Partner Article

Lack of due diligence gives company buyer four days in court

When the sale of a company is taking place, it is usual for warranties to be given regarding how the company being sold has conducted its affairs prior to the sale. Making sure these are accurate is essential says Julian Milan, Senior Solicitor at Sydney Mitchell LLP.

In a recent case, the purchaser of a company that sold ‘lost key’ and legal expenses insurance policies brought a legal action against the vendors. The purchase price of the shares was nearly £2.4 million. The warranties given included the usual ones that the company’s last filed accounts were fairly stated and did not include any unusual or non-recurring items other than as disclosed, and that the subsequent management accounts at the date of sale fairly represented the position of the company.

The vendors had agreed to the sale on the condition that the purchaser would complete within two weeks, claiming that the price represented a good deal for the purchaser. No due diligence work was performed. The share purchase agreement limited the sum recoverable for breach of warranty claims to the purchase price, and also made the first £500,000 of any claim irrecoverable.

The purchaser alleged that some of the representations were not true, that there was an understatement of some liabilities, and that the balance sheet also included a loan that should have been written off. Importantly, the company had changed the method by which it remunerated brokers, and the liability to them in respect of commissions was alleged to be understated.

The result was a four-day trial with considerable expert testimony. The High Court found that the claim was supported and that the losses arising from the breach of warranty amounted to more than the purchase price plus £500,000. It therefore ordered the vendors to pay damages equal to the purchase price.

Julian Milan, Senior Solicitor at Sydney Mitchell LLP, commented:

The case illustrates the dangers for both sides if a sale is rushed through without the necessary work having been completed to verify that the financial and other information being presented is accurate.

This was posted in Bdaily's Members' News section by Sydney Mitchell LLP .