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What constitutes a material adverse change or a material impact on the profitability of a target company? In the recent decision in Finsbury Food Group plc v Axis Corporate Capital UK Ltd and others [2023] EWHC 1559 (Comm), the English Court ruled on this very relevant question.

The Court rejected the claim of a policy holder of a Warranties and Indemnities (W&I) insurance policy on the ground that the policy holder had failed to establish a breach of the warranties given by the seller under the Sale and Purchase Agreement.

This is only the second reported English judgment on a claim under a W&I insurance policy. Claims under W&I insurance policies are largely referred to arbitration given that most W&I policies contain an arbitration clause. Therefore, the High Court’s reasoning and decision in this case would be interesting for arbitration practitioners as well, and hence, we are publishing this article on this forum also (see also Global Litigation News).

Facts of the case

Finsbury Food Group Plc (Finsbury) entered into a Sale and Purchase Agreement dated 31 August 2018 (SPA) with the former shareholders (Sellers) of Ultrapharm Limited (Target Company). Finsbury was a group of food manufacturing companies, engaged in the manufacture, sale and distribution of various bakery goods, including food that was free from gluten, nuts and dairy. The Target Company was, prior to its sale to Finsbury, an own label manufacturer of gluten free (GF) specialty breads and bakery products. It had its head office and UK bakery in Pontypool and another manufacturing facility in Poland. Its main business in the UK was the supply of GF goods to Marks & Spencer Plc (M&S), which were sold under M&S’s own brand. Finsbury purchased the Target Company under the SPA for a price of GBP 20 million.

In connection with the SPA, Finsbury signed a Buyer-Side W&I Insurance Policy (the Policy), which was underwritten by the Defendants. Under the Policy, Finsbury was insured against the Sellers’ liability under the SPA inter alia for breaches of warranties. The Policy provided that the Defendants would, subject to relevant limits, indemnify Finsbury for any losses covered by the Policy.

After the conclusion of the deal, Finsbury claimed that the Sellers breached the warranties under the SPA. Finsbury claimed that as a result of the breach, the value of the shares in the Target Company were reduced by GBP 3,194,370. Finsbury contended that this loss was covered by the terms of the Policy.

Under the SPA, the Sellers inter alia gave the following warranties:

  1. That there had been no material adverse change in the trading position of any of the Group Companies or their financial position, prospects of turnover, and no Group Company’s business was adversely affected by the loss of any customer representing more than 20% of the total sales of the Group Companies (the MAC Warranty)
  2. That no Group Company had offered or agreed to offer ongoing price reductions or discounts or allowances on sales of goods that would result in an aggregate reduction in turnover of more than GBP 100,000 or otherwise materially affect the relevant Group Company’s profitability (the Price Reduction Warranty)

The SPA also provided for limitations of the Sellers’ liability in respect of the warranties offered, to the extent that the “Buyer as at the date of this Agreement had (i) actual knowledge of the circumstances of such warranty claim and (ii) is actually aware that such circumstances would be reasonably likely to give rise to a warranty claim.” The knowledge of the buyer (Finsbury) was limited to “such facts, matters or circumstances in the actual knowledge of Steve Boyd, Julie Turnbull and Jas Randhawa” (the Knowledge Exception).

The Policy was executed simultaneously with the execution of the SPA. The following definitions and provisions in the Policy were relevant in determining whether or not Finsbury had a valid claim against the Defendants:

  1. ‘Loss’ included “the amount of monies which Finsbury is legally entitled to claim against the Sellers and/ or the Warrantor pursuant to the Transaction Documents (including the SPA) for a Breach or would be entitled to claim in respect of such Breach if the Limitation Provisions were disregarded.”
  2. ‘Actual Knowledge’ meant the “actual personal knowledge of the relevant person and for the avoidance of doubt does not include constructive or imputed knowledge of the relevant person nor does it include any actual, constructive or imputed knowledge of any director, officer, employee, advisor or agents of the Insured (save in their capacity as Transaction Team Member) nor the information provided by such advisors or agents of (i) the Insured or (ii) of the relevant person”.
  3. ‘Breach’ included the breach of the General Warranties under the SPA.
  4. The Defendants’ obligation to indemnify Finsbury was subject to an exclusions clause, under which Defendants were not liable to pay for losses arising out of any breach in respect of which any Transaction Team Member (Steve Boyd, Julie Turnbull and Jas Randhawa) had Actual Knowledge prior to the Commencement Date. The Defendants were also not liable to pay for losses arising out of any breach which had been disclosed in the Transaction Documents (Disclosure Letter, Due Diligence Materials, Data Room), resulting in a Transaction Team Member having Actual Knowledge of the breach (the Knowledge Exclusion).

Finsbury’s Claim

Finsbury argued that the MAC Warranty and the Price Reduction Warranty were violated because the Target Company had agreed with its most important customer, M&S, on price reductions for the two most important products which reduced the profitability by 14% and 9.5% respectively.

Defendants’ defence

Defendants argued that members of Finsbury’s Transaction Team were aware of the price reductions in certain of the Target Company’s GF products which had reduced its profitability and they had a chance to independently analyse the standard costs spreadsheets and discuss this with the Target Company before the deal was closed.

Finsbury’s internal meeting minutes also evidenced that it was aware that the profit decline in Ultrapharm was due to price reduction, and that this had been accounted for in Finsbury’s pre-acquisition modelling. It had decided to go ahead with the Ultrapharm acquisition, despite knowing the risks.

Reasoning and Decision of the Court

On the MAC Warranty, the Court held that it included two warranties: (i) a warranty that there has been no material adverse change in the trading position of Ultrapharm or in its turnover; and (ii) a separate warranty that there has been no loss of a customer representing more than 20% of Ultrapharm’s total sales.

As regards what constitutes a material adverse change, the Defendants contended that the material adverse change threshold should be read in conjunction with the 20% of total sales threshold in respect of the loss of customer warranty, whereas Finsbury argued that the standards were independent of each other. The Judge examined various decisions of the England & Wales High Court where it was held that a material adverse effect meant something that was substantial or significant, as opposed to something of a de minimis level. On the facts of the case and the evidence presented, the Judge concluded that a material adverse change did not mean a 20% of total sales threshold; instead a loss that exceeded 10% of the total group sales of the Target Company would be sufficient to amount to a material adverse change for it to be a breach of the MAC Warranty. In the case at hand, this threshold was not met. Only a loss in profitability of two GF products could be proved, and this loss did not amount to 10% of the Target Company’s sales.

On the Price Reduction Warranty, the Court considered it crucial that the price reductions agreed by the Target Company with M&S were already offered and agreed to be offered before the Accounts Date, although they came in to effect only after that date. What is more, Finsbury was aware that the Target Company had negotiated price reductions for its GF products with M&S, it only wasn’t aware about the quantification. 

Although the Court concluded that the Sellers breached neither the MAC Warranty nor the Price Reduction Warranty, the Court nevertheless examined the alternative argument that if a breach of warranty under the SPA had taken place, the Knowledge Exception under the SPA or the Knowledge Exclusion under the Policy would exclude liability. The Court held that if the Defendants were relying on the Policy’s Knowledge Exclusion clause, then the burden of proof was on the Defendants to establish that Finsbury, and more particularly Jas Randhawa, had actual knowledge of the circumstances that would give rise to a breach of warranty claim. On examining the oral evidence given by Mr. Randhawa and Mr. Chu, the Judge concluded that both of them had given untruthful evidence in support of Finsbury’s claim and their evidence was not to be accepted. The Judge held that since Mr. Randhawa was in possession of all the material facts, he had Nelsonian knowledge (i.e. knowledge attributed to a person as a consequence of his “willful blindness”) that the information that he possessed could likely result in a claim for breach of warranty. Accordingly, the Knowledge Exclusion under the Policy was applicable.

As a result of the above, the Court dismissed Finsbury’s claim.

The role of W&I insurance in M&A transactions

In recent years, the role of W&I insurance in M&A transactions has increased. Most frequently, W&I insurances are taken out by purchasers from Private Equity sellers. However, there are also other cases – such as the case at hand where purchasers acquire coverage as they consider it more beneficial to direct their claims against an insurer instead of the Sellers which comprise various individuals.

W&I insurance policies have several benefits, but they also have the downside that protection under the insurance policy is often more limited than under the SPA. Most notably, the insurance policy usually provides for a so-called “retention” which is an amount of money that is deducted from any claim under the policy.

As mentioned above, there are only very few published cases against W&I insurers. Very often W&I policies contain arbitration clauses so that claims must be raised before arbitral tribunals. The insurance broker AON publishes every year a report that gives an interesting insight into what claims are raised against W&I insurers and how these claims are handled by insurers.[1]



Brigitta John is a member of the Dispute Resolution team at Baker McKenzie in Frankfurt. Ms. John holds an LL.M. in International Dispute Settlement from the University of Geneva and the Graduate Institute of International and Development Studies. She has more than 13 years of post qualification experience in international arbitration as well as civil and commercial litigation. She can be reached at


Dr. Markus Altenkirch LL.M. is a member of Baker McKenzie's Dispute Resolution teams in Düsseldorf and London . Markus focuses on international arbitration and currently represents clients in ICC, DIS, LCIA, and HKIAC arbitrations. Markus primarily advises on Post-M&A as well as construction disputes. Moreover, Markus regularly advises on disputes in the Pharmaceutical industry. In 2021, Markus has started his own podcast series: #zukunft. Markus, and his colleague Lisa Reiser, interview leading arbitration practitioners and in-house lawyers on the future of international arbitration. Markus teaches at the University of Mainz and regularly publishes in the field of international arbitration. He is a contributor and editor for Global Arbitration News. Markus Altenkirch can be reached at and +49 211 311160 and +44 20 7919 1000.


Richard Molesworth is a Senior Associate in the London office of Baker McKenzie. Richard primarily advises on commercial litigation and arbitration, and also advises on defamation matters. He is a member of the LCIA Young International Arbitration Group. Richard can be reached at and + 44 20 7919 1310.