18 March 2020

Share purchase agreements: Lessons for Sellers

Triumph Controls UK Limited & others v Primus International Holding Company & others [2019]

This case covers the typical arguments which arise in SPA disputes in circumstances where a target does not perform as well as expected.  In March 2019, the UK’s High Court handed down its judgment on, amongst others, three key areas which corporate lawyers, buyers and sellers should be mindful of, being:

(1) notification of warranty claims;

(2) fair disclosure; and 

(3) forward looking projections. 

The High Court’s ruling provides the following important takeaways:

  • sellers need to be mindful of the standard test of disclosure set by UK case law in order to ensure that sufficient detail is included in any disclosure to be considered “fair”.  Whilst disclosing the contents of a virtual data room is a generally acceptable approach in a UK transaction, it is best practice to append the data room index to the disclosure letter and provide the buyer with a USB/CD containing the data room documents.  To seek to avoid uncertainty around “fair disclosure”, the data room should be properly structured, with key sections specifically referred to within the disclosure letter.

  • both buyers and sellers (alongside their lawyers) each need to be careful when drafting and negotiating share purchase agreements and disclosure letters.  Whilst a seller in most cases is not required to warrant the accuracy of forward-looking projections, there is still danger in warranting any type of future projection or performance.  

  • If projections are provided and a buyer wants comfort as to the standard of care applied when forward-looking projections have been prepared, a seller could accept the wording “careful enquiry with management”; or alternatively a warranty could have been qualified by a specific accounting standard.  

This case helpfully outlines to sellers what careful preparation of such projections could involve in order to meet the requisite standard.  By way of example, in this instance, taking into account key operational and financial assumptions, the building of buffer stock, reducing arrears, increases in costs and delays were all noted as important when modelling forward-looking projections (albeit this is not an exhaustive list and will of course be dependent on the facts). 

Facts

Triumph Controls UK Limited, a multinational aerospace and defence manufacturer (the claimant) (“Triumph”), bought the entire issued share capital of three subsidiaries specialising in the manufacturing of composite components for the aerospace industry (the “Targets”) from Primus International Holding Company & others, a multinational manufacturer of complex aircraft components (the defendant) (“Primus”) pursuant to the terms of a share purchase agreement dated 27 March 2013 (“SPA”). 

The value in the Targets was derived from their future profitability, which was partly dependent on the transfer of operations from the UK to Thailand.  Due to delays in such transfers and the UK subsidiary losing its “NADCAP” industry accreditation, the Targets suffered a significant shortfall in revenue resulting in Triumph bringing a claim for damages of approximately $63.5m against Primus in which a number of warranty breaches were alleged. 

Judgment

Valid notice of warranty claims

The SPA contained standard language obligating Triumph to notify Primus of any claim for breach of warranty, in this instance, within 18 months of completion of the acquisition.  The SPA required Triumph to provide unambiguous notice with sufficient details to enable Primus to investigate the claim and make financial provision for such claim.  Primus argued that valid notification of the alleged breaches of warranties had not been provided under the terms of the SPA as Triumph had included additional and/or different complaints when launching legal proceedings to those allegations contained in the notification.  Primus believed that such additional and/or different claims could not form part of Triumph’s claim.  

However, the High Court felt otherwise.  It found that a summary of the claims contained in the notification, whilst not amounting to full particulars of a claim (as required in formal legal proceedings), did make Primus aware of the substance of the claims being made. 

Triumph also claimed that Primus had failed to provide adequate notice of the breaches of warranty at closing, breaching the notice clause of the SPA, which meant the liability cap for breach of the SPA was $63m rather than the $15m cap for claims.  Triumph argued that notice of a breach of warranty was an “other obligation”, not a breach of warranty.  In this instance, the High Court agreed with Triumph as this would defeat the purpose of the $15m cap for claims. 

Fair disclosure against warranties 

Triumph argued that the documents disclosed by Primus, and subsequently referred to in the disclosure letter, did not clearly disclose the true and full extent of the operational situation of the Targets.  Eurocopy v Teesdale [1992] and Infiniteland v Artisan [2005] set the UK precedent in respect of disclosure whereby a claim for breach of warranty cannot be brought by a buyer if it knew about the breach when entering into the transaction, although Infiniteland meant it may be possible to modify the contract. 

The High Court ruled in favour of Primus, finding that they had clearly and fairly disclosed the significant delivery and quality issues with the Targets to Triumph, and as such were not liable for this particular warranty claim. 

Forward looking projections

Triumph argued a number of breaches of warranties, including that the forward-looking projections relating to the Targets were not “honestly and carefully prepared”.  Triumph failed to establish any other breach of warranty.  The projections did not take various matters into account including the loss of the NADCAP accreditation, the significantly reduced rate of both the transfer of work to Thailand and production in Thailand.  Primus argued that whilst they had prepared the projections honestly and carefully and based the projections on due and careful enquiry, they had not warranted to their accuracy. 

Whilst “carefully prepared” was not a defined term in the SPA nor a recognised accounting term, the High Court found, taking an objective approach based on what a professional in that field would consider reasonable, that the projections should have included various adjustments which would illustrate the potential delay in profitability for the Targets.  This included, for example, challenges relating to training and delays and more importantly, the recent operational difficulties the subsidiaries had experienced.  

Consequently, the High Court held that the projections had not been carefully prepared.  Primus were ordered to pay the difference between the price Triumph paid and the price it would have paid had the projections been properly adjusted (subject to a contractual cap on liability of $15m).


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