Corporate update: the latest corporate law developments June 2024

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In this month’s update we:

  • examine two cases dealing with warranty claims under share purchase agreements, both of which favoured the buyer;
  • explain how a transfer of company assets at an undervalue was found to be unfairly prejudicial conduct; and
  • highlight proposals to narrow the scope of companies subject to the Takeover Code.

Court of Appeal confirms validity of warranty claims notice

The Court of Appeal has overturned the decision of the High Court and held that a notice of warranty claim was valid and complied with the relevant requirements of a share purchase agreement (Drax Smart Generation Holdco Ltd v Scottish Power Retail Holdings Ltd [2024] EWCA Civ 477).

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. Failure by the buyer to comply with these requirements may result in the claim being unenforceable and the seller avoiding liability, regardless of the merits of the claim itself.

The courts have taken an increasingly strict (and some would say harsh) approach to the interpretation of claim notifications, requiring a formulaic compliance with contractual provisions. The first instance decision in the Drax Smart Generation case provides a good example of this approach. However, the fact that the Court of Appeal has overturned that decision, and its reasons for doing so, may well indicate that the courts will adopt a more pragmatic attitude to these cases in the future.

Facts of the case

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)”.

Scottish Power applied to dismiss Drax’s warranty claim on the basis that Drax had failed to comply with the SPA notification requirements. The notice of claim 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. Once legal proceedings had started, however, Drax had sought permission to amend its claim and base its loss on the reduction in value of Target’s shares arising from the warranty breach. Scottish Power alleged that Drax had claimed for a completely different type of loss than had been specified in the claim notice and, therefore, the claim notice was invalid.

The High Court agreed with Scottish Power, holding that Drax’s notice of claim did not give reasonable detail of the loss claimed (and how that loss had been calculated) and was, therefore, void. In the judge’s view, the fact that Drax’s claim had been based on the diminution in value of the Target shares was both part of the “nature of the claim” and also an essential part of the explanation required to provide the necessary “reasonable detail” of the amount claimed. This fact had not been included in Drax’s original notification of claim and, as a result, the claim had no real prospect of success. Drax appealed.

Court of Appeal decision

The Court of Appeal unanimously disagreed with the High Court and allowed Drax’s appeal on the basis that the notice of claim had satisfied the requirements in the SPA.

In relation to the “nature of the claim,” the Court held that Drax did not need to spell out that its claim was based on the diminution in value of the Target shares resulting from the alleged breach of warranty. Imposing such a requirement served no commercial purpose and would merely introduce a trap to defeat what may be a valid claim. All that was required was a simple statement that Scottish Power had failed to ensure that Target had the benefit of an option agreement (as it had warranted.)

As for the amount claimed, the Court found that Drax’s notice unquestionably stated the amount claimed and provided details of how it had been calculated. Even though Drax had not originally based its claim on the diminution in value of the acquired shares, the claim notice had set out Drax’s genuine (in good faith) calculation of the claimed loss, and that was all that was required. That genuine calculation did not have to be set in stone, and if further reflection indicated that the calculation was capable of improvement or was legally unsound, there was no reason to insist that Drax should be held to that method of calculation.


The Court of Appeal decision will be welcomed by buyers as it suggests that courts may be increasingly willing to interpret claim notices in a more pragmatic (and less legalistic) manner. The Court helpfully stated that notification clauses “should not become a technical minefield to be navigated, divorced from the underlying merits of a buyer’s claim”.

It is, however, difficult to reconcile some of the Court of Appeal’s findings with previous decisions. This is particularly so in relation to its conclusions on the “nature of the claim.” Previous cases have required buyers to identify the specific warranties that have been breached when setting out the nature of their claims, but the Court of Appeal was not convinced that this was necessary. Its conclusions suggest that, provided the recipient of the notice has enough information to assess or prepare for any impending claim, that should be sufficient.

Ultimately, whether a buyer’s notification of claim is found to be satisfactory will depend on the specific contractual requirements of the SPA. Despite this buyer-friendly Court of Appeal decision, buyers would still be well advised to err on the side of caution and provide as much information in their claims notices as they are reasonably able (based on the language of the relevant clause.) This is likely to include:

  • the type of claim being brought (e.g. for breach of a warranty);
  • what provisions of the contract are alleged to have been breached (identifying specific warranties where possible); and
  • a genuine estimate of how any loss has been calculated.

Calculation of earn out consideration suspended time limit for warranty claims

The High Court has held that a contractual time limit for bringing warranty claims under a share purchase agreement did not begin to run until after the quantum of earn out consideration had been determined. Only at that point would the relevant warranty claims become actual or quantifiable claims as required under the agreement.

The facts

In Onecom Group Ltd v Palmer [2024] EWHC 867 (Comm) a buyer acquired a group of telecommunications services businesses. Initial consideration was paid on completion, based on a multiple of the target’s EBITDA. In order to bridge the expectation gap between the buyer and the seller regarding the target’s value, the agreement provided for further earn out consideration to be payable if the target’s EBITDA in the 12 months post-completion exceeded an agreed threshold.

As is normal, the agreement contained a number of warranties from the seller to the buyer in relation to the target and its businesses. Any claim in respect of those warranties was subject to a number of contractual limitations set out in the agreement. In particular:

  • written notice of a warranty claim had to be given within 24 months of completion (the notice period);
  • legal proceedings in respect of a notified claim had to be commenced within a further six months of that written notice (the litigation period); and
  • for any claim based on a contingent or unquantified liability, the litigation period did not begin until that liability had become either an actual liability or capable of being quantified.

After completion, the parties were unable to agree the calculation of the earn out consideration so, in accordance with the mechanism set out in the agreement, the matter was referred to an independent expert for determination. Separately, the buyer also gave notice of various warranty claims. That notice was given within the notice period.

The buyer subsequently commenced proceedings in respect of its warranty claims within six months of the earn out calculation being determined. But that was more than six months after the initial notification of the warranty claims which, according to the seller, meant that the claims were time-barred. The seller applied for strike out of the claims and/ or for summary judgment dismissing those claims.

The buyer argued that as certain matters which formed the basis of the warranty claims also affected the calculation of the earn out, its warranty claims were not actual or quantifiable liabilities until that calculation had been completed. Accordingly, the litigation period did not commence until the earn out had been determined.

The decision

The Court agreed with the buyer and refused the seller’s application for strike out and summary judgment.

The seller had argued that the calculation of the earn out consideration (which looked at the target’s value 12 months after completion) was unconnected with the valuation of the warranty claims (which were concerned with the target’s value at completion). But the judge said it was a “misconception to suggest there was no connection” between them. They were both based on an EBITDA figure projected forward for about 10 years meaning that, for example, an undisclosed ongoing overhead could affect both the target’s value at completion and at the end of the earn out period. Taking that overhead into account in both a successful warranty claim and the calculation of the earn out could result in the buyer benefitting from a double price reduction which would be “wholly unjustifiable”.

The Court also noted that a claim for breach of warranty is a claim for loss based on the difference between the buyer’s actual position given the breach and the position it would have been in had the breach not occurred. In this case, the buyer’s actual position – namely, the total amount it had to pay the seller for the target businesses – could not be known until the earn out consideration had been determined. This meant the warranty claims were contingent and unquantifiable until the earn out consideration had been determined. Indeed, the buyer’s notice of the warranty claims made clear that the figures used in that notice were estimates and acknowledged a connection with the earn out calculation.


Although the judge found in the buyer’s favour, that is not the end of the matter. Since this claim was merely an application for strike out and summary judgment, the case will now proceed to trial in order to determine the actual merits of the buyer’s warranty claims.

But it is a useful reminder of the need to give careful consideration to the interaction between warranty claims and any price adjustment mechanism. The parties need to ensure that any inter-dependent timetables work appropriately and that there is no possibility for double counting the same liability under the two matters, resulting in a windfall to either party.

Transfer of company assets at an undervalue amounted to unfairly prejudicial conduct

In Simpson v Diamandis and others [2024] EWHC 850 (Ch), the Court held that a company shareholder suffered unfair prejudice when the company’s sole director arranged for the sale of the company’s main asset to another entity owned by the director. The sale took place at a price significantly below the asset’s true market value.

Unfair prejudice

An unfair prejudice claim is the main procedural route for a minority shareholder to petition the courts when they believe that the company’s affairs are being conducted in a manner that is unfairly prejudicial to their interests. For the claim to be successful, the conduct complained of must:

  • relate to “the company’s affairs” (which could include management decisions or disruptive attempts by shareholders to exert greater control);
  • relate to members’ interests in their capacity as members; and
  • must be prejudicial to the member and unfair.

The courts are more likely to find that conduct is unfairly prejudicial if the relevant company is a “quasi -partnership”. This may be the case, for example, where the company has been established based on mutual trust and confidence between the founding members, or where there is an understanding that all or some of the shareholders will be involved in the conduct of the business.

If a petition is successful, the courts are given a wide discretion to make any order they think fit to grant relief. In many cases, the petitioner will ask the court for a buy-out order where the other shareholders are required to buy out the petitioner’s shares at fair value.

The facts

Mr Simpson (the petitioner) and Mr Diamandis set up a company (AJH) in which each of them held 47.5% of the shares, with the remaining 5% held by AJH’s company secretary. Mr Diamandis was the sole director of AJH, but Mr Simpson was heavily involved in all strategic decision making. AJH subsequently acquired the shares in another company that had previously been owned by Mr Simpson (Subsidiary). Subsidiary was AJH’s most profitable asset.

Several years later, Mr Diamandis and a third-party investor, Mr Woollett, devised a scheme whereby the shares in Subsidiary would be transferred to a new holding company (Holdings). Under the initial plan, Mr Simpson and Mr Diamandis were to hold an equal number of shares in Holdings, but by the time the scheme was finalised, Mr Simpson had not been allocated any shares in the new company.

As the sole director of AJH, Mr Diamandis approved the board documentation for the reorganisation. AJH also passed a members’ written resolution approving the sale of Subsidiary to Holdings for £150,050. Mr Simpson had objected to the resolution, but Mr Diamandis and AJH’s company secretary together held sufficient shares to pass it.

Mr Simpson petitioned the Court on the basis that the shares in Subsidiary had been worth £2.9m at the date of transfer, considerably more than the £150,050 paid by Holdings. He claimed that the transfer of the shares at such an undervalue, to a company controlled by Mr Diamandis (and in which he himself had no shareholding), amounted to unfair prejudice. Mr Simpson also claimed that the transfer of Subsidiary at an undervalue was a breach of Mr Diamandis’ duties as a director and in breach of the quasi-partnership relationship that existed between Mr Simpson and Mr Diamandis.

The decision

The Court agreed with Mr Simpson, finding that he had suffered unfair prejudice as a result of the sale of Subsidiary to Holdings at a substantial undervalue.

In relation to its finding of prejudice, the Court held that the transfer of Subsidiary had resulted in the value of AJH (in which Mr Simpson still held shares), being reduced by approximately £2.75m. The Court noted that it was: “hard to conceive of a clearer example of the economic value of the petitioner’s shareholding being seriously diminished by reason of the conduct on the part of a person with de facto control of the company, namely, Mr Diamandis.” Mr Diamandis’ actions as sole director were properly regarded as the conduct of the affairs of AJH.

The Court also held that the prejudice suffered by Mr Simpson was unfair for several reasons. The business relationship between Mr Simpson and Mr Diamandis was based on mutual trust and confidence in each other – a quasi-partnership. It was a clear breach of that trust and confidence for Mr Diamandis to:

  • deprive Mr Simpson of the value of his shareholding in AJH, whilst preserving the value of his own;
  • cause AJH to sell its principal asset at an undervalue to benefit himself; and
  • ignore professional advice and fail to obtain a valuation of the shares in Subsidiary.

In addition to breach of trust, Mr Diamandis’ actions had also constituted a breach of his fiduciary and statutory duties as a director of AJH.

The remedy ordered by the Court was for Mr Diamandis to buy out Mr Simpson’s stake in AJH.


This was a fairly straightforward case of unfair prejudice, particularly given the significant and obvious prejudice caused to the petitioner by the transfer at such an undervalue of AJH’s most valuable asset.

The case is still a useful reminder, however, that where individuals are in a quasi-partnership, additional equitable considerations will be taken into account and conduct may still be unfair even when carried out in what appears to be a procedurally correct manner. In this instance, the transfer at an undervalue had been blessed by an ordinary resolution of AJH’s shareholders, and its sole director had signed the necessary paperwork, but the transfer was still held to be unfairly prejudicial to Mr Simpson.

It is also interesting that the Court considered it appropriate to make a buy-out order against Mr Woollett, even though he was neither a shareholder nor a director of AJH. The Court found that Mr Woollett had colluded with Mr Diamandis in the restructuring scheme with the objective of obtaining a 15% share in Holdings. This was sufficient for the Court to make a secondary liability order against Mr Woollett (meaning that Mr Simpson could enforce the buy-out order against Mr Woollett, but then Mr Woollett could recover that money from Mr Diamandis).

Proposals to narrow application of Takeover Code

The Takeover Panel has issued a Public Consultation Paper containing proposals to significantly reduce the scope of the companies to which the UK’s Takeover Code applies.

Current position

Although the Takeover Code is primarily aimed at regulating takeovers of UK companies that are listed in the UK, its scope is actually wider than this. For example, the Code applies to private companies that have been listed at any time in the previous 10 years and also to public companies that are either unlisted or listed on an overseas market. In each of those cases, the Code will apply where the company satisfies a residency test of having its place of central management and control in the UK, the Channel Islands or the Isle of Man.


Under the proposals, the Code would only apply to a company that is (or was recently) both UK registered and UK listed.

The proposals are that, to be subject to the Code, a company must have its registered office in the UK, the Channel Islands or the Isle of Man – i.e. the company is UK registered – and either:

  • the company must have shares or securities admitted to trading on a UK regulated market (such as the LSE’s Main Market), a UK multi-lateral trading facility (such as AIM) or a stock exchange in the Channel Islands or the Isle of Man (such as The International Stock Exchange) – i.e. the company is UK listed; or
  • the company must have been UK listed at any time during the previous three years.

As a result, the Code would no longer apply to:

  • a company that was UK listed more than three years ago;
  • a company whose securities are only listed on an overseas market;
  • a company whose securities are traded using a “matched bargain facility”;
  • an unlisted public company; and
  • a private company that has filed a prospectus during the previous 10 years.

In addition, the residency test will be abolished, meaning companies that are only listed on an overseas market would fall outside the Code even if their place of central management and control was inside the UK, the Channel Islands and the Isle of Man.

Any company with its registered office outside the UK, the Channel Islands and the Isle of Man would continue to fall outside the scope of the Code.


The proposals are aimed at focusing the application of the Code on just those companies with a close connection to the UK and to which the Code might be expected to apply. Over recent years a number of UK companies have chosen an overseas market for their primary listing, particularly the NYSE or NASDAQ. The proposals in the consultation will mean these companies, and their shareholders, will lose the Code protections in relation to bids and other changes of control. However, as a non-US company, they may also fall outside the scope of the US rules governing takeovers. Such a company may want to take advantage of the consultation’s proposed three year transition period to adopt appropriate provisions in its constitutional documents to provide some protection from unwanted suitors once the Code protections fall away.

The consultation is open until 31 July 2024 and the Panel expects to publish a response statement in autumn 2024. Any changes to the Code are expected to be implemented one month after the response statement with a three year transition period to allow companies time to adjust.

First published in Accountancy Daily.

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