AMA Group Limited v ASSK Investments Pty Limited [2021] NSWCA 45: what does ‘subject to board approval’ actually mean?

In late March 2021, the NSW Court of Appeal decided the appeal in the AMA v ASSK matter.  AMA and ASSK had signed a Heads of Agreement (HOA), in which AMA had promised to purchase businesses owned by ASSK, but subject to AMA’s board approval following due diligence.

Although it conducted due diligence, AMA then decided it did not want to purchase the businesses and terminated the HOA.  ASSK brought proceedings to compel AMA to do so.

The Court of Appeal had to decide what the parties intended the HOA to mean.  Particularly, was the requirement for AMA board approval a condition precedent to its obligations under the HOA?  In deciding it was (and overruling the lower Court decision), the Court found AMA was not required to purchase the business.

This decision demonstrates how important it is to obtain proper legal advice in drafting legal documents, including heads of agreement.  Although the Court of Appeal took a commercial and pragmatic approach, obtaining good advice at the outset will help avoid costly and time consuming legal proceedings later on.

Background

AMA was a publicly listed company.  In October 2020 it signed a binding Heads of Agreement (HOA) with ASSK, [1] to purchase car smash repair businesses.  The HOA stated:

• ASSK would allow AMA to carry out due diligence on the businesses;
• that, “subject to the above, the transaction will be recorded in a Business Sale Agreement”;
• under a clause headed Conditions Precedent, “all necessary third party consents, authorisations and approvals being obtained (including the Purchaser’s Board approval)”; and
• following due diligence, AMA could insert further warranties which it (acting reasonably) considered necessary as a result of that due diligence.

Following the HOA, the parties exchanged mutual Confidentiality Agreements, and AMA undertook comprehensive due diligence.  At the same time, the parties negotiated but did not sign business sale agreements (BSAs).

The first proceedings

AMA then decided the deal did not meet the requirements for its board approval.  AMA terminated the HOA.  ASSK brought legal proceedings to require AMA to purchase the businesses and was successful.[2]  The primary judge decided:

• the Board’s approval was a condition precedent to entry into BSAs, but not a condition precedent to performance of the HOA; and
• hence AMA’s the obligation to purchase the businesses continued and, in the absence of a BSA, was governed by the terms set out in the HOA. [3]

Appeal

AMA then appealed that decision to the Court of Appeal.  The Court of Appeal took a different view and decided AMA did not have to purchase the businesses.  It found:

• there is a legal difference between an agreement to sell (especially in a conditional agreement) and a sale.[4]
• in this case, the parties intended a business sale would not take place unless the AMA Board approved the sale subject to outcome of the due diligence. That is, the requirement for AMA board approval was a condition precedent to AMA’s obligations under the HOA.  Instead, the HOA was effectively an agreement by ASSK to provide information coupled with options in AMA’s favour to buy the businesses.

Commercially sensible approach

The main issue on appeal was the intended meaning of the HOA.  The Court of Appeal applied the following principles of construction:

1. A court should view the contract as a whole to ascertain its intended meaning;
2. The contract will be interpreted using commercial sense;
3. A Court should where possible attempt to give meaning to all clauses.

The Court of Appeal decision shows that the Courts will construe such agreements to avoid caprice, and be commercially sensible.  Particularly:

• (in the first decision) the common law requires that the party with a preferred position (i.e. AMA) must demonstrate the honesty of its Board decisions. In fact, these decisions may be held to even a higher standard of honesty and reasonableness.   (Recognising this, AMA provided evidence of the steps it undertook to make its decision to terminate the HOA.)
• (on appeal) it was not commercially sensible for a public company like AMA to commit to a $6 million acquisition without undertaking a comprehensive due diligence; and
• (on appeal) the HOA was not intended to govern the terms of a sale, for example given it did not define key terms, such as key personnel, material contracts, completion date and so on. Also, the drafting of the ‘conditions precedent’ clause was poor and some parts were not in fact actually conditions precedent.  However, even a poorly drafted clause does not lose all meaning.

Takeaways

This case highlights that it is imperative for parties negotiating heads of agreement, MOUs or similar that:

• such documents can be legally binding even if informal or short form;
• if a party wants to avoid being committed to the transaction, then this should be carefully documented in the right way to avoid costly legal proceedings later on (AMA was only awarded 50% of its costs on appeal).

[1] It is sometimes felt that Heads of Agreement or similar documents (e.g. a MOU) is not legally binding.  In fact, such documents can be legally binding if intended by the parties to be so.

[2] ASSK Investments Pty Limited v AMA Group Limited [2020] NSWSC 1756.

[3] [37] quoted at [49].

[4] [51].