In the recent case of MDW Holdings Limited v Norvill, the Court of Appeal looked at how a buyer should be compensated for a seller’s breach of a warranty given in a Share Purchase Agreement.
The phrase ‘buyer beware’ applies to share acquisitions just as much as any other purchase. The law does not provide any protection for a buyer in relation to the assets and liabilities they are acquiring. For that reason, Share Purchase Agreements will often include extensive contractual statements (warranties) as to the condition of the target company.
What happened?
On 14 October 2015, MDW Holdings bought all of the shares in G.D. Environmental Services Limited (GDE) from James Norvill and his parents, Jane and Stephen Norvill. The purchase price was £3,584,224.
GDE’s business involved the collection, processing and disposal of waste and depended on consents and permits from environmental regulators.
Warranties given by the Norvills in the Share Purchase Agreement included, amongst others, that:
- GDE had conducted its business in accordance with all applicable laws and regulations.
- GDE held the requisite consents and was not in breach of any of their terms and conditions.
- No legal proceedings against GDE had been threatened and there were no circumstances giving rise to any such proceedings.
- GDE’s accounts showed a true and fair view.
- GDE had complied with environmental laws and permits and there were no facts or circumstances likely to lead to any breach of any such law or claims etc.
The High Court found that there were various occasions where regulators had been supplied with false information by GDE and it had not disposed of waste appropriately. The sellers were found to be in breach of the warranties and the Judge found that MDW was induced to enter into the agreement due to James Norvill’s deceit.
What loss did MDW suffer?
The starting point for breach of warranty claims, is that damages are assessed based on the difference between the value of the company based on the warranties being true, and the value of the company given that the warranties were false. The date of assessment is the date of the share purchase agreement.
When the matter was heard initially (in the High Court), the Judge found that the true value of the business, at the time of purchase, and based on the warranties being true, was £3,331,276 (the “Warranty True Value”). The Judge found that the value of the business on the basis that the warranties were false, was £2,958,676 the (“Warranty False Value”). Therefore, the damages award was the difference between the two, i.e., £382,600.
Both parties appealed to the Court of Appeal. The Norvills’ central argument was that the Warranty False Value incorrectly took into account risks which were known not to have materialised. No reputational damage was caused, no prosecutions brought, GDE did not lose its permits or licences. The Norvills argued that whilst damages must be assessed as at the date of the Share Purchase Agreement, the Judge should still have had regard to how matters actually turned out. The end result was that the damages award put MDW in a better position than it was entitled to be in.
The Court of Appeal rejected the Norvills’ argument. The High Court Judge was essentially saying that a purchaser who was aware of how GDE had been conducting its business, would not have been willing to pay as much for the share capital of GDE or, alternatively, would have thought the goodwill of GDE was less valuable. Whilst GDE may not have actually suffered the kind of damage a “well-informed purchaser might have feared”, that does not mean that the value of GDE was not reduced as at the date of the share purchase agreement.
One of the other issues before the Court (MDW’s appeal), was whether damages should be assessed on the contractual or tortious basis. The Hight Court Judge’s assessment of damages in the sum of £382,600 was on the contractual basis. MDW argued that the judge should also have considered the tortious basis of damages as a result of James Norvill’s deceit. The measure of damages for tort (such as deceit) is slightly different than the measure of damages for contract. In tort, damages for MDW would be based on the difference between the price actually paid by MDW (£3,584,224) and the true value of the shares plus any recoverable consequential losses after purchase. The Court of Appeal agreed that it was open to MDW to claim the tortious measure of damages but, in order to determine what that figure was, the matter had to go back to the High Court Judge to consider whether MDW would (a) not have bought GDE at all had it known the truth, or whether (b) MDW would despite GDE’s misconduct, have proceeded with the sale albeit perhaps at a reduced price. In the case of (a), damages would be the different between the purchase price and the “Warranty False Value” of £2,958,676 (a total of £625,548). In the case of (b), damages would be assessed by reference to the difference between the perhaps reduced price (whatever that may be) and the actual price paid.
What’s the takeaway?
Start with a well drafted Share Purchase Agreement. Make sure proper and thorough due diligence is carried out to avoid the potential for a breach of warranty situation all together.
Record your decision making and before you enter into the Share Purchase Agreement and ask yourself what weight those warranties have? Are some warranties more important than others? What if a particular warranty turns out to be incorrect? And, again, record your decision making! If MDW was able to show that it would not have gone ahead with the purchase of GDE, then its damages claim jumps from £382,600 to £625,548.
Share Purchase Agreements commonly place limitations on bringing claims and provide strict time limits for notifying the seller of the claim. If you do find yourself in a potential breach of warranty situation, most importantly, take advice early on.
