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SPAs: Are warranties also representations?

SPAs: Are warranties also representations?


Debbie King discusses recent case law on share purchase agreements and the payment of dividends, as well as the introduction of confirmation statements

In Idemitsu Kosan Co Ltd v Sumitomo Corp [2016] EWHC 1909 (Comm), the High Court considered whether matters warranted by the seller to the buyer in a share purchase agreement (SPA) were also representations capable of bringing an action for misrepresentation under the Misrepresentation Act 1967.

Under the terms of the SPA, the buyer purchased from the seller the entire issued share capital of the company. The warranty clause in the SPA provided: 'Each of the sellers warrants to the buyer in respect of itself and its relevant shares in the terms of the warranties in paragraphs 1 and 2 of schedule 4'¦

on the date of this agreement.'

The SPA included a number of limitations on

the seller's liability for breach of the warranties, including a provision excluding the right of the buyer to bring a claim under the warranties unless the seller had been notified of the claim within

18 months of completion of the SPA (the notice limitation). The SPA included an entire agreement clause which provided that the buyer had not 'relied on, or been induced to enter into [the SPA] by any representations, warranties, or undertakings of any kind other than the warranties (as modified by the disclosure letter)'.

After a time period exceeding 18 months, the buyer brought a claim against the seller alleging that certain warranted matters, as at the date of the SPA, were untrue. Due to the notice limitation, the buyer brought proceedings against the seller under section 2(1) of the Misrepresentation Act 1967, making a case that the notice limitation did not prevent bringing a tortious claim for misrepresentation. The buyer argued:

  • The statements of fact made in the warranties as contained in the SPA were capable of founding an action under the Act. The warranties were statements and as such representations; and

  • The seller had made actionable pre-contractual representations to the buyer before the execution of the SPA. By providing the buyer with an execution copy of the SPA and by signing the same (or offering to sign it), the seller made representations to the buyer in terms of statements of fact in the warranties prior to and independently of the completion of the SPA, and the buyer had signed the execution copy of the SPA in reliance on those representations.

The seller made an application for summary judgment seeking to dismiss the buyer's claim,

on the grounds that the buyer had no real prospect of success.

The court granted summary judgment.

The court found that where a contract provides that a party is giving a warranty, that party, by concluding that contract, is not in any way making a statement to the other party that is actionable

as a misrepresentation. It is not enough that the subject matter of a warranty is capable of being a representation. The court took the view that if

the only material relied upon is the existence,

in the SPA as concluded, of a contractual warranty, there will be no representation in the absence of a provision to the contrary. The court did not follow Mr Justice Arnold in Invertec Limited v De Mol Holding BV and another [2009] EWHC 2471 (Ch).

The buyer's claim failed on the basis that it relied upon representations in the terms of the warranties having been made by the concluded SPA.

The court accepted that language used to communicate a negotiating position or draft contract to amount to a pre-contractual representation is capable of founding a claim

under the Misrepresentation Act 1967. However, this required the warranty schedule to be detached from the other provisions of the SPA. The seller's provision of the SPA conveyed a willingness to give certain warranties in a concluded contract. The seller did not make any representations to the buyer by the warranty schedule because, by its nature, it was not a set of statements of fact. The warranty schedule was the means by which the parties together chose to define the content of the warranties.

The court found that the buyer's contentions were defeated by the entire agreement provision, under which the buyer agreed and acknowledged that it had not relied on or been induced to enter into the SPA by any representations or warranties other than the warranties. The court agreed with the seller that the purpose of the clause was to confine the buyer solely to the warranties given in the SPA.

Decision to pay dividends

In BTI 2014 LLC v Sequana SA and others [2016] EWHC 1686 (Ch), the High Court had to determine whether dividends contravened part 23 of the Companies Act 2006 (CA 2006), whether the decision to pay

the dividends was a breach by the directors of their fiduciary duties towards the company, and whether the dividends were transactions defrauding creditors under section 423 of the Insolvency Act 1986.

Arjo Wiggins Appleton Limited (A Ltd) was a wholly owned subsidiary of Sequana SA (S SA). Through a series of acquisitions, BAT Industries

plc (BAT plc) became liable to pay for part of an environmental clean-up operation in the US and

A Ltd was liable to indemnify it for part of that liability. Provision was made in A Ltd's accounts to reflect the directors' best estimate of the value of that liability.

The accounts of A Ltd showed a substantial

debt owed by S SA. The directors wished to remove the inter-company receivable by reducing the company's capital, declaring a dividend in favour of the parent and setting that dividend off against the receivable. In December 2008, the directors signed

a solvency statement stating that they had formed the opinion that:

  • There was no ground on which A Ltd could

    be found to be unable to pay or otherwise discharge its debts; and

  • A Ltd would be able to pay or discharge its

    debts as they fell due during the year following 15 December 2008.

The capital of A Ltd was reduced, by special resolution of S SA. Later that December, the directors of A Ltd resolved to pay an interim dividend to S SA, effected by setting off the payment against the intra-group receivable

due to A Ltd from S SA.

The directors of A Ltd held another meeting

at which they resolved to pay a further interim dividend payment to S SA to be satisfied by the release by A Ltd of S SA's intra-group debt. On the same day S SA sold A Ltd.

A Ltd brought a claim against its directors and

S SA on the grounds that:

  • The dividends contravened part 23 of the CA 2006 because the accounts were not prepared in accordance with the Act or that they did not enable a reasonable judgment to be made as to the amounts of the specified items by section 838(1) in so far as they were interim accounts; and

  • The decision to pay both the dividends was a breach by the directors of their fiduciary duties.

BAT plc brought a claim against S SA and A Ltd

on the grounds that the dividends constituted transactions which contravened section 423 of

the Insolvency Act 1986.

The court dismissed the claims brought by A Ltd but allowed BAT plc's claim. The court held that by preparing a solvency statement pursuant to section 643(1) of the CA 2006, the directors must have formed the opinion that there were no grounds

on which the company could not pay its debts. The directors had to look at the company on the date of the statement, taking into account contingent and prospective liabilities, and form an opinion.

The authorities did not establish that whenever a company was at risk of becoming insolvent at some point in the future, the duty of the directors to act in the interests of the creditors arose unless that risk could be described as remote. The essence of the test was that the directors ought in their conduct

of the company's business to be anticipating the insolvency of the company, because when that occurred the creditors had a greater claim to the assets of the company than the shareholders.

To hold that the creditors' interests duty arose in a situation where the directors made proper provision for a liability in the company's accounts but there was a real risk the provision would turn out to be inadequate would be a significant lowering of the threshold applied in the cases. There was no justification in principle for such a change.

A dividend was a transaction entered into at an undervalue within the meaning of section 423(1) of the Insolvency Act 1987. There was nothing in the wording of section 423(1) excluding the payment

of a dividend from the scope of section 423 if the payment was made with the purpose of putting assets beyond the reach of a potential claimant or of otherwise prejudicing the interests of such a person in relation to a potential claim.

Confirmation statement

A confirmation statement is the new format of

an annual return. Each company will file its first confirmation statement on its annual return filing date, which falls on or after 30 June 2016. Each company must then file a confirmation statement at least once a year, but a company can file the confirmation statement more often (for example, on any change of shareholding) if required.

The filing date is a rolling year from the date of

the previous filing. The company will have 14 days rather than

the previous 28 days to file the confirmation statement.

Debbie King is a partner at Farleys @FarleysLaw

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