Interpretation and clarity in business

There have been several company law cases decided recently that highlight ?the need for careful drafting in share purchase agreements (SPAs).

In Wood v Suretem Direct Ltd & Capita Insurance Services Ltd [2015] EWCA Civ 839, the Court of Appeal considered how the actual wording of an indemnity given by the seller in an SPA should be construed.

The indemnity wording covered any losses ‘following and arising out of claims or complaints registered with the Financial Service Authority (FSA)… pertaining to any mis-selling’ of insurance. The court was asked to establish the circumstances in which the indemnity could be enforced: either ?as a result of the buyer suffering a loss due to the company’s self-referring potential mis-selling to the FSA, or only as a result of a customer making a complaint to the FSA. 

The court held the indemnity was limited ?to any loss incurred by mis-selling which resulted from a customer claim or complaint being registered with the FSA, on the basis that the self-referrals did not arise out of any claim or complaint made against the company. The court held that it could not widen the scope of the indemnity simply on the basis that to do so would make the deal better for the buyer, who would otherwise suffer losses as a result of the company’s self-referring potential mis-selling to ?the FSA.

The court held that where the language of an agreement is ambiguous enough to create the possibility of multiple meanings, business sense cannot be used to diminish the value of the words used. It ruled that it could not improve the bad bargain of a party. 

This is a cautionary tale: indemnities should always be drafted with sufficient clarity, so as to leave no room for any alternative interpretation.

Material adverse change 

In Ipsos SA v Dentsu Augis Network Ltd (previously Aegis Group plc) [2015] EWHC 1726 (Comm), the High Court considered the interpretation ?of a material adverse change (MAC) clause ?within an SPA. 

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 target business ?as a whole. The question was whether the buyer could terminate the agreement as a result of the target making substantial negative alterations to its financial forecasts between exchange and completion.

It was held that the revision of the ?forecasts did not constitute an MAC and ?that the agreement could therefore not be terminated. The construction of the actual ?MAC definition 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 an MAC. 

Notice clause

Also in Ipsos, the court considered whether ?the limitation period had passed on the buyer’s ?ability to bring warranty claims 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 to be highly significant and will strictly enforce their terms.

Unfair prejudice

In Thomas v Dawson and another [2015] EWCA Civ 706 the Court of Appeal ruled that the first >> ?>> instance decision to grant relief for unfair prejudice, under section 994 of the Companies Act 2006 (CA 2006), should be upheld. 

Relief was in the form of an option for the remaining shareholder to purchase the other shareholder’s single share in the company for £55,000. This was despite the fact that the balance sheet showed the company to be insolvent, as per expert valuation evidence. An interim order which dictated that the shares be valued by reference to the company’s assets, profitability, and future prospects was upheld. 

It was held that it was within the court’s remit under section 996 of the CA 2006 to use its discretion and to apply a positive value to the single share in the company so that the value in obtaining the company to the remaining shareholder was recognised. 

This judgment indicates just how broad ?the court’s discretion can be when formulating ?a just resolution to an unfair prejudice claim. 

Beta search service

In line with the government’s commitment to ?free data, Companies House has launched a new public beta search service, which is available ?on its website. This user-friendly database now provides free public access to over 170 million digital records currently held on the UK register ?of companies.

Current features now available on the beta service include company overviews; current and resigned officers; document images; mortgage charge data; previous company names; insolvency data; and changes of registered office address.

Planned features for the future will also include officer searching; disqualified directors; company monitoring; company name availability; dissolved companies; and overseas data. 

Officer changes 

It has been reported that 47 per cent of all public searches consist of the director appointment database, but that only 53 per cent of companies file such notification of changes to their directors or company secretaries within the relevant timescale.

Companies should be aware that filing documentation late is a breach of the relevant CA 2006 provisions, and can also affect credit ratings due to credit reference agencies using this data as an indication of a company’s reliability. 

Transparency and trust 

The government aims to enhance transparency and ensure the UK is seen as a trusted and fair place to do business through the Small Business, Enterprise and Employment Act 2015 (the Act), which will implement new measures and ?changes to the CA 2006. 

These measures will affect all companies ?in some way as they will change certain legal requirements, including filings at Companies House. The Act received royal assent on 26 March 2015 and has introduced the biggest changes ?to UK company law since the introduction of ?the CA 2006. 

There have been some changes to the original timescales proposed for when each of the measures are due to come into force and further alternations to the implementation schedule may still occur. Companies need to be aware of when each stage will be implemented, in order to comply with their new responsibilities. 

Bearer shares were abolished with effect from 26 May 2015 and any existing share warrants will need to be surrendered within nine months.

The Small Business, Enterprise and Employment Act 2015 (Commencement No 2) Regulations 2015 and The Companies (Disclosure of Date of Birth Information) Regulations 2015 were published on 18 September and implement the following provisions of the Act with effect from 10 October 2015:

The change to the existing ‘consent to act’ procedure affecting all newly appointed directors and secretaries will be implemented. A statement confirming that the newly appointed director or secretary has consented to act in such a capacity will be introduced. This declaration will be implemented across both paper and electronic appointment forms. The statement will replace the current practice of providing signatures for paper forms and personal authentication for electronic filings;

Newly appointed directors will receive correspondence from Companies House confirming the filing of their new appointment and an explanation of their statutory general duties;

The day element of the date of birth of new and current directors on the public register ?will be eliminated; and

A reduction in the time it currently takes to strike off a company from the register will be implemented. At present, if no objections are registered by creditors, a company is struck off not less than three months after publication of the first Gazette notice. It is intended that this will be reduced by one month, resulting in strike-off taking not less than two months from when the first Gazette notice is published. 

The remaining provisions will be implemented in December 2015 and then during the course of 2016 and early 2017.

Debbie King is a partner at Farleys @FarleysLaw www.farleys.com

---