Two recent High Court of Justice decisions provide guidance on the interpretation of provisions customarily included in sale and purchase agreements for the acquisition of private companies or businesses.

Expert adjudication

Sale and purchase agreements often include purchase price adjustment provisions pursuant to which the parties agree that the final price to be paid will be determined in accordance with completion accounts to be drawn up following the transaction's completion. Such provisions impose obligations on the seller and purchaser to deliver information by particular times and specify the circumstances in which disagreements must be referred to an expert for independent determination so that the initial price paid can be adjusted. Following completion of the sale of a company, a seller will ordinarily lose access to the financial information and working papers relevant to finalising the completion accounts in accordance with the purchase price adjustment procedure. Accordingly, a seller's ability to challenge the basis on which completion accounts are drawn up will be prejudiced if a purchaser can deny access to relevant information or a purchase price adjustment procedure is not suspended until such information is provided.

In O'Brien v TTT Moneycorp Ltd(1) the court considered whether the provisions of a purchase price procedure were conditions precedent. This case centred on a dispute about whether the purchaser had failed to comply with its obligations under a sale and purchase agreement to provide the sellers access to working papers that would allow review of the draft completion account prepared by the purchaser. The relevant provisions of the purchase price adjustment procedure provided that:

4.1 The Draft Completion Accounts shall be deemed to have been accepted by the Vendors as the Completion Accounts unless, within 20 Business Days… of their being received by the Vendors, the Vendors deliver to the Purchaser notice to the contrary specifying (i) the item or items disputed; (ii) the Vendors' reasons for such dispute; and (iii) how the Draft Completion Accounts and the Consideration should be adjusted ("Notice") .

4.2 On receipt by the Purchaser of the Notice, the parties shall endeavour to agree the matters in dispute within 15 Business Days ("15 Day Period"). If the parties resole the matters raised in the Notice during the 15 Day Period, the draft Completion Accounts… shall be certified by the parties as being the Completion Accounts and the Completion Accounts shall become final and binding on the parties

5 The Vendors (and their respective agents) [shall be granted] access during normal working hours to all relevant files and/or working papers… in the Purchaser's and/or the Company's possession or control to the extent they are reasonably required for the purposes of reviewing the Draft Completion Accounts by the Vendors.

6 If the parties are unable to reach agreement within the 15 Day Period… the matter(s) contained in the Notice that remain in dispute may… be referred to the decision of an independent chartered accountant. (Emphasis added.)

The court concluded that, taken as a whole, it was clear that the purchase price adjustment procedure was intended to be a unitary one, with each step in the series comprising the procedure a necessary precondition to the next. In the court's view, there was sufficient clarity and certainty for the steps envisaged by the purchase price adjustment procedure to form preconditions to the reference to expert adjudication. In reaching that conclusion, the court considered that no party had been deprived of a valuable right as the effect of Paragraph 5 being a precondition to Paragraph 6 was only suspensory. Also, the court considered that the drafting gave no indication that the parties had intended to distinguish certain obligations from others, for example, by explicitly referring to certain provisions being conditions precedent but not others. Finally, the court considered that:

  • it made good commercial sense to regard Paragraph 5 as a necessary precondition to Paragraph 6 because it ensured that the precise ambit of a dispute to be referred to expert determination would be defined before a reference was made; and
  • to conclude that the expert should determine what is needed to resolve a disputed matter would put the cart before the horse.

A seller may take comfort from the court's decision that a buyer cannot undermine a purchase price adjustment procedure by denying the seller access to the relevant working papers and information needed to review and dispute completion accounts drawn up by the purchaser as the basis for determining the final price to be paid. However, a seller would be better served by ensuring that the relevant procedure is explicitly suspended if relevant information is not provided so that the purchaser cannot frustrate the seller's ability to review and dispute draft completion accounts. Accordingly, however, if the parties to an acquisition want to be able to unilaterally commence an expert determination of the final price payable in respect of an acquisition, the procedure should specifically and explicitly provide for such a right so that it is not frustrated by being subject to preconditions that could delay commencing such an expert determination.

Restrictive covenants

The Supreme Court recently considered the scope of a restrictive covenant in an employment agreement which provided that an employee should not "directly or indirectly engage or be concerned or interested in any business" that competed with their employer for six months after termination of their employment.(2)

The Supreme Court considered that the phrase 'interested in' captured any shareholding in another company which was an unreasonable restraint of trade causing the restrictive covenant to be prima facie unenforceable. However, having considered the rules applicable to severance, the Supreme Court concluded that it was possible to sever reference to 'interested in' to protect the former employer's legitimate interests.

Although the decision concerned an employment agreement, in several respects it may be relevant to sale and purchase agreements (and shareholder agreements) containing similar restrictive covenants. It is expected that a restrictive covenant included in a sale and purchase agreement (or shareholder agreement) that is drafted in the same terms would be interpreted in the same way which could cause the clause to be regarded as unduly restrictive. Any such risk may be mitigated by the customary practice of including an exception in respect of de minimis holdings in publicly limited companies, usually up to 5%, although reference to specific private companies may also be suitable.

However, such risk may be weighed against the decision of the Court of Appeal in Ronbar Enterprises Ltd v Green,(3) where the court remarked that "the court takes a far stricter and less favourable view of covenants in restraint of trade entered into between master and servant than it does of similar covenants between vendor and purchaser". In Ronbar Enterprises a restrictive covenant requiring that a seller not "carry on or be engaged or interested in any business similar to or competing with the business of the partnership" was not too wide in scope merely because it extended to salaried employment cases.

The Supreme Court's approach to severance may also be relevant to restrictive covenants included in sale and purchase agreements and shareholder agreements. The Supreme Court considered that a provision could be severed, provided that:

  • the remaining terms of a provision did not require modification;
  • consideration continued to support the remaining terms; and
  • the removal of the unenforceable part would not cause a major change in the overall effect of the provision.

Therefore, a restrictive covenant may not fail simply because part of it is regarded as unenforceable; however, the prospects of an unenforceable part being severed will likely be increased by structuring restrictive covenants as separate clauses or distinct sub-clauses and by including an express severance provision to confirm the parties' intention to allow severance.

For further information on this topic please contact Simon J Little at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email ([email protected]). The Davis Polk & Wardwell website can be accessed at


(1) 2019 EWHC 1491 (Comm).

(2) Tillman v Egon Zehnder Ltd, 2019 UKSC 32.

(3) 1954 1 WLR 815.

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