As the new year gets into full swing and thoughts turn to deal making, we thought that it would be useful to draw attention to some important decisions made last year that may have a bearing on M&A transactions.

Completion Accounts 

The first case relates to completion accounts in a Share Purchase Agreement (“SPA”) used to adjust the consideration that was paid on completion.  The case demonstrates the importance of agreeing and clearly setting out the accounting policies and methodology that the parties want to apply.

The SPA stated that the completion accounts would be drawn up on the following, fairly common, basis: first, the specific policies agreed by the parties and stated in the SPA would be applied; next, the policies adopted for the target company’s last accounts would be used; and then, where none of the policies stated above dealt with the matter, generally accepted accounting principles would be applied.

During the process of drawing up and agreeing the completion accounts, a dispute arose relating to the treatment of equipment leases.  As no specific policy for dealing with equipment leases was stated in the SPA, the seller argued that the polices used in the last set of the company’s accounts should be applied.  The purchaser did not agree with the way this target company had accounted for equipment leases and so an expert was appointed.  The expert found that the company had indeed been incorrect in its previous accounting practice regarding the treatment of leases and that these practices did not comply with applicable accounting standards.  However, the expert concluded that the provisions in the SPA setting out the hierarchy of accounting policies, bound him to treat the leases in the same erroneous way for the purposes of the completion accounts.

The court held that the expert was wrong and that the correct construction in these circumstances, where the company’s accounts were expressed to be compliant with applicable accounting standards but were not, was that the completion accounts should be prepared by applying the correct accounting policy, supplemented, if necessary, by reference to practices adopted by the target.

This case highlights the importance of taking particular care when drafting SPA provisions and ensuring that the agreement clearly sets out what the parties intend.  In this case, if the parties wished to have completion accounts prepared in accordance with the target company’s last annual accounts, regardless of whether they were compliant with accounting standards, express wording to that effect should have been used. 

Shaffi v Rutherford (2014) EWCA Civ1186

Indemnity Clauses

Another case provides useful guidance on the court’s interpretation of indemnity clauses and further highlights the necessity of clear drafting in share purchase agreements.

The case concerned the interpretation of an indemnity provided by the seller of an insurance broker in relation to post completion claims made in respect of pre-completion mis-selling of insurance.  Following completion it emerged that the target company had mis-sold insurance and the purchaser sought to make a claim against the seller under the terms of the relevant indemnity.  Unsurprisingly, the purchaser and seller offered differing interpretations of the indemnity clause wording.  The court ruled in favour of the purchaser and held that the indemnity clause should be construed widely citing two main reasons:  it was supported the language of the clause and, it was supported by the commercial context and practicable consequences. The judgement should serve as a warning to parties when negotiating and drafting indemnities.  Tight and unambiguous drafting of relevant clauses will be required to ensure that the scope of any indemnity is clear to all parties concerned.

Andrew Wood v Sureterm Direct Limited and another (2014) EWHC 3240


Holiday Pay

Finally, the Employment Appeal Tribunal has handed down a ruling that confirms that all elements of a worker’s remuneration, including payments in respect of non-guaranteed overtime, must be taken into account when calculating holiday pay and that this can take effect retrospectively.  A fuller commentary on the ruling can be found in the Memery Crystal Employment update.  

The impact of this on businesses (especially those that rely heavily on employees working overtime) could be significant and should be considered by companies and M&A lawyers.  Buyers should be sure to carry out relevant due diligence and, if necessary, consider how to take account of the ruling in drafting their warranty and indemnity protections.  Sellers should be aware that this is an issue that is likely to crop up and take steps to limit any risk