Legal briefing | Corporate & Commercial Litigation, Tax, Tax Enquiries & Disputes | 13 Aug 2019

Notices of claim under share purchase agreements: the importance of getting it right

Overview

In this briefing we look at the recent Court of Appeal judgment in Stobart Group Limited and Anor v William Stobart and Anor [2019] EWCA (Civ) 1376. This judgment confirmed that a purported notice of claim given under a share purchase agreement will be construed objectively and also highlighted the grave consequences of failing to serve a valid notice in such circumstances.

THE FACTS

The main issue in this case was whether the unilateral notice served was valid for the purpose of giving notice of claims under a Share Purchase Agreement dated 7 March 2008 (the "SPA"). Pursuant to the SPA, Mr Stobart and Mr Tinkler (the Respondents and Vendors) sold Stobart Rail Limited ("SRL") to Stobart Group Limited ("SGL") (the Appellants).

The SPA contained regular provisions in relation to the tax liabilities of SRL, which were set out in Schedule 4 of the SPA. Schedule 4 contained the following two separate provisions relating to notices:

  • Paragraph 6.3 – "The Vendors shall not be liable in respect of a Tax Claim [i.e. a claim against the Vendors under a tax warranty or tax covenant] unless the Purchaser has given the Vendors written notice of such Tax Claim (stating in reasonable detail the nature of such Tax Claim and, if practicable, the amount claimed) on or before the seventh anniversary of Completion…"

    Paragraph 6.3 therefore discharged the Vendors from liability unless SGL gave written notice of a 'Tax Claim' before 4 April 2015 (i.e. the seventh anniversary of completion).
  • Paragraph 7.1 – "Upon the Purchaser of the Company becoming aware of any Claim [i.e. a claim made by a tax authority against SRL], the Purchaser shall as soon as reasonably practicable, and in any event within 10 Business Days of the date thereof, give notice of such Claim to the Vendors' Representative stating how the liability arises under paragraph 3 or pursuant to the Tax Warranties and a reasonable estimate of the quantum of the Liability to Taxation or other liability, and upon the Purchaser becoming aware of any event, fact or circumstances which may give rise to such a Claim, the Purchaser shall give notice thereof and of the possible Claim to the Vendors' Representative provided that the giving of notice under this paragraph 7.1 shall not be a condition precedent to the liability of the Vendors under this schedule."

    Paragraph 7.1 was intended to give the Vendors as much notice as possible of a potential 'Claim' by the tax authorities against SRL. In contrast to paragraph 6.3, compliance with the provision was not a condition precedent to liability being incurred by the Vendors and there was no time limit for giving a notice.

SRL incurred a tax liability of £3.8m in relation to conditional share schemes that it had concluded with employees, in respect of which the Appellants issued proceedings The material issue was whether a letter sent to the Vendors on 24 March 2015 (shortly before the 7 year deadline) was a valid notice under paragraph 6.3 of Schedule 4.

SGL's letter of 24 March 2015 gave "formal notice pursuant to the SPA of a potential Liability to Taxation under the Tax Covenant contained in Schedule 4 of the SPA" in relation to the conditional share schemes. The letter made no reference to paragraph 6.3 of Schedule 4, but did refer to paragraph 7: "We would be grateful if you would confirm pursuant to paragraph 7 of Part 4 of Schedule 4 as to whether you wish to have continued discussions with HMRC in relation to the Claim." It was this letter that SGL contended constituted a valid notice pursuant to paragraph 6.3 of Schedule 4. SGL's case relied on the argument that the letter would have been understood by the Vendors to be compliant notice under paragraph 6.3 of Schedule 4 regardless of its terms.

The decision

In the High Court, Phillips J ruled that whilst the letter of 24 March 2015 was a notice under paragraph 7.1 of Schedule 4 in respect of a potential claim by HMRC it was not a valid notice under paragraph 6.3 and therefore that SGL was unable to pursue its claim for £3.8m. The Court of Appeal dismissed the appeal against Phillips J's judgment.

The Court of Appeal affirmed the basis for construction of unilateral notices in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, which states: "The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question, the notices must be construed taking into account the relevant objective contextual scene." Therefore, the Vendors' subjective understanding of the letter dated 24 March 2015 was irrelevant.

The Court of Appeal noted the important distinction between notices made under paragraph 7.1 and those under paragraph 6.3. The Court of Appeal stated that while a paragraph 7.1 notice may give rise to a paragraph 6.3 claim, it does not necessarily mean a paragraph 6.3 claim will be made (and this had indeed happened in relation to another liability relating to National Insurance contributions). This distinction was important in the Court of Appeal's decision. Further, in reaching its decision the Court of Appeal noted that (i) the letter dated 24 March 2015 did not refer to a 'Tax Claim' (as is the reference used paragraph 6.3 of Schedule 4); (ii) only referred to potential liabilities and claims (as distinct from a claim actually being pursued); (iii) referred to the possibility of ongoing discussions with HMRC pursuant to "paragraph 7"; and (iv) referred to a summary of company exposure (i.e. SRL's exposure to HMRC). All of these factors pointed to the letter being a notification pursuant to paragraph 7.1 but not paragraph 6.3 of the SPA. The Court of Appeal concluded that "a person receiving the 24 March letter with the knowledge of the terms of the SPA would have understood it to be a notice under paragraph 7."

In conclusion

The Court of Appeal's judgment provides a useful summary of how the courts will construe unilateral notices and affirms the objective basis by which they will do so. But, perhaps more importantly, given the objective nature of the enquiry, the judgment highlighted the importance of drafting such notices with precision and clarity. As is evidenced by SGL's inability to pursue its claim, failing to serve a valid notice can have very serious and expensive consequences.

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