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The Importance of Clear Drafting in M&A Transaction Documents
“The sign stopped me-- or rather, this text stopped me. Words are my profession; I seized these and demanded that they explain themselves, that they cease to be ambiguous.”
Daniel Quinn, Ishmael: An Adventure of the Mind and Spirit
Although uncommon for the courts to intervene and rule that the terms of an executed commercial agreement entered into between private parties should be altered after the fact, the decision of Persimmon Homes Limited v (1) Anthony John Hillier and (2) Colin Michael Creed is an interesting example where the UK High Court ordered the rectification of ambiguous terms in a share purchase agreement and disclosure letter entered into as part of a M&A transaction.
Although this decision is, at best, of persuasive authority in Ireland, it highlights, for both sellers and buyers operating in the Irish M&A market, the importance of agreeing to precise and clear transaction terms and also gives some guidance as to how a court might look to resolve ambiguous drafting.
Background and Facts
Pursuant to the terms of a commercial deal, Persimmon Homes Limited acquired two companies from two individuals, a Mr Hiller and a Mr Creed. The target companies held options to purchase four of six connecting parcels of land, which together constituted a potential development site. The other two connecting parcels of land (or ransom land) provided access to the development site and were fundamental to its future use by Persimmon but were separately owned by a different entity controlled by the sellers. The entity which owned the ransom land did not form part of the share sale under the share purchase agreement entered into as part of the transaction.
Although the sellers had warranted to Persimmon under the terms of the share purchase agreement that the target companies had good title to the “Properties” constituting the development site, the warranty language did not clearly and specifically identify the individual parcels of lands comprising the development site. Rather, it was in the disclosure letter provided by the sellers to Persimmon where it was disclosed, by way of exception to the warranties, that the target companies did not hold any interest in the two parcels making up the ransom land.
Following the closing of the deal, Persimmon applied to the UK High Court seeking relief as it considered that all six parcels were included in the commercial deal, which the sellers disputed. Firstly, it claimed that the definition of “Properties” included in the share purchase agreement should be interpreted as referring to the entirety of the development site to include the ransom land. In addition, Persimmon claimed that both the share purchase agreement and the disclosure letter should be subsequently rectified so as to reflect the actual intention of both parties, namely that Persimmon would acquire the whole of the development site as part of the deal.
The UK High Court accepted that the trajectory of the transaction negotiations had adequately demonstrated that the parties had intended for the entirety of the development site, including the ransom land, to be transferred to Persimmon under the share purchase agreement. On this basis, the court decided to order rectification of the transaction documents so as to include the description of the ransom land within the scope of the definition of “Properties” in the share purchase agreement, and to remove the specific disclosure that the target companies did not own any interest in the ransom land from the disclosure letter.
Although this decision did not result in Persimmon ultimately being entitled to acquire the entity which owned the ransom land, it had the effect of restoring Persimmon’s right to take a claim for breach of warranty against the Sellers under the share purchase agreement on the basis that the ransom land was not in fact owned by the target companies acquired, as otherwise warranted.
Impact of decision in practice
This decision acts as a helpful reminder of the importance of ensuring that all commercially agreed terms are accurately and clearly captured in the documents executed as part of a commercial deal so as to avoid any potential dispute or disagreement arising post-closing. It also shows the benefit of being able to produce a record of the transaction negotiations should the need arise to clarify an ambiguity and such evidence is admissible.
Without a doubt, when executing M&A transactions, the devil is in the detail, and this case is a clear example of this.
This article was co-authored by Corporate partner Fergus Bolster and Corporate associate Cáit Murphy