Is subject to board
approval effective as a weasel clause?
In Heads of Agreement to
purchase a business, purchasers
like to insert a subject to
board approval clause, to
give them the flexibility to
walk away from the purchase.
This clause is known as a
‘weasel clause’, because it
permits a purchaser to ‘weasel
out’ of the agreement.
The validity of a subject to board approval clause
which was inserted into a Heads of Agreement as a condition
precedent to the entry of a formal Business Sale Agreement
was examined in a recent decision of the Court of Appeal,
Supreme Court of New South Wales.
The decision is AMA Group Limited v ASSK Investments
Pty Limited  NSWCA 45 (26 March 2021) (Bell P,
Leeming JA and Emmett AJA agreeing).
AMA is a publicly-listed company which has businesses in
the panel shop and car repair industry. It approached ASSK
Investments to purchase the ASSK smash repairs businesses.
On 31 October 2019, following a period of negotiations
extending over 18 months, AMA entered into a Binding Heads
of Agreement (HOA) with ASSK Investments to purchase its
smash repairs businesses for a price of $6 million.
These clauses of the HOA are relevant to the issues in
this case –
2(b) The parties agree to enter into Business Sale
Agreements subject to the terms and conditions set out
in this Heads of Agreement.
6(a) The Vendor and Covenantor must make available to
the Purchaser all things necessary for Purchaser to
carry out a comprehensive due diligence on the Vendor,
Business, Assets and the premises.
6(b) Subject to the above, the transaction will be
recorded in a Business Sale Agreement.
7(b) All necessary third party consents, authorisations
and approvals being obtained (including the Purchaser’s
A full copy of the HOA is attached to the judgment. The
Court labelled it “an infelicitous instrument” because of
its drafting ambiguities.
Following the entry of the HOA, ASSK sent a Mutual
Confidentiality Agreement to AMA for approval, AMA sent ASSK
a “Due Diligence Checklist”, and the due diligence process
was undertaken. Draft Business Sale Agreements were
exchanged between solicitors.
After due diligence, the Chief Financial Officer of AMA
decided not to submit the acquisition for Board approval. He
was concerned that ASSK’s profit margins were not
sustainable, and that the business would not be making the
required EBITDA amount to make the purchase financially
On 10 January 2020, the solicitors for AMA sent the
solicitors for ASSK a letter which concluded:
“We further note that the HOA is subject to certain
conditions precedent. In particular, clause 7(b) states
that the approval of the Purchaser’s Board is to be
We are now instructed that our client’s Board has not
approved the purchase
Our client accordingly terminates the HOA, and the
matter is at an end.”
ASSK was unhappy to lose the sale and decided to sue AMA
for specific performance of the HOA.
The primary judge
The primary judge decided that on proper construction of
the HOA, AMA as purchaser could not use the subject to
board approval clause to terminate the HOA. He said it
was ‘capricious, unreasonable, inconvenient and unjust’ for
AMA to rely upon its own Board Approval as condition
precedent which enabled it to terminate the HOA. He added:
“Objectively viewed, I do not think that the parties
intended this to be the case.”
Consequently, he ordered that AMA specifically perform
the HOA. In doing so, the primary judge found that the HOA
was a concluded contract capable of specific performance.
See ASSK Investments Pty Limited v AMA Group Limited
 NSWSC 1756
The Court of Appeal
The Court of Appeal upheld the appeal by AMA, holding
- Clause 7(b) of the HOA was valid as a condition
precedent to AMA’s entry of the Business Sale Agreements
- The HOA could not be treated as a contract for sale
of business because the HOA contemplated that Business
Sale Agreements were required to be entered into
- The Court found that the parties’ objective
intention was that a sale of the businesses would not
take place unless AMA’s Board approved the purchase
- Consequently, as AMA’s Board did not approve the
purchase, the HOA was validly terminated by AMA
The Court made these observations concerning the
subject to board approval clause (7(b)) -
- ‘all necessary’ means that Board approval was a
precondition to entry of the Business Sale Agreements
- ‘third party’ governs ‘consents’ and possibly
authorisations, but not ‘approvals’ such as Purchaser’s
- Clause 7(b) is a condition precedent to the
performance of the obligations contained in the HOA, the
principal obligation being the entry into of the
Business Sale Agreements
- The AMA’s promise to enter into Business Sale
Agreements was conditional upon Board approval
- This interpretation is reinforced by clause 6(a)
which states that “comprehensive due diligence” was
still to be undertaken at the time of entry into the HOA
The Court made these observations concerning specific
performance of the HOA:
- The HOA was conditional upon the entry of the
Business Sale Agreements (see clause 2(b))
- The HOA was not comprehensive – no Material
Contracts or Key Personnel had been identified, and
there was the possibility of additional warranties
included as a result of the due diligence; it was
therefore not specifically enforceable
- The fundamental purpose of the due diligence was to
ascertain whether the ASSK businesses were worth the
amount of $6 million contained in the HOA
- The withholding of Board approval under the
subject to board approval clause was not capricious:
the requirement was that “any withholding of Board
approval as referred to in cl 7(b) had to be simply
honest and bona fide”; it may also need to be
“objectively reasonable as well”. But this “was not an
issue [to be decided] in the present case”.
A costs decision followed: AMA Group Limited v ASSK
Investments Pty Limited (No 2)  NSWCA 116. The
Court of Appeal decided to award AMA 50% of its costs on
appeal “because of the shift in argument at first instance
which appears to have contributed to the primary judge’s
[faulty] reasoning”. The shift was an oral submission that
the Board’s approval could be withheld capriciously, which
was contrary to AMA’s written submissions.
The Court of Appeal has found that a subject to board
approval clause can be effective so long as it is not
exercised capriciously. In summary, the Court of Appeal:
- Upheld the validity of a subject to board
approval clause in a Heads of Agreement for the
purchase of a business as the basis for termination of
the HOA by the purchaser.
- Held that to rely upon the clause, the
purchaser’s board must have an ‘honest and bona fide’
reason to withhold approval, without deciding whether it
must be ‘objectively reasonable as well’. The clause
does not give an unfettered right to withhold approval.
- Decided that uncertainty about the future
financial performance of the business, as a result of
due diligence enquiry, was valid reason for the board to