The recent case of ‘Hughes and others v CSC Computer Sciences Ltd’ has highlighted the importance of clear drafting of, and the strict compliance with obligations contained within, an acquisition agreement.

The case concerned a dispute over the interpretation and application of the terms of a share purchase agreement between Hughes and others (the Sellers) and CSC Computer Sciences Limited (the Buyer) for the sale of the entire issued share capital of Fixnetix.

Share Purchase Agreement (SPA)

The SPA contained provisions that part of the purchase price would be paid in the future, with the amount of that payment being dependent on future performance of the Fixnetix business (an “earn-out”). The earn-out mechanism in the SPA:

• required the Buyer to ‘prepare and submit’ to the Sellers within sixty days of the first and second anniversary of completion, its calculations and determinations of the amount of the earn-out for those years;

• allowed the Sellers a specific period in which to ‘notify’ the Buyer ‘in writing’ of any objections to the determinations; and

• had a dispute resolution procedure that would apply if, following the Sellers’ objection to the Buyer’s calculations, the parties were unable to agree on the amount of the earn-out.

The SPA contained a standard clause that any notice or other communication under or in connection with the SPA had to be in writing and delivered personally or sent by post or by fax. Importantly, this omitted delivery by email.  

Facts of the case

The Buyer submitted its determinations in respect of the first earn-out year and the second earn-out year within the stipulated timeframes. The determinations were sent by email in each instance.

The Sellers and/or their advisers received and responded to those determinations each year. There was sporadic correspondence from the Sellers’ representatives to the Buyer’s representatives in respect of both of the determinations. These involved queries in respect of calculations and notably, in respect of the second earn-out period, the Sellers’ objected to the determination. The Buyer’s response to the objection was that it was not valid as the Sellers had failed to copy the objection to the Buyer’s representatives as required by the notice clause, and the Sellers were now late to dispute the calculations.

The Sellers’ representatives issued a claim few years later, contending that the Buyer’s determinations were not valid as they had not been delivered in accordance with the notice clause in the SPA.

High Court’s Decision

The Court held that the notice clause in the SPA applied to the delivery of the Buyer’s determinations of the amount of earn-out payment payable under the SPA. As the Buyer had failed to comply with the notice clause, the Court held that, in respect of the second earn-out year, the contractual timeframe for objecting to the determinations had not begun. The Court ordered for the parties to engage in the dispute resolution procedure set out in the SPA.

Implications

The case demonstrates the importance of the parties carefully complying with the terms of an acquisition agreement containing an earn-out or a mechanism to adjust the purchase price.

To avoid costly litigation, and potentially the loss of contractual entitlements, the parties should ensure that they are fully aware of and comply with the process, time limits and methods of communication in relation to earnouts to mitigate risks and pitfalls.

How can we help

If you require advice on this topic or are in the process of buying or selling a business, please contact our Corporate Commercial Team who would be pleased to assist.