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Can a Disclosure Letter Accompanying a Share Purchase Agreement Be Rectified?
Can a Disclosure Letter Accompanying a Share Purchase Agreement Be Rectified?

The Court of Appeal in the recent case of Persimmon Homes Ltd v Hillier [2019] EWCA Civ 800 (09 May 2019) (McCombe LJ, David Richards LJ and Newey LJ) held that a disclosure letter accompanying a share purchase agreement (SPA) could be rectified where it did not give effect to the parties' intended transaction.

BACKGROUND:

Persimmon Homes intended to acquire a development site of six plots of land by purchasing the shares of the companies with ownership of the site. One company which was purchased had a subsidiary which held options to acquire four of the plots.

Another company held the freehold title to the two remaining plots, including one which contained access to the whole site and were therefore critical to its future development (the Ransom Land). This company, although controlled by the defendants, had a separate chain of ownership which meant it did not form part of the share sales and the shares were not transferred under the terms of the SPA. Consequently, the land actually acquired by the share purchases (i.e. the 4 plots and not the entire 6 with access) was considerably less valuable.

ISSUES WITH THE SHARE PURCHASE AGREEEMENT (‘SPA’)

In a sale and purchase of shares, the principal document which sets out the legally binding terms on which the deal is made is a Share Purchase Agreement (“SPA”).

In this instance, the description of “Properties” used in the SPA was vague. Although it included the location it did not refer to the individual plots of land. This created a degree of uncertainty as to the exact assets which the companies were stated to own.

This is of relevance as the SPA contained warranties that the companies had good and marketable title to the “Properties” but did not identify the individual parcels that were subject to the warranty.  A warranty is a contractual statement of fact. If the warranty proves to be untrue then the buyer is able to claim damages.

ISSUES WITH THE DUE DILIGENCE PROCEDURE

As part of the negotiations, the defendant’s supplied a “Data Room” which contained a document stating the actual ownership of the additional two plots. Data Rooms are often used in acquisitions to store the information provided to a buyer to enable it to assess the company being purchased.

The contents of the Data Room were incorporated into the Disclosure Letter (disclosing against the warranties given in the SPA). The accompanying Disclosure Letter also specifically disclosed that the acquired companies did not own the Ransom Land.

THE HIGH COURT

Persimmon applied to the High Court on two grounds:

  1. Firstly, as a matter of construction, the definition of Properties should be interpreted as referring to the whole site and therefore there was a breach of the property warranties. This argument was rejected on the basis that the definition was imprecise and it was needed to refer to the Disclosure Letter and the Data Room.
  2. Secondly, that the SPA and Disclosure Letter should be rectified to reflect the actual intention of both parties (that Persimmon would acquire the whole site and that the documents, therefore, contained a ‘common mistake’).

The High Court accepted the claimant's argument that the course of the parties' negotiations demonstrated a common intention that it would acquire the whole development site, including the Ransom Land.  Therefore, the High Court ordered rectification of the SPA and Disclosure Letter so that the appellants gave an unqualified warranty that the acquired companies owned the Ransom Land.

Consequently, there was a breach of the property warranties (as the defendant did not own the two plots). Persimmon was entitled to damages representing the difference in the value of the company as warranted and its actual market value at the time of the acquisition.

Permission to appeal was then granted and the matter referred to the Court of Appeal.

ISSUES FOR THE COURT OF APPEAL

The appellants appealed, arguing that the judge in the High Court had erred in ordering rectification because it was not supported by the evidence before him and, in any event, the Disclosure Letter was a unilateral document notifying particular facts that was incapable of rectification as a matter of law.

Dismissing the appeal, the Court of Appeal found that on the evidence, the judge had been entitled to conclude that the SPA and disclosure letter did not record the terms agreed between the parties, and that the requirements for rectification had been met accordingly.

The Court of Appeal also found that the disclosure letter was an integral part of the suite of documents designed to give effect to the parties' intended transaction and, in circumstances where its terms failed to achieve this purpose, it was as much capable of rectification as the SPA itself. It did not matter that it was a unilateral document. Such documents could be rectified if they did not give effect to the maker's intention. Rectifying the disclosure letter would not, as the appellants argued, re-write history but would simply give effect to the parties' common intention that the acquired companies should be warranted as owning the Ransom Land.

HEALTH WARNING!

Great care must be taken to ensure the documents drawn up and entered into in respect of a business sale or acquisition careful reflect the intention of the parties.

We regularly advise on business acquisitions and disposals and draft bespoke documents to reflect the intended sale. We are also experienced in undertaking due diligence exercises from small family run to multi-million-pound businesses.

If you have any questions surrounding the sale or purchase of a business or would like to discuss undertaking a due diligence process please give Andrew Morgan, Partner and Head of Corporate and Commercial a call on 020 7644 6303 or email amorgan@jpclaw.co.uk or contact him on LinkedIn.

 

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