Corporate Law Update
- ESMA updates Q&A on prospectuses
- Court rectifies SPA to include missing properties
- High Court sanctions conditional cross-border merger
The European Securities and Markets Authority (ESMA) has updated its Q&A on prospectuses. A new question 102 addresses profit forecasts in prospectuses.
The key points from the updated Q&A are as follows:
- A statement can be a profit forecast if it refers to a range of figures, rather than to a precise figure or a minimum or maximum figure.
- A statement need not refer to profit or loss for the year to be a profit forecast. It could equally refer to other measures of profitability that convey an expectation of future performance.
- Similarly, a statement need not cover the entirety of an issuer’s results to be a profit forecast. It will be a forecast if it relates to a segment comprising the “vast majority” of the issuer’s profit.
- A statement of a “hope or aim” can amount to a forecast, particularly if it includes a specific figure.
- Saying that a form of words is not a profit forecast will not stop it being a profit forecast.
The High Court has rectified a share sale and purchase agreement (“SPA”) to bring two properties that had been omitted, and which were not owned by the target group that was being acquired, within the scope of the warranties.
In Persimmon Homes Ltd v Hillier and others, Persimmon Homes agreed to acquire a site from various individuals, which it intended to develop.
The acquisition was structured as a share sale. Persimmon agreed to buy the shares in two companies. One of those had a wholly-owned subsidiary, which in turn held options over four parcels of land lying within in the site.
However, the site in fact comprised six parcels. The freehold title to two of those parcels belonged to a third company whose shares Persimmon did not acquire from the individuals. This meant that the site Persimmon had acquired was subject to a “ransom strip” still owned by the sellers. This in turn had the effect of dramatically reducing the value of the development site.
Those two parcels had not been specifically listed in the SPA. However, the description of the site in the SPA was somewhat vague. In particular, the SPA cited the site’s registered title number as “WSX333449 (and others)”.
Persimmon asked the court to rectify the SPA to include the two missing properties within the scope of the warranties. Although this would not have the effect of transferring the properties to Persimmon, it would give Persimmon a right to claim against the sellers for breach of warranty.
In putting forward this argument, Persimmon said it was clear from the parties’ negotiations that the two sites were to be included in the sale, and their omission from the SPA was a mistake.
What did the court say?
The Court agreed with Persimmon. It was prepared to look at both the disclosure letter that accompanied the SPA, as well as the data room put together for the sale, in interpreting the SPA.
The judge found that the warranties in the SPA did not cover the two missing parcels. In order to include those two parcels, therefore, the judge had to be comfortable he could rectify the SPA.
To do this, he had to be satisfied that the parties had intended to include the two missing parcels, and that, by mistake, they had omitted to include those parcels in the SPA. The judge was prepared to find this, based on the surrounding evidence. He therefore rectified the SPA to include the missing parcels.
This led to a problem. In the SPA, the sellers warranted that the target group had “good and marketable title” to the site. Clearly, this was not the case for the two missing parcels, which were owned by another company. At first glance, this would have given Persimmon a right to claim damages for breach of warranty.
However, the disclosure letter contained a statement (a “specific disclosure”) that the site was not legally or beneficially owned by the target group. (This reflected the fact that the target only held the benefit of an option to acquire the four parcels it held.) This had the effect of qualifying the warranty to the point of negating it. (Whilst seemingly odd, this is a standard way of dealing with warranties on a share sale.)
If left like this, Persimmon would not have had a claim for breach of warranty after all.
To address this, and to “restore” Persimmon’s right to claim, the judge was also prepared to rectify the disclosure letter by excluding the two missing parcels from the statement in the disclosure letter. This essentially “re-activated” the warranty and allowed Persimmon to claim on the basis that the two missing parcels were not in fact owned by the target group.
This was a mixed outcome for Persimmon. It did well to succeed in its claim for rectification. The courts generally prefer not to intrude into private deals between commercial parties and so are generally reluctant to rectify commercial contracts. They will do so only if there has been a clear mistake by the parties when putting their intentions down on paper.
However, it is worth noting that the court did not rectify the SPA so as to transfer the two missing parcels to Persimmon. It is unlikely the court could have done this. To do so, it would have had to join the true owner of the two parcels to the sale, but that company had never been party to the negotiations.
Alternatively, the court might in theory have been able to rectify the SPA to include the shares in the true owner of the parcels in the sale. However, this would have resulting in all of the true owner’s assets being transferred to Persimmon, and not merely the two missing parcels, and it would not have accorded with the parties real intentions.
As a result, although Persimmon did not get the two missing parcels, it did find itself able to sustain a claim for damages against the sellers.
To avoid these kinds of problems arising, a buyer should ensure it conducts robust due diligence on the assets owned by the target company or group it is acquiring. Any core assets should be listed separately and individually in the SPA (alongside the name of their legal owner and, if they have one, their registered number).
The buyer should also ask the seller to warrant that the target group legally and beneficially owns those assets and that the lists of assets set out in the SPA are complete, accurate and up to date.
In the matter of Chanel Ltd & Fasa S.à r.l., the High Court approved a cross-border merger in which FASA S.à r.l. (a Luxembourg company) (“FASA”) would be absorbed into Chanel Ltd (a UK company) (“Chanel”).
The merger was conditional on a demerger in Luxembourg first taking place. Under that demerger, around €2 billion of assets were to be transferred to FASA.
The court was satisfied that, at the point of approving the cross-border merger, everything possible had been done to achieve the demerger. It was also happy that Chanel, with shareholder assets of €3.5 billion, was in a very healthy state and that creditors would not be put at risk.
It therefore approved the merger, subject to the sole condition that the demerger complete.
To date, there has been some discussion over whether a UK court would be prepared to issue a pre-merger certificate, or to approve a cross-border merger, where one or more conditions to the merger have not been satisfied. This decision suggests the courts will be willing to do so, provided the parties can demonstrate that have taken all steps needed to satisfy that condition, other than implementing the cross-border merger itself.