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Breach Of Warranty Disclosure And Knowledge Notes

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M&A Workshops(5)&(6)

Breach of Warranty Disclosure and Knowledge 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?
a. 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…)

b. 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?
a. 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)

b. The Buyer will say that the Seller has not - say what the Buyer will argue c. 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

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