#4781 - Allocation Of Risk - Private Acquisitions

Allocation of Risk

Ws and Is

s.397 FSMA - misleading statements and practices offence (only relevant to share sales, not business sales)

applies to any person who -

makes a statement, promise or forecast which he knows to be false or deceptive in a material particular;
dishonestly conceals any material facts whether in connection w/a statement, promise or forecast made by him or otherwise; or
recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive in a material particular

a person to whom subsect (1) applies is guilty of an on offence if he makes the statement, rpomise or forecast or conceal the facts for the purpose of inducing, or is reckless to inducing, another person -

to enter or offer or enter into, or to refrain from entering or offering to enter into, a relevant ag; or
to exercise, or refrain from exercising, any rights conferred by a relevant instrument

Basically, caveat emptor. If a d’or is naughty/dishonest, then they may be guilty of an offence under s.397 FSMA. However, B is left out in the dark w/no form of recourse. The law punishes the S but doesn’t help the B so make B needs to make sure they do their DD and get their Ws/DL and Is!

s.393 CA - Accounts to give true and fair view

d’ors of a co must not approve accounts for purposes of this chapter, unless they are satisfied that the give a true and fair view of the assets, liabilities, financial position and profit or less -

in the case of the co’s individual accounts, of the co;
in the case of the co’s group accounts, of the undertaking included in the consolidation as as whole, so far as concerns co’s s’ers

Auditors carrying out their functions under this Act in relation to co’s annual accounts must have regard to d’or’s duty under subsect (1)

Basically - d’ors under duty as S to give true and fair account of co via Ws and Is. In order to avoid breach, d’ors must include statement re accounts saying “info give is a true and fair view in accordance w/s.393 CA” to avoid breach. Nb. never say ‘true and accurate’ because it is a higher standard and there are claims about this kinda stuff all the time. Accurate is too high a standard for anyone to meet as would include being 1p off.

Ws	primary purpose is disclosure Always come hand in hand w/Disc Letter (‘DL’) contractual statement of fact given by S damages governed by normal contractual principles main purpose is to elicit info given for substantive aspects of T
Is	promise by S to reimburse B if a specific liability arises remotes, forseeability, mitigation [ie. normal contractual principles] not relevant purpose is financial redress given for specific areas of possible loss or liability which have been discovered eg. doubtful debts, actual or potential litigation, e’ent or pension liability [if not big]
Categories of W	e’ees, tax, pension, stock, property, IP, corporate governance, contracts, clients, customers, suppliers, compliance, litigation generally, competition, accounts and finance, ownership of shares, ownership of assets, P&M, environmental
Main categories	Those which: red - related to matters over which the S has no control (and should not give) amber - the S can give in principle but should amend to limit their effort green - are vital to the B (and S must give to the deal) Nb. you always have lots of tax Is
Negotiation/Qualifying Ws	striking out or amending Ws if S is required to give a statement in relation to something over which it has no control in other cases, a W may be acceptable in principle but S’s solicitors will want some amendments to drafting to get rid of ambiguity or narrow scope [often to make them easier to disc against]
Limiting Is	S’s solicitors should ensure that the Is refer only to specific types of risks S should not accept Is which are general in nature
Tax covenant/Zim	logic of making payments under I directly to T was that if any liability was incurred it was T who would have to pay Are there any tax consequences of providing for payment to be paid this way? Yes Zim Properties says there could be potential tax consequences if I payment is made to a T. T may be required to pay tax on entire amount of payment when it is received HMRC has agreed that any payment under an I paid by a S to a B will be treated as an adjustment to cons (same as payment under Ws) Effect of this is: the B will be treated as paying less for T (so T will have a lower base cost if and when it is eventually disposed of by the B) and the cons received by S will be deemed to have been reduced by the amount paid under the I (so the S’s capital gain on sale of T will be correspondingly reduced and if any tax has already been paid the S may receive a partial tax refund) Therefore it is v imp for Is to be given in favour of B not T
Split exchange (= signing of AA, parties formally agree to enter into trans usually by delivering and executing SPA) and completion (= closing, essentially formalities to conclude trans are performed)	doesn’t happen in majority of cases. Why might it be needed? s’er approval regulatory approval 3rd party consent ... etc What contractual provisions might B want to see in acq ag (‘AA’)? exchange usually executed as a deed as no consideration is being given @ exchange so cannot be a contract conditions precedent in AA: details of cond, long-stop date, obligation on B and S, ‘what if’ cl How should T be run between exchange and compl: clauses re conduct of T, eg restrictions on capital expenditure, disposal of material assets, additional borrowing, issuing shares etc ... When can Ws be given? @ exchange Will Ws still be in force @ time completion? B will asked for them to be repeated and will ask for right to rescind if there is material change
Who can bring a breach of W claim?	clearly the B in some circs, also a person who is not a party to ag may wish to and be able to bring a claim: the benefit of Ws and Is in acq ag might be assigned to 3rd party if agreed in Acq Ag Contracts (Rights of Third Parties) Act 1998 (‘CRoPTA’ allows a 3rd party to enforce a term of contract if: the contract expressly provides it may; or the term purports to confer a benefit on it The common response to CRoPTA is to exclude it so S can limit liability
How are damages calculated for breach of W claim?	breach of contractual contractual remedies seek to put the injured party they would have been in if there had been no breach - so w/Ws as if the W had been true Must prove loss - tricky then also damages may be limited by remoteness (Hadley Baxendale) and B’s duty to mitigate
Ensuring funds are there to meet a claim	retention/escrow acc deferred cons guarantee W and I insurance
Misrep	defined as an ‘untrue statement of fact (or law) which one party makes to another and which induces that other to enter into a contract w/the person making the representation’ offers B an alternative remedy to breach of W Remedies include: rescission (for all types of W) damages (quantum depends on type of MR) Fraudulent MR: innocent party can rescind and claim damages. Smith New Court cl may not be restricted to damages relating to MV of asset - could get more Negligent MR: rescission and damages Innocent MR: rescind or damages in lieu of rescission and @ court’s discretion
Other tortious remedies	negligent misstatement. Important because: someone who is not party to a contract could possibly be made liable to a B and scope of negligent mis extends to advice and opinion whereas MR can only be statement of facts vicarious liability: - for fraudulent statements made by T’s e’ees
Barriers to MR	MR must be proved a representation will only ever amount to an MR if it is: material, a statement of fact or law, untrue and induced the representee to enter in the the contract

Discs

= essentially have effect of qualify Ws and should also be considered w/Ws. Discs qualify Ws so the S is not liable to breach of W

Nb. DL is split into general discs [first] then specific discs [latter part of letter]

Ws are in AA

Discs are in DL

Nb. never ever allow disc against an I -> the whole point of Ws is that they never disclose an I

Standard of disc	depends on what parties agree on/wording in AA - Infiniteland if B agrees to wording “we are subject to matters disclosed in DL” - it leaves them v open, S can potentially disc anything to qualify Ws - this wording favours S if B chooses wording “we subject to matters fairly disclosed in DL” then there is a standard implied: specifically agreed to clear and unambiguous Therefore ‘fair disc’ is far preferable to B In practice, you must advise S to disclose everything in as much detail as possible - Ss usually reticent to begin w/but then they realise it removes their liability they are more keen. In practice B will also know re most matters from DD so disc is just giving more deets. Solicitors should ensure AA contains wording similar to New Hearts case so that only fair disc will qualify Ws
Infiniteland	there is no universally accepted standard of disc - it is whatever parties agree between them. If there is no agreement then potentially any disc could qualify the Ws
DL	S’s solicitor -> B’s solicitor qualifies W in AA by providing info that makes the Ws untrue - carve outs
Standard of disc - cases (relate to specific discs, not general)	What is meant by fair disc? Daniel Reeds - requires...

#4781 - Allocation Of Risk - Mergers and Acquisitions (Private Acquisitions)

Ws

Is

Categories of W

Main categories

Negotiation/Qualifying Ws

Limiting Is

Tax covenant/Zim

Split exchange (= signing of AA, parties formally agree to enter into trans usually by delivering and executing SPA) and completion (= closing, essentially formalities to conclude trans are performed)

Who can bring a breach of W claim?

How are damages calculated for breach of W claim?

Ensuring funds are there to meet a claim

Misrep

Other tortious remedies

Barriers to MR

Standard of disc

Infiniteland

DL

Standard of disc -

cases (relate to specific discs, not general)

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