Where a buyer is purchasing all of the shares of a company, it is commonplace to document the agreement in the form of a Share Purchase Agreement (SPA). This agreement sets out the terms on which the sale and purchase should proceed.
In a share purchase, the buyer acquires the whole of the target company ‘warts and all’, and inevitably there will be increased risk assumed by the buyer. In order to reduce this risk, and to encourage the seller to highlight any known issues, extensive warranties and indemnities in favour of the buyer are often inserted into SPAs.
The importance of carrying out due diligence was highlighted in the recent case of Persimmon Homes Ltd v Hillier [2018].
Facts
In order to purchase a potential development site, Persimmon Homes Ltd (Persimmon) entered into an SPA with various individuals, including Mr Hillier (Sellers), to acquire all the shares in two companies. A subsidiary of one of the companies held options to purchase four plots within the site, which would be transferred as part of the share purchase.
The dispute arose from the fact that the site actually comprised six plots. The two ‘extra’ plots in fact belonged to a third company, which was not being acquired by Persimmon. This had the effect of leaving Persimmon with a landlocked site with a ‘ransom strip’ in the middle, considerably reducing the value of the site.
The SPA, however, warranted that the Sellers either had good marketable title to the plots comprising the site, or a right to acquire any which they did not own. Clearly, this was not the case and so the Sellers were in danger of breaching this warranty.
If a warranty within an SPA is breached (and putting to one side any relevant limitation and exclusion of liability provisions), then the buyer has the right to sue for damages. Persimmon therefore asked the court to rectify both the SPA and the disclosure letter to include the two plots on the basis that the parties had intended for the two plots to be acquired by Persimmon. This would have had the effect of allowing Persimmon to sue for damages for breach of warranty on the basis that the Sellers did not have good or marketable title, or a right to acquire any plots they did not own.
Decision
The court found that the description of the development site was vague and did not accurately identify the site. It was clear from the surrounding evidence that the shared intention was for Persimmon to acquire the entirety of the site. The warranties in the SPA did not include these plots. The court agreed with Persimmon that the SPA should be rectified so bring the two ‘extra’ plots within the scope of the warranties, and thereby allowing Persimmon to claim for breach of warranty.
However, notwithstanding the fact that the SPA warranted that the Sellers had good and marketable title to the site, the disclosure letter included a statement to the effect that the sellers were not the legal owners of the site. This is because the group only had options to acquire the plots within the site. Therefore, the court also rectified the disclosure letter to exclude the two ‘extra’ plots of land from the qualifying statement regarding legal ownership, allowing Persimmon to successfully claim for breach of warranty.
Comment
Although Persimmon was not able to acquire the two plots of land, it was able to succeed in a claim for damages against the Sellers. However, courts are usually reluctant to directly interfere with commercial agreements. The evidence put forward in this case showed the clear intentions of the parties and, therefore, the court felt comfortable in rectifying the SPA accordingly.
Of course, the intentions of parties will not always be so clear cut. Therefore, thorough due diligence by a purchaser on a target company remains essential.
