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Explanation and interpretation of M&A documentation

On 19 March 2019, the Amsterdam Court of Appeal ruled in a case regarding the interpretation of provisions of M&A documentation. The dispute between the parties concerned the interpretation of certain provisions laid down in an earn out-agreement. The Court of Appeal ruled that a linguistic interpretation of agreements will be the guiding principle if professional parties have been assisted by lawyers and accountants during the negotiations.    

Facts and claim

In summary, the facts are as follows. The six shareholders of Buckaroo B.V. (“Buckaroo”), as sellers, and Intrum Justitia B.V. (“Intrum Justitia”), as purchaser, entered into a share purchase agreement in early 2012 concerning the sale and purchase of all shares in Buckaroo.

The purchase price for the shares consisted of two components: (i) a fixed basic purchase price of EUR 8 million and (ii) an additional purchase price in the form of an earn out-payment. The amount of the earn out-payments depended on the results achieved by Buckaroo for the years 2012, 2013 and 2014 and could amount to a total of EUR 32 million.

The terms and conditions of the earn out were laid down in an earn out-agreement, which was attached to the share purchase agreement. The earn out-agreement referred to a so-called commercial letter, in which policy intentions regarding Buckaroo were included. This commercial letter was an attachment to the earn out-agreement.

Article 4 of the earn out-agreement stipulates the following: “Nothing contained in this Agreement shall impair or restrict the Purchaser’s ability to conduct its businesses (...) as it deems fit in its sole discretion in accordance with its internal business practices and processes, however, in reasonable consultation with the Company’s management board (...) and taking into account the commercial agreement between the Parties as set forth in Schedule 2. The Purchaser has no obligation to operate the Group in order to achieve any Earn-Out Payment (...)”.

One and a half years after the acquisition, an earn out-fee of approximately EUR 3.2 million was paid to the sellers with regard to the result achieved by Buckaroo for 2012. One of the sellers, Beleggingsmaatschappij Ingenium Participaties B.V. (“Ingenium”), was of the opinion that the earn out-payment was too low. According to Ingenium, this was the result of the fact that in the period after the acquisition the policy at Buckaroo was not in line with what was laid down in this respect in the earn out-agreement and the commercial letter.

Ingenium claimed that Intrum Justitia had failed to comply with the earn out-agreement and therefore claimed damages.

Judgement

In the first instance, the District Court rejected Ingenium’s claim. The District Court applied a textual interpretation and ruled that the earn out-agreement and the commercial letter did not include the arrangements which Ingenium claimed were included. On appeal, the main point of discussion was the method of interpretation used by the District Court.

The Court of Appeal had first and foremost established that the earn out-agreement was entered into between two professional parties who had been assisted by lawyers and accountants. According to the Court of Appeal, under these circumstances decisive weight should be given to the most obvious linguistic meaning of the provisions when interpreting the agreement.

According to the Court of Appeal, Intrum Justitia should take into account the provisions of the commercial letter, since article 4 of the earn out-agreement prescribes this (“taking into account the commercial letter…”), but the Court of Appeal ruled that this wording is not so imperative that the commercial letter is always leading.

In addition, the Court of Appeal stated that the earn out-agreement provides that Intrum Justitia may freely determine Buckaroo’s policy (“Nothing contained in this Agreement shall impair or restrict the Purchaser’s ability to conduct its businesses (…) as it deems fit in its sole discretion”). The Court of Appeal also noted that the parties have agreed that Intrum Justitia is not obliged to focus its policy on effecting a payment on the basis of the earn out-agreement (“The Purchaser has no obligation to operate the Group in order to achieve any Earn-Out Payment”).

The Court of Appeal used a linguistic interpretation and concluded the following: (i) after the acquisition Intrum Justitia was allowed to freely determine Buckaroo’s policy, (ii) its actions did not have to be aimed at a payment on the basis of the earn out-agreement and (iii) it was obliged to take into account the provisions laid down in the commercial letter. 

According to the Court of Appeal, the interpretation and explanation of the earn out-agreement in connection with the commercial letter leads to the conclusion that Intrum Justitia does not have any obligation that will result in any earn out-payments being due or on the basis of which it had otherwise failed to comply with the earn out-agreement and therefore could be held liable on that ground. The Court of Appeal therefore confirmed the judgement of the District Court.

Importance for legal practice

The Court of Appeal’s judgement once again shows that it is important how the provisions in M&A documentation are worded. During the negotiation process it is therefore important to consider possible interpretation and explanation risks, especially when it concerns the terms and conditions of an earn out-arrangement which will remain important for a certain period after the acquisition is completed. 

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