M&A Disputes - seller opportunism or buyer's remorse?

Publication August 2015


This article appeared in the June 2015 issue of PLC Magazine.

Ffion Flockhart and Charlie Weston-Simons of Norton Rose Fulbright LLP examine current trends in disputes arising from M&A deals.

In recent months, the English courts have considered a steady fl ow of disputes arising out of mergers and acquisitions (M&A). While straightforward indemnity and breach of warranty claims are well represented among these cases, less common battlegrounds have also been traversed. In most instances, the issues have centred on the drafting of particular provisions in sale and purchase agreements (SPAs) and other transaction documents. However, diffi cult questions of principle have also come up that will be of real interest to deal team advisers and disputes lawyers who operate in this area.

This article examines the major M&A cases to have come before the courts since 2013. The case for undertaking this survey now is particularly justifi ed because the incidence of these cases appears to be on the rise. This increase may be attributable to the recent growth in M&A activity in most business jurisdictions. However, buyers may also be perceiving post-completion claims as an opportunity to unlock further value from deals or, viewed less cynically, as an acceptable route to recovering losses for which the seller has accepted liability.

Price disputes

In any deal, the appropriate pricing mechanism will be an important consideration. In some cases, a locked box structure will be preferred, where the equity price is fixed based on a historic set of accounts, leaving limited scope for post-acquisition adjustment. In other transactions, a completion accounts, or price-adjustment, mechanism may be adopted, where the buyer pays an agreed enterprise value at completion that can be adjusted after a set of completion accounts have been produced.

Another commonly used structure is an earn-out mechanism, where additional consideration becomes payable if the company meets certain financial targets, as in Treatt Plc v Barratt & Others [2015] EWCA Civ 116, or if the company is sold on by the buyer for a price exceeding an agreed threshold, as in Starbev GP Limited v Interbrew Central European Holdings BV [2014] EWHC 1311 (Comm).

Procedural requirements

Where an earn-out mechanism is used, its operation may be contingent on compliance with some procedural requirements, such as service of a notice. That was the position in Treatt, where the SPA provided for the buyer to serve a notice specifying the amount of the earn-out within a certain period, failing which the amount would be determined by an independent accountant. If a valid notice was properly served, the seller would have a limited period in which to invoke the SPA’s dispute resolution provisions, otherwise the notice would be binding.

The seller in Treatt had omitted to invoke the dispute resolution provisions, so the issue was whether the buyer’s notice was valid. Although this was a technical issue, it was capable of binding the seller to the buyer’s valuation. Construing the relevant clause in the SPA, the Court of Appeal found that it was necessary for the notice to be based on audited accounts, which the buyer’s purported notice was not, and so the notice was invalid. The decision reinforces the importance of observing the procedural steps that are prescribed.


An important question in Starbev was whether the buyer had fallen foul of anti-avoidance provisions in the SPA by structuring the onsale of the company with the purpose of reducing payments due to the seller under the earn-out mechanism. The dispute turned on whether the provisions were wide enough to capture the proceeds of a convertible note that were payable to the buyer, and whether the purpose of the note was to reduce the sums payable to the seller. This was an objective test that, in the High Court’s view, required ascertaining the transaction’s dominant purpose.

On both counts, the court was satisfied that the anti-avoidance provisions applied. This conclusion was reached with the benefit of important factual evidence showing that the note was given by the on-buyer at the buyer’s insistence and that the advantage for the buyer was, in fact, very limited.

Price adjustment

As for the completion accounts or price adjustment approach, it is common for SPAs to provide for post-completion adjustment of the price based on the company’s net debt at closing. A provision of this kind was the source of considerable argument in Bikam OOD & Anor v Adria Cable SARL [2013] EWHC 1985 (Comm), where the seller rejected the net debt figure arrived at by the independent accountant. That dispute was settled under a so-called net debt agreement.

However, in the proceedings before the High Court, the seller attempted to re-open the issue. The seller claimed that the buyer had made various misrepresentations that had induced the seller to enter into the net debt agreement. However, none of these misrepresentations were established on the evidence. The court also gave short shrift to a further argument that the buyer was in breach of a clause in the SPA requiring it to give the seller full access to all accounting information and documents on which the net debt review was based.

Accounting error

A completion accounts regime was also at the heart of the dispute in Shafi v Rutherford [2014] EWCA Civ 1186. Unusually, the issue was whether the expert accountant instructed by the parties to resolve a dispute relating to the draft completion accounts had misdirected himself when deciding that the SPA obliged him to carry forward an error made in the company’s previous audited accounts. Although it was a question of construction, the Court of Appeal’s view that the expert was not required to do so, was informed by the commercial argument that the parties cannot have expected the expert to ignore the correct implementation of accounting policies. Shafi demonstrates how even apparently uncontentious SPA provisions are also being tested in the courts.

Indemnity claims

One of the principal means by which a buyer can protect itself against known financial liabilities of the company is to require the seller to give indemnities. If indemnities are necessary, it is clearly preferable from the seller’s point of view that they are capped at an agreed value. However, if liability is open ended, sellers may still draw some comfort from the general approach taken by the courts, which is to construe indemnity provisions strictly. That said, the courts will not go out of their way to assist sellers faced with indemnity claims, as shown by various cases in 2014.

Notice provisions

In Heritage Oil and Gas Ltd & Anor v Tullow Uganda Ltd [2014] EWCA Civ 1048, the seller had sold its interest in two petroleum exploration areas to the buyer.

Among other detailed provisions relating to tax claims, the buyer was required to give notice to the seller of any tax claim within 20 business days. Following completion, the Ugandan revenue authority decided that the seller was liable to pay tax of approximately $313 million in respect of the profi t that it had made on the disposal of its interests.

When the Ugandan government refused to recognise the transfer of the seller’s interests until the tax liability was paid, the buyer paid the outstanding amount and claimed under the indemnity. However, the seller argued that it was discharged from any liability to indemnify the buyer as a result of the buyer’s failure to comply with the notice provisions that, according to the seller, operated as a condition precedent.

The Court of Appeal rejected the seller’s argument, noting two features of the SPA that strongly militated against the notice provision being a condition precedent:

  • The absence of any wording to show that this was the intention of the parties.
  • The presence of express conditions precedent elsewhere in the agreement.

Arguments as to construction

In Wood v Sureterm Direct Limited & Anor [2014] EWHC 3240 (Comm), the narrow preliminary issue before the High Court was whether an indemnity “against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA…” was to be construed so that the final words applied to the whole of the clause, or so that they only applied to the words “all fines, compensation or remedial action or payments imposed on or required to be made by the Company”.

This issue was important because, if the former construction was correct, the sellers would be relieved from any liability to indemnify the buyer against a potentially large number of car insurance mis-selling claims that were not causally connected with an investigation by the then regulator, the Financial Services Authority. That commercially unattractive consequence was one of the matters taken into account by the court when finding against the sellers, a conclusion that was also supported by the language of the clause.

Time limits

In Global Draw Limited v IGT-UK Group Limited & Anor [2014] EWHC 2973 (Comm), the seller of the shares in a gaming company sought to resist an application for summary judgment on the SPA’s indemnity provisions, arguing that the indemnity clause was limited in time to losses suffered or incurred within a period of two years after completion. Given the potential relevance of factual evidence and the certainty that other indemnity and warranty claims would be heard at trial in May 2015, the High Court declined to decide the construction issue.

Warranty claims

The law affords buyers very limited protection against the risk that the assets that they have bought are worth less than they believed. This risk is generally mitigated during the due diligence process but it can also be addressed by way of warranties. Warranties in SPAs and other transaction documents therefore serve an important purpose, in that they provide the buyer with a remedy if statements made about the company prove to be incorrect.

Claim restrictions

SPAs often impose restrictions on bringing a claim for breach of warranty, for example, a shortened contractual limitation period or a provision specifying the timing of an initial notice of claim. In T&L Sugars Limited v Tate & Lyle Industries Limited [2014] EWHC 1066 (Comm), the SPA required the buyer’s warranty claims to be issued and served within a certain period, failing which they would be deemed to be irrevocably withdrawn.

Despite the existence of other recent authority to the contrary in Ageas UK Limited v Kwik-Fit (GB) Limited [2013] EWHC 3261 (QB), the High Court concluded that the phrase “issued and served” implied service in accordance with the Civil Procedural Rules and that service in accordance with the SPA’s general notice provisions was insuffi cient. Nonetheless, the warranty claims were found to have been served in time.

Notice requirements

In many cases, the SPA will also specify the required content of the initial notice. In The Hut Group Ltd v Nobahar-Cookson & Anor [2014] EWHC 3842 (QB), the SPA contained a standard provision requiring the buyer’s notice of a claim to specify “...in reasonable detail the nature of the claim and, so far as practicable, the amount claimed in respect of it...”. The sellers argued that the buyer’s notice of a breach of warranty claim relating to the accuracy of the target company’s management accounts was defective because it understated the amount and did not set out the basis of the claim. However, the High Court rejected this argument, noting that, at this stage, not much information was contractually required.

Evidential issues

Even if the necessary procedural steps are complied with, there will often be a substantial evidential dispute as to whether the warranties in question have been breached. That was the position in Bikam OOD, where the key warranty specified the number of subscribers who had signed up to the target company’s digital television service at completion. It was also the case in Sycamore Bidco Limited v Breslin & Anor [2012] EWHC 3443 (Ch), where a number of familiar warranties given by the seller were said to have been breached, for example, as to the accuracy of the company’s accounts and the absence of any material breach of contract.


Perhaps most interestingly, Sycamore Bidco also addressed the typically knotty issue of how the buyer’s losses fell to be valued. It is well established that where a warranty in an SPA has been breached, the measure of loss is the difference between the value of the shares as warranted and their true value. However, this hypothetical exercise of determining what a willing buyer would have paid to a willing seller in the absence of a market can be fraught with difficulty. For example, it may turn on what the buyer would have done had the true position been known, which is an inquiry that raises questions as to the factors relevant to the buyer’s approach and potentially requires expert evidence to be elicited.

The buyer in Sycamore Bidco argued that the warranties given in the SPA were also representations in an attempt to sidestep the possibility that the quantum of the claim would be reduced by a valuation exercise. If the High Court had accepted that the warranties had this dual quality, the effect on the measure of damages would have been significant, as it would have enabled the buyer to recover a sum equal to, or in excess of, the consideration paid, as opposed to the far lower sums available for breach of warranty. However, the argument was firmly rejected and the position now must surely be that clear words are needed for this improbable outcome to arise.

Valuation was also at the centre of the dispute in Ageas (UK) Limited v Kwik-Fit (GB) Limited & Anor [2014] EWHC 2178 (QB), where the underlying point of principle was whether hindsight or subsequent events could be relied on in order to value a company at the date of the breach. Without the benefit of any clear authority, the High Court concluded that it was permissible, but that this approach can only be justified if the overriding compensatory principle requires it, and if the parties have not agreed that the risk of the contingency arising should fall on one party or the other.

On this occasion, it could not be shown that the buyer would obtain a windfall and it was implicit in the parties’ bargain, as the deal was structured on a locked-box basis, that any change of position following the locked-box date should take effect to the buyer’s benefit. The court therefore rejected the argument put by the seller, in tandem with the buyer’s insurers, that the quantum of the buyer’s warranty claim should be reduced.

Matters following breach

Since the 2014 decision in Ageas, the courts have seen at least two further attempts to limit loss by reference to matters following the date of breach. On each occasion, the attempt has been unsuccessful.

In The Hut Group, the transaction involved the seller receiving shares in the buyer as part of the price, with the buyer giving various warranties in relation to the shares. It was expected that an initial public offering (IPO) would take place shortly after the sale, giving the seller an opportunity to realise more cash.

Following completion, it emerged that an accounting fraud had been committed by the buyer’s finance director, with the result that the buyer’s management and draft statutory accounts did not fairly present the company’s profits and losses in the period before the sale.

The seller admitted a breach of warranty. However, it argued that the buyer had suffered no loss or, at most, a very modest loss because, although the anticipated IPO had not taken place for reasons relating to the seller’s breach of warranty, the chance of an IPO had not been lost.

Adopting the same approach as in the 2014 decision in Ageas, the court confirmed the general position that it is not possible to rely on hindsight evidence, except in exceptional circumstances, such as the existence of cancellation rights in the event of a future contingency or contractual provision for post-contract adjustment of the price.

The same conclusion was also reached subsequently in Bir Holdings Ltd v Mehta [2014] EWHC 3903 (Ch), following a breach of warranty by the seller as to the nature of the licences held by the target company at the time of the sale. Again, the absence of a windfall for the buyer that would offend the compensatory principle, coupled with a clear allocation of risk under the transaction contract, proved fatal to the seller’s argument.


An important issue for negotiation in many deals will be the value of the cap to be placed on the seller’s liability for indemnity and warranty claims. While higher limits can be provided with the assistance of insurance, it may transpire that the buyer’s actual losses substantially exceed the agreed cap.

If so, the buyer will want to explore ways to lift the cap although, in most instances, this will only be possible if there has been fraud. While proving fraud is invariably difficult and fact dependent, The Hut Group is a recent example of a case where it was possible to do so. On this occasion, the seller was able to prove, on the facts, that the fraudulent intent of the buyer’s finance director was to be attributed to the buyer, given his heavy involvement in the transaction and the nature of the fraud. As a result of the buyer’s fraud, the cap therefore did not apply to the seller’s breach of warranty claim.

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