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To buy or not to buy?

To buy or not to buy?


Debbie King advises companies on due diligence in light of Brexit, the interpretation of the phrase 'close of business', and other recent developments in company law

Due diligence of a target business is key in the decision-making process of any acquisition, helping a potential buyer to decide whether to proceed at all, whether a price adjustment is required, or if any specific risk identified needs to be covered by way of specific warranty or indemnity in the sale and purchase agreement (SPA).

During the period of uncertainty following the EU referendum result, buyers need to consider broadening the extent of their due diligence to include Brexit-related issues such as European-registered intellectual property, foreign employees, and contracts with third parties based in the EU.In connection with any European-registered IP identified, consider whether it would be wise to obtain specific UK registrations. IP licences where the territory of the licence is linked to the EU or the European Economic Area may need to be renegotiated, so as to ensure that all relevant parts of the UK are still included (as appropriate).

If a number of foreign workers are engaged or employed by the target business, consider the likely impact if the free movement of people to the UK is restricted post Brexit.

If the target company has entered into contracts with an EU dimension, consider the territorial scope of the contract, the governing law, the forum for disputes, and any agreed payment terms, taking into account that there will most likely be an effect on currency when article 50 is engaged.

The regulatory EU law affecting UK businesses will change following Brexit. The extent and nature of these changes remains unknown. However, buyers should carefully consider the existing contracts and trade arrangements of the target company to assess whether they will continue to be contractually bound by the potentially more onerous EU regulatory legislation following Brexit.

Buyers should also identify if the business has been adversely affected in terms of customer demand following the referendum result and the potential impact on any EU grants, funding, or other investments that the target company may have received.

Confirmation statements

Companies House has updated its guidance on confirmation statements. It has formally clarified that if a company is filing its first confirmation statement and hasn’t previously filed a new-style statement of capital (after 30 June 2016), it must file a full statement of capital with the first confirmation statement.

This is because the company will not have previously provided the aggregate amount unpaid on the total capital of the company, which is one of the new requirements.

Practitioners will have noted that since 1 July 2016, in addition to the confirmation statement, Companies House forms SH01, SH02, SH15, and SH19 have all been updated to include boxes requesting the aggregate amount unpaid on the total capital of the company. If the total amount unpaid is zero, the word ‘zero’ or ‘nil’ cannot be used on the form and the boxes cannot be left blank: a ‘0’ in each such box is required to ensure Companies House will accept it.

Close of business

Numerous commercial and corporate contracts make reference to an event occurring at the ‘close of business’. This is often accompanied by a specific time, but in a recent judgment, the High Court considered the question of how the phrase ‘close of business’ should be interpreted if there is no reference to a specific time (Lehman Brothers International (Europe) (In administration) v Exxonmobil Financial Services BV [2016] EWHC 2699 (Comm)).

The notices clause in the agreement in question provided that, in order for a particular type of notice to be deemed received on a particular day, it must be received before ‘close of business’. The contract did not provide clarification on when ‘close of business’ occurred.

ExxonMobil submitted a notice to Lehman’s London offices at 6.02pm on 22 September 2008. Lehman submitted that the notice should be deemed received on the following day because a reasonable person would regard ‘close of business’ in London as being 5pm. ExxonMobil argued that ‘close of business’ should be 7pm. The judge rejected Lehman’s submission: given the nature of the business (repo financing extended by an oil major to an international investment bank), a reasonable person might be surprised to hear that close of business is 5pm. This was not the case. The onus was on Lehman to establish when close of business occurred. Lehman had failed to submit any admissible evidence; that was sufficient to decide the point in favour of ExxonMobil.

The issue of when ‘close of business’ occurred for ‘commercial banks’ in London was also considered. A working definition from the Financial Times lexicon was put forward to the court. The judge took the view that the expression ‘commercial banks’ did not have a particular meaning in English law. Lehman submitted that the expression ‘commercial banks’ suggested normal business hours, such as are worked by ordinary businesses and high-street banks. Lehman argued that this was a further pointer towards ‘close of business’ being 5pm (if not earlier).

The judge rejected this. Lehman’s experts did not give evidence on the subject. The only evidence came from ExxonMobil’s expert, who suggested that modern commercial banks closed at 7pm as a rough approximation. The judge said that there was no reason not to accept his evidence but stressed that this was a finding of fact limited to this case.

Even though the point is limited to commercial banks and noting the caveat, the case remains of interest given the lack of English judicial authority on the point.

Restrictive covenants

The High Court recently considered the enforceability of two restrictive covenants given by an individual seller in a share purchase agreement in Rush Hair Ltd v Gibson-Forbes and another [2016] EWHC 2589.

The case related to two hairdressers. The covenants were:

  • Not to canvass, solicit, entice, or employ several named employees for a period of two years; and

  • Not to be engaged or interested in any business similar to or competitive with the purchaser’s business, within a two-mile radius of any salon.

After the sale had completed, the seller had started up a new limited company and that company was operating a salon on the same street as one of the buyer’s existing salons and had employed two of the named employees.

The court rejected the purchaser’s submissions that the seller had used a newly incorporated company as a device to get round the restrictive covenants and that this justified ‘piercing the corporate veil’. The judge said that, before doing so, he would need evidence that the seller had interposed a company, the separate legal personality of which would defeat a legal right or frustrate its enforcement. There was no such evidence in this case.

However, the court gave the non-solicitation and non-employment covenant an expansive interpretation. The covenant appeared only to prevent the seller from soliciting or employing the named employees on her own behalf. The judge found the clause to be ambiguous, rendering it permissible as a matter of contractual construction to give the clause a commercially sensible meaning. The seller habitually ran her salons through the medium of a limited company and the parties would have understood that; they would have also understood that a covenant binding on the seller only in respect of acts done on her own behalf would have been toothless. The only way to construe the clause in a commercially sensible way was as prohibiting the seller from canvassing, soliciting, enticing, or employing any of the named individuals both on her own behalf and as agent for another.

The court rejected the seller’s submission that she was excused from any further compliance with the SPA on the basis that the buyer had accepted an earlier repudiatory breach by the seller of the restrictive covenants. The court also rejected the seller’s submission that the non-compete covenant was void on the basis of uncertainty.

The court reviewed the law relating to the enforceability of restrictive covenants specifically relating to SPAs and concluded that the covenants went no further than were reasonably necessary to protect a legitimate business interest and were therefore, in principle, enforceable.

The court found that the seller had breached both restrictive covenants. She had breached the non-compete covenant by establishing the new salon and the new company had employed two employees, breaching the non-solicitation and non-employment covenant. The court also found that the seller had breached the non-solicitation and non-employment covenant further by signing an agreement on behalf of the new company retaining another named employee as a consultant to manage the new salon and be its chief stylist.

Debbie King is a partner and head of corporate at Farleys