The Mergers & Acquisitions Litigation Review: United Kingdom - England & Wales
Mergers and acquisitions (M&A) are typically significant events in the life of a buyer, seller and target and impact a large number of stakeholders, often with conflicting interests, including shareholders, directors, employees, creditors, customers, suppliers and, on occasion, governments or other regulatory bodies. As such, it is no surprise that these transactions often give rise to disputes and litigation.
M&A disputes can be broadly classified into two categories: disputes that arise between a party to the transaction and a stakeholder in that party (e.g., a shareholder); and disputes that arise between the counterparties to a transaction (i.e., the buyer and the seller).
In this chapter we examine the common traits of each of the two categories and how typical claims in each category are treated under English law.
Legal and regulatory background
Shareholder claims typically arise under the legal framework governing shareholder control and directors' duties as set out in the Companies Act 2006 (CA 2006). In recent years, claims by shareholders under the Financial Services and Markets Act 2000 (FSMA) have become more frequent, where a claim is made for loss claimed to have been incurred as a result of misleading or untrue statements in a company's public documents.
In the context of public M&A, bidders, targets and their respective advisers may face claims under the regulatory framework that sets out parameters on how such transactions should be conducted by the parties and disclosed to stakeholders, namely, the Takeover Code, UK Listing Rules and AIM company rules, as well as related legislation, including the Market Abuse Regulation.
Counterparty claims may arise out of the parties' contractual documents governing the transaction, or (less frequently) from non-contractual private law obligations owed in tort. The risk of such claims is, however, greatly impacted by the surrounding political, regulatory and economic context in which deals happen. For example, over the past few years, the UK government has implemented various proposals aimed at giving itself greater powers to intervene in and block transactions on public interest and national security grounds.2 These new regulatory initiatives have been seen, in part, as a response to Brexit and a desire for the UK to determine its own merger policy, and also to address wider public concerns about core national infrastructure, national defence and cybersecurity. These rules have implications for transaction timetables and how counterparties allocate completion risk in transaction agreements, both of which could lead to potential counterparty claims, particularly as a consequence of uncertainty in the initial years as the regime develops. In addition, governmental entities may also sanction counterparties for non-compliance with the regime, with the possible introduction of both criminal offences and civil sanctions such as fines.
i Common claims and procedure
Claims for breach of directors' duties
In the context of M&A transactions, shareholders may bring claims relating to the relevant company's directors' fiduciary duties in considering, negotiating or recommending a particular transaction. The CA 2006 sets out the main directors' duties, which include the duty to act in a way that would promote the success of the company for the benefit of the shareholders as a whole.3
As a general rule, such duties are owed directly to the company and not to any one shareholder, so only the company can enforce a claim for their breach (although see below on derivative claims).4 However, in exceptional circumstances, a fiduciary duty can arise between directors and shareholders where there are special or unusual circumstances giving rise to a relationship that replicates the prominent features of a fiduciary relationship. The English court found such exceptional circumstances existed in Vald Nielsen Holding A/S v. Baldorino, in which the selling shareholders argued that the directors had misled them as to the state of the business and, as a result, they had sold their shares for a lesser sum than they would have if they had been presented with the true picture of the company's prospects. The court found that circumstances existed that took the relationship over and above the usual (and more limited) director–shareholder relationship.5
Similarly, in Sharp v. Blank6 (also known as The Lloyds/HBOS Litigation because it arose from the acquisition by Lloyds Bank of Halifax Bank of Scotland during the 2008 financial crisis), the court found that the directors owed a duty of care to shareholders in relation to statements made in shareholder circulars seeking approval for the acquisition, as this document also included statements of personal responsibility from the directors, but not in relation to more generic statements to the wider market in the form of regulatory stock exchange announcements or statements on investor calls. Ultimately the directors were found not to have breached this duty, as they were only required to provide shareholders with sufficient information to enable them to make an informed decision and not complete disclosure of every consideration that might affect shareholder voting.
Shareholders can also bring a derivative claim7 on behalf of the company where there has been an actual or proposed act or omission involving negligence, default, breach of duty or trust by a director or a third party. Such a claim may only be brought with the permission of the court (which has a discretion whether to allow such a claim to proceed). Derivative claims are very rare in England.
Claims under FSMA
Shareholders of a public company may also bring claims against the company or its directors on the basis of statements in published information in relation to the company's affairs, such as in prospectuses and listing particulars. Such claims may be brought under Section 90A of FSMA, which imposes statutory liability on issuers of securities for untrue or misleading information in published statements or if the information fails to include what is required to be included by statute. There appears to be increasing interest in the possibility of such litigation in England, although most claims to date have been outside the M&A context. In SL Claimants v. Tesco plc 8 and The Lloyds/HBOS Litigation, shareholders brought claims and there is no reason, in principle, why Section 90A would not be available in respect of public statements made about an M&A transaction.
Unfair prejudice claims
A shareholder may also petition the court, alleging that the company's affairs have been conducted in a way that has unfairly prejudiced the interests of some or all of its shareholders9 (for example, if the directors take actions to block a potential transaction that is in the interests of the company and its shareholders). While possible in an M&A context, unfair prejudice claims are rare as they are often complex and challenging. A mere breakdown in trust and confidence between shareholders does not, on its own, constitute unfair prejudice, and there needs to be a clear element of fault on the part of one of the parties.10 A shareholder is generally not entitled to complain about the way in which another shareholder exercises the rights attached to their shares unless it amounts to actively managing the company's affairs. In UTB LLC v. Sheffield United Ltd,11 the court held that even if a shareholder's actions amount to managing the company's affairs, another shareholder will not be 'entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted'.
For claims for breach of directors' duties under the CA 2006, a claimant is entitled to recover loss as damages. In addition, remedies may include injunctive relief; setting aside the transaction complained of and restitution or an account of profit; restoration of company property held by the director; or the purchase of a shareholder's shares at a certain value.12
A breach of duty may also be grounds for disqualification as a director under the Companies Directors Disqualification Act 1986.
As a general rule, damages are calculated on a compensatory basis, namely, such that the claimant is put in the position he or she would have been in had the breach not occurred. Restitutionary damages may also be available for breaches of statutory directors' duties. The aim of restitutionary damages is to strip the defendant of any gains made from the breach, rather than compensating the claimant.
Shareholders cannot bring a claim for damages in circumstances where their loss is merely reflective of a loss suffered by the company. This is known as the 'reflective loss' principle. However, in situations where a shareholder brings a claim for a different type of loss, even if the company has a concurrent right of action in respect of substantially the same loss, the shareholder will be permitted to recover its loss.13
Exemplary or punitive damages are very rarely awarded in England.
Injunctive relief can be sought, for example, in circumstances where a shareholder is seeking to prevent a transaction from going ahead alleging breaches of directors' duties. An injunction is, however, only available at the discretion of the court and is subject to the American Cyanamid test.14 The claimant would need to demonstrate that there is a serious issue to be tried between it and the defendant and that the balance of convenience justifies the injunction. Under the balance of convenience element of the test, the court would consider whether there would be irreparable harm suffered by the claimant and whether damages would be an adequate remedy.
The assessment of whether the test is satisfied in each case is highly fact-specific.
The type of defence to the claims set out above will depend on the particular circumstances of each case. Generally, if directors can establish that their actions had been honest and reasonable with regard to all circumstances, the court would reject a claim for breach of duty. Directors will generally look to record in documents such as board papers the relevant considerations in the decision-making process and advice from professional or internal advisers. In addition, breaches of directors' duties can be ratified by an ordinary resolution of shareholders. Similarly, claims based on false or misleading information in published statements can be countered by demonstrating that the directors had an honest belief in the statements at the relevant time.
iv Advisers and third parties
A claim against a third-party adviser can typically only be asserted in tort. It will be necessary to establish that the third party owed a duty of care towards the claimant. In practice, this will be easier for the company than for its shareholders as the relevant adviser will customarily be engaged by the company. For a shareholder to bring a claim, he or she must show that there was a duty owed to him or her in his or her personal capacity, that the loss suffered was foreseeable and it would be fair, just and reasonable for such a duty to be imposed. If a parent company and its subsidiary bring joint claims on the basis of an adviser's breach of duty, the subsidiary's claims may be struck out on the basis of the reflective loss principle.15
v Class and collective actions
The principle of a class action as it exists in the United States is not available in the same form in England. There are, however, processes by which claims involving multiple claimants can be managed. These include consolidation of actions brought by multiple claimants into one proceeding if they can conveniently be disposed of in the same proceeding; and issuance of a group litigation order (GLO) by the court.16
Litigation under a GLO is an opt-in process, meaning that each claimant must commence an individual action first.
There have historically been few collective actions in England. There are, however, a number of recent examples in the context of shareholder litigation including The Lloyds/HBOS litigation,17 The RBS Rights Issue Litigation18 and SL Claimants v. Tesco.19 There are also a number of collective actions in other contexts, such as consumer litigation and product liability. The Competition Appeals Tribunal has also implemented rules to allow for class action litigation in certain antitrust-related disputes. As a result, group and collective litigation is rapidly evolving in England, leading to a number of recent developments in case law on subjects such as liability for the costs of the claim if it is unsuccessful.
vi Insurance and indemnification
While it is not generally possible for a company to exempt20 or indemnify21 one of its directors from liability in connection with any negligence, default, breach of duty or breach of trust, it is possible for a company to indemnify a director against liability and associated legal fees incurred by a director in the context of a third-party claim,22 or to purchase and maintain insurance for its directors against any potential liability.23 It is not, however, open to a company to indemnify its directors for any civil proceedings brought by the company, any fines or liability in respect of criminal proceedings or penalties imposed by a regulatory authority in respect of non-compliance.
Company policies are generally divided into those that cover directors for personal liability where indemnification from the company is not permissible (Side A coverage), those that reimburse the company where it has made payment pursuant to a director's indemnity (Side B coverage) and those that cover the company against claims made directly against it by third parties (Side C coverage). The scope of directors' and officers' insurance policies would generally cover any error, misrepresentation or breach of duty committed by a director in connection with a transaction but would exclude matters such as fraud, illegality and dishonesty, wilful or intentional acts of non-compliance or civil or criminal fines.
English court rules promote settlement discussions between parties, and permit cases to be stayed for settlement discussions to take place, encouraging settlement offers by imposing consequences on a party that either unreasonably refuses to participate in settlement discussions or mediation or that rejects a settlement offer that it fails to beat at trial. These consequences usually take the form of adverse cost orders being made against the party in question. There is a detailed regime provided by Part 36 of the Civil Procedure Rules that allows settlement offers to be made with prescribed consequences if an offer is not accepted but is not subsequently beaten at trial.
Settlement dynamics in circumstances where there may be several thousand claimants and, as is increasingly the case for such matters, a litigation funder, may be complex. There are competing interests, and there may be different groups of claimants sometimes represented by different counsel and with varying appetite for settlement. Often, disputes relating to the costs of proceedings continue after the court's decision or after the settlement of claims.
viii Other issues
Shareholder activism, although previously rare, has increased since the 2008 financial crisis. The UK market is increasingly seeing shareholders actively seeking to monitor and influence the companies they invest in. In the context of M&A transactions, shareholders may be required to consent to the transaction (for example, in the context of a class 1 or related party transaction under the Listing Rules). Alternatively, investors may seek to encourage or pressure a company to undertake a particular acquisition or sale as part of the broader strategy of the company. While activists predominantly rely on the various shareholder rights set out in the CA 2006 to achieve their aims, the UK market has seen an increasing willingness of investors to pursue litigation to enforce these rights, including through the use of derivative and unfair prejudice claims.
Most public bids in the UK market are implemented by way of scheme of arrangement, which (provided it has sufficient shareholder support) will bind non-accepting shareholders. The scheme of arrangement process requires court approval to determine whether applicable regulatory requirements have been complied with, whether there has been coercion of minority shareholders by the majority of shareholders and if the scheme is such that a target shareholder may reasonably approve. In recent years, there has been a trend of intervention by shareholder activists in public bids to attempt to force the bidder to improve the terms of their bid in a practice known as 'bumpitrage'. This is often done at court hearings on the basis that required disclosure in relation to the transaction was inadequate or the scheme unfairly undervalued the target, or both. A number of recent examples include the bid by Caesars Entertainment for William Hill PLC and the consortium bid for Inmarsat PLC. Ultimately neither of these attempts was successful in blocking the relevant transactions, but they illustrate that care needs to be taken by target companies and their boards in the context of public bids to ensure that the disclosure in scheme documentation does not open the door to criticism and challenge by bumpitraging activists.
i Common claims and procedure
Disputes and claims arising out of the contractual documents following an M&A deal are common and often relate to the parties' diverging interpretations of what has been agreed. Subjects that often arise include allegations of non-fulfilment of a condition precedent, breaches of warranty and indemnity disputes, and price adjustment disputes. Claims can also arise in misrepresentation where a party seeks to challenge statements made by the counterparty prior to the contract.
Parties will customarily set out what constitutes the required standard of fulfilment of a relevant condition (for example, is the condition satisfied on making a notification to a particular regulatory authority or only once that authority provides an affirmative response). In the absence of this detail, the court may be required to decide whether the condition is objectively satisfied and what the parties intended when they entered into the contract. Courts have upheld provisions that require fulfilment to the satisfaction of one of the parties, despite the fact they confer wide discretion on the party in question.24 Whether this determination must be made reasonably (or even in good faith) is an issue of construction; however, it may in some cases be possible to imply a term within which the satisfaction will not be unreasonably withheld.25 The courts have shown a willingness to hold that such power is not completely unqualified and that 'in the absence of very clear language to the contrary, contractual discretion must be exercised in good faith' and 'must not be exercised arbitrarily, capriciously or unreasonably'.26 A party benefiting from a provision requiring its satisfaction should therefore be prepared to demonstrate that its decision is made in good faith and for proper purposes.
Generally, in the absence of express time limits or longstop dates, a condition will need to be fulfilled within a reasonable time frame.27 There is some ambiguity as to what constitutes a reasonable time frame; however, often the court will look to the circumstances that actually existed, and a party responsible for fulfilment will generally not be in breach provided any delay is attributable to factors it cannot control and if it has not acted in a way that is negligent or unreasonable on the facts.28
M&A agreements will usually set out which party is responsible for ensuring the relevant condition is fulfilled and the standard of efforts it must apply to satisfy the condition. There is generally a spectrum of such endeavour obligations, ranging from reasonable endeavours, being the least stringent, to best endeavours, being the most.29 Best endeavours are generally seen as requiring the relevant party to take all steps or courses of action that are capable of producing the desired results,30 and that a reasonable and prudent person acting in his or her own interests and desiring to achieve that result would take.31 While this is onerous, it is not an absolute obligation.32 In contrast, a reasonable endeavours obligation seeks to balance the contractual obligation against any relevant commercial considerations, acknowledging that such an assessment should still reflect the circumstances and position of the obligor. Crucially, the obligor is not normally required to sacrifice its own commercial interests and may be entitled to consider the financial impact on its own business,33 and may only need to take one reasonable course as opposed to all of them.34 Despite their wide use, there is some uncertainty as to what efforts each different endeavours clause requires in practice, which can often result in disputes. Because of this uncertainty, parties will often set out the steps a relevant party should take to satisfy a particular obligation (for example, specifying whether a party take legal action or appeal to satisfy a particular obligation, or imposing a cap on the amount of expenditure a party may need to incur).
Indemnity and warranty disputes
Common areas where specific contractual protection is sought to allocate risk include potential tax liabilities, environmental risks, doubtful debts and other significant but contingent diligence concerns. Typically, this protection is achieved through indemnities, although in English law-governed share purchase transactions, protection for pre-completion tax liabilities of the target group typically takes the form of a standalone covenant to pay an amount equal to the relevant tax liability.35 While the purpose of these indemnities and covenants is to provide parties with clarity on how a particular liability should be apportioned, disputes are common where drafting is not specific or clear enough or where a novel situation arises post signing of the agreement. A party claiming under an indemnity or covenant must prove that the relevant trigger event has occurred. There is no duty to mitigate loss, in contrast to claims for damages for breaches of warranties.
Common warranty claims following an M&A transaction include claims in relation to the seller's contractual warranties as to the financial health of the target (accounts warranties) or compliance with law or licensing requirements. A successful claimant will have to demonstrate that the party giving the warranty has breached it and that the effect of that breach is to reduce the value of the business being acquired.
In Wood v. Capita Insurance Services,36 the Supreme Court analysed a sale and purchase agreement (SPA) with a large number of 'detailed and professionally drafted' indemnities. The Supreme Court recognised that in most transactional contexts, the desire to get a deal done and the nature of negotiations means that unambiguous drafting may not always be achieved. As a result, it may frequently be necessary for the court to take into account not just the objective meaning of the words used but also the commercial consequences of those words and the context of the contract in which they are used as a whole. A recent example involved the High Court considering the construction of an indemnity37 concerning liability for the costs of replacing damaged subsea export cables. The Court held that the relevant indemnity was limited to damage done to the cables during the period between signing and closing. This case underlines the potential importance, in deals involving a split exchange and completion, of giving individual consideration to what the parties intend by reference to the period 'prior to' or 'before' completion, in particular where used to delineate a party's contractual responsibilities or liabilities. The Court held that these terms have no common meaning, and that the provisions must be interpreted at the date they come into force with regard to specific wording of the provision, including the tense used, and the broader structure of the SPA, including the presence of overlapping warranties and their related limitations of liability.
In relation to warranty claims, disputes often arise in relation to whether the seller disclosed a particular fact or circumstance negating the warranty or if the fact or circumstance was otherwise known to the buyer at the time of purchase. The contract will often specify the standard in relation to any disclosure, for example 'fairly and clearly disclosed in writing',38 and there will be a factual dispute as to whether that standard has been met. There will often be a question of whether a breach of the warranty is material such that liability arises. In relation to breaches of an accounting warranty in which the seller typically warrants that the audited accounts of a certain date present a true and fair view of the target's financial position, the court has found that failure to comply with accounting standards is prima facie evidence that the resulting accounts do not present a true and fair view of the target's financial position.39
Almost all SPAs will include a provision requiring the buyer to give notice of any claims within a certain period of time. Often these provisions will also prescribe what the notice is required to include. The English court has repeatedly required strict compliance with such notice provisions, in terms of both the deadlines and the notice contents. Recent examples of notices that the English court has found to have failed to comply with the stipulated contractual requirements include:
- a notice that failed to include a reasonable estimate of the amount of the claim;40
- a notice that did not assert a claim but merely stated that the claimant may have claims that it might make in the future;41 and
- a notice that did not contain reasonable detail about the matter that gave rise to the claim.42
What constitutes reasonable detail will depend on all the circumstances of the case, including the recipients' knowledge. The Court of Appeal, overturning the High Court's decision in Dodika, said that requiring an explanation of details of which the recipients are already aware, unless such details are expressly required by the contract to be provided, is an unnecessary formality.43
Price adjustment disputes
Disputes frequently arise in circumstances where the parties have agreed to some form of post-completion price adjustment mechanism (such as a closing statement mechanism or earn-out).
For example, where parties have agreed to a closing statement mechanism, one party to the agreement is typically required to prepare and provide to the other a closing statement within a certain time period following the signing of the contract. The seller and buyer will typically agree to the principles on which the closing statement is to be prepared, which often seeks to ensure consistency with the target's accounts and specify certain accounting principles and treatments for matters specific to the transaction. Notwithstanding the consistency principle, where the parties agree to certain principles on which the closing statements are to be prepared, and that the reference accounts (with reference to which closing statements are prepared) contain errors or departures from such agreed principles, absent clear and unambiguous wording in the contract that such errors are to be carried forward, the closing statements must comply with the agreed principles first and then seek to be consistent with any reference accounts.44 There are other common reasons why a price adjustment dispute may arise, including over accounting treatments; for example, whether something should be treated as cash or debt.
Price adjustment disputes are typically resolved by way of an expert determination procedure, and the contract will set out the scope of the expert's determination and the process for any submissions by the parties. This is viewed as being a more cost-effective and simpler procedure than a court proceeding, where the expert (typically an accountant) is asked to determine whether the accounting treatments in the closing statements are correct.
Where a dispute arises as to the jurisdiction of an expert, the court will have the final decision as to whether the expert has jurisdiction. This is the case even if a clause purports to confer that jurisdiction on the expert in a manner that was final and binding.45 If there is a dispute that falls outside the scope of the jurisdiction of expert determination it is within the jurisdiction of the court to make the decision. There may also be disputes about whether the expert's determination is binding. For example, if the expert departs from his or her instruction in a material respect46 (e.g., valuing the wrong shares or the shares of the wrong company), then the determination may not be binding because the expert has not done what he or she was appointed to do.
The expert's decision will typically be final and binding unless there is a manifest error. The expert has a degree of discretion in interpreting contractual provisions without falling afoul of the manifest error limitation, for example, with respect to determining the hierarchy of the prescribed principles to be applied when preparing completion statements.47
Claims of misrepresentation in the context of an M&A transaction governed by a contract can arise where a claimant alleges that a statement made by the defendant during negotiations induced him or her to enter into the contract. Establishing misrepresentation requires the claimant to show that the defendant made a statement that was not true and that induced the claimant to enter into the contract. Claims for misrepresentation can be for innocent, negligent or fraudulent misrepresentation.
Fraudulent misrepresentation involves a claim in deceit and requires the claimant to establish that the defendant was acting dishonestly and had the intention to induce the claimant into the contract.48 The principles are well established in case law and each case will turn on its own facts.
It is necessary to show that the misrepresentation induced the claimant to enter into the contract in question, which again is a question of fact, although where a fraudulent misrepresentation is established there is a presumption that the claimant was induced.49 Notably, statements made during a due diligence process can be actionable misrepresentations.50
The principal remedy for breach of contract is an award of damages calculated on a compensatory basis, meaning that the claimant should be put in a position it would have been in had the breach not occurred.51
The time of assessment is at the time of the breach, and subsequent events influencing the claimant's loss should not be taken into account. Departure from the prima facie position that damages are assessed at the date of breach without hindsight must be justified and must only occur where it is 'necessary to give effect to the overriding compensatory principle'.52
The claimant is under a duty to mitigate its losses. In essence, this principle is complementary to the causation requirement, namely, that the defendant's breach caused the damage to the claimant. If the claimant unreasonably fails to act to mitigate its loss or unreasonably acts so as to increase its loss, the law treats those actions as having broken the chain of causation and measures damages as if the claimant had instead acted reasonably.
By contrast, a claim under an English law tax covenant is a claim for a debt, rather than damages. Accordingly, if a seller is held liable, it will typically be for an amount equal to the relevant tax liability of the target company, rather than for the damage suffered by the buyer as a consequence of such tax becoming due. This prevents any arguments about what the buyer's loss (in contrast to the target's) actually is in a particular case and means that no mitigation is required.
The basis of the calculation of damages in indemnity claims will depend on the precise wording of the contract, but on a general level, the claimant seeking to claim under an indemnity will not be under a duty to mitigate its losses. Questions as to causation and remoteness of loss also do not arise in indemnity claims.
Rescission is available as a remedy for successful misrepresentation claims. The consequence of rescission is that the parties are put in a position as if the contract had never existed. By contrast, the remedy for breach of contract is to put the parties in the position as if the contract had been performed. This impacts the calculation of damages, and in certain circumstances it may be an advantage for the claimant to seek rescission rather than damages in a misrepresentation claim. When assessing damages in claims for misrepresentation, consideration of what the buyers had subjectively factored into the purchase price is irrelevant. Instead, the court will assess the objective value of the assets purchased at the relevant date.53 It is important to note that a claimant is unlikely to be successful in claiming misrepresentation where the claim is made on the basis of a contractual warranty. Contractual warranties have been held not to amount to representations of fact and were not capable of founding an action for misrepresentation.54 It is for this reason that, when drafting English law transaction documents, it is common practice to avoid the use of the word 'representation' throughout.
Defendants to a breach of warranty claim will typically seek to argue that:
- there has been no breach;
- the breach was not material so no liability can arise; and
- the particular fact or circumstance giving rise to the claim was known to the buyer and therefore it cannot bring a claim.
In a claim under an indemnity, a defendant will seek to argue that the particular trigger event has not occurred. In either case, a defendant may argue that the claimant has failed to comply with notice provisions (which, as set out above, are construed strictly) and therefore the claim should be dismissed.55 In addition, there may be contractual defences or limitations on liability. Almost all agreements will include some form of limitations on the seller's liability with respect to the warranties they give, and these sometimes extend to other provisions such as indemnities, tax covenants or even the agreement as a whole. Common limitation provisions include individual and aggregate liability caps, minimis thresholds and time limitation periods (and one agreement may contain a number of different caps, thresholds and time limits in respect of different types of claim). Tax covenants will typically also contain their own set of exclusions from seller liability.
Broadly, losses will be calculated according to normal contract law principles, which, as noted above, means that a loss must arise naturally in the ordinary course of things from a particular breach or must be within the reasonable contemplation of the parties as a result of specific circumstances known to the parties at the date of the contract.56 Sellers will often seek to exclude liability for indirect or consequential losses. The issue that arises is that the distinction between direct and indirect or consequential losses is not always an easy distinction to draw. For example, there have been a number of cases where loss of profits has been held to be a direct loss and, therefore, recoverable.57 As a result, parties will often look to expressly exclude loss of profits (and sometimes loss of goodwill) in addition to indirect or consequential losses.
Arbitration as a method to resolve commercial contractual disputes is very common, and sophisticated parties to M&A transactions will often choose to refer their disagreements to an arbitral tribunal.
A wide range of international transactions may be subject to arbitration seated in England, and London is a well-known centre for international arbitration. The Arbitration Act 1996 applies to all arbitrations seated in England, and there is a considerable body of case law relating to issues arising out of arbitrations seated in England. England is widely considered to be arbitration-friendly, and the court will give effect to arbitration agreements and have a wide discretion, where requirements are met, to issue anti-suit injunctions to restrain a party from continuing proceedings initiated in breach of an arbitration clause. The court also has the power to order disclosure and compel witness evidence in support of arbitration proceedings (seated in London or elsewhere). Further, the grounds on which a party can apply to the court to challenge an arbitral award are limited. It is possible (unless the parties have agreed otherwise) to appeal an arbitration award on a point of law,58 although the applicant is required to demonstrate that the tribunal made an obvious error.
v Other issues
Disclosure in English court proceedings can be extensive. In recent years, tentative reforms have been introduced to seek to streamline the process. A disclosure pilot scheme under the Civil Procedure Rules59 was recently extended to run until the end of 2022. The disclosure pilot scheme requires parties to give initial disclosure aimed at providing the opposing party with documents relied on towards the beginning of proceedings. In addition, parties are required to agree a list of issues for disclosure to seek to limit disclosure on issues that do not require substantial volumes of documents to be determined. Notwithstanding the scheme, the basic principle of disclosure in the English court remains the same: the parties are expected to conduct proceedings with their cards on the table, namely, providing to the opposing party documents that either undermine a party's case or support the other party's case.
England is also an adverse costs jurisdiction, where the court has a broad discretion to award legal fees in favour of one party or the other. The default position is that the unsuccessful party to litigation will be ordered to pay the successful party's legal costs. This applies both to the case as a whole and on an ongoing basis to any interim applications made to the court. This can result in significant costs orders being made against unsuccessful parties and in a successful party recovering the majority of its legal costs from pursuing a claim.
In the context of M&A transactions, the process of initiating a claim against a foreign defendant may be simple if the parties have agreed that any dispute arising out of the contract will be subject to the jurisdiction of the English court.
If other parties not domiciled in the UK are also involved, the English court has wide-reaching jurisdictional rules that allow claimants to bring defendants into proceedings in England even if they have no nexus to England, provided certain jurisdictional thresholds are met.
There are certain circumstances where the English court will reject or stay a claim against an English defendant; for example, if the proceedings are brought in breach of an arbitration clause or if the parties to the contract expressly agreed that the courts of another jurisdiction should determine any dispute.
Following Brexit, the Recast Brussels Regulation, which previously governed the English court's jurisdiction over parties domiciled in the EU, has ceased to apply. Common law rules on jurisdiction now apply to defendants instead. Common law rules start with the question of whether the defendant can be properly served with the proceedings in England and Wales. Where a defendant cannot be served within the jurisdiction, the court's permission may be required to serve a defendant out of the jurisdiction. To obtain the court's permission, the claimant must show that a jurisdictional ground giving the English court jurisdiction over the matter applies;60 the claim raises a serious issue to be tried; and England is the proper place in which to bring the claim.
The court's permission to serve out of the jurisdiction may not be required where the contract contains a jurisdiction clause in favour in favour of the English court.61
Year in review
The courts' approach to M&A disputes remained consistent with established principles and past practice, with cases over the past year largely focusing on the application of those established legal principles in different factual contexts.
The courts have remained focused on the interpretation of contractual provisions and the language used by the parties. Compliance with notice provisions was an issue in Dodika v. United Luck Group62 (discussed in Section IV.i), where the Court of Appeal overturned a prior decision that notice provisions must be followed strictly, and held that where information is known to the recipient and is not specifically required to be provided by the contract, it is unreasonable to require such information to be included for the sake of formality.
There have been several claims for misrepresentation in an M&A context, with the court confirming in MDW Holdings Limited v. Norvill that statements made during the due diligence process can be actionable misrepresentations. In that case, the issues that arose related to environmental due diligence and representations related to environmental consents and requirements where the buyer had raised specific questions on the issues. The claims succeeded notwithstanding an entire agreement clause, which the court found did not affect the question of reliance on statements made during the due diligence process or non-contractual claims. With corporates increasingly focused on matters such as environmental liabilities and broader environmental, social and governance concerns, the case is an illustration of the importance of conducting careful diligence and the risks to sellers who do provide misleading information during the diligence process.
There has been an increased level of shareholder activism in the context of bids, with court challenges to schemes of arrangement by bumpitraging activists seeking improved valuations. This mirrors the general trend towards shareholder activism in public companies in particular, and represents a new mechanism by which shareholders have sought to maximise shareholder value and scrutinise board decision-making through the courts.
Outlook and conclusions
The choice of English law as the governing law of an M&A transaction is popular, even with parties who have no other nexus to the UK and whose businesses are located elsewhere. In 2020 and 2021 there has been a marked recovery in deal activity, and it is likely that parties will continue using English law to govern their contracts or choose to resolve their disputes in the English court.
While the core principles applicable in an M&A context are well understood, some areas of development may include the increasing role of third-party litigation funders and the issues that come with their involvement in the parties' ability and willingness to bring claims, claims brought by large groups of claimants (another rapidly developing area of law and practice) and shareholder claims.
We also expect that coming years will see issues relating to data protection (an increasingly regulated area with substantial risk and potential regulatory and private law liability) and liability for cyberattacks, ransomware and other data security risks becoming more prominent. Managing and litigating these risks may well take place in the M&A context as well as more generally. There may also be risks for companies arising from the covid-19 pandemic; for example, where companies benefited from government funding, or because of impacts on relations with customers and suppliers. These may also result in litigation risks, including in the M&A context. We also expect traditional M&A disputes over purchase price adjustments, warranties and indemnities to continue.
While the covid-19 pandemic continues to influence M&A activity, unlike some other jurisdictions, the UK has not so far seen any significant litigated disputes where buyers have refused to close transactions because of the pandemic. In part, this is because English law-governed M&A agreements typically only contain a limited range of conditions that focus on mandatory regulatory and antitrust clearances, and therefore tend to provide greater deal certainty for a seller. As counterparties have attempted to navigate the market disruption caused by the covid-19 pandemic, we have continued to see an increased use of US-style material adverse change or material adverse effect conditions, alongside specific covid-19 warranties brought down as closing conditions, robust interim operating covenants and deferred consideration or split investment structures used in transaction documentation. In addition, we have also seen a willingness of parties to exercise walk away rights or pay substantial break fees, or both, in transactions where there are significant gaps between signing and closing as parties re-evaluate either strategic priorities or valuation assumptions as a consequence of the pandemic.
Even though M&A activity in the market has rebounded and continues to be strong, uncertainty remains. As parties chose to address risk by, for example, including express references to the covid-19 pandemic in conditions precedent, we anticipate that these strategies and provisions will come under increased scrutiny and potentially carry significant litigation risk. There has also been an increase in exits by way of merger with a special purpose acquisition company (SPAC). While the process is still relatively new in England and, to date, there has been no reported litigation involving a SPAC, it is likely that as SPAC activity increases, the risk of, inter alia, disclosure or process-based litigation involving SPAC shareholders or target companies in connection with SPAC deals will also increase, as has been seen in the US.
1 Nallini Puri and James Brady are partners and Andrew Halton is an associate at Cleary Gottlieb Steen & Hamilton.
2 For example, Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020 and the National Security and Investment Act 2021.
3 Section 172 Companies Act 2006.
4 Section 170(1) Companies Act 2006; Percival v. Wright [1902 ] 2 Ch 421; Sharp v. Blank  EWHC 3220 (Ch).
5 Vald Nielsen Holding A/S v. Baldorino  EWHC 1926 (Comm).
6 Sharp v. Blank  EWHC 3078 (Ch).
7 Part 11 CA 2006.
8 SL Claimants v. Tesco plc  EWHC 2858 (Ch).
9 Part 30, Sections 994–999 CA 2006.
10 O'Neill v. Phillips  1 WLR 1092.
11 UTB LLC v. Sheffield United Ltd  EWHC 2322 (Ch).
12 See Re Stratos Club Ltd  EWHC 3485 (Ch) in which the Court, in dealing with an unfair prejudice petition, held that a director breached his duties, which resulted in unfair prejudice to the petitioner. The remedy the Court awarded was requiring the respondent to purchase the petitioner's shares at pre-covid value.
13 Sevilleja v. Marex Financial Ltd  UKSC 31.
14 American Cyanamid Co (No 1) v. Ethicon Ltd  UKHL 1.
15 Naibu Global International Co Plc v. Daniel Stewart and Co Plc  EWHC 2719 (Ch).
16 Part 19 Civil Procedure Rules.
17 Sharp v. Blank  EWHC 3078 (Ch).
18 The RBS Rights Issue Litigation  EWHC 1217 (Ch).
19 SL Claimants v. Tesco plc  EWHC 2858 (Ch).
20 Section 232(1) Companies Act 2006.
21 Section 232(2) Companies Act 2006.
22 Section 234 Companies Act 2006.
23 Section 233 Companies Act 2006.
24 R&D Construction Group Ltd v. Hallam Land Management Ltd  CSIH 96.
25 Cream Holdings Ltd v. Davenport  EWHC 3096 (Ch).
26 Novus Aviation Ltd v. Alubaf Arab International Bank BSC (c)  EWHC 1575 (Comm).
27 Smith v. Butler  1 QB 694; United Dominions Trust (Commercial ) Ltd v. Eagle Aircraft Services Ltd  1 WLR 74.
28 Jolley v. Carmel Ltd  3 EGLR 68.
29 Rhodia International Holdings Ltd v. Huntsman International LLC  EWHC 292.
30 Rhodia International Holdings Ltd v. Huntsman International LLC  EWHC 292; Jet2 .com Ltd v. Blackpool Airport Ltd  EWHC 1529.
31 Terrell v. Mabie Todd & Co Ltd  69 RPC 234; IBM United Kingdom Ltd v. Rockware Glass Ltd  FSR 335.
32 Midland Land Reclamation Ltd v. Warren Energy  EWHC 375 (TCC)); Jet2 .com Ltd v. Blackpool Airport Ltd  EWHC 1529.
33 P&O Property Holdings Ltd v. Norwich Union Life Insurance Society  EGCS 69; Phillips Petroleum Co UK Ltd v. Enron Europe Ltd  CLC 329; Rhodia International Holdings Ltd v. Huntsman International LLC  EWHC 292; Gaia Ventures Ltd v. Abbeygate Helical (Leisure Plaza) Ltd  EWCA Civ 823.
34 Rhodia International Holdings Ltd v. Huntsman International LLC  EWHC 292.
35 Some reasons for using a covenant, rather than an indemnity, are discussed in subsections ii and iii below.
36 Wood v. Capita Insurance Services Limited  UKSC 24.
37 Gwynt Y Mor Ofto Plc v. Gwynt Y Mor Offshore Wind Farm Ltd  EWHC 850 (Comm).
38 Triumph Controls UK Ltd v. Primus International Holding Company  EWHC 565 (TCC).
39 Macquarie Internationale Investments Limited v. Glencore UK Limited  EWCA Civ 697.
40 Teoco UK Ltd v. Aircom Jersey 4 Ltd & Anor  EWCA Civ 23.
41 Zayo Group International Ltd v. Ainger & Ors  EWHC 2542 (Comm), see also TP Icap Ltd v. Nex Group Ltd  EWHC 1375 (Comm).
42 Dodika Limited & Others v. United Luck Group Holdings Limited  EWHC 2101 (Comm).
43 Dodika Ltd v. United Luck Group Holdings Ltd  EWCA Civ 638. See also Arani & Ors v. Cordic Group Ltd  EWHC 829.
44 Shafi v. Rutherford  EWCA Civ 1186.
45 Barclays Bank PLC v. Nylon Capital LLP  EWCA Civ 826.
46 Jones v. Sherwood  1 WLR 277.
47 Flowgroup Plc (in liquidation) v. Co-operative Energy Limited  EWHC 344 (Comm).
48 The Kriti Palm  EWCA Civ 1601.
49 MCI WorldCom International Inc v. Primus Telecommunications Inc  EWCA Civ 957.
50 MDW Holdings Limited v. Norvill and Others  EWHC 1135 (Ch).
51 The Hut Group Ltd v. Oliver Nobahar-Cookson and others  EWHC 3842 (QB).
52 Ageas (UK) Limited v. Kwik-Fit (GB) Limited, AIG Europe Limited  EWHC 2178 (QB).
53 Glossop Cartons and Print Ltd and others v. Contact (Print & Packaging) Ltd and others  EWCA Civ 639.
54 Idemitsu Kosan Co Ltd v. Sumitomo Co Corp  EWHC 1909 (Comm).
55 Dodika Limited & Others v. United Luck Group Holdings Limited  EWHC 2101 (Comm).
56 Hadley v. Baxendale (1854) 9 Ex. 341.
57 British Sugar v. NEI Power Projects Ltd (1998) 87 BLR 42; Deepak v. ICI  1 Lloyd's Rep 387.
58 Some arbitral institutions' rules exclude appeals on points of law. See, for example, the LCIA Arbitration Rules, Article 26.8, which provides for the parties' waiver of a right to any form of recourse regarding the award, insofar as such a waiver is not prohibited by the applicable law. Under the Arbitration Act 1986, parties are permitted to opt out of the provision allowing challenges to an award on a point of law.
59 Civil Procedure Rules, Practice Direction 51U.
60 There is a number of different jurisdictional grounds available, which are contained in paragraph 3.1 of Practice Direction 6B of Civil Procedure Rules, Part 6.
61 Civil Procedure Rules, 6.33(2B).
62 Dodika Limited & Others v. United Luck Group Holdings Limited  EWHC 2101 (Comm).