The importance of clarity in Share Purchase Agreements and disclosure letters

In the recent case of Persimmon Homes Limited v (1) Anthony John Hillier and (2) Colin Michael Creed,  the Court of Appeal dismissed an appeal by Hillier and Creed, holding that a disclosure letter accompanying a share purchase agreement (SPA) could be rectified where it did not give effect to the parties’ intended transaction.

Pursuant to terms of the SPA, the Sellers (Hillier and Creed), transferred to the Buyer (Persimmon Homes Limited), the share capital in two companies which held interests in four of six connecting parcels of land comprising a potential development site. The remaining parcels, which provided access to the site and were critical to its future development (the Ransom Land), were owned by another of the Sellers’ companies. The shares in this company were not transferred under the terms of the SPA. Whilst the SPA contained warranties that the acquired companies had good title to the land, it did not identify the individual parcels that were subject to the warranty. The accompanying disclosure letter also specifically disclosed that the acquired companies did not own the Ransom Land.

At first instance the High Court accepted the Buyer’s argument that the course of the parties’ negotiations demonstrated a common intention that it would acquire the whole development site, including the Ransom Land. The Court ordered rectification of the SPA (to include the Ransom Land in the definition of Properties) and the disclosure letter (to exclude the statement that the appellants did not own the Ransom land).

The Sellers appealed. Dismissing the appeal, the Court held that the Judge had been correct to conclude that the SPA and disclosure letter did not record the terms agreed between the parties, and that the requirements for rectification had been met accordingly. The court also found that the disclosure letter was an integral part of the suite of documents designed to give effect to the parties’ intended transaction and, in circumstances where its terms failed to achieve this purpose, it was as much capable of rectification as the SPA itself.

This case highlights the importance of ensuring that the parties intentions are accurately reflected in the transactional documentation being used and that the transactional documents are fit for purpose. It is also a warning to ensure that the due diligence process is properly carried out whereby all documents in the data room are fully reviewed, considered and reflected in the documentation and where required the price of the transaction is adjusted accordingly. The case also highlights the importance of using clear and precise definitions generally and specifically in relation to key assets in SPAs and other such documentation.

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