Corporate update: the latest corporate law developments April 2025

Earn-out determinations invalid due to non-compliance with notices provisions

The High Court has held that the contractual provisions for delivery of notices under a share purchase agreement applied to the buyer’s earn-out calculations under the agreement. As the buyer had failed to comply with the notice provisions when delivering its calculations to the seller, the Court held that the earn-out calculations were invalid.

Facts

In Hughes v CSC Computer Sciences Ltd [2025] EWHC 302 (Comm), the shares in a services company had been acquired by CSC (the Buyer), from certain individual shareholders (the Sellers). The purchase price for the shares was due to be paid in tranches, with the Buyer paying deferred consideration to the Sellers if the company’s financial performance met specified targets (the earn-out).

The earn-out mechanism in the share purchase agreement (SPA) required the Buyer to “prepare and submit” to the Sellers its determination of the earn-out for each of the two years following completion. The Sellers could then object to the Buyer’s calculations within a specified period. If the parties were ultimately unable to agree on calculations, a dispute resolution procedure would apply.

The Buyer emailed its determination of the earn-outs for years one and two to the Sellers. Although the Sellers questioned the Buyer’s calculations in relation to both years, they only disputed the validity of the year two calculation. These disputes were not resolved at the time.

Several years later, the Sellers brought proceedings claiming that both of the Buyer’s earn-out determinations were invalid as they had not been delivered in accordance with the notices clause in the SPA. This required “any notice or other communication” under or in connection with the SPA to be in writing and delivered to the recipient either personally, by first-class post or by fax. The Sellers argued that the determinations were communications under the SPA, and as the Buyer had emailed them to the Sellers, it had not complied with the notices clause.

The Buyer contended that the earn-out determinations were not covered by the notices clause as they were not required to be given “in writing” and the SPA did not impose any requirements on their form or content. The Buyer was merely required to “prepare and submit” its determinations, whereas the Sellers were expressly required to notify any objections to the determinations “in writing”.

Decision

The Court found in favour of the Sellers, deciding that the notices clause in the SPA applied to the delivery of the Buyer’s earn-out determinations. The notices clause was very widely drafted, referring not merely to notices, but also to other communications, and it would be undesirable to draw fine distinctions between different forms of communication. Whilst the notices clause might not apply to every single communication, the Court found that it must apply to communications of contractual significance, and the earn-out determinations were, clearly, important contractual documents that dealt with the calculation of the purchase price.

The Court held that as the notices clause did not permit service of communications by email, both of the Buyer’s earn-out determinations were invalid. However, because the Sellers had actively engaged with the Buyer and discussed the year one determination, they were now legally prevented (estopped) from denying its effectiveness. This was not the case with the year two determination – there was no estoppel – and as the determination was invalid, the contractual timeframe for the Sellers to object to it had not begun. The Court granted the Sellers an order for specific performance requiring the parties to engage in the dispute resolution procedure provided for in the SPA.

Comment

Contractual requirements relating to the service of notices are often tucked away in the back end of an agreement and might be dismissed as mere boilerplate. However, as illustrated by this case, it is important to take these provisions seriously and ensure that any notice satisfies all contractual requirements, whether they relate to content, timing or the manner of delivery. Failure to comply may result in the notice being invalid and the courts have repeatedly shown that they are willing to hold commercial parties to their contractual bargain, even if that results in a particularly harsh outcome for one of them.

High Court sets aside expert determination due to manifest error

In a recent case, the High Court set aside an expert determination on the basis that it contained two manifest errors.

Expert determination is usually binding on the parties involved and the grounds for setting it aside are limited. As such, this case provides a relatively rare example of a successful challenge to an expert determination. It also usefully clarifies what is meant by the term “manifest error” and when that term can be applied to an expert’s decision.

Facts

The dispute arose out of a concession agreement under which an owner permitted a company to run sporting events at a London stadium, and allowed West Ham United Football Club Limited (the Club) to use the stadium as its home ground. The concession agreement also entitled the owner to a share of any gains made as a result of certain of the company’s shareholders selling or transferring any of their interests in the Club (Clause 20).

The concession agreement provided that certain disputes were to be referred to an expert whose decision was final and binding “in the absence of manifest error”. When a dispute subsequently arose as to the operation of Clause 20, the parties agreed to put it before an expert for determination.

The expert determined the issue in favour of the owner, requiring the company to pay £3.6 million to the owner. The company claimed that the expert had made a manifest error and sought a declaration from the High Court that it was not bound by the expert determination.

Decision

The High Court held that there had been two manifest errors in the expert determination and granted a declaration that the company was not bound by it.

In making its decision, the Court usefully discussed the definition of “manifest error”, whilst noting that its precise meaning would depend on the particular contract in question and the context in which it was used. The Judge rejected terminology with pejorative overtones such as “blunder” and “howler”, and instead, he focused on guidance from the Court of Appeal that restricted “manifest” errors to those which were “so obvious and obviously capable of affecting the determination as to admit no difference of opinion”.

It was also relevant that the parties had agreed that the expert should give reasons for their determination. This showed the parties’ intention to examine the expert’s reasoning for manifest error and permitted the Court to review documents expressly referred to in the determination. The Court noted, however, that the word “manifest” should not be diluted. The finality of expert determination was an important factor and should not be subject to attack just “because another view could, in the light of further argument, properly be taken of the matters dealt with during the determination”.

Applying these principles, the Court found that the expert determination in this case was “obviously wrong” and admitted no difference of opinion. In particular, the expert had misread the concession agreement, treating “or” as “and”, and had also used a calculation that was not provided for in the agreement.

Comment

Expert determination is a commonly used form of alternative dispute resolution as it is confidential and can be quick and relatively cost-effective. As this case shows, however, experts can make mistakes.

Expert determination clauses require careful consideration. The intention is that expert determinations are meant to be final and if parties find themselves on the wrong side of a determination, their grounds for challenging that decision are likely to be limited. Where a challenge on the basis of manifest error is to be allowed, then this must be stated in the underlying agreement. The parties should also specify whether they require a reasoned determination from the expert.

As illustrated by this case, a permitted challenge to an expert determination on the grounds of “manifest error” can be a difficult threshold to reach – it was reached in this case. The Court found on the facts that there had been manifest error, applying the test that the errors were “so obvious and obviously capable of affecting the determination so as to admit no difference of opinion”.

Extended powers to strike off companies

Companies House has published updated guidance on the circumstances in which a company can be struck off the register and dissolved. The updated guidance reflects a number of recent reforms made by the Economic Crime and Corporate Transparency Act 2023 (ECCTA) which have extended the Registrar’s powers in this area.

Strike off by the Registrar

There are now three circumstances in which the Registrar may initiate action to strike off a company:

• Company formed on a false basis

Under the new powers, the Registrar may strike off a company where they have reasonable cause to believe that the company was formed on a false basis. The Registrar may form this opinion where they believe that information in the company’s application for registration, or any statement made in connection with that application, is materially misleading, false or deceptive.

• Company does not have an “appropriate” registered office address

ECCTA introduced a requirement for all companies to have an “appropriate” registered office address. This is an address where, in the ordinary course of events, a document addressed to the company would be expected to come to the attention of a person acting on behalf of the company. In addition, the delivery of documents to the address must be capable of being recorded by obtaining an acknowledgement of delivery.

If the Registrar believes an address used by a company does not meet this requirement, they may change the company’s registered office address to a default address maintained by Companies House. If the company does not then either appeal that decision or, within 28 days, change the registered office from the default address to an “appropriate” address, the Registrar may strike off the company.

• Company no longer in operation

The Registrar has always had the ability to strike off a company if they believe it is not carrying on business or in operation. In particular, they are likely to do this where the company has no directors or where it fails to submit its annual filings, i.e. its accounts and confirmation statement.

In each case, the Registrar will give notice of its intention to strike off the company. That notice will be placed on the company’s public record and published in the Gazette. Depending on the reason for the strike off action, the company could stop the process by providing evidence to the Registrar that it is still in operation (and bringing its filings up to date), by providing evidence to show that the Registrar did not have cause to believe it had been formed on a false basis, or by changing its registered office to an appropriate address. If it fails to do this, the company will be struck off and dissolved not less than two months after the notice is published in the Gazette.

Voluntary strike off

In addition to the Registrar’s ability to initiate the strike off process, if a company is no longer needed, its directors may apply for it to be voluntarily struck off. The application can only be made three months after the company has ceased all activities, other than ones which are necessary to make the strike off application, conclude the company’s affairs or comply with a statutory requirement.

Once the application is made, the company must send a copy of the application to its shareholders, creditors and employees. To guard against fraudulent applications, the Registrar will send an acknowledgement of the application and notify the company at its registered office. It will also place a copy of the notice on the company’s public record and publish it in the Gazette. Assuming no objection is raised, the company will then be struck off and dissolved not less than two months later.

Comment

The extension of the Registrar’s powers to strike off companies is the latest ECCTA-related measure aimed at improving the integrity of the public register of companies. Directors of companies that wish to carry on operating need to ensure they are not caught out by keeping their filings up to date and ensuring they have an “appropriate” registered office address.

If a company is struck off, the consequences are severe. In particular, any assets held by the company will go to the Crown as “bona vacantia” (or vacant goods). Whilst there is a process for restoring a dissolved company, it would be better to avoid the related complications, expense and business disruption caused by this.

Find out more about the ECCTA and how it impacts companies at our ECCTA hub.

First published in Accountancy Daily.