Corporate update: the latest corporate law developments August 2023

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In this month’s update we:

  • explain how a warranty claim failed due to defects in the buyer’s notice of claim;
  • look at another failed warranty claim, this time against a W&I insurer; and
  • review the latest report into the operation and impact of the UK’s investment screening regime.

Warranty claim notices: compliance with contractual requirements is key

The High Court has held that a buyer’s notice of claim for breach of warranty was invalid because it did not include reasonable details of the loss claimed by the buyer, nor how that loss was calculated. This case is just one of several in recent years where warranty claims have failed due to claim notices not complying with content or service requirements in the relevant agreement. (Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2023] EWHC 412 (Comm).)

Notice of warranty claims

When giving warranties to a buyer under a share sale agreement, the seller will commonly negotiate contractual limitations on its liability under those warranties. Those limitations will usually include a requirement for the buyer to notify the seller of any potential claims within a specified period and for that notification to include reasonable details of the claim and how it has been calculated.

Compliance with claim notification provisions is essential for buyers as failure to satisfy those requirements will often result in the seller not having any liability in respect of that claim. 

Although the exact information a buyer needs to provide in its notice of claim will depend on the specific provisions of each contract, the courts have considered many warranty claim notices in recent years and have issued helpful guidance on how to comply with these requirements. 


Drax had acquired a company (Target) from Scottish Power under a share purchase agreement (SPA) and subsequently brought a claim against Scottish Power for breach of a warranty in that SPA. 

The SPA required any notice of warranty claim to state, “in reasonable detail the nature of the claim and the amount claimed (detailing the Buyer’s calculation of the Loss thereby alleged to have been suffered).” Compliance with the notification clause was a condition of Scottish Power’s liability for any claim.

The dispute between the parties related to whether Drax’s notice of claim met the requirements in the SPA. The notice had included the required calculation of Drax’s loss, but that calculation had been based on an estimate of the losses that Target was expected to suffer due to the warranty breach, and for which Drax would be ultimately liable. However, once legal proceedings had started, Drax sought permission to amend its particulars of claim to remove reference to any loss that Target might suffer and, instead, to base its loss on the reduction in value of Target’s shares arising from the warranty breach.

Scottish Power applied for summary judgment dismissing Drax’s warranty claims on the basis that Drax was claiming for a completely different type of loss than that specified in its notice. As such, it had failed to comply with the notice requirements in the SPA and the notice was, therefore, invalid.


The Court agreed with Scottish Power, holding that that the notice did not comply with the SPA and was void. 

In reaching this decision, the Court noted that part of the purpose of a notification clause was certainty for the party receiving the notice. It concluded that a reasonable recipient of Drax’s claim notice would have understood that the loss being claimed was loss which Target would suffer and for which Drax was liable. They would not have understood that Drax was, in fact, claiming for loss that it had already suffered due to a reduction in the value of the shares in Target. This meant that the claim notice had not given reasonable detail of the loss claimed (and how that loss had been calculated) and was, therefore, invalid.


This case is another example of a Court taking a strict approach to the interpretation of a warranty claim notice and declaring that notice to be invalid and of no effect.

The fact that the notice of claim was invalid could have had particularly dire consequences for Drax. It had served the notice on the cut-off date for notifying claims under the SPA and so was out of time to serve another valid notice. This meant that Drax could no longer bring a breach of warranty claim under the SPA. 

Fortunately for Drax, it had also brought an indemnity claim against Scottish Power and the Court held that indemnity claim notice to be valid. Other buyers may not be as fortunate and may well find themselves without any remedy for breach of warranty due to, arguably, a technical breach of the SPA. 

The Courts have repeatedly shown that they are willing to hold commercial parties to their contractual bargain, notwithstanding that this may result in a particularly harsh outcome for one of them. Buyers would be well advised to heed this lesson and take the time to ensure compliance with relevant contractual provisions when notifying warranty claims. Particular thought should be given to what a “reasonable recipient” of the notice is likely to understand from it, whether that be in relation to the nature of the claim or the way in which any alleged loss has been calculated.

Buyer fails in breach of warranty claim against W&I policy

The last 10 years has seen a significant increase in the number of M&A transactions which use a warranty and indemnity (W&I) policy. For sellers, they offer the opportunity to walk away from a sale with little (or even no) residual liability. For buyers they can offer protection where the available warranty cover is reduced (for example because an investor is not giving commercial warranties or because the seller is facing solvency issues) or help make the buyer’s bid more attractive in a competitive sales process. 

Despite that increase, however, it is rare for a claim under a W&I policy to come before the courts. But that was the case in Finsbury Food Group PLC v Axis Corporate Capital UK Limited & others [2023] EWHC 1559 (Comm).


The case involved the acquisition of a gluten free bakery which supplied various customers, including Marks & Spencer, from its operations in Wales and Poland. 

The sale agreement contained various “material adverse change” warranties from the sellers to the buyer, including:

  • a Trading Conditions Warranty under which the sellers confirmed that, “since the Accounts Date…there had been no material adverse change in the trading position of any of the Group Companies …..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….”; and
  • a Price Reductions Warranty under which the sellers confirmed that “since the Accounts Date…no Group Company has offered or agreed to offer ongoing price reductions or discounts”.

The agreement also contained a Knowledge Exception under which the sellers would have no liability for breach of warranty where the buyer had “actual knowledge of the circumstances of such Warranty Claim and is actually aware that such circumstances would be reasonably likely to give rise to a Warranty Claim”.

As noted above, at completion the buyer had taken out a W&I policy. Like most W&I policies, this was a “buy-side” policy, indemnifying the buyer for any loss arising from a breach of warranty. So, when the buyer subsequently claimed for breach of the Trading Conditions Warranty and the Price Reductions Warranty, it claimed directly against the insurers without the involvement of the sellers.


The judge found that there has been no breach of warranty.

The insurer had argued that the Trading Conditions Warranty should be interpreted such that, to be “material”, a change in the target’s trading position had to meet the 20% threshold. But the judge disagreed, holding that the Trading Conditions Warranty actually contained two different warranties:

  • firstly, a warranty that there had been no material adverse change in the target’s trading position; and 
  • secondly, a separate warranty that there had been no loss of a customer representing more than 20% of the target’s total sales. 

It was wrong to read the 20% threshold as also applying to the material adverse change. Instead, the judge said that, in this case, a 10% change in the target’s total group sales would be sufficiently significant to amount to a material adverse change. But the matters which the buyer complained of did not result in such a change, meaning there was no breach of the Trading Conditions Warranty.

In relation to the Price Reductions Warranty, the buyer had argued that it prohibited price reductions implemented after the Accounts Date, regardless of whether they were offered or agreed before or after that date. But the judge agreed with the insurer that the warranty looked at the date at which the price reduction was offered or agreed, and not the date on which it actually becomes effective. Price reductions offered or agreed before the Accounts Date were therefore outside the scope of the warranty, even where they did not come into effect until after that date. 

The judge also found that, even if there had been a breach of warranty, the knowledge of the buyer’s business director, whom the judge found to be a “most unsatisfactory witness”, would have prevented a claim. He was not only aware of price reductions agreed with Marks & Spencer but, had he given any thought to them at the time, he would have (or at least should have) considered that they would have been reasonably likely to give rise to a warranty claim. Accordingly, the Knowledge Exception applied.


This case shows that a W&I policy cannot be viewed by a buyer as a cast iron route to recovery. All the usual elements of a warranty claim – breach, loss, causation, etc. – still have to be proved when claiming against the insurer.

Since a W&I policy is designed to protect the buyer against unknown issues in the target, the insurer will usually expect the buyer to conduct a thorough due diligence investigation in order to uncover any potential liabilities. These can then be addressed in the transaction negotiations, rather than the buyer simply relying on a post-completion claim under the policy. In this case, the buyer had deliberately taken a “light touch” approach to due diligence but the judge said that the sale agreement was not “intended to be a panacea to resolve any unforeseen consequences of [that] approach”.

National Security and Investment Act 2021: Annual Report

The Cabinet Office has published a Report into the operation of the National Security and Investment Act 2021 (the NSI Act) over the last 12 months. According to the Report the investment screening regime introduced by the NSI Act and overseen by the Investment Security Unit (ISU) is working well, providing a light-touch and proportionate regime that nonetheless protects the UK’s national security.

The investment screening regime

The NSI Act came into force in January 2022. It was aimed at preventing state and non-state actors who may wish to do harm to the UK from acquiring parts of the UK economy.

The NSI Act tackled this via a three-pronged regime:

  • a mandatory notification regime for some transactions in certain specified sectors (i.e. those considered to be the most significant in terms of risk to national security);
  • a voluntary notification regime for certain transactions outside those specified sectors which may still give rise to national security concerns; and
  • call-in powers under which the Government can review transactions which should or could have been notified under either the mandatory or voluntary notification regimes.

The Report’s findings

Key highlights from the Report include: 


866 notifications were made during the year of which 671 were mandatory notifications and 180 were voluntary. The final 15 notifications were retrospective validation applications made in respect of transactions which should have been notified but which were not. 

The overall level of notifications is still well below the range (1,000 to 1,800) originally anticipated by the ISU. This suggests the regime may be having a less significant impact than anticipated or, as the number of retrospective validation applications perhaps indicates, that there are still buyers and advisers who are unaware of the regime’s reach.

The number of voluntary notifications suggests many investors are taking a cautious approach, notifying transactions that are outside the mandatory regime in order to avoid the risk of a post-completion call-in.


Whilst some sectors are narrowly drawn (so, for example, the transport sector only catches ports, harbours and airports that exceed certain thresholds), the defence sector is deliberately wide, catching all contractors (including all sub-contractors) supplying goods or services to the MoD. As the Government guidance notes, even businesses providing catering or cleaning services at MoD facilities will be within scope of the regime due to the potential access to sensitive sites which come with those arrangements.

So it is perhaps unsurprising that the sector with the highest number of notifications was defence which accounted for 47% of all mandatory notifications. Other sectors receiving a high number of notifications were critical suppliers to the Government, data infrastructure, military and dual use, and artificial intelligence. 

Advance materials, defence and military and dual use were the sectors receiving the most voluntary notifications.

Transactions in the military and dual use (37%), defence (29%), and advanced materials (29%) sectors accounted for the majority of the call-in notices issued following a notification and the military and dual use sector topped the table for transactions where a final order was made following a call-in review.


Of the 866 transactions notified, 65 (7.5%) were called in for review. A final order was issued in just 15 cases, with five transactions being blocked and conditions imposed on the remaining 10.

The number of interventions is below that (70-95) anticipated in the original Impact Assessment for the NSI Act. This could suggest that the NSI Act is having a less significant impact than expected but it may simply be a factor of the overall number of notifications being less than anticipated.

Buyers/ investors

The Report suggests that transactions with Chinese investment are being subjected to more in-depth scrutiny. Whilst the majority of notifications (58%) involved transactions where the associated investment originated in the UK, 42% of all call-in notices related to investments originating in China. China also topped the table for prohibited transactions by associated origin of investment.


All of the notifications made were either cleared or called-in within the statutory period of 30 working days after being accepted. The average times were marginally shorter at 28 working days for mandatory notifications and 27 working days for voluntary ones.


Although the overall level of notifications remains below that originally predicted, it is clear that the NSI Act is affecting UK transactions, including those with no foreign investment involved. The overall level of interventions is low but still 50% higher than was anticipated. 

All transaction parties need to take into account the operation of the NSI Act and, in particular, be aware of the impact a notification can have on a deal timetable. The clock only starts running once the notification is accepted as complete by the ISU so getting that application right is also important. The ISU has issued Guidance on completing and registering a notification form which should help ensure the clock starts ticking as quickly as possible. 

First published in Accountancy Daily.

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