The importance of interpretation and clarity in Share Purchase Agreements

There have been several Company law cases decided recently that highlight the need for careful drafting in a Share Purchase Agreement (SPA).

Indemnity Clauses

Mr. Wood and Capita Insurance Services entered into a SPA whereby Capita acquired all of the shares in Sureterm, an insurance broker company, from Mr. Wood.

Shortly after the acquisition Capita had to pay out approximately £1.35 million in compensation to customers that had been misled and treated unfairly prior to the acquisition. Capita sought to recover these costs from Mr. Wood under the warranty and indemnity clauses that were contained within the SPA.

The High Court considered how the actual wording of the indemnity, provided by Mr. Wood in the SPA, should be interpreted. The High Court agreed with Capita’s interpretation. Mr. Wood appealed the decision and the Court of Appeal reversed the High Court ruling, concluding that Mr. Wood’s construction of the indemnity clause was to be preferred as the clause should be read as a whole. The Court could not widen the scope nor rewrite the poorly drafted indemnity clause simply on the basis that to do so would make the deal better for Capita.

This case demonstrates the importance of drafting clear and transparent clauses within any legal document. This is a cautionary tale; the stakes involved make indemnities particularly susceptible to dispute if the drafting in such clauses lacks clarity, or leaves any room for differing interpretations.

Material Adverse Change

The High Court has also considered the interpretation of a material adverse change (MAC) clause within a SPA.

In a recent case before the High Court the Buyer purchased from the Seller one of its business divisions know as ‘Synovate’. Completion was conditional on no “Material Adverse Event” (MAE) having occurred. However, following completion the Buyer brought a contractual claim against the Seller alleging that the Seller was in breach of this condition. The Seller had failed to notify the Buyer of matters which were reasonably likely to give rise to the Buyer being able to rely on the MAE Condition. The Buyer argued that if they had been aware of the information which was withheld they would not have completed the transaction at all.

The clause in question entitled the Buyer to terminate the SPA if something occurred between exchange and completion which had a material adverse effect on the Seller’s business as a whole. The issue in dispute was whether the Buyer could terminate the agreement as a result of the Seller making substantial negative alterations to its financial forecasts between exchange and completion.

It was held that the revision of the forecasts did not constitute a MAC and that the agreement could therefore not be terminated. An analysis of the actual MAC definition within the SPA was key in determining this.

The court did however indicate that if there was an actual deterioration of the financial performance in the month prior to completion, this could arguably constitute a MAC.

Notice Clause

In the same case the High Court also considered whether the limitation period had passed on the Buyer’s ability to bring a warranty claim under the SPA, or whether two letters that were sent before the limitation period had expired constituted written notice of the claim.

The court held that a reasonable recipient, with knowledge of the previous correspondence and the business context, would not have considered either letter as equating to notice of a warranty claim.

Neither letter indicated that they were to be considered as notice, nor did they state that a claim was being brought and therefore the warranty claim was deemed to have failed for being brought out of time.

This decision indicates that the courts consider the requirements of a notice clause within agreements to be of high significance and will strictly enforce the terms of them.

These cases serve as a useful reminder of the accuracy required when drafting corporate documents, and in particular SPA’s, to deliver what the client intended from the outset. Here at Farleys our experienced business solicitors specialise in corporate matters and have a wealth of expertise in all aspects of commercial and corporate law. To speak to a specialist solicitor call 0845 287 0939  or alternatively please complete the online enquiry form.

This article was originally published in the Solicitors Journal.