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. In the first decision, the court considered whether the provisions of a purchase price procedure were conditions precedent. In the second decision, the court considered the scope of a restrictive covenant in an employment agreement and its impact on sale and purchase agreements.
The High Court of Justice recently considered two disputes regarding breaches of warranties arising from the acquisitions of private companies. The decisions affirm the orthodoxy that the measure of damages for breach of warranty included in a sale and purchase agreement for the sale of shares is the diminution in the value of the shares purchased but also sound a warning to sellers that have struck a poor economic bargain.
The Court of Appeal recently confirmed that a company was entitled to use and benefit from the EU cross-border merger regime for its corporate reorganisation, even though the only cross-border element was the inclusion of a single, dormant foreign entity solely to allow the otherwise domestic reorganisation to benefit from the cross-border rules. The court's purposive approach to the interpretation of the rules may be relevant in a broader context when determining the effectiveness of corporate actions.
UK groups with members in at least two member states of the European Economic Area can use Societas Europaea or cross-border mergers to redomicile to another European jurisdiction. Both regimes may be helpful to a group looking to redomicile entities to other parts of Europe in the context of Brexit, although both have been the subject of recent judicial decisions regarding the form of transactions which are considered permissible.
The EU Directive on Cross-Border Mergers of Limited Liability Companies, implemented by the Companies (Cross-Border Mergers) Regulations 2007 (as amended), has proven to be a popular means of reorganising European group structures and has been occasionally used in arm's-length cross-border transactions. However, recent transactions have tested the boundaries of the sorts of structure that may be permitted under the regulations, which could reduce the popularity of the procedure.
A cross-border merger is a transaction involving a true merger of European entities, in which one or more of the participants ceases to exist. In the United Kingdom, cross-border mergers are governed by the Companies (Cross-Border Mergers) Regulations 2007. The procedure has been frequently implemented in connection with solvent reorganisations of group structures. Arm's-length cross-border transactions involving UK companies have also incorporated cross-border mergers.
Recent English case law regarding material adverse change (MAC) conditions suggests that parties to acquisition agreements governed by English law should expect provisions to be construed narrowly and as a backstop against significant unforeseen events. A buyer's prospects of protection from adverse changes should be increased if specific and objectively quantifiable criteria are included in the MAC definition.