Corporate Law Update

This week:

• An entire agreement clause in a share sale agreement was effective to exclude a claim in misrepresentation
• The Financial Reporting Council publishes draft principles of corporate governance for large private companies for consultation
• The Financial Conduct Authority is consulting on changes to its guidance regarding inside information when preparing periodic financial reports

Entire agreement clause excluded misrepresentation claim

The High Court has held that an entire agreement clause in a share sale agreement prevented the buyer from bringing a claim for misrepresentation against the seller.

What happened?

NF Football Investments Ltd v NFFC Group Holdings Ltd concerns the 2017 takeover of Nottingham Forest Football Club (the “Club”).

In April 2017, a company ultimately controlled by Mr Evangelos Marinakis (the “Buyer”) agreed to buy all of the shares in the Club from its previous owner, a company ultimately controlled by Mr Fawaz Al-Hasawi (the “Seller”).

As part of the due diligence exercise on the sale, the Seller provided the Buyer with a spreadsheet setting out the amount of the Club’s liabilities.

Following the sale, the Buyer alleged that the spreadsheet understated the Club’s liabilities by around £4 million. It claimed damages in misrepresentation, arguing that it had relied on the inaccurate figures in the spreadsheet when deciding whether to buy the Club.

In response, the Seller pointed to an entire agreement clause in the sale agreement, which read:

“This agreement (together with the documents referred to in it) constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter.”

The Seller also noted that the sale agreement contained indemnities in favour of the Buyer in relation to specific matters, including one clause under which it had agreed to indemnify the Buyer against any losses arising if the Club's liabilities were more than the amount set out in the spreadsheet.

The Seller argued that the combination of the entire agreement clause and these indemnities showed that the parties had agreed on specific remedies for potential misrepresentations, rather than a general claim at law. It said the court should therefore interpret the entire agreement clause as excluding a general right to claim for misrepresentation.

What did the court say?

Perhaps surprisingly, the court agreed. It said the entire agreement clause did prevent the Buyer from bringing a claim in misrepresentation.

Entire agreement clauses do have some effect. They will normally prevent contract parties from claiming they are bound by arrangements sitting outside the written contract (such as in an oral agreement or a collateral contract) at the time they enter into it.

However, the courts have historically refused to find that an entire agreement clause will exclude liability for misrepresentation, unless the clause is worded clearly to that effect. A “standard”, relatively short entire agreement clause is unlikely to achieve this.

The master in this case acknowledged this, but he also noted that it is not possible to say that a clause will have a particular effect merely because it takes a particular form. Rather, “the effect and meaning of a particular clause in a contract must always be a matter of the construction of the particular clause set in its particular context”.

When looking at the entire agreement clause alongside the specific indemnities in the sale agreement, he felt the parties had intended to exclude liability for misrepresentation. This was despite the fact that the sale agreement also said that the rights and remedies in it were “in addition to and not exclusive of any rights or remedies provided by law”.

Practical implications

This was a judgment on a strike-out application. There was no full trial and so it is important not to place too much emphasis on the decision. However, it is nonetheless important, not just in the context of a share sale, but for commercial contracts generally.

First and foremost, the case makes it clear that it is not possible to lay down generalised rules about contractual clauses. It can be very tempting to assume that certain words have special meanings, or that formulating a contract term in a particular way will yield a particular effect.

Rather, courts try to understand the intention of the contract parties. Because of this, similar language could be interpreted in a certain way in one case, but in an entirely different way in another.

This doesn’t apply solely to entire agreement clauses. As noted above, the sale agreement in this case also contained a “reservation of rights” clause, stating that rights and remedies provided by law were preserved. However, the master found that this did not preserve the right to claim in misrepresentation.

The case highlights the following points to bear in mind:

• If looking to exclude liability for misrepresentation, it is still best to refer specifically to actions for misrepresentation in the contract. This could take the form of an explicit exclusion of liability, but a “non-reliance statement” should also work. It will not always work simply to insert the word “representations” into an entire agreement clause.
• If there is no express exclusion of misrepresentation, do not assume that a party will be entitled to bring misrepresentation claims. Consider carefully the interaction of any specific remedies in the contract with general boilerplate, such as an entire agreement clause.
• Make sure that your entire agreement clause is worded broadly to capture as much as possible. In this case, the fact that the clause referred to “correspondence”, “negotiations” and “assurances”, which are non-contractual in nature, persuaded the court that the parties intended to exclude non-contractual remedies, such as claims in misrepresentation.
• Do not rely on a reservation of rights clause. This kind of clause will only preserve the parties’ rights and remedies in law to the extent they haven’t been cut away by the parties’ contract. And, as shown by the recent decision in Phones 4U Limited (in administration) v EE Limited, attempting to reserve rights at law may not help if the party fails to exercise them in the first place.

Governance code for private companies released for consultation

In our Corporate Law Update for the week ending 9 February 2018, we reported that James Wates CBE had been appointed to chair a Coalition Group to implement the Government’s recommendation of producing a code of corporate governance for large private companies.

The Financial Reporting Council (FRC), on behalf of the Coalition Group, has now published for consultation a set of proposed principles of corporate governance for large private companies, called the “Wates Corporate Governance Principles” (the “Principles”).

The consultation follows the Government’s publication last week of draft regulations that would require very large unlisted companies, for financial years beginning on or after 1 January 2019, to choose a corporate governance code and to explain the extent to which they comply with it.

The Group has designed the Principles specifically to enable companies to report against them and so satisfy this requirement. However, the paper states that companies adopting the Principles will be expected to apply them fully, explaining how their processes work to achieve the desired outcome of each Principle and how applying the Principles has resulted in improved corporate governance.

The six Principles are:

1. Purpose. An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
2. Composition. Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
3. Responsibilities. A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.
4. Opportunity and risk. A board should promote the long-term success of the company by identifying opportunities to create and preserve value and establishing oversight for the identification and mitigation of risks.
5. Remuneration. A board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.
6. Stakeholders. A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good stakeholder relationships based on the company’s purpose.

The proposed code also contains guidance on each of the six Principles, and, by way of illustration, the consultation paper provides examples of how a family-owned company, a private equity-owned company and a listed company could apply proposed Principle 3 respectively.

The FRC has asked for responses by Friday, 7 September 2018.

FCA consults on inside information guidance when preparing financial statements

The Financial Conduct Authority (FCA) has published Primary Market Bulletin No. 19, in which it is proposing to make extensive changes to its Technical Note 506.1. TN/506.1 assists issuers with their obligations to identify and announce inside information when preparing periodic financial statements.

The key points in the FCA’s proposed new Technical Note 506.2 (which would replace TN/506.1) are as follows:

• The draft note has been updated to refer to an issuer’s obligations under the EU Market Abuse Regulation (“MAR”), rather than the FCA’s Disclosure and Transparency Rules.
• Issuers should begin with the assumption that information relating to financial results could constitute inside information for the purposes of MAR. However, they should not take a “blanket approach” and assume that information in periodic financial reports will either always or never constitute inside information.
• An issuer may be able to delay disclosing inside information if it is in the process of preparing a periodic financial report if immediate disclosure would impact on the orderly production of the report and could result in the public incorrectly assessing that information. This would help issuers by allowing them to wait until their periodic financial report is ready before disclosing. However, an issuer would still need to be satisfied it has a “legitimate interest” to protect.
• The FCA reminds issuers that they are no longer able to delay the disclosure of inside information if, by doing so, the public is likely to be misled.

The FCA has asked for comments by 23 July 2018.