The price is right – or is it? Share purchase overvaluations and breach of warranties.

Peter Knibbs and Santos Hau consider BPE’s recent successes in securing settlement awards for purchasers of companies, in breach of warranty claims where sellers had provided inaccurate warranties.

Major purchases of company shares are usually conducted through a Share Purchase Agreement (“SPA”).

So that a buyer can properly assess the company’s value so as to pitch an appropriate offer price, and so that the buyer can carry out an effective risk assessment when deciding whether to purchase at all, the seller will ordinarily give the buyer a series of warranties, contained in the SPA.

The warranties given will usually cover all or most aspects of the company’s finances, operations, assets and potential or active legal disputes.  The warranties are a significant factor which buyers consider, when deciding whether a certain price is ‘right’.

But, what happens, when it turns out the warranties given are inaccurate, especially when this means the true value of the company is less than originally assessed on purchase?

The general position is that this amounts to a breach of the contractual warranty under the SPA, and the buyer would be entitled to damages.

The damages for a breach of warranty claim are usually calculated with reference to the difference in the value of the company had the warranties been true and the value of the company in its true condition. The quantification of breach of warranty claims therefore require a valuation to be conducted by an expert company valuer.

Such breach of warranty claims are often complex. An SPA will also usually contain a contractual limitation clause requiring notice to be given to the sellers within a fixed period after completion of the sale, and for a court claim to be issued within a fixed period thereafter. If a buyer fails to serve notice or issue the claim on time, then they will be likely barred from pursuing the claim. Statutory limitation periods will also apply.

Such complexities necessitate legal advice early on in a dispute, to increase the chances of success and to reduce wasted costs down the line.  

BPE’s Litigation team have a history of successfully pursuing, and defending against, such breach of warranty claims and securing substantial settlement sums for our clients. This is achieved by formulating robust litigation strategies, and successfully negotiating with sellers’ legal representatives and mediating with their clients.

A recent example of BPE’s success in matters such as these include securing a substantial settlement in a multi-million-pound breach of warranty claim, for a national leisure operator.

As businesses across the country are facing the prospects of a difficult economic downturn, it is fundamental that businesses take every necessary step to protect their position, through taking legal action where appropriate.

BPE’s Litigation team are well placed to provide strategic legal advice on SPAs, breach of warranties and any other breaches of contract. For any queries relating to the above, please contact Peter Knibbs on 01242 248239 or peter.knibbs@bpe.co.uk.

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.