Summary

A share option agreement between a Hong Kong toy manufacturer and a UK distributor was expressed to be conditional upon the distribution arrangements between the parties continuing up to the date on which the option was exercised. The manufacturer's action in rescinding the distributor's invitation to a toy fair made it clear that it regarded the relationship between the parties as being at an end and thus invalidated the option agreement.

Facts

The claimant brought proceedings against the defendant seeking an order for the issue of shares pursuant to an option agreement.

The claimant was a Hong Kong toy manufacturer and the defendant was a UK distributor. The claimant described the defendant as having a preferred relationship with the claimant, whereby the defendant was invited to bid for products and was provided, if necessary, with information as to how the bid might be improved. The defendant enjoyed great success with a particular product, Zhu Zhu Pets, which it bought from the claimant and distributed in the UK. There was no written distribution agreement. The claimant sought an equity participation in the defendant. In July 2010, the parties agreed that the claimant would have an option to purchase up to 1 million shares in the defendant at a specified price. That option was expressed to be conditional upon the distribution agreement between the parties having continued in existence until the date the option was exercised. According to the defendant, the distribution agreement covered all the claimant's products. In October 2014, the claimant rescinded its invitation to the defendant to attend the Hong Kong toy fair. In July 2015, the claimant purported to exercise the option. The defendant refused to issue the shares, claiming that the right to exercise the option had been invalidated by the claimant's breach of the exclusive distribution agreement by rescinding the toy fair invitation and by awarding a contract for another range of toys, The Happys, to another distributor after the defendant had been invited to bid for it.

Held

(1) In reality, the condition which had to be satisfied in order for the exercise of the option to be valid was that the defendant would continue to be the exclusive distributor of Zhu Zhu Pets. It was commercially improbable that the claimant would have agreed to give the defendant an exclusive distribution right over all its products, including those not yet designed. The existing arrangements were ones pursuant to which the defendant acted as the claimant's exclusive distributor on agreed terms in relation to certain toys, such as Zhu Zhu Pets, and the claimant as a matter of practice sought a bid from the defendant as to the terms upon which it would distribute new lines of product. It was therefore more likely that the defendant had requested and secured an agreement that if the existing practice did not continue in relation to all the claimant's products, the claimant would not be able to exercise the option to purchase shares in the defendant (see paras 34-36, 43 of judgment).

(2) The fact that the claimant had not gone back to the defendant regarding the contract for the right to distribute The Happys did not mean that the claimant had failed to abide by the practice prevailing before July 2010 such that the "distribution agreement" between the claimant and defendant had not continued in existence. The claimant had sought a European deal with regard to The Happys, which the defendant could not offer, and the defendant's bid was much lower than the bid made by the successful contractor. Therefore, the claimant had offered the defendant the opportunity to bid and had rejected its bid in good faith. However, the claimant's act in rescinding the defendant's invitation to the toy fair had made it clear that it regarded the relationship between them as being at an end, so that the prior course of dealings between the parties could not be said to have continued after that date. Accordingly, the defendant was not obliged to issue shares to the claimant because the distribution agreement, in the sense of the prior course of dealing between the parties, had ended in October 2014 and was therefore no longer in existence at the date on which the claimant purported to exercise the option (paras 61, 74-75, 94).