Mergers and Acquisition – Deposit at the MOU Stage

In the context of mergers and acquisitions, it is not uncommon for the intended seller to ask for a deposit or other amount to be paid under a memorandum of understanding (“MOU”).  The MOU, much of which is usually not binding, will also provide for key commercial terms that will form the basis of formal documentation to be negotiated. 

In the recent case of Da Shing Group Limited v. Nicerich Promise Limited [2020] HKCFI 588 (“Case”), the intended purchaser (“Purchaser”) paid a deposit in the sum of HK$30,000,000 (“Deposit”) under an MOU in relation to the acquisition of shares in Crocodile Garments Limited (“Target Company”).  Often where a deposit is requested by the vendor, the purchaser would usually want to specify when the deposit should be returned to the purchaser.  In this Case, the Purchaser in negotiating the MOU asked that the Deposit be returned if the formal documentation is not ultimately signed.  However, such position was not insisted upon and the final version of the MOU provided for a deposit but with no mechanism to return the Deposit in the event that the deal fell through.  The court was then called upon to consider if the Deposit was refundable. 

Interpreting the MOU

Deputy High Court Judge Kenneth Wong (the “Judge”) set out key principles that apply when it comes to interpreting an MOU:

1. When the parties have rival constructions of an MOU, two tools are available for the Court to interpret the MOU: the text (language) and the context (factual and commercial background). 
    
2. The extent to which each tool will assist the Court in the interpretation will vary according to the nature and circumstances of the particular agreement:  where the document is professionally prepared, sophisticated and complex, the textual approach may be adopted without the need to resort to the context or factual matrix of the case; where the document is informal or not professionally drafted, a consideration of the context will assist.  But even with professionally drafted documents, there may be inconsistencies which may be clarified by considering the context. 
    
3. The task of interpretation should begin by first considering the language used, i.e. textual analysis.  It is necessary to examine the specific clause in the texts of the MOU as a whole.
    
4. Subsequently, with regard to contextual analysis, each suggested interpretation should be checked against the commercial context, commercial purpose and commercial consequences.  In particular, the Court should be alert to the possibilities such as that one side may have agreed to terms which with hindsight did not serve his interest, or that a provision may be a negotiated compromise, or that the parties were not able to agree to more precise terms.

Amendments in the drafts of the MOU are not admissible

The vendor (“Vendor”) intended to rely on the drafts of the MOU in which a provision stating the Deposit may be refunded was deleted.  The Judge did not allow the pre-MOU drafts to be admitted as evidence based on the following principles:

1. It is only the final document which records a consensus of both parties.  The exchanges and alterations in the negotiation stage are excluded as evidence because they are irrelevant to the question before the Court, namely, what the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement.
    
2. In exceptional circumstances, the amendments can be taken into consideration to interpret the meaning of the MOU, that is when the amendments had already reflected the parties’ common intention on what they both wanted the MOU to be, even though the MOU had not yet concluded. 
    
3. In most cases, evidence on pre-MOU negotiation only reflects one party’s subjective intention, not both parties’ mutual intention.  It is dangerous to admit evidence of one party’s objective, even supposing this is known to the other party. 
    
4. Even if such prior negotiations do reflect the parties’ mutual intention, the value of such evidence may be very limited, as such negotiations have likely been superseded by and merged in the final version of the agreement.
    
5. In respect of the deleted words in the drafts, they should not be admitted to contradict the language of the MOU when the retained words are unambiguous.  Even if recourse is to be made to the deleted words, care must be taken as to what inferences, if any, can be properly drawn.  The parties may have deleted certain words because they considered that those words added nothing to, or were inconsistent with, what was already contained in the document.  The parties may have different ideas of the meaning of the words and whether or not the words that remained achieved their respective purposes.

Nature of the Deposit

Bearing in mind that the MOU was not drafted by lawyers, considerations were given to the wider factual matrix including whether the Deposit represented a significant amount, the interplay of the binding and non-binding clauses in the MOU, each party’s benefits and obligations under the MOU, the volatility of the stock market around the time of the MOU, the Target Company’s share trading, and none-existence of previous business dealings between the parties.

The Judge reached the conclusion that neither the language of the MOU nor the commercial context at the time of the MOU supports the Vendor’s contention that the Deposit served as monetary consideration for the obligations assumed by the Vendor under the MOU.  It was held that the Vendor must return the Deposit to the Purchase because the nature of the Deposit was a sign of sincerity, which demonstrated that the Purchaser was serious in moving into negotiation with the Vendor. 

Take Away Point

The key take away point in relation to any documentation, including the MOU is to ensure that the position of the Vendor and Purchaser should be clearly and expressly stated, particularly in relation to amounts paid in contemplation of an acquisition.  Furthermore, although in acquisitions, parties tend to instruct lawyers after the MOU is signed, it is highly recommended that the purchaser and vendor of an acquisition seek legal advice on the MOU to avoid issues such as the one appearing in this Case. 

Eddie Look and Ling Meng

If you would like to discuss any of the matters raised in this article, please contact:

Eddie Look
Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.