High Court considers the meaning of "material adverse change" in recent case

High Court considers the meaning of "material adverse change" in recent case

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In the recent case of Finsbury Food Group plc v Axis Corporate Capital UK Ltd and others [2023] EWHC 1559 (Comm) the High Court considered the wording and construction of a material adverse change trading warranty, in a share purchase agreement relating to the purchase by Finsbury Food Group (Finsbury) of Ultrapharm Ltd (target), a manufacturer of speciality baked goods.


The share purchase agreement had completed on 31 August 2018 (completion) and contained a list of warranties given by the target’s CEO to Finsbury. Following completion, Finsbury began to investigate whether warranties in the share purchase agreement had been breached because of a recipe change of a certain product supplied to Marks & Spencer and a price reduction of the same product, both of which had occurred prior to completion.

A number of warranties were called into question including a warranty that there had been no material adverse change in the trading position of the target’s group between the date of the last accounts (accounts date) and completion (a period of roughly nine months). The relevant warranty (trading warranty) read as follows:

2.1.2  There has been no material adverse change in the trading position of any of the group companies or their financial position, prospects or turnover and no group company has had its business, profitability or prospects adversely affected by the loss of any customer representing more than 20% of the total sales of the group companies or by any factor not affecting similar businesses to a like extent, other than as a result of factors which have affected businesses in the same industry, in general and so far as the warrantor is aware, there are no circumstances which are likely to give rise to any such effects. 


Finsbury had taken out a buy side warranty and indemnity insurance policy to insure the risk of warranty breaches (W&I policy) and in 2019 brought a claim against the underwriter claiming that that breaches had caused them loss of over £4m. The underwriter rejected the claim and Finsbury brought legal action. The trial started in 2022.

The issues for resolution

The court considered the facts of the case and the construction of the relevant warranties. In his judgement Lionel Persey KC (sitting as Deputy Judge of the High Court) said that the essential task when looking at the trading warranty was to determine what the parties meant by the language used and ascertaining what a reasonable person would have understood the parties to have meant.

Both parties agreed that no set meaning of “material adverse change” had been agreed during the course of negotiations and put forward their positions on their interpretation of the trading warranty. Lionel Persey KC concluded that the warranty was not well drafted and that it contained two specific warranties:

  1. A warranty that there has been no material adverse change in the trading position of Ultrapharm or in its turnover, and
  2. A separate warranty that there has been no loss of a customer representing more than 20% of Ultrapharm's total sales.

Court held

Lionel Persey KC considered what was meant by a “material adverse change”. There is no definition of this wording in law, and there have been a multitude of recent cases where the wording was considered (see our article here). Interpretation will differ from case to case depending on the facts.

Lionel Persey KC concluded that a material adverse change since the accounts date must exceed 10% of the total group sales of Ultrapharm for the latter to be a breach of the trading warranty. He explained that in his opinion, this would be a sufficiently significant or substantial change over the relevant period. The “substantial” and “significant” wording appears in the judgments given in Decura IM Investments LLP v UBS AG London Branch [2015] EWHC 171 (Comm) (where Burnton J held that a "material adverse effect" meant something that was substantial or significant, as opposed to something of a de minimis level) and Grupo Hotelero Urvasco SA v Carey Value Added SL [2013] EWHC 1039 (Comm) (where Blair J held that an adverse change would be material if it significantly affects the borrower's ability to repay the loan in question) both of which were quoted in Lionel Persey KC’s judgment. 

The result of this case highlights the importance of having clear and unambiguous language in contracts and ensuring that both parties understand the meaning of certain phrases. Failure to agree on the interpretation of legalese could result in parties having to spend huge amounts of money litigating over contracts they have already paid someone to draft. 


Some key takeaways to consider from this case are:

  1. The importance of a buyer conducting thorough and satisfactory due diligence when making an acquisition. 
  2. That the construction and wording of warranties is key, and it should be ensured that warranties are specific and clear in meaning. 
  3. To be aware that there is no fixed meaning of “material adverse change” and that a court will look at the intention and position of the parties when reaching a determination, as well as previous case law. 
  4. That it should be considered whether “material adverse change” should be defined in the share purchase agreement to avoid ambiguity.

During the case the court also considered other matters including the price reduction claims and buyer’s knowledge provisions in the share purchase agreement, and a number of other issues which arose during the trial including two adjournments, an order for disclosure (which resulted in Finsbury disclosing an additional 2,000 documents) and an order for Finsbury to pay the underwriters costs due to the adjournments on an indemnity basis.

The full judgment can be read here.

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