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24 May 2021 0 Comments
Posted in Corporate, Opinion

M&A deals and notice of a claim: United get lucky

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As any buyer who has been involved in an M&A transaction will know, some of the most important elements of the share purchase agreement are the warranties and the tax covenant.

They seek to protect the value the buyer has negotiated to acquire and to ensure the buyer is getting what they are paying for. We have considered the protection warranties and the tax covenant provide to a buyer in further detail here and here.

The share purchase agreement will also include a number of contractual requirements on how the buyer is to notify the seller of a potential claim under the warranties or tax covenant. Some of the typical requirements of the notice included in the share purchase agreement are:

  • that it needs to be written notice given within a specified time period after completion;
  • that the notice of a potential claim needs to include reasonable detail of the matter which gives rise to the claim; and
  • that the notice of a potential claim needs to include the amount claimed (where reasonably possible).

The recent case of Dodika Ltd v United Luck Group Holdings Ltd [2021] EWCA Civ 638 has highlighted the importance of complying with the contractual requirements for any notice of a potential claim.

The case

United Luck Group Holdings Ltd (United Luck) purchased shares in Outfit 7 from various sellers in December 2016. The share purchase agreement required United Luck to bring claims by giving written notice to the sellers stating in reasonable detail the matter which gave rise to the claim; the nature of the claim; and (so far as reasonably practical) the amount claimed in respect of the claim.

Following an investigation by the Slovenian tax authorities, United Luck sent a letter to the sellers which purported to give written notice of a claim under the tax covenant in the share purchase agreement. The notice referred to the investigation by the Slovenian tax authorities, which at the time of the notice was unresolved.

The sellers issued proceedings seeking a declaration that United Luck’s notice of the claim was defective as it failed to provide reasonable detail about the matter which gave rise to the claim and also failed to quantify the claim. The High Court granted the sellers application for summary judgment finding that United Luck’s letter failed to give reasonable detail about the matters which gave rise to the claim. United Luck appealed to the Court of Appeal.

Court of Appeal Decision

The Court the Appeal upheld United Luck’s appeal and found that, on the facts (including the sellers’ knowledge of the full details of the tax investigation), United Luck’s notice did state the matter giving rise to the client in reasonable detail – meaning that the claim against the sellers could proceed.

The Court of Appeal held that information conveyed by a unilateral notice to the reasonable recipient could, in principle, be affected by the background context, including the recipient’s knowledge. Such knowledge could be relevant to both the issues of the notice’s construction and its compliance with a contractual requirement.

Implications for buyers in M&A deals

Whilst each case is decided on its specific facts, this case serves as a timely reminder for buyers to:

  • think carefully when negotiating the requirements as to what must be included in any notice of a potential claim, and
  • ensure they strictly adhere to those requirements when serving any notice.

Whilst, on this occasion, the sellers’ existing knowledge ensured that United Luck’s claim was not struck out, in circumstances where the sellers did not have knowledge of the matter, the notice might well have been held to be defective, and United Luck left unable to pursue the sellers in respect of the matter.

Generally it is better for a buyer to err on the side of caution, and provide too much information rather than too little detail.

Practical tips for buyers

  • make sure you allow sufficient time for a full notice of claim to be drafted, and
  • do not leave the preparation of the notice until the very end of the claims limitation period.

 

For more information, please contact Janetta Barrett on:

+44 (0)1225 459921     Email usjanetta.barrett@roydswithyking.com

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