#10205 - Breach Of Warranty Disclosure And Knowledge - Mergers and Acquisitions (Private Acquisitions)

Step 1: ¿Is there a breach of warranty on the facts (on the wording of the SPA)

1. Has there been a breach of warranty on the facts?

1. State the relevant warranty and the operative clause in the SPA (e.g. warranty clause 3.3 states that the management accounts… Clause 5.1 requires that save as “fairly” disclosed the warranties…)

2. State how the warranty was breached (e.g. the accounts were not prepared in accordance with warranty clause 3.3 (a) and/or they were misleading clause 3.3(b))

2. Is it “material”? (assuming the word “material” is used in the warranty) Things to look at when considering whether it is material:

• Look at the loss incurred compared to consideration i.e. the size of the transaction (e.g. 70.000 claim where the transaction was for 7bn thus, may not be material in the context of the value of the transaction)

• In relation to percentage of net asset/net current asset figure

• Question whether there is a definition of material in the SPA(e.g. you may not have been given a definition of material in the facts)

• Assuming the breach is material, has the warranty been effectively disclosed against?

3. Has loss been suffered? Was there provision in the completion accounts or discount in the purchase price for the event? (e.g. How have the 70.000 been calculated, is this actually loss or an estimate?)

Step 2: ¿Can B bring a claim against S (Disclosure letter)(i.e. is S protected by specific disclosure in the Disclosure Letter?)

1. State whether there is specific or general disclosure against the warranty?

• Specific disclosures will be listed in the disclosure letter (e.g. management accounts have under-provided for bad debts)

• General disclosure (i.e. publicly available information which DD did or should have turned up)

2. What is the Standard of disclosure in the SPA? Examples:

• Minimum “save as disclosed” or “fairly” (levison) (this standard is seller friendly)

• Middle “Fully, clearly and accurately” (Infiniteland) (this standard is obviously in between)

• Maximum “Fully, clearly and accurately disclosed, (with significant details to identify the nature and scope of the matter disclosed)”. (New Hearts Case) (this standard is Buyer friendly)

3. Does this disclosure meet the standard under the SPA?

1. The seller will argue that they have met the standard – say why Seller might have (if the standard is “fairly” (clause 5.1) S will say that it was fair to state that the management accounts had consistently under-provided for bad debts)

2. The Buyer will say that the Seller has not – say what the Buyer will argue

3. Always mention all cases:

Levinson v Farin

In L v F where warranties were given subject to the phrase “save as disclosed” it was held that disclosure should do more than “merely making known the means of knowledge which may enable the other party to work out facts and conclusions” i.e. disclosure must in a formal form either specificor general disclosure. It must do more than provide facts, it must give info as to the nature and extent of the breach and not leave B to work out the info for themselves.

InfiniteLand

It was held that it is important to look at the standard of disclosure agreed by the parties as defined by the SPA. It will be for the court to determine whether the specific disclosure constituted fair disclosure in the circumstances. In the case, no specific disclosure was given, merely a letter providing general disclosure (including the accountant’s reports). The court held that the letter amounted to effective disclosure because the breach could have been identified from the accountant’s report.

New Hearts Case

Merely providing documents that might bring B’s attention to a matter is insufficient and the particular breach must be expressly brought to the attention of the B.

MAN Nutzfahrzeuge AG v Freightliner Ltd [2005] EWHC 2347

Qualifying InfiniteLand the judge considered (obiter) ‘the disclosure of all matters revealed by an inspection ofspecified documents’ would not extend so far as to include inferences which might be drawn from the documents inspected.

4. Conclude, ¿is the standard satisfied? And, assuming that the specific disclosure may not be sufficient ¿can the Seller rely on a general disclosure that might be found in the disclosure letter or elsewhere?

Step 3 :¿Can the Buyer bring a claim? (Knowledge of the Buyer)

1. State what standard of knowledge the Seller would argue the Buyer hand and why. e.g. the seller will be inclined to say that “the buyer had actual knowledge of the matter pre-contract and therefore impliedly waived the breach by signing.” (But depends on the facts)

2. ¿What does the SPA provide? FIND the relevant warranty clause:

The Eurocopy clause reads: “The Warranties are given subject to matters set out in the Disclosure Letter … but no other information relating to the Company of which the Purchaser has knowledge (actual constructive or imputed) shall preclude or affect any claim made by the Purchaser for breach of any of the Warranties or reduce any amount recoverable”

The Infiniteland clause reads:”the rights and remedies of the Purchaser in respect of any breach of the Warranties shall not be affected … by any investigation made by it or on its behalf into the affairs of any Group Company (except to the extent that such investigation gives the Purchaser actual knowledge of the relevant facts and circumstances).”

3. ¿Can the clause be challenged using Eurocopy/Infiniteland?

1. Eurocopy:the clause may not prevent the seller from raising the defence that B knew of the actual problem and that the buyer entered into the agreement with knowledge of a particular fact, event or circumstance, and...