More is more when giving a notice of claim under an SPA
A buyer's notice of claim pursuant to the terms of a sale and purchase agreement in a USD1 billion transaction failed adequately to comply with the notice requirements set out in the tax covenant of the SPA. As a result, a sum of USD50 million held in escrow for claims was paid out unconditionally to the sellers under the SPA. Dodika Ltd v United Good Luck Holdings Ltd  EWHC 2101 (Comm).Background
UGLH purchased all the issued shares in Outfit 7, the holding company of a group of companies specialising in mobile device applications. The consideration paid for the shares was USD1 billion.
USD100 million of the purchase price was to be held in escrow, to be released in two tranches of USD50 million on 31 December 2018 and 1 July 2019 respectively. If UGLH made a claim against the sellers under the share purchase agreement before a tranche was due to be released, that tranche would be held in escrow until the claim was resolved; if UGLH was successful, the claim would be satisfied out of the escrow account.
The SPA required UGLH to give written notice to the sellers of any claim, stating in reasonable detail the matter giving rise to that claim, its nature and (so far as reasonably practical) the amount claimed. In the tax covenant, the sellers agreed to reimburse UGLH for any tax liabilities of the Outfit 7 group that arose before completion of the transaction.
In July 2008, the Slovenian tax authority started to investigate the transfer pricing practices of one of the group companies, Ekipa2 d.o.o. (Ekip). Several of the seller's representatives knew about the investigation and saw relevant documents.
As the draw down date for the second tranche drew closer, on 24 June 2019 solicitors for UGLH sent a letter to the sellers purporting to give notice of a claim under the tax covenant. The claim related to the Slovenian tax authority's investigation into Ekip's transfer pricing practices and set out a chronology of the investigation. It alluded to the fact that the investigation was ongoing and explained that the amount of any tax liability remained contingent on the outcome of the investigation; it was not therefore possible to quantify the value of the claim at that stage.
This notice having been given, the remaining USD50 million was not released from the escrow account to the sellers. The sellers applied to the court for declarations that UGLH's notice of a claim did not comply with the claim notification provision under the SPA. The letter dated 24 June 2019 was defective because it failed to quantify the claim or provide reasonable detail about the matter that gave rise to the claim.
ULGH resisted the application on the grounds that the notice was adequate for the purposes of the SPA and that even if it did not provide reasonable detail about the matter giving rise to the claim, the sellers and their representatives knew about the investigation.
It was common ground that the 24 June 2019 letter provided reasonable detail of the nature of the claim.
The deputy judge found that the 24 June 2019 letter failed to give reasonable detail about the matters that gave rise to the claim, so did not satisfy the notice requirements of the SPA.
(i) Failure to quantify the claim
The obligation in the notice provision was qualified by the words "so far as reasonably practical", meaning that if it was not reasonably practical to quantify the claim, no claim value need be stated in the notice. That was consistent with the terms of the SPA which recognised that the sellers' liability for a claim might still be contingent and that the sellers would not be liable "unless and until the liability… becomes capable of being quantified."
Given the qualification of the notice provision, the deputy judge found that the absence of an estimate of the value of the claim did not of itself render the notice invalid.
(ii) Failure to give reasonable detail about the "matter giving rise to the claim"
ULGH's case was that sufficient detail of the matter giving rise to the claim had been given; the "matter" was the tax investigation into Ekip's transfer pricing practices. The 24 June 2019 letter identified that "matter" and provided a clear chronology of the key milestones. The knowledge of certain of the sellers' representatives meant that they understood what the matter was.
The sellers' case was that the notice lacked any detail of the matter giving rise to the claim; specifically, the underlying facts, events and circumstance giving rise to (or which may in the future give rise to) any tax liability.
The deputy judge agreed with the sellers. On a fair reading of the relevant paragraph of the SPA, the "matter giving rise to the claim" required ULGH to set out the factual basis of the claim. This conclusion was based on the following points:
1. The recipient would want to know, at least in general terms, the factual basis, the legal basis and the quantum of the claim insofar as it was possible to do so and was in accordance with the terms of the notice provision.
2. The use of the phrase "giving rise to" meant setting out the factual reasons why a pre-completion tax liability had or might accrue.
3. The purpose of the notice is to inform the receiving party of what facts discovered during the tax investigation are relied upon by the notifying party in support of its claim for breach of the tax covenant. It is not sufficient for the relevant facts relied upon to be inferred by the receiving party.
4. The information in the notice must also allow the receiving party to determine, at least in general terms, whether the facts as alleged give rise or might give rise to a liability for a breach of the tax covenant.
5. The purpose of the notification is to enable the recipient part to deal with the claim, for example by investigating the matters which allegedly gave rise to the claim.
A valid notice would have set out the specific transfer pricing practices or transaction that ULGH relied upon in support of its claim against the sellers. The 24 June 2019 letter did not do so.
Relevance of the sellers' knowledge
UGLH argued that the sellers' representatives were aware of the tax investigation and that on receipt of the 24 June 2019 letter the sellers would have been aware of the matter giving rise to the claim. Their case was that in order to interpret the 24 June 2019 letter the court must take into account what the sellers or their representatives knew. However, the deputy judge was persuaded by the sellers' argument that irrespective of the state of knowledge of the sellers' representatives about the tax investigation, this did not rectify the want of reasonable detail required by the notice provisions of the SPA.
Buyers should consider carefully the terms of the notice requirements and follow these rigorously. Where the notice requirements call for full details of a claim, buyers should not rely on the recipient having this information through other sources.
The deputy judge considered that recent cases concerning the validity of claims notices establish that notice of claims clauses are based on the need for commercial certainty and they should be construed with that in mind.