In Ipsos S.A. (Ipsos) v Dentsu Aegis Network Limited (Aegis) [2015] EWHC 1726 the High Court considered whether a change in a target company’s profit forecasts could trigger a material adverse effect (MAE) clause in the SPA, entitling the buyer to not complete the transaction. This decision is one of three actions to date in respect of the acquisition by Ipsos of Synovate from Aegis. Most recently in Ipsos S.A. v Dentus Aegis Network Limited [2015] EWHC 1171 the buyer brought a claim against the seller for breach of warranty. The seller successfully applied for the claim to be struck out, or alternatively summary judgment entered against the buyer, because notice had not been served in accordance with the SPA.

In this action, the buyer sought damages for, amongst other things, breach of contract. There was a gap between signing and completion of the SPA during which each party was required to notify the other of any fact, matter or circumstance reasonably likely to enable the buyer to invoke a condition and not proceed to completion. One of the completion conditions was, broadly, that no MAE had occurred between signing and closing. The buyer contended that a MAE event had occurred which had been concealed from it and if it had known of the MAE it would either not have proceeded to completion or would have negotiated a reduced price. Its grounds for asserting a MAE were two-fold: the target’s actual performance in the gap between exchange and completion which was significantly worse than expected; and / or the material downward revision to the target’s profit forecasts during that period.

What constituted a MAE was set out in full in the SPA and is replicated in the judgment (para. 15). In short, it was defined to mean “an act or omission, or the occurrence of a fact, matter, event or circumstance” affecting the target group which was likely to give rise to a MAE on the target’s business, subject to certain exclusions.

The seller did not succeed in its request to strike out the buyer’s claim based on the target’s actual performance but it was successful in striking out the part of the claim which relied on the assertion that a downwards revision to the target’s profit forecasts could comprise a MAE. The judge gave four reasons why a revision to forecasts would not be caught by the MAE provision:

  • a forecast revision did not fall naturally within the words “act or omission or the occurrence of a fact, matter, event or circumstance”. The judge construed the wording narrowly, taking into account that the seller had given a warranty that there had been no material adverse change in the financial or trading position of the company since the prior calendar year end which the buyer had not claimed had been breached;
  • it was considered tenuous that the fact the forecasts had been revised would have a MAE on the target, rather it was thought to be more likely that the facts underlying the revision might have been a MAE;
  • construing the MAE clause in this way was not in accordance with commercial sense. The judge noted that in this case the seller had specifically excluded its liability for forecasts in the seller limitations schedule and construing the MAE clause to include forecasts would effectively result in warranting forecasts given after signing; and
  • construing the MAE clause in this way would generate uncertainty in the market.

Impact – the judge’s regard to the commercial situation is interesting in the context of the recent decision by the Supreme Court in Arnold v Britton & Ors [2015] UKSC 36 (featured in last week’s M&A weekly update). In Arnold v Britton the  court emphasised a number of factors to be considered when interpreting a contract. It noted that reliance on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language used. The decision in Ipsos v Dentsu makes clear that the language used to describe a MAE may be interpreted narrowly, focusing those drafting similar clauses in the future, of the need to clarify the provision’s scope.