On 7 May 2021, the Court of Appeal held5 that a purchaser’s notice of claim under an SPA tax covenant was not invalid on the grounds that it failed to state “in reasonable detail the matter which gives rise” to the tax covenant claim.

The purchaser acquired an English target company in 2016. The target company’s business consisted mainly of the development of apps for mobile phones, including the hugely popular ‘Talking Tom’ app. As part of the negotiated Sale and Purchase Agreement (SPA) for the acquisition, the purchaser obtained the benefit of a tax covenant from certain of the sellers. Just prior to the expiry of the time period for bringing claims under the tax covenant, in 2019, the purchaser gave to those sellers what it considered to be a valid notice of claim (by way of a letter, the “Claim Letter”). The trigger for the (purported) claim was an investigation launched by the Slovenian tax authorities concerning the transfer pricing practices of one of the acquired company’s subsidiaries.

The issue was whether the purchaser, in making the claim, had complied with the requirements of the SPA. In particular, whether the Claim Letter stated “in reasonable detail the matter which gives rise” to the claim.

The Claim Letter stated that the purchaser’s tax covenant claim(s) related to the Slovenian tax authorities’ investigation and included a brief chronology

The High Court held that the Claim Letter did not comply with the SPA requirements. The judge concluded that the “matter” which needed to be described in reasonable detail was not the tax authority investigation, but instead were the underlying facts, events or circumstances on which the claim is based.

  1. what is the “matter” that gives rise to the claim? On this, Lord Justice Nugee had little difficulty in finding that the “matter” was a reference to the underlying preCompletion facts giving rise to the tax liability. To use the language of the tax covenant, this would be either (i) the occurrence of a pre-Completion event, transaction, action or omission, or (ii) the earning, accrual, receipt of pre-Completion income, profits or gains
  2. did the Claim Letter state this matter in “reasonable detail”?

On this second question Lord Justice Nugee noted that the Claim Letter did not say very much about the underlying pre-Completion facts that gave rise to the tax liability. The sellers’ position was that the Claim Letter should have contained more information, to include detail as to what the subsidiary had, in fact, done and detail as to the tax authority’s position. However, the sellers accepted that they had full knowledge of this information, such that setting this out in the Claim Letter would have served little useful purpose. As the Lord Justice put it “[if the sellers are right] it would mean that the Claim Letter was a non-compliant notice not because it failed to inform the [sellers] of anything that they needed to know, but because it failed to go through the ritual of setting out things that they already knew”. 

For this reason, the Court of Appeal held that the Claim Letter did give reasonable detail of the matter giving rise to the claim, as required by the SPA. What amounted to “reasonable detail” was, it was found, dependent on all the circumstances – including what the recipients of the notice already knew. A businessperson would not expect to receive further detail, for the sake of mere formality, which served no commercial purpose.

The decision can be viewed here.