8 Costs
2.1.8 any reasonable third party costs and expenses which are properly incurred by the Buyer or the Company in connection with any Tax Liability under this clause 2 or in successfully taking or defending any action under the covenants contained in this Deed (including, but not limited to, all reasonable legal and other professional fees and disbursements). 8.1 The words “reasonable”, “third party” and “properly” would normally be included in this clause in order to provide the Covenantors with some protection from excessive costs being incurred. 8.2 There is an understandable concern that the Buyer should not be presented with an open cheque book with which to take action against the Covenantors, even if such actions might be considered as frivolous or vexatious. It is for this reason that the clause refers to “successfully taking or defending”. There are circumstances in which this might be resisted, in which case an alternative wording is to refer to “making any bona fide claims under the covenants”. 8.3 It is our view that such a costs clause should normally be restricted to third party costs: this is firstly on the basis that management time is largely a fixed cost, and secondly on the basis that the idea of raising a charge in respect of management time brings it with a host of measurement problems: how can the Covenantors have confidence that the time estimates are reasonable, and what is the hourly cost for management time? 8.4 There is a counter-argument to the effect that Covenantors who decide to pursue time- consuming and frivolous defences against tax properly levied by HMRC or other tax authorities should be made to pay for the burden that this places on the management of the Company. Against that, there are various clauses which protect the Buyer in this circumstance. It is also our opinion that Covenantors will be very mindful of the costs of pursuing claims and will be likely to do so only in those cases where there is the serious prospect of success. We are also aware that the management of smaller companies will have followed a policy of delegating virtually all matters connected with corporate tax to the professional advisers to the Company, and the involvement of management may be modest in any event.
9 Other Matters
9.1 There are sometimes additional clauses added, dealing with cases where the profits or gains are recognised before Completion but the Tax then arises after Completion. As previously noted, such a clause may bring with it some unintended consequences: if an investment property is revalued in the accounts, this will not trigger a Tax Liability at the point of revaluation, or a deferred tax provision under UK GAAP. (It will produce a deferred tax provision under IFRS.) However, if the property is then sold after Completion, the tax on such a sale would be caught within such a clause. It is therefore important to make sure that the workings of such a clause are understood. We would
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