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A purchaser of a company acquired from a corporate group should ensure that all intra-group arrangements are fully investigated and formally terminated, regardless of whether such arrangements have been documented, according to a leading corporate lawyer.
“We commonly encounter arrangements whereby a service company provides human resources and other administrative services to trading companies in the same group,” says Philip Round, a partner based at George Green’s Wolverhampton office. “It is rare to see a formal contract for the provision of such facilities. A recent Court of Appeal decision demonstrates that the absence of a written contract does not, however, prevent such an arrangement from being legally binding.”
Mr Round continues, “The Court of Appeal case of MF Global UK Limited (in special administration), Re concerned an arrangement whereby a service company seconded employees to another group company. Whilst there was no express agreement between the two companies, their holding company had contracted with the service company to procure that the trading company would reimburse the employment costs. When the companies were placed into administration, the court was required to consider how a significant group pension scheme deficit was to be funded.”
“The existence of a formal contract depends upon there being sufficient certainty for the essential terms to be enforceable, an intention to create legal relations and the passing of consideration. An intention to create legal relations is assumed in the case of a written agreement. Where an arrangement has not been documented, however, a claimant must demonstrate the necessity for implying a contract. This will not be possible where the parties might have acted in the same way had there not been a contract.”
Mr Round explains that in the MFG case, the terms of the arrangement were clear. “The trading company had reimbursed significant employee costs in return for the provision of the seconded employees, and the trading company’s accounts had referred to the payment of such costs. Whilst the trading company argued, amongst other things, that it had reimbursed such costs because it had been compelled to do so by its holding company, not because of a contractual obligation to the service company, there was no evidence of the holding company having taken action to procure compliance. The Court of Appeal considered that given the significant sums involved, the parties would not have left this point to a non-contractual arrangement. There was therefore a binding contract between the trading and service companies.”
Mr Round concludes, “This is the first reported case in which a contract has been inferred by conduct between companies in a large corporate group. When a target company is acquired out of a group, it is important to obtain a legally binding commitment from the seller to procure the termination of all existing inter-company arrangements. When the group has a final salary pension scheme, it is imperative that the parties seek advice from a pensions lawyer. The purchaser might otherwise inherit unwanted ongoing liabilities.”
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