In the recent case of Asher v Jaywing Plc  EWHC 893 (Ch) the sellers bought a claim against the buyer for breach of contract relating to earn-out provisions in the share purchase agreement (SPA).
Under the terms of the SPA, the buyer was required to deliver to the sellers a statement prepared by the buyer's auditor illustrating its process for calculating the amount of earn-out consideration payable to the sellers. However, the buyer's statutory auditors declined to prepare the statement, citing a lack of independence and so instead the buyer delivered a statement produced by its Chief Financial Officer. The sellers brought a claim against the buyer on the basis that the statement was not produced in accordance with the terms of the SPA.
The court rejected the buyer's argument that the term “auditors” used in the SPA should be interpreted as including any appropriately qualified third-party firm of accountants. The court did, however, accept the buyer's argument that a term should be implied into the SPA on the grounds of business efficacy allowing the buyer to appoint a suitably qualified independent firm given its auditor had declined to act. Notwithstanding, the court concluded that the buyer had not acted in accordance with the implied term as the statement was produced by its CFO rather than an accountancy firm. The buyer further argued that the sellers were bound by the statement having not rejected it in the timeframe specified in the SPA. This argument was rejected by the court on the basis the earn-out statement had not been produced in accordance with the SPA and so the provisions surrounding the process for rejecting or agreeing the statement had not been initiated.
Having concluded that there had been a breach by the buyer of the SPA, the court looked to determining an appropriate award of damages with the help of an expert. The court assessed the amount of earn-out payments payable to the sellers based on the terms of the SPA and found that the earn-out targets had not been met and so no loss had arisen as a result of the breach. The court therefore concluded that the sellers were not entitled to any damages.
It's noteworthy that the buyer's auditors declined to act in preparing the earn-out statement on the basis of a lack of independence, even though the terms of the SPA seemed to envisage their involvement (as agreed between the parties). Moving forward it will be interesting to see if other auditors will follow suit and decline to act in this context. Contingency provisions should be included in share purchase agreements to provide for what happens if the entity which the parties intend to produce the completion accounts is unwilling or unable to do so.
Originally published 27 May, 2022
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