Corporate Law Update

This week we look at a case where a warranty claim under a share sale agreement failed in its entirety because it was not validly served on one of the several sellers that gave warranties. We also review a case where the failure to circulate a special resolution did not amount to unfair prejudice, and we take a look at the Hampton-Alexander supplementary report on progress on women’s representation.

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Claim notice under SPA was not validly served

In Zayo Group International Limited v Ainger and others [2017] EWHC 2542 (Comm), the High Court held that a notice of warranty claim under a share sale and purchase agreement (SPA) was not validly served, because it was not left at the address of one of the management sellers. As a result, the claim was barred not only against that seller, but against all of the management sellers.

Background

In 2014, Zayo bought all of the shares in Ego Holdings Limited, which until then had been held by Ego’s management team and a private equity house. Ego had various subsidiaries, including a company called Geo Network Limited, which specialised in providing fibre optic.

The management team gave various warranties in the SPA about the group’s business. In due course, Zayo identified four potential breaches of warranty relating to Geo Network.

The SPA contained a standard provision requiring Zayo to give the management sellers notice of a potential warranty claim within 18 months of completion. The wording of the clause was:

“No Management Vendor shall have any liability for a Management Warranty Claim except in circumstances where [Zayo] gives notice to the Management Vendors before the date that is eighteen months of Completion.”

The SPA stated that a notice was served if it was delivered by hand or sent by special delivery to the address of the relevant party set out in the SPA. If notice was served after 5:00 p.m. on a business day, it would be deemed served at 9:00 a.m. on the next business day. The SPA contained a mechanism allowing a party to notify a change of address. (Again, this is all relatively standard.)

What happened?

Zayo’s lawyers instructed a courier to serve the notice of claim on the seven management sellers on Friday 13 November 2015 (the last day under the SPA for serving the notice). The courier successfully served the notice on six of the seven management sellers.

The seventh seller (Ms Jaggard) had moved away from her address in the SPA. She had not notified the other parties that her address had changed. The courier arrived at Ms Jaggard’s old address at 2:24 p.m. but, instead of leaving the claim notice at that address, he brought it back and delivered it to one of the other sellers. He later returned to the old address and left the notice there at 7:50 p.m.

Ms Jaggard later became aware of the claim notice when the new occupant informed her of it.

The management sellers applied to strike Zayo’s claims out. They argued the following:

  • Zayo had not served notice on Ms Jaggard within the time limit in the SPA (as it was deemed served on the following Monday), and so the claim against Ms Jaggard was barred.
  • The SPA required Zayo to serve notice on all of the management sellers. As a result, the failure to serve notice on Ms Jaggard meant the claim was barred against the other sellers as well.

Zayo gave several arguments in response. These all revolved broadly around the core concept that Ms Jaggard had breached the SPA by failing to inform the other parties of her change of address, and that it was an implied term of the SPA in those circumstances that Zayo only be required to attempt to deliver the notice. Zayo said it had done this and, as a result, the notice was validly served.

What did the court say?

The court agreed with the management sellers. In particular, it said:

  • It was very clear from the wording of the SPA that notice was to be served by leaving it at an address, not by delivering it to a person. Zayo had failed to do this by the deadline.
  • There was nothing in the SPA requiring Ms Jaggard to notify a change of address. The SPA allowed her to do so, but she was not obliged. She therefore had not breached the SPA and so Zayo’s argument that there should be an implied term could not work.
  • In any case, there was no mention of “attempting to deliver” in the SPA. To achieve this, the court would have had to imply words into the SPA, but this was not necessary to make the SPA work. Indeed, the court thought this concept would have created uncertainty, rather than remove it.
  • The wording “the Management Vendors” in the clause cited above referred to all of the management sellers. This was supported by other drafting in the SPA and by the plain meaning of the words. Significantly, as a result, by failing to serve notice on Ms Jaggard, Zayo’s claim was barred as against all of the management sellers, effectively nullifying it.

Practical implications

Cases of this kind always turn on the precise facts and wording of the SPA. Indeed, the parties had encouraged the court to find common principles for warranty claim notices by referring to several cases from recent years, but the court was cautious of doing so.

It is, however, a stark reminder of the need to follow the claims notification clauses in an SPA very carefully. Although these provisions often use very similar wording, small or subtle differences can have a profound effect on the ability to bring a claim.

For example, in this case, using the words “the Management Vendors”, rather than language such as “that Management Vendor”, placed a higher bar on serving notice and, in the circumstances, meant that Zayo ultimately lost the ability to bring any claim at all.

The decision also highlights the importance of keeping control over the process of serving a claim notice. Had Zayo’s courier simply pushed the notice through the letterbox at Ms Jaggard’s old address, Zayo would have complied with the SPA and the case could have proceeded to full trial. This would have been the case even if Ms Jaggard had never found out about the notice.

In the end, the fact that the courier took the notice away from the old address and only delivered properly after 5:00 p.m. meant that the claim failed both against Ms Jaggard and against the other management sellers. This was so even though Ms Jaggard was actually aware of the claim notice and Zayo had validly served notice on all of the other management sellers.

Had the courier simply pushed the notice through the letterbox at 2:24 p.m., it would have been a different story.

Failure to send special resolution to shareholder was not prejudicial

In Watchstone Group PLC v Quob Park Estate Limited and others [2017] EWHC 2621 (Ch), the High Court found that, by omitting to circulate a special resolution to one of its shareholders, the directors of a company breached their duties to the company but did not cause unfair prejudice to the shareholder.

What happened?

Watchstone held a 19% shareholding in OS3 Distribution Limited. In September 2011, Watchstone and OS3 entered into a distribution agreement. Over the years, Watchstone loaned money to OS3, and OS3 steadily became more and more dependent on Watchstone.

In 2014, a dispute arose between Watchstone and OS3, which was settled in December 2014. Under the settlement, Watchstone was entitled to increase its shareholding to 33%, which it elected to do in January 2015.

Following a change of board, OS3 looked to become more independent of Watchstone. In June 2015, in order to improve its financial position, OS3’s directors circulated a special resolution (by way of written resolution) requesting authority to allot further shares and disapply statutory pre-emption rights.

OS3 failed to circulate the resolution to Watchstone. Furthermore, at the time of the resolution, OS3 had still not allotted the further shares to Watchstone to bring its shareholding to 33%.

The resolution passed with more than 76% of votes cast in favour. OS3’s directors went on to allot shares to an existing shareholder in a private placing, diluting Watchstone’s interest in OS3 to 5.3%.

Watchstone brought a claim in unfair prejudice. First, it complained that, by failing to send the resolution to Watchstone, OS3’s directors had breached their statutory and fiduciary duties as directors and had deprived Watchstone of the ability to object to the resolution. In doing so, Watchstone argued, OS3’s affairs had been conducted in a manner unfairly prejudicial to Watchstone.

Second, Watchstone alleged that OS3’s directors had conducted the private placing without genuinely believing that it was in OS3’s best interests and for the benefits of its shareholders as a whole, and this was a breach by the directors of their statutory duty under section 172, Companies Act 2006.

What did the court decide?

The court agreed that, by failing to send the written resolution to Watchstone, OS3’s directors had breached their duty to OS3 under section 171, Companies Act 2006 to act in accordance with OS3’s constitution and to exercise their powers appropriately.

However, the court did not agree that the omission had unfairly prejudiced Watchstone. Although OS3 had agreed to allot shares to Watchstone to bring its shareholding up to 33%, this had not yet been done, and Watchstone’s shareholding remained at 19%. The resolution passed with over 76% of the votes, and it was clear that Watchstone, with its 19% shareholding, would have been unable to block it.

The court was not persuaded that OS3’s directors had pushed the resolution through before allotting Watchstone its additional shares in order to take advantage of Watchstone’s lower shareholding.

On the second point, the court was unsurprisingly reluctant to analyse the commercial merits of the directors’ decision to enter into the private placing. However, it did note that, rather than worsening OS3’s financial position, the private placing improved it, and the judge drew on this as evidence that OS3’s directors genuinely believed the resolution and subsequent placing were of benefit to OS3.

The court therefore dismissed the claim.

Practical implications

Unfair prejudice claims can be difficult to bring and win. Generally, the petitioner needs to show three things: that the terms on which the company is to be run have been breached (or, in some cases, that they have been used inequitably); that the breach has been prejudicial to one or more shareholders; and that the prejudice itself was not fair.

As this case shows, an unfair prejudice claim is not a tool with which to hit back against improper behaviour. It is a means to a remedy, and, where a shareholder has not actually suffered from the inappropriate conduct, it will not succeed in its claim.

Hampton-Alexander Review publishes supplementary report

The Hampton-Alexander Review was established in July 2016 to report on female representation at executive level in FTSE 350 companies. In November 2016, the Review published a report setting targets of 33% female representation on the boards of FTSE 350 companies and the leadership teams of FTSE 100 companies by the end of 2020.

The Review has now published a supplementary report  on progress towards these targets. The supplementary report notes the following:

  • Women’s representation on FTSE 100 boards has risen from 26.6% in 2016 to 27.7% in 2017
  • Over one third of FTSE 350 companies have either hit or exceeded the 33% target or, based on performance to date, are on track towards doing so by 2020
  • Women’s representation on FTSE 100 leadership teams has risen only modestly from 25.1% in 2016 to 25.2% in 2017
  • The Review has decided to extend the leadership team target from just FTSE 100 companies to all FTSE 350 companies
  • To achieve the stated targets, around 40% of all appointments over the next three years will need to go to women

Overall, the report strikes a positive tone and praises an increased level of transparency by FTSE 350 companies. However, it also urges a continued drive and a “step change in pace” to achieve all targets.

FRC publishes thematic reports on corporate reporting

The Financial Reporting Council (FRC) has published three thematic reports designed to assist companies with corporate reporting in acknowledged areas of difficulty. The reports relate to judgments and estimates, pensions disclosures and alternative performance measures (APMs).

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