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The high court judgement in Saxon Woods Investment Limited V Francesco Costa and Ors (Saxon Woods v Costa) sheds some light on the "working towards exit" obligations commonly seen in shareholders' agreements and private equity investment agreements (Exit Clause). Breaching such a clause could give rise to an unfair prejudice claim. 


Saxon Woods Investments Limited, a founding shareholder in Spring Media Investments Limited (the Company), claimed that the Company had breached the Exit Clause of the shareholders' agreement causing unfair prejudice to Saxon Woods and that Mr Costa, a director and investor shareholder of the Company, was responsible for this breach. The Exit Clause provided that:

  1. the Company and the investors agree to work together in good faith towards an exit no later than 31 December 2019; and
  2. if an exit has not occurred by the 31 December 2019 deadline, the directors shall engage with an investment bank to cause an exit on terms consented to by the directors, which consent shall not be unreasonably withheld.

What is meant in practical terms by "working towards an exit"?

The judgement in Saxon Woods v Costa provides practical examples which would evidence a company and its directors working towards an exit:

  1. The company and board are actively seeking exit opportunities within a proposed timeline by:
    1. engaging an investment bank/corporate finance advisor to solicit exit opportunities within a proposed timeline (however it is not enough to simply instruct them on general terms – see note 2 below);
    2. conducting a valuation;
    3. marketing the company for sale;
    4. approaching potential investors;
    5. seriously engaging with any potential offers by giving them due consideration and presenting any viable bids to the shareholders;
    6. assessing all possible approaches and strategies with the overall aim of maximising value for the shareholders.
  2. The instructions to an investment bank or corporate finance advisor should clearly align with the exit obligations in the shareholder or investment agreement. For example, include instructions to instigate and pursue exit opportunities within the stated timeline in the clause. It is also important to make the investment bank/corporate finance advisor aware of the Exit Clause's existence, so that they can be instructed to comply with it on behalf of the company.
  3. Senior management's compensation packages should include an element of incentivisation to procure a sale, for example, a share option scheme which is exercised on a successful exit which meets a certain value threshold.
  4. The company's board of directors and each investor need to consider opportunities collectively. It is not sufficient for one or two directors to seek exit opportunities whilst excluding others from the process, especially if there are drag and tag provisions in the shareholders agreement.

Does the timeline matter in the Exit Clause?

The Exit Clause in Saxon Woods v Costa did not stipulate any further timeline for exit in the event that a sale was not achieved by the initial deadline. The judge found that in the absence of such wording, there was an implied term that the exit must take place as soon as reasonably practicable and within a reasonable time after 31 December 2019. The purpose of the clause was to achieve a transaction by a particular date, and a construction requiring no further urgency after 31 December was, in the absence of relevant facts, entirely counter-intuitive.

Note however that the mere fact the company was not sold in accordance with the predetermined timetable does not automatically indicate a breach of the Exit Clause; directors cannot compel shareholders to accept offers. The judge stated that the Company's obligation was solely to solicit offers by the specified date in order to present them to the shareholders, if they were determined to be commercially viable.

What if the Company isn't ready for sale by the envisaged timeline?

The judge held that the belief that the Company was not ready for sale because it would realise a low price if sold by the specified deadline, did not, of itself, release the directors from the obligation to seek acceptable offers for the Company. The directors need to have evidence to support this belief, such as a valuation or advice from corporate finance advisors who have been adequately instructed (see para 2 above). The board should then discuss and decide a strategy which will allow a sale to be achieved at an agreeable price in the future; the obligation does not simply fall away because the company is not ready for sale at that particular time. However, the court rejected the argument that Mr Costa's actions amounted to a breach of directors' duties.

Including clear financial thresholds, such as profitability requirements, in exit provisions will serve as objective criteria for evaluating the success of an exit strategy and will help mitigate potential conflicts between contractual obligations and directors' fiduciary duties by providing a framework for assessing the commercial viability of a potential exit and the overall benefit to the company and its shareholders.

Exit clauses in private equity investment agreements

Although Saxon Woods v Costa is a dispute between a group of high-net-worth individual investors, "working towards exit" wording is also found in higher value private equity (PE) investment agreements. This case highlights the need for careful consideration when drafting exit provisions.

Exit Clauses in PE investment agreements should include for example:

  1. Utilisation of investor-friendly language: Instead of phrases like "investors agree to cause/work towards an exit," employ wording such as "the investors intend to work towards an exit." This language ensures that the investors are not burdened with mandatory obligations to actively pursue exit opportunities.
  2. Specification of financial conditions for triggering an exit: the clause tends to specify the financial circumstances necessary to initiate an exit. For example, it may require that the sale must result in a profitable return for the investors above a certain financial threshold.
  3. Detailing managers' responsibilities in seeking exit opportunities: this puts the onus more on the individual managers to work towards the exit, for example obligating them to prepare annual reports for the investors assessing likely exit opportunities, prepare information memoranda in readiness for sale, and deliver presentations to potential buyers and deal brokers.