GENERAL CORPORATE

Compliance with notification of warranty claims provisions

The High Court in TEOCO UK Limited v Aircom Jersey 4  Limited and another [2015] EWHC (Ch) (in a judgment handed down on 25 April 2016) has again considered the construction of warranty claim provisions in a share sale and purchase agreement (“SPA”). The judgment (para. 23) contains a useful summary of the legal principles in this area noting, amongst others, recent decisions in Arnold v Britton [2015] AC 1619, Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ  128 and Ipsos S.A. v Dentsu Aegis Network Ltd [2015] EWHC  1171  (analysis of each of which can be found by clicking on the relevant citation). In addition to those legal principles, the judge specifically flagged four further points:

  • there is a significant difference between notifying a party of a claim and notifying a party that a claim may be made;
  • where, as a condition of liability of the seller for breach of warranty, the buyer is required to give some level of detail of the claim, a compliant notice should identify the particular warranty that is alleged to have been breached, and say why, with some kind of particularisation of the facts on which the alleged breach is based;
  • the underlying commercial purpose of contractual notices in this area is that of commercial certainty; and
  • proper compliance with contractual notice requirements is not a technical or trivial matter.

The key question for the judge was whether the claims had been properly notified by the buyer to the sellers in accordance with the SPA. The SPA, in addition to seller limitation of liability provisions:

  • required the buyer to give notice of any “matter or thing” “as soon as reasonably practical” of which the buyer became aware, that indicated that the buyer “has or is likely to have” a claim (a “Possible Claim”);
  • stated that the sellers had no liability for a claim unless notice of the claim had been given to the sellers setting out “reasonable details” of the claim including grounds of the claim and the buyer’s “good faith estimate of the amount” (the “Claim Details”); and
  • that the claim be served within six months of notice of the Claim Details being given.

There was also a carve-out for seller liability where claims could be rectified within 60 days.

On the facts, the judge concluded that the buyer’s claims failed on the first two of his further points mentioned above and were therefore struck out. Despite service by the buyer of fairly detailed letters (including an accountant’s report on the buyer’s possible exposure) in respect of the claims, the court considered that they did not comply with the Claim Details provision for two main reasons:

  • it was “far from clear” that the letters were intended to be notice of a claim (under the Claim Details provision) as opposed to notice of the existence of one (a Possible Claim) (the letters did not specifically cross-refer to the Claim Details provision, instead referring to the relevant schedule as a whole); and
  • did not detail the actual warranties allegedly breached but contained an ‘omnibus’ reference to warranty claims or tax claims.

The judge also observed that:

  • “reasonable details” do not need to be to the level of specificity set out in Particulars of Claim but there must at least be a clear identification of the claim;
  • “grounds on which it is based” must include identification of the warranties said to be breached;
  • “good faith” in this context meant “honest”. It did not import any greater obligation such as objective reasonableness, “an estimate is just that”; and
  • the requirement on the buyer to give notice of a Possible Claim did not operate as a condition precedent to liability for a claim, it was simply a requirement to give notice of existence of a claim. However the Claim Details provision did operate as a condition precedent to bringing a claim as it governed the making of a claim. It was also apparent that a claim must be clear that it is a claim therefore enabling the seller to remedy the breach where possible.

Impact – the judge noted, echoing the decision in the Hut Group, that the SPA contained a series of limitations on the buyer’s right to claim, which therefore operated as an exclusion clause and should be construed narrowly. Whilst the decision is not a novel application of the law it is a useful summary of the relevant legal principles and a reminder, particularly to buyers, that courts may construe claim provisions in a SPA narrowly. Interestingly the judge also noted that “considerations of good faith and conscience ... do not sit wel ... with a relationship which is wholy at arms’ length and adversarial” and that “the touchstone here is commercial certainty”.

PUBLIC COMPANIES

New market abuse regime – confirmed changes to the Listing Rules (“LRs”) and Disclosure and Transparency Rules (“DTRs”) - 3 July 2016

The FCA has, following last year’s consultation papers, published its Policy Statement on the implementation of the Market Abuse Regulation ('MAR”) and revisions to the FCA Handbook which will take effect on 3 July 2016. There are significant changes to, amongst other sourcebooks, the Code of Market Conduct, the LRs and DTRs. The changes are required to reflect the fact that the EU’s market abuse directive will be replaced, on 3 July 2016, by a regulation. Under the EU’s legislative procedure MAR, as a regulation, will be directly effective i.e. the UK will not need to implement legislation to adopt MAR in order for it to be applicable. The UK does however have to review existing legislation and regulation to ensure that it is not contrary to MAR and the FCA will no longer be able to issue binding rules on market abuse where it is within MAR’s scope. The FCA has emphasised that it is not ‘copying out’ the EU provisions instead users will be required to refer directly to MAR and other relevant EU provisions.

The Policy Statement and changes to the Handbook will be of interest to issuers and advisers on a number of levels which cannot be explored in detail in this summary (a more detailed note on MAR’s impact on UK issuers will be published shortly). Key changes include the:

  • deletion of the Model Code. The FCA consulted on replacing the Model Code with guidance for firms to use when developing their processes to allow persons discharging managerial responsibilities (PDMRs) to apply for clearance to deal. Following feedback that this may inadvertently create a two tier compliance regime the FCA has confirmed that the Model Code will not be replaced. Instead reference must be made directly to MAR and other relevant EU provisions;
  • deletion of a number of the Disclosure Rules and their replacement with signposts to the relevant MAR provisions and which will be renamed as ‘Disclosure Guidance’; and
  • replacement of the Code of Market Conduct with a chapter giving the FCA’s views and expectations about market abuse, retaining those provisions which are not incompatible with MAR. The code will be known as MAR 1 and will also including signposts to relevant EU provisions.

Each of the above, if retained in their current form, would otherwise overlap with MAR. In addition to the FCA’s proposals, the Treasury is also preparing secondary legislation to repeal or modify existing domestic law e.g. the Financial Services and Markets Act 2000.

Impact – there are provisions in the Handbook which are dependent on the finalisation of EU Level 2 measures and ESMA Guidelines. The FCA has therefore noted that further changes to the Handbook may be required and, consequently, signposts to Level 2 texts do not yet appear in the text. Implementation of MAR wil significantly change the regulation of market abuse in the UK (and EU) and require increased safeguarding measures to be employed by both individuals and corporates to avoid faling foul of the provisions.

OTHER ITEMS

  • Following the recent publication by the London Stock Exchange ('LSE”) of proposed changes to the AIM Rules in advance of MAR coming into effect on 3 July 2016 (summarised here) the LSE has issued a new ‘Inside AIM’ entitled Preparation for Market Abuse Regulation intended to support nominated advisers (Nomads) as they work with their clients to prepare them for the introduction of MAR.
  • The proposal for an EU financial transactions tax appears to have been withdrawn.
  • The FCA has published a new issue of Market Watch (No. 50) focusing on market abuse. It:
    • details observations from the FCA’s suspicious transaction reporting visits;
    • reminds firms of the obligation to submit complete transaction reports; and
    • details key messages from the FCA’s final notice against W H Ireland Limited earlier this year, including the requirement that firms have in place appropriate measures to protect against, detect and help prevent, market abuse.
  • In Edgeworth Capital (Luxembourg) S.A.R.L. and another  v Ramblas Investments B.V. [2016] EWCA Civ 412 the Court of Appeal confirmed the High Court’s decision that the law against penalties is not applicable unless a breach of duty triggers the clause. In Edgeworth Capital and another v Ramblas Investments B.V. [2015] EWHC 150 (Comm), the High Court had restated the principle that the law against penalties only applies if the clause is triggered by a breach of duty owed by the party claiming relief to the party seeking to enforce the clause. For a summary of the case click here.