Acquiring or selling a company: a reminder of some key contractual issues

As the year draws to a close, those planning to acquire or sell a business in the New Year should take note of some useful reminders issued by the UK courts in 2019. 

By way of reminder, the agreement for the sale and purchase of a business invariably includes a significant number of contractual statements that are commonly referred to as the warranties and are given by the seller for the benefit of the buyer.  If a warranty is breached (that is, found to be untrue), the buyer can potentially bring a claim against the seller for a breach of warranty.  Generally, the acquisition agreement will allow disclosure against the warranties so that unless the seller has made a "fair" disclosure against the relevant warranty, it is potentially liable to pay damages to the buyer if a warranty proves to be untrue.

The disputes that have come before the UK courts this year serve as a useful reminder of why it is critically important for the buyer and the seller to be comfortable with the terms negotiated in the acquisition agreement governing the warranties, disclosure and claims for breach of warranty.

Agreeing the standard of disclosure

With regard to whether a matter has been "fairly disclosed" by the seller, the buyer should always seek to include additional words in the acquisition agreement (such as "with sufficient details to identify the nature and scope of the matter disclosed") so that the agreed standard of disclosure is sufficiently robust and minimises the risk that the seller can "fairly disclose" matters by simply disclosing their existence with no detail as to their scope or extent.  The court will usually enforce the disclosure standard agreed between the parties in the acquisition agreement and is generally unlikely to impose any higher standard of disclosure than that agreed.¹ In specifically disclosing any matter that might otherwise constitute a breach of warranty, the seller should preferably refer to any additional document that contains more information about the matter rather than simply relying on an assumption that the buyer will be able to infer the position from the mere disclosure of the additional document.²

Warranting a forecast or projection

If the seller is asked by the buyer to warrant that a forecast or projection has been carefully or diligently prepared, it should only do so if the forecast or projection has been prepared using the latest available financial and operational information, and only after it has spoken with the relevant managers with such specialist knowledge.  The seller should satisfy itself that the forecast or projection specifies the basis of any assumptions on which it is prepared, which should be checked by somebody independent of the person that has prepared the forecast.  Finally, the forecast or projection should reflect the forecasting practice applicable in the relevant industry.  If these issues have been inadequately addressed, the seller could either arrange for the forecast or projection to be prepared again before giving the warranty or if that is impracticable, disclose the deficiencies in the preparation of the forecast or projection against the relevant warranty.³

Bringing a warranty claim

A notice for bringing a warranty claim must comply with the terms of the acquisition agreement.  The court is likely to dismiss a warranty claim if the notice of claim served on the seller by the buyer does not adequately summarise the nature of the claim if that is what the acquisition agreement requires.⁴ In bringing a claim, the buyer's notice should preferably specify the warranty purportedly breached by the seller.⁵ If it subsequently transpires that the matter did not contravene the relevant warranty, the buyer might face some difficulty in claiming under a different warranty unless the notice referred to it. Subject to the terms of the acquisition agreement, the buyer should generally include specific details of the matters that have caused the breach of warranty in the notice so that the seller can understand the basis of the claim.  At the same time, the buyer should consider whether any other relevant breaches of the acquisition agreement (for example, in relation to any indemnities or post-completion restrictions given by the seller) should be included in the claim.⁶

Establishing the measure of damages

The court will not generally depart from the established measure of damages for breach of warranty, that is, the difference between the value of the company's shares at the completion of the acquisition on the assumption that all of the warranties are true (which will generally be the price paid under the agreement) and their actual value at that time given the breach of warranty, subject to agreements to the contrary or special circumstances within the contemplation of the parties.⁷

Further assistance

If you would like to discuss any of the issues set out above please speak with your usual contact at Ashurst LLP.

1. Triumph Controls UK Limited v Primus International Holding Company [2019] EWHC 565
2. 116 Cardamon Ltd v MacAlister [2019] EWHC 1200 (Comm)
3. Triumph Controls UK Limited v Primus International Holding Company [2019] EWHC 565
4. 116 Cardamon Ltd v MacAlister [2019] EWHC 1200 (Comm)
5. Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23
6. Triumph Controls UK Limited v Primus International Holding Company [2019] EWHC 565
7. Oversea-Chinese Banking Corporation Ltd v ING Bank NV [2019] EWHC 676 (Comm)