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Selling Your Business? Ensure Your Pre-Contract Questionnaires are Correct

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Ince

Written By:

Theresa Grech

Partner and Head of Corporate (Cardiff)

Ince


A recent Court case highlights the importance of ensuring your responses to your buyer’s questionnaire are accurate before selling your company or business. In the case of MDW Holdings Limited v James Robert Norvill and others (2021), the court examined whether false responses given by the sellers to a buyer of a company in the due diligence questionnaire amounted to a breach of warranty and misrepresentation.

What were the facts of the case?

The buyer, MDW Holdings Limited (MDW) purchased the entire issued share capital of G.D. Environmental Services Limited (GDE) from three individual sellers.

GDE operated a waste management business that involved disposing of various types of waste. As part of the due diligence process, the sellers had answered queries submitted by the buyer’s solicitors in a pre-contract questionnaire about GDE’s environmental permits and compliance record. The share purchase agreement (SPA) which the parties had signed contained detailed environmental warranties dealing with compliance. The SPA also included contractual exclusions and limitations on the sellers’ liability for a breach of warranty claim, and an entire agreement clause.

Once MDW had completed the purchase of GDE, it was later found that GDE had breached environmental laws, and avoided the costs of compliance with such laws. As a result, MDW had paid more for the shares in GDE than they were worth.

MDW claimed against the sellers for (1) breach of the warranties, which the sellers had given MDW in the SPA; and (2) pre-contractual misrepresentation.

What was the decision in the court?

The court found that the sellers were liable for various breaches of the warranties contained in the SPA. It also found that there were actionable misrepresentations. As the misrepresentations covered the same ground as the breaches of warranty, they did not affect the quantification of damages in this case.

It was also found that the entire agreement clause included in the SPA did not preclude MDW from bringing a misrepresentation claim based on pre-contractual representations. The judge said that the purpose of an entire agreement clause is to clarify that nothing said or written before the SPA creates contractual obligations or liabilities. The clause has nothing to do with excluding claims of a non-contractual nature – the exclusion of liability for misrepresentation must be clearly stated in the SPA.

What should business owners note from this case?

If you are looking to, or are currently in the process of selling your business or company, this case provides cautionary advice so as to avoid disputes once you have sold your business:

  • You should ensure that your answers to the buyer’s questionnaires are complete and accurate. The responses should make full and fair disclosure in relation to any warranties which they feel may be an issue.

 

  • If a professional adviser is preparing the replies to pre-contract enquiries on your behalf, you should ensure that you read and understand the answers which they are giving, and that the responses accurately record the correct position.

 

  • You should seek to include express protection and limitations in the SPA as follows (in this case, the sellers had not included such clauses):

 

  • A non-reliance clause which states that the buyer is not relying on any pre-contract statements or representations when entering into the SPA;

 

  • A clause dealing with an express exclusion of liability for misrepresentation;

 

  • An express waiver of non-contractual remedies e.g. damages awarded on a tortious basis or rescission.

 

Any such express contractual limitations will obviously be subject to the usual negotiation with the buyer’s solicitor so whilst a sellers’ solicitor may try and include such protection, such clauses may not be acceptable to a buyer.

The above does not constitute legal advice nor is it complete list of issues to consider pre-sale.

Should you need help in selling or buying a company or business, please do not hesitate to contact Partner & Head of Corporate at Ince (Cardiff), Theresa Grech, on 07849 834082 or [email protected]  or your usual contact at Ince.