• The court interprets the meaning of “material adverse change” in a share sale agreement
• Companies House gains new power to issue fines for failure to comply with the Register of Overseas Entities
• The first two IFRS Sustainability Disclosure Standards are published

Court interprets meaning of “material adverse change”

The High Court has interpreted the meaning of a warranty in a share sale agreement that there had been “no material adverse change” (MAC) in trading or financial position.

In reaching its decision, the court examined both the scope of the warranty and what the parties meant by a “material” change.

Finsbury Food Group plc v Axis Corporate Capital UK Ltd and others [2023] EWHC 1559 (Comm) concerned the acquisition of a food manufacturing business.

The SPA contained several contractual warranties as to the state of the target’s business, including a warranty that:

“there has been no material adverse change in the trading position of any of the Group Companies or their financial position, prospects or turnover and no Group Company has had its business, profitability or prospects adversely affected by the loss of any customer representing more than 20% of the total sales of the Group Companies or by any factor not affecting similar businesses to a like extent, other than as a result of factors which have affected businesses in the same industry, in general and so far as the Warrantor is aware, there are no circumstances which are likely to give rise to any such effects”

Following completion, the buyer noticed that the target had agreed changes in the recipe for two products that it supplied to a substantial customer, and it had agreed price reductions for those products with that customer.

The buyer claimed for breaches of the warranty above under its buy-side W&I policy. The underwriters refused to pay out, claiming that (among other things) these matters did not amount to a “material adverse change”.

The court was required (among other things) to interpret what the parties meant by the phrase “material adverse change” (or MAC). To do so, the judge reflected on previous cases that have considered the meaning of this phrase, as well as the text of the share sale agreement.

The judge ultimately found that a change of 10% or more to the target’s overall sales amounted to a material adverse change.

You can read more about the case in our separate in-depth piece.

New civil fines for failing to comply with Register of Overseas Entities

New legislation has come into force giving Companies House the power to levy monetary penalties for failure to comply with the requirements to register on the UK’s Register of Overseas Entities (ROE).

Overseas entities that hold certain types of real estate in the UK are required to register on the ROE and provide details of their beneficial owners (and, in some cases, managing officers and any trusts in their corporate structure). Information on the entity, its beneficial owners and its managing officers is publicly available at no cost. (Information on trusts is not publicly available.)

Under the new regulations, if Companies House believes a person has committed an offence under the ROE regime, it can send them a “warning notice” explaining why it believes an offence has occurred and giving them at least 28 days to make representations.

If, after that period, Companies House is satisfied beyond reasonable doubt that the person has committed an offence, it may issue a monetary penalty up to the maximum amount of any fine a court could impose for that offence.

Last week, Companies House published new guidance on how it would use its new enforcement powers. For more information, see our previous Corporate Law Update.

First two Sustainability Disclosure Standards published

The International Sustainability Standards Board (ISSB) has published its first two IFRS Sustainability Disclosure Standards.

The ISSB originally consulted on the new standards in April 2022 (see our previous Corporate Law Update).

IFRS S1 sets out general requirements for the disclosure of sustainability-related financial information. These integrate into a company’s general financial reporting, so that disclosures on sustainability-related risks and opportunities are presented alongside other information.

IFRS S2 sets out more specific climate-related disclosures. These draw heavily on the recommendations and recommended disclosures in the final report of the Task Force on Climate-related Financial Disclosures (the TCFD).

The standards do not automatically form part of the UK financial reporting framework. In May 2022, the Financial Reporting Council (FRC) asked for UK stakeholder views on the draft standards through a short survey in order to inform its own response to the drafts.

We can now expect the FRC to confirm, in due course, how and to what extent the standards will be incorporated in the UK financial reporting standards.