Sale of loss-making company – Construction of wording in share sale agreement
Business Tax
A loss-making company (L Ltd) was sold for £1. At the time of sale, L Ltd had significant accumulated trading losses. At the end of its most recent complete accounting period before sale (the Balance Sheet Date) those losses amounted to around £30 million. The seller wanted to be paid additional consideration if the buyer was able to use any of those losses.
Clause 4.2.1 of the share sale agreement provided that the seller would be paid ‘at the rate of 20p for every £1 of Tax saved as a result of the set-off after Completion of the Losses, against profits of L Ltd or Buyer’s Group.’ A dispute had arisen between seller and buyer over the definition of ‘Losses’ for the purpose of clause 4.2.1.
The directors of the seller had understood that the provision for the payment of additional consideration would apply to the total accumulated and unclaimed losses of L Ltd at the Balance Sheet Date. This understanding had been reflected in a draft share sale agreement reviewed by them. Clause 1 of that draft defined Losses as the aggregate of trading losses as computed for the purposes of ICTA 1988 ‘at’ the Balance Sheet Date. For some reason, this wording was changed and, in the share sale agreement as executed, Losses were defined as the aggregate amount of trading losses as finally agreed for the purposes of section 393 ICTA 1988 with HMRC ‘for’ the year ending on the Balance Sheet Date.
Ann was asked to provide an opinion on whether the definition of Losses in the share sale agreement as executed was broad enough to include all accumulated losses as at the Balance Sheet Date (£30 million) or whether that wording limited the seller’s claim for additional consideration to the use of losses agreed with HMRC for the year ending on the Balance Sheet Date (£8 million).
Update (at August 2013)
Ardagh Group SA v Pillar Property Group Limited is a good illustration of the dangers of loose wording in relation to tax in a share sale agreement. The decision of the Court of Appeal turned on the interpretation of a clause which provided for the payment of additional consideration based on the utilisation of capital losses to reduce taxable profits or gains in the purchaser’s group.
Lord Justice Underhill summarised the matter as follows:
‘… the language used in clause 6 of the Sale Agreement is perfectly clear and plainly applies to the arrangement which Pillar reached with HMRC in the present case. All that has happened is that the Agreement failed to provide for the circumstances created by the particular arrangement which it made (or, rather, chose to make) with HMRC, so that it ended up paying out for an apparent benefit which was, in those circumstances, of no real value to the group. But that is not a licence for departing from the straightforward meaning of the words used: parties not uncommonly make contracts which work out expensively for them in particular situations for which they have failed to provide.’
At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.