Court Rejects ‘Pay Twice’ Attempt


Many agreements for the sale of a company by way of a sale of the shares in the company will contain a clause that the sale consideration is to be adjusted for a change in the value of the company’s net assets between the time the agreement is reached and the date of completion. This allows the new owners of the shares to be compensated for any fall in the value of the company between the time of making the contract and its completion. Conversely, if the net asset value of the company rises during that time, the vendors receive additional compensation.

In a recent case, a company owning a portfolio of properties was sold to another company. The sale agreement included a clause which adjusted the price negotiated between the buyer and seller to take into account a change in the net asset value of the company being sold as at the time of completion. There were associated transfers of other assets, including the sale proceeds of a foreign property and the transfer of a debt.
The properties were treated for accounting purposes as being trading stock and were shown on the balance sheet at cost. The properties were worth considerably more than the balance sheet values. On completion, accounts were drawn up by the vendor which showed the properties valued at the prevailing current market values. The vendor claimed that an extra payment was due. The buyer disagreed, arguing that the deal was done at a price which was intended to reflect market values of the properties that were current at the time the deal was done.
The court agreed. It would be an absurd result for the buyer to pay for the properties twice – once as a part of the originally agreed value of the company and again by way of an ‘uplift’ calculated on the difference between the balance sheet value and the market value at the time of completion.
“This is yet another example of a dispute that could have been avoided had the documentation been drafted more tightly,” says <<CONTACT DETAILS>>. “Fortunately, it only took a dose of common sense on the part of the judge to dismiss the case.”
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Partner Note
Croftcall Ltd. v Morgan and Morgan [2008] EWHC 1622 (Ch).

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