In a recent case, the High Court has held that a statement made in a draft disclosure letter could amount to a misrepresentation, entitling the buyer to sue the seller for deceit.
In this article, we outline the background to the case, explain the court’s decision and highlight the implications of a misrepresentation in a disclosure letter.
In May 2022, Johnson Matthey PLC completed the sale of a health business to Veranova Bidco LP pursuant to a share purchase agreement dated 16 December 2021.
Shortly after the share purchase agreement was signed, Johnson Matthey agreed a large reduction in the price paid by one of its key customers, Alvogen, for a pharmaceutical product. Alvogen had secured a lower price from a competing supplier, and the supply agreement between Johnson Matthey and Alvogen provided that Alvogen would be released from its obligation to purchase the relevant product from Johnson Matthey, if Johnson Matthey did not match the competing price.
A draft of the disclosure letter was circulated to Veranova on 15 December 2021, before the share purchase agreement was signed. The draft included a statement that price negotiations were ongoing with Alvogen, but made no mention of the competing offer and stated that the impact of the negotiations could not be quantified.
Veranova brought claims for breach of warranty and fraudulent misrepresentation against Johnson Matthey, on the grounds that the disclosures relating to Alvogen were insufficient to qualify the warranties given. Veranova argued that, because Johnson Matthey had verified the competing offer made to Alvogen on 10 December, it knew it would have to reduce the price paid by Alvogen accordingly, and so the statements made in the draft disclosure letter on 15 December were untrue.
This hearing arose from an application made by Johnson Matthey for summary judgment and strike-out in response to the misrepresentation claim. Johnson Matthey argued that the draft disclosure letter did not contain any representations, since the share purchase agreement included a no-reliance clause, and the disclosure letter stated: ‘The disclosure of any matter hereby shall not imply any representation.’
The court declined to strike out Veranova’s claim for deceit. Sean O’Sullivan KC (sitting as a Deputy High Court Judge) held that, while a warranty is normally regarded as a contractual promise rather than a representation of fact, there is no reason why statements made in a disclosure letter could not have a dual purpose.
Although the primary contractual function of a disclosure letter is to qualify the warranties given, a statement made in a draft disclosure letter can also amount to a representation of fact on which a buyer might rely when deciding whether or not to proceed. If such statements were made deceitfully, and the buyer relied on them, the buyer should not be deprived of the opportunity to sue for misrepresentation. Even an explicit statement that no representations are made in the disclosure letter would not be sufficient to exclude liability for a statement made fraudulently.
It is important to note that this judgment was given at an interim hearing and is not a final finding in Veranova’s favour. If the case proceeds, the issue will be decided alongside Veranova’s other claims at trial in the autumn, after the court has heard evidence.
In the meantime, those selling a business should note the possibility that a statement made in a draft disclosure letter, if made deceitfully, could found an action against them for misrepresentation, with the possible consequence that the sale could be rescinded.
For further information, please contact our corporate team.
