Legal Updates

An economic term in a commercial contract will be interpreted in accordance with the accepted and well-known meaning in the business world

May 2, 2022

Holder of a put-option to sale its holdings of the Osem company shares demanded an additional ILS 39 million, about 4 years after exercising its option, according to a clause in the option agreement that granted the option holder to choose between three alternatives formulae to calculate the share price, whichever is higher.

The Court dismissed the claim and held that the term ‘put option’ should be given the accepted meaning in the business world under which the option comes to an end upon its exercise. As a general rule, an economic term within the framework of a business contract will be interpreted according to the usual meaning known and accepted in the relevant industry and in the business world. The weight of the written language of the agreement and the common meaning of the economic expressions increases when it comes to companies listed on the stock exchange that enter into agreements with officers, as third parties may also rely on the written language of the agreement. Here, it is a commercial agreement made between the controlling shareholders of a public company (Osem) and Nestlé. The option agreement gave the vendors three alternative routes for formulating the share price, whichever is higher. The first option set a fixed price. The second is a fixed addition to the premium. The third option provided a right to compare the price at which the other party would purchase a third-party stock contract. The option holder exercised its option in 2012 and about four years later, a merger transaction was made that entitles the option holder, insofar as it chooses this route at the appropriate time, to a higher return. However, the agreement did not establish a mechanism for adjusting the price of the consideration after the exercise of the option. The accepted linguistic meaning of a ‘put option’ is that the option holder will exercise its right and sell its shares, and the counterparty will purchase such, and thus the transaction will come to an end and the option will end its life and expire. Therefore, in the absence of an explicit contractual provision the language of the contract should be given the accepted meaning in which the option holder is not entitled to demand an update of the consideration in respect of events that are late to exercise of its option.