With a seventy per cent interest sold to Cambridge Stud in 2018 for $2.1 million, stallion Highly Recommended stands at the centre of a legal storm over nomination rights and entitlements to share in the sale proceeds.
Part sale of the stallion was made by Berkley Stud, based just outside Christchurch. Berkley part-financed its 2013 purchase of Highly Recommended with sale of nomination rights. Thoroughbred purchases can be funded from sale of part shares in the stallion, or from selling nomination rights giving an entitlement to future servicing. Nomination rights are a form of forward contract; payment upfront for future delivery, in this case future delivery of a service in every sense of the word – the right to mate nominated mares with the stallion.
The High Court was told Berkley sold lifetime nomination rights at $10,000 each. Nomination holders were entitled to a defined number of service rights. Nomination rights are likened to tickets in a lottery. If progeny race successfully, the stallion’s market value increases and the nomination right itself becomes more valuable. There is a downside. The stallion may prove infertile, die, be sold, or leave progeny which race poorly. Express terms of a nomination agreement typically specify who bears some of these risks.
Purchasers of Highly Recommended nomination rights joined forces to sue for a share of the $2.1 million generated by the stallion’s part sale to Cambridge Stud. They said a plain reading of the nomination agreements entitled them to a two per cent share of the sale price; payment of $42,000 for each nomination right held.
In the High Court, Associate judge Paulsen ruled in favour of Berkley Stud. Reading the agreement as a whole, entitlement to share in the sale price arose only if a sale extinguished their nomination rights, he ruled. Sale to Cambridge Stud did not bring their nomination rights to an end.
Nomination holders argue it is common practice in the throughbred industry for nomination holders to share in any sale price even where nomination rights continue. This requires a full trial with evidence provided by industry experts, Judge Paulsen said.
Harris v. Berkley Stud – High Court (4.12.19)
20.006