Tactus Holdings Limited v Philip Mark Jordan & Ors
[2024] EWHC 399 (Comm)
Decision Inc Holdings Proprietary Limited & Anor Stephen Garbett & Anor
16 March 2023
[2023] EWHC 588 (Ch)
High Court
Imagine buying a lemonade stand. The sellers said it would make lots of money, but it actually made very little. The buyers sued because the sellers lied about how much money the stand would make. The court agreed and made the sellers pay for the difference between what was promised and what they actually got.
Key Facts
- •Decision Inc Holdings Proprietary Limited (Decision) acquired Copperman Consulting Limited (the Company) from Stephen Garbett and Anis El Mariesh.
- •The sale was governed by a Sale and Purchase Agreement (SPA) containing warranties.
- •The Company performed significantly worse than projected post-acquisition.
- •Decision claimed breach of warranties regarding material adverse change and inaccurate records.
- •The Defendants argued Decision had prior knowledge and the notice of claim was invalid.
Legal Principles
Interpretation of a "material adverse change" clause depends on the clause's terms and established principles. An adverse change is material if it significantly affects the borrower's ability to repay (in loan agreements), or substantially threatens the overall earnings potential of the target in a durationally significant manner (in SPA's).
Grupo Hotelero Urvasco v Carey Value Added [2013] EWHC 1039 (Comm), IBP Inc v Tyson Foods Inc
Materiality in a contractual context is assessed objectively; would a reasonable person in the buyer's position have withdrawn from or renegotiated the transaction had they known of the change?
Fitzroy House, Epworth Street (No. 1) Limited v. Financial Reporting Standard 102
In share sale agreements, the measure of loss for breach of warranty is the difference between the warranted value and the true value of the shares at the date of breach.
Ageas (UK) Ltd v Kwik-Fit (GB) Ltd [2014] EWHC 2178 (QB), Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438
A compliant notice under a notice provision in an SPA must give the recipient sufficient detail to enable informed enquiries, assessment of the claim, and potential settlement. Clarity is required, but not the full detail of pleadings.
Laminates Acquisition Co v BTR Australia Ltd [2003] EWHC 2540 (Comm), Highwater Estates v Graybill [2009] EWHC 1192 (QB), Triumph Controls – UK Ltd v Primus International Holding Company [2019] EWHC 565 (TCC)
The meaning of contractual terms is determined by interpreting them in the context of the transaction.
Macquarie Internationale Investments Ltd v Glencore UK Ltd [2009] EWHC 2267
Outcomes
Breach of warranty regarding material adverse change in prospects was found.
The Company's actual prospects (around £300,000 EBITDA) significantly differed from the reasonable expectation (around £1 million EBITDA) at the Effective Date. This would have led to renegotiation of the price.
No breach of warranty regarding material adverse change in turnover was found.
While there was a significant drop in turnover, it wasn't deemed sufficiently material to suggest a fundamental change in the nature of the revenue flows, considering the context of the transaction.
No breach of warranty regarding inaccurate records was found.
The disputed documents (pipeline documents, forecasts, invoice schedules) were not considered “records” within the meaning of the warranty or, even if they were, did not inaccurately reflect the Defendants' beliefs at the time.
The Defendants' defenses of Decision's prior knowledge and invalid notice were rejected.
Decision lacked actual knowledge of the material adverse change in prospects at the Effective Date. The notice provided was deemed sufficient.
Damages awarded to Claimants were £1.31 million.
This reflects the difference between the warranted value (£6.43 million) and actual value (£3.69 million) of the company, adjusted for the already paid portion of the purchase price. Claims for additional costs were rejected due to insufficient evidence.
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