The High Court has held that a purchaser was entitled to an award of damages amounting to the full purchase price under a share purchase agreement (“SPA”), where the sellers were found in breach of warranty relating to the accounts of the target company: 116 Cardamon Ltd v MacAlister & Anor  EWHC 1200 (Comm).
In assessing damages for the sellers’ breach, the judge applied the diminution in value measure and found that the difference between the value of the shares “as warranted” and their value “as is” exceeded the purchase price by more than the de minimis threshold for warranty claims contained in the SPA. The SPA also contained a cap on liability (equal to the purchase price), so the judge therefore awarded the full purchase price as damages.
Though the decision applies orthodox principles, it highlights the possibility that shares “as warranted” can be worth significantly more than the purchaser in fact agreed to pay for them, meaning that – even with market standard limitation and de minimis provisions – the sellers may be liable for the entire purchase price if the shares have zero or nominal value “as is”.
The case is unusual in that it is a rare example of a purchaser both recovering the entire purchase price from the sellers and retaining the shares which were sold. In contrast, in a claim for rescission of a share sale, most obviously on the basis of misrepresentation, the purchaser would have to hand back the shares in exchange for the refund of the purchase price.
The decision also serves as a reminder of the need to exercise care in complying with contractual provisions regarding the notification of warranty claims, and in particular to ensure that all potential claims are included. A failure to do so may mean that a claim cannot be brought, even if it would otherwise be well-founded.
Andrew Cooke, a senior associate in our disputes team, considers the decision further below.
On 23 May 2014, the claimant (“Cardamon”) entered into a SPA with the defendant (“the MacAlisters”) under which it bought a 100% shareholding in Motorplus Limited (“Motorplus”) for the price of £2,386,247.50. As the sale was concluded quickly, including because the management of Motorplus was considering a management buyout, Cardamon did not perform any due diligence on Motorplus.
The SPA contained, inter alia, warranties by the MacAlisters relating to the truth, fairness, accuracy and proper preparation of Motorplus’s accounts. The SPA also contained the following limitation provisions:
- a cap on warranty claims up to the amount of the purchase price;
- a de minimis provision which provided that the first £500,000 of any claim was irrecoverable;
- a clause stating that warranties were subject to matters “fairly disclosed” by the sellers; and
- a requirement to give notice of warranty claims by a particular cut-off date and a clause stating that any claim so notified would be deemed withdrawn six months later unless legal proceedings had been issued and served by that point.
Cardamon alleged that the MacAlisters had breached various warranties as Motorplus was effectively insolvent at the time of sale, but the accounts did not truly reflect the true financial condition of Motorplus.
The High Court (Mrs Justice Cockerill) upheld Cardamon’s claim in relation to an underprovision for liabilities in Motorplus’s accounts, but dismissed all other claims as they were barred by the limitation clauses in the SPA.
Breach of warranty
Though the issues affecting the accounts were specific to the transaction, one is likely to arise in other transactions and is therefore of broader interest. Motorplus had a claim against a related company, Boomerang-Tag Limited. The accounts valued the claim at half of its face value. However, since Boomerang-Tag was effectively insolvent, the judge found that, for the purposes of the accounts, the claim should have been recorded as having no value.
In relation to this issue, Cardamon’s claim was nevertheless dismissed on the basis that the circumstances surrounding irrecoverability of the debt had been fairly disclosed. The claim and its value were addressed in the accounts. The disclosure letter from the MacAlisters had contained a specific disclosure that the other half of the claim, albeit not included in the accounts’ provision for doubtful debts, might be irrecoverable. Further, email correspondence between the parties (which was treated as disclosed) suggested that the “essential worthlessness” of Boomerang-Tag Limited was understood by Cardamon.
The SPA’s limitation machinery was also relied upon by the judge in deciding a different issue which arose on the accuracy of the accounts. Cardamon alleged that the MacAlisters failed to disclose a change in the method of remunerating insurance brokers which occurred during the 2013 financial year. The judge found that this allegation failed because Cardamon had not advanced it within the time period allowed under the SPA. In its letter of claim (served within time), Cardamon had advanced an argument on this issue but, when pleading its claim, had advanced an alternative argument which was not raised in the letter of claim and which it was therefore too late to raise.
The judge affirmed the orthodox principle that damages for loss of bargain should be assessed by reference to the difference between the value of the shares “as warranted” (ie on the basis that the warranties were true) and the value of the shares “as is” (ie given the actual state of affairs).
The parties disputed the value of the shares “as warranted”. The MacAlisters contended that this was represented by the purchase price under the SPA (in which case, the amount recovered would have been £2.38 million less the £500,000 de minimis threshold). Cardamon argued that, on any orthodox valuation approach, the value “as warranted” was higher, taking into account the future maintainable earnings of Motorplus.
The judge dismissed the MacAlisters’ argument, holding that it would be wrong to take the purchase price as indicative of Motorplus’s value without considering the full expert evidence. In so doing, the judge rejected the price paid as conclusive evidence of the value of the shares “as warranted” as at the date of the SPA on the basis that all parties had entered into the SPA knowing that the price did not represent the full market value due to the transaction being completed quickly and for cash consideration.
The judge found that the value of Motorplus “as warranted” was approximately £3 million. Since the judge found that, in reality, Motorplus was essentially worthless, that was the amount of the loss suffered by Cardamon as a result of the breach. The judge discounted this figure by £500,000 to reflect the de minimis provision, leaving approximately £2.5 million, then applied the cap at the purchase price of £2.38 million. It followed that Cardamon could recover the full amount of the purchase price.
Though Cardamon asserted that its losses were in fact higher even than the difference between the value “as warranted” and “as is” because Cardamon had been forced to fund Motorplus through its financial difficulties, the judge did not make any findings on this issue (presumably because the entire liability cap had already been exhausted).