Thinking Ahead with Heads of Agreement: Is binding really binding if its ‘Subject to Board Approval’?
Heads of agreements (HoA) or terms sheets are frequently used to document the salient terms of a proposed transaction, such as the purchase price or sale date. Lawyers may not like them, but they are a commercial reality, and some, if not all HoAs, are often expressed to be binding.
However, if the transaction contemplated by the HoA ultimately falls through, questions inevitably arise as to what, if any, parts of the HoA remain enforceable.
This was highlighted by the recent case of AMA Group Limited (AMA) v ASSK Investments Pty Ltd (ASSK) [2021] NSWCA 45, which considered whether a purchaser may back out of a business sale after signing a HoA which contained a condition that the business sale was ‘subject to Board approval’.
The New South Wales Court of Appeal held that the purchaser could back out, although the Court also, helpfully for the lawyers looking to draft these types of contracts, gave some clues as to how to that may occur.
Facts
The parties entered into a HoA for the sale of ASSK’s business to AMA in October 2019. The key term of the HOA was that the business sale was subject to:
‘all necessary third party consents, authorisations and approvals being obtained (including the Purchaser’s Board approval).’
The HOA also stated that:
- ‘[t]he parties agree to enter into Business Sale Agreements subject to the terms and conditions set out in this Heads of Agreement’ (emphasis added);
- ‘[t]he Vendor and Covenantor must make available to the Purchaser all things necessary for Purchaser to carry out a comprehensive due diligence on the Vendor, Business, Assets and the premises’;
- ‘Subject to [the due diligence investigation noted above]’, the transaction will be recorded in a Business Sale Agreement’ (emphasis added); and
- “completion” was defined as ‘completion of the Business Sale Agreements pursuant to the terms of this HOA whereby all right, title and interest in the Assets and the Businesses transfers to the Purchaser’.
In January 2020, the Chief Financial Officer of AMA wrote to ASSK informing it that AMA would not make the purchase, as Board approval could not be provided given the findings of due diligence undertaken by AMA after signing the HOA.
ASSK sought specific performance of the HOA, which was granted at first instance. AMA appealed this decision, arguing the primary judge had erred in failing to find the HOA had been validly terminated by AMA and it was not open to the court to order specific performance of the HOA.
Judgement
The Court of Appeal upheld the well-accepted position that there is a ‘fundamental distinction between an agreement to sell and a sale’, and noted this distinction was evidenced in the current case by the sale being conditional on the purchaser undertaking due diligence and receiving Board approval.
It can also be inferred from Hammerschlag J’s comments at [61] to [66] that if a party wishes to bind another to a heads of agreement notwithstanding a condition that the sale is subject to Board approval, then the condition may be amended to assert that Board approval cannot be unreasonably withheld and that the Board must act honestly and in good faith in making such a determination, in order to mitigate the risk that a Board capriciously declines to proceed with the sale.
Key Takeaways
- A party may back out of a deal despite having signed a binding HoA if the HoA states the sale is ‘subject to Board approval’ and that approval is not obtained.
- There are drafting tools that the parties can use to ensure that the decision not to proceed with the sale is not made capriciously or dishonestly.
- As always, the Court will look closely at the language used in ascertaining whether the parties have agreed to an actual sale, or merely reached an agreement to agree, and if it’s the latter, the conditions that must be satisfied to effect the actual sale.
