Have you ever entered into an agreement without understanding its terms?
A recent case, in the High Court serves as a reminder of the consequences that may arise for all parties involved.
In this scenario business owners who choose to sell their businesses through a share sale usually have the specifics of the sale documented in a share purchase agreement (SPA). Sometimes of a fixed purchase price paid when the transaction is completed a portion of the price is. Contingent upon the businesses performance during a specified period after completion, commonly known as an ‘earn out.’
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In a case (Asher v Jaywing Plc) the High Court determined that the buyer had violated the terms outlined in the SPA by not following the prescribed procedure, for making earn out payments to the sellers. However since the earn out targets were not achieved and no losses resulted from this breach damages were not awarded to the sellers.
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Disagreements Regarding SPA
The disputed SPA detailed three earn out payments based on conditions related to the performance of the target business. The buyer argued that these conditions were not met for both the third earn out payments therefore no additional payments were owed.
On the hand the sellers presented their argument stating that a verbal agreement made during a meeting had altered the conditions, for the third earn outs entitling them to receive those payments.
Two Important Matters Arise;
1. Changes to SPA
The Court faced a challenge as there were no explicit meeting minutes to support the agreement. There was limited written correspondence. Testimonies from witnesses played a role in this case. However, several witnesses proved unreliable due to memory lapses resulting in inconsistencies in their recollections of events. The SPA, like agreements contained a clause stating that any amendments to its terms must be documented in writing and signed by all parties involved. Since there was no written evidence demonstrating a modification, the Court concluded that no agreement had been reached to amend the terms of the SPA.
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2. Procedure Specified in SPA
The next concern centred around whether or not the buyer violated the terms of the SPA regarding adherence to the process outlined for calculating and agreeing upon earn out payments. The SPAs provisions required that the buyer provide a statement prepared by their auditors outlining how they calculated these payments to be shared with the sellers. However due to concerns, about impartiality auditors appointed by the buyer declined involvement.
Instead the buyer provided a statement that was written by their financial officer with some input, from another accounting firm. The Court acknowledged the buyers argument that a suitable accounting firm could have prepared the calculation. It ruled that the buyer violated the terms of the SPA by having the calculation done by their financial officer.
Implications for both Buyers and Sellers
Even though damages were not awarded in this particular case it highlights how important it is for buyers and sellers to fully understand the terms outlined in an SPA and ensure strict adherence to procedures regarding post completion payments. Furthermore, when considering any changes, to an SPA both parties should make sure that all relevant requirements stated in the agreement are met.