Greg Vincent, a Partner in our Corporate and Commercial team looks into why reading the small print is vital when buying and selling a company and the importance of assurances, warranties and indemnities.
We all know we’re supposed to read the small print but a recent case has shown, once again, why this is so important. In Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23 the court considered a £3.5 million claim against the previous owners of two companies who had sold their shares for £41 million.
When privately owned businesses are sold, buyers usually ask the sellers for assurances about the state of the business and its history. Without these assurances the buyer would be buying the business “as seen” and would have limited comeback for historic problems. These assurances (known as warranties and indemnities) are negotiated as part of the sale process and included in the share sale agreement together with agreed terms which limit the sellers’ liability for breach. These “hurdles” include time limits for notifying claims as well as rules about how claims should be handled and what information has to be given to sellers about claims.
In the “Teoco” case the buyer wanted to claim for tax which should have been paid before the sale. The buyer sent two letters to the sellers about the claim in February and June 2015 but, crucially, the letters failed to identify the specific warranties the buyer believed had been breached and used language that only implied there may be potential breaches rather than alleging an actual breach. When later sued, the sellers said that the letters did not comply with the notice requirements of the share sale agreement. The court agreed and struck out the buyer’s claim.
This case highlights two important points about buying companies. First, buyers need to make sure that the hurdles for bringing claims are not too stringent. Secondly, if a buyer does identify a potential claim, it is vital that the buyer checks what the sale agreement says about giving notice and makes sure that he complies with those terms. Otherwise there is a risk that the buyer will lose the right to claim compensation.