When selling or acquiring a financial advice firm, the importance of clear, unambiguous contract terms cannot be overstated. Yet, the risk of vague or overly broad language creeping into legal agreements is ever-present.
Enter ejusdem generis, a longstanding legal principle that ensures general terms are interpreted in line with the specific terms that precede them, with significant practical implications if you are a buyer or a seller.
Let’s unpack what this means:
What Is Ejusdem Generis?
Ejusdem generis, meaning “of the same kind,” is a rule of interpretation in law. Imagine a contract stating that a sale includes “client records, software, contracts, and other assets.” Without ejusdem generis, “other assets” could theoretically mean anything from furniture to the office plant. But under this rule, the general term (“other assets”) is limited to items similar to the specific ones listed (intangible business assets in this case).
This principle aims to prevent the misinterpretation of general terms in legal documents, offering protection to both parties in a deal. While it sounds simple, the principle has been at the centre of disputes with significant outcomes, as illustrated by two key court cases.
Powell v. Kempton Park Racecourse Co. [1899]
What Happened?
This case arose under the Betting Act 1853, which banned betting in a “house, office, room, or other place.” The operators of Tattersall’s Ring at Kempton Park, an open-air betting area, were accused of violating this provision. The Crown argued that “other place” included outdoor spaces like Tattersall’s Ring, while the defendants maintained it applied only to enclosed spaces.
The Court’s Ruling
The House of Lords sided with the defendants. Applying ejusdem generis, the Court determined that “other place” must be interpreted in the context of the specific terms preceding it (house, office, and room) all of which were enclosed spaces. As Tattersall’s Ring was open-air, it did not fall within the scope of the Act.
Why It Matters
This ruling narrowed the application of the law, protecting businesses operating in open-air venues from unintended regulation. For M&A, the lesson is clear: general terms will not always be interpreted broadly. Instead, their meaning will depend heavily on the specific terms that precede them. If you want to include something beyond the obvious scope, it needs to be explicitly stated.
Allen v. Emmerson [1944]
What Happened?
This case examined the phrase “theatres and other places of amusement” in a statute. The question was whether a funfair qualified as a “place of amusement.” Unlike Powell, this case presented only one specific term “theatres”, leaving the court to decide whether ejusdem generis could still apply.
The Court’s Ruling
The court concluded that ejusdem generis did not apply because a single example (theatres) was insufficient to establish a clear category. As a result, “other places of amusement” was interpreted broadly to include the funfair.
Why It Matters
This case highlights the limits of ejusdem generis. If a list lacks multiple specific terms to establish a clear category, the general term will be interpreted in its ordinary sense. For sellers drafting M&A contracts, this underscores the need to include enough specific examples to guide interpretation. If you rely on a single example, you risk unintended inclusions—or exclusions.
What Does This Mean for M&A?
In the context of financial advice M&A, contracts are full of clauses where ejusdem generis might come into play. Misinterpretation of these clauses can lead to disputes that derail deals or result in costly post-sale litigation. Here are three areas where the principle is particularly relevant:
Asset Transfer Clauses If a sale agreement states that “client records, contracts, and other business assets” are being transferred, ejusdem generis would limit “other business assets” to items similar to client records and contracts—likely intangible assets. If physical assets like furniture or IT equipment are to be included, they should be explicitly listed.
Non-Compete Agreements Non-compete clauses often use terms like “clients, suppliers, employees, and other parties.” Ejusdem generis would restrict “other parties” to similar categories, such as contractors or vendors, rather than extending to unrelated entities like former colleagues or personal contacts.
Deferred Consideration Terms Agreements with deferred consideration based on “revenues, profits, and other financial metrics” would likely interpret “other financial metrics” as measurable and comparable metrics, not subjective criteria like customer satisfaction, unless clearly defined.
Practical Steps for Buyers and Sellers
To avoid disputes and ensure your contracts are watertight, consider the following:
Use Clear, Specific Language
Include as many specific terms as necessary to define the scope of general terms. For example, instead of “other assets,” specify exactly what is included (e.g., “software licenses, intellectual property”).
Define General Terms Where Possible
If general terms are unavoidable, include definitions in the contract to avoid ambiguity. For instance, “‘other financial metrics’ means metrics agreed upon in writing by both parties before calculation.”
Work with Experienced Legal Counsel
An experienced lawyer familiar with M&A contracts within the financial advice sector will anticipate ambiguities and ensure the language reflects your intentions, protecting you from unintended consequences.
Final Thoughts
Ejusdem generis may sound like an obscure legal principle, but its implications in M&A are anything but academic. As demonstrated by cases like Powell and Allen, the interpretation of general terms can significantly impact businesses, regulations, and the outcomes of multimillion-pound transactions.
For financial advice firm owners navigating the complexities of selling or acquiring a business, understanding this principle is not just useful, it’s essential. Clarity in contracts protects your interests, avoids disputes, and ensures that the deal you think you’re making is the deal you actually make.
So, before you sign on the dotted line, take a moment to review your terms. It’s better to get it right upfront than to rely on the courts to sort it out later.
