Whiplash! NSW Court of Appeal overturns specific performance of heads of agreement for sale of smash repair business: AMA Group Limited v ASSK Investments Pty Limited

The NSW Court of Appeal has overturned a Supreme Court decision ordering specific performance of a heads of agreement for a business sale, finding that board approval was a condition precedent that had not been satisfied. The case is a reminder of the importance of clear drafting when entering into preliminary transaction documents.

Background

AMA Group Limited (AMA) is an ASX-listed panel shop and car repair company. ASSK Investments Pty Ltd (ASSK) operated smash repair businesses.

The parties signed a “Binding Heads of Agreement” (HOA) in October 2019, with AMA to buy the businesses from ASSK. Under the HOA:

• the parties agreed to “enter into Business Sale Agreements subject to the terms and conditions set out in this [HOA]”;
• the parties “intend[ed] to complete the sale 31 days after the [HOA] is executed by all parties … or such other date as the parties agree to”. “Completion” was defined as “completion of the Business Sale Agreements pursuant to the terms of this HOA…”;
• subject to “comprehensive due diligence”, the transaction would be “recorded in a Business Sale Agreement”; and
• clause 7, headed “Conditions Precedent”, included “all necessary third party consents, authorisations and approvals being obtained (including the Purchaser’s Board approval)” (clause 7(b)).

The parties signed the HOA and AMA began due diligence. However, AMA concluded that the deal didn’t meet requirements for board approval. AMA then terminated the HOA on the basis that a condition precedent to the agreement to enter into the Business Sale Agreements hadn’t been satisfied.

NSWSC: clause 7(b) not a condition precedent to performance of the HOA, orders specific performance  

In the NSW Supreme Court, ASSK successfully sought an order for specific performance of the HOA. The primary judge, Hammerschlag J, did not consider that AMA board approval was a condition precedent to performance of the HOA.

Hammerschlag J found that the HOA “legislate[d] comprehensively” for the sale, with mechanisms to determine the purchase price, comprehensive warranties and restraints, and mechanisms to insert further warranties following due diligence. Although the HOA contemplated further Business Sale Agreements, these would merely record the transaction and weren’t required for a binding sale.

Hammerschlag J criticised the “Conditions Precedent” clause, noting that some clauses couldn’t be conditions precedent to the sale because they imposed post-completion obligations. If anything, clause 7(b) was a condition precedent to signing further Business Sale Agreements – if not satisfied, the sale could be governed by the HOA alone. Board approval was not “necessary” as AMA had already signed the HOA with the directors’ authority.

Court of Appeal: overturns decision, condition precedent not satisfied

The Court allowed AMA’s appeal, finding that:

• clause 7(b) was a condition precedent to AMA’s obligation to enter the Business Sale Agreements; and
• as a condition precedent hadn’t been satisfied, the primary judge erred in ordering specific performance.

The HOA itself did not effect the sale of the businesses. The agreement to enter into the Business Sale Agreements was subject to the terms of the HOA, including clause 7(b). There was a fundamental distinction between an agreement to sell and a sale – especially when the agreement to sell is conditional. The HOA also did not “legislate comprehensively” for the sale – e.g. “completion” was defined by reference to the contemplated Business Sale Agreements.

The parties’ objective intention was that the sale would not proceed without AMA board approval. “[C]omprehensive due diligence” was still to be undertaken when the HOA was signed. Bell P commented that:

“A construction of the HOA which involved the board of a publicly listed company committing itself to a $6 million acquisition without the undertaking of comprehensive due diligence is one that might readily be thought to flout business common-sense… The same might be said of a construction which contemplated comprehensive due diligence notwithstanding that AMA was, on the trial judge’s construction, already committed to the acquisition.”

Clause 7(b) was not a condition precedent to the formation of an agreement, but to the performance of the obligations in the HOA – the key obligation being entering into the Business Sale Agreements. Although other parts of clause 7 could not rationally be condition precedents, this did not affect clause 7(b) – and these other clauses were clearly still intended to form part of any Business Sale Agreement.

Takeaways

The case is a reminder of the importance of clear drafting when entering into preliminary transaction documents, with the primary judge’s criticism of the HOA’s “Conditions Precedent” clause underpinning his Honour’s decision to order specific performance. Practitioners should take care when drafting such clauses, particularly where the agreement is expressed to be binding.

A copy of the judgment, attaching the HOA, is available here.

For more information contact your Relationship Director about our Practical Guidance Mergers & Acquisitions module or visit our Practical Guidance website.