The way company share sales are meant to work and the way they can end up applying are not always the same.
The way share sales should work is that problems ought to be disclosed before the contract is signed. There is a system within the English legal system designed to encourage disclosure as we explain below. There is often a price adjustment following disclosure.
The way share sales can work is faults are not disclosed and the buyer acquires shares for a price that does not take into account the warts causing loss. Unscrupulous sellers trade on the buyer not finding out or, if they do find out, not having the funds to pursue an action for loss
In this insight based on our experience of dealing with varying sizes of companies across a range of sectors over the years we look at how loss will be dealt with under the UK legal system by considering:
The disclosure letter and its relevance
Common areas a buyer should request warranties on
What do you do if the seller has swept dirt under the carpet?
How much can I recover from the seller?
Tactical considerations of a seller
Ensuring that losses are kept to a minimum
Recent case law
The disclosure letter and its relevance
The contract for sale of the shares, being the share purchase agreement, is negotiated between a buyer and a seller and will usually include a list of warranties. The warranties are contractual statements about the state of the seller’s business when it is purchased. If a warranty is untrue at the time of the sale and purchase, a seller is required to disclose why the warranty is untrue and this is done in a disclosure letter.
By a seller disclosing information against the warranties in a disclosure letter, his risk is reduced as a buyer is unable to pursue any claims against a seller if he suffers a loss for a breach of a warranty. A prudent buyer should consider that whilst a disclosure may mean there is an increased risk being purchased, a buyer can use this as an opportunity to negotiate a lower purchase pric
Common areas a buyer should request warranties on
Typically, a buyer should request warranty protection from the seller in connection with:
the share capital of the company being purchased
the accounts of the company being purchased
financing and banking
real property
environmental issues
commercial contracts
employees
intellectual property
legislation
tax
The above list is not exhaustive and warranty protection required should always be tailored for the transaction at hand.
What do you do if the seller has swept dirt under the carpet?
If a seller has failed to disclose an issue to you meaning that a warranty provided by the seller when the shares were purchased was untrue, you have a possible claim against the seller. The next step for you is to show that you have suffered a loss. This may seem obvious but without suffering a loss, there is no right to pursue a claim for damages.
Common areas a buyer should request warranties on
Typically, a buyer should request warranty protection from the seller in connection with:
the share capital of the company being purchased
the accounts of the company being purchased
financing and banking
real property
environmental issues
commercial contracts
employees
intellectual property
legislation
tax
The above list is not exhaustive and warranty protection required should always be tailored for the transaction at hand.
What do you do if the seller has swept dirt under the carpet?
If a seller has failed to disclose an issue to you meaning that a warranty provided by the seller when the shares were purchased was untrue, you have a possible claim against the seller.
The next step for you is to show that you have suffered a loss. This may seem obvious but without suffering a loss, there is no right to pursue a claim for damages.
If the buyers of your business later claim you provided misleading or inaccurate information or the accounts were inaccurate, we can assist in defending any claims made, including for alleged breach of warranty. Please do get in touch. We regularly deal with the sale and purchase of shares in private companies and disputes that arise therefrom