, the defendant and the Other Shareholders for the plaintiff to subscribe for up to 15,800,000 redeemable convertible preference shares ("RCPS") in the company. The subscription was to occur over three stages, with the first subscription of 5,800,000 RCPS to occur within 14 days of the fulfilment of the conditions precedent. The plaintiff had the right, but not the obligation to subscribe for the stage two and stage three RCPS;
(b) a Share Sale Agreement was entered into between the plaintiff and the defendant, by the terms of which the plaintiff purchased 2,997,570 ordinary shares in the company (representing 16.36% of the total ordinary shares in the company) from the defendant for RM6 million; and
(c) the Shareholders' Agreement was entered into to govern the relationship of the shareholders in the company
[7] The effect of
