Asking the Court’s Permission to Rectify the Share Purchase Agreement
Persimmon Homes intended to acquire a development site of 6 plots of land by purchasing the shares of the companies with ownership of the site. One company which was purchased had a subsidiary which held options to acquire 4 of the plots.
Another company held the freehold title to the 2 remaining plots, including one which contained access to the whole site. This company, although controlled by the defendants, had a separate chain of ownership which meant it did not form part of the share sales. Consequently, the land actually acquired by the share purchases (i.e. the 4 plots and not the entire 6 with access) was considerably less valuable.
Issues with the share purchase agreement
In a sale and purchase of shares, the principal document which sets out the legally binding terms on which the deal is made is a Share Purchase Agreement (“SPA”).
In this instance, the description of “Properties” used in the SPA was vague. Although it included the location it did not refer to the individual plots of land. This created a degree of uncertainty as to the exact assets which the companies were stated to own.
This is of relevance as the SPA contained warranties that the companies had good and marketable title to the Properties. A warranty is a contractual statement of fact. If the warranty proves to be untrue then the buyer is able to claim damages.
Issues with the due diligence procedure
As part of the negotiations, the defendant’s supplied a Data Room which contained a document stating the actual ownership of the additional 2 plots. Data Rooms are often used in acquisitions to store the information provided to a buyer to enable it to assess the target company.
The contents of the Data Room were incorporated into the Disclosure Letter (disclosing against the warranties given in the SPA). The Disclosure Letter also expressly stated that the defendant did not own the 2 plots.
Persimmon applied to the High Court on two grounds:
- Firstly, as a matter of construction, the definition of Properties should be interpreted as referring to the whole site and therefore there was a breach of the property warranties. This argument was rejected on the basis that the definition was imprecise and it was needed to refer to the Disclosure Letter and the Data Room.
- Secondly, that the SPA and Disclosure Letter should be rectified to reflect the actual intention of both parties (that Persimmon would acquire the whole site and that the documents, therefore, contained a ‘common mistake’).
This was accepted as on the whole the contents of the Data Room and the course of the negotiations suggested that Persimmon would be acquiring the whole site. Therefore, the Court rectified the definition of Properties to include the 2 plots and excluded the statement from the Disclosure Letter that they did not own these plots.
Consequently, there was a breach of the property warranties (as the defendant did not own the 2 plots). Persimmon was entitled to damages representing the difference in the value of the company as warranted and its actual market value at the time of the acquisition.
A common mistake is a difficult argument to establish and this was a case that turned on its facts. Also, Persimmon’s entitlement to damages did not mean that it acquired the 2 plots (and the access) it wanted.
Therefore, it is important that a buyer undertakes a thorough due diligence exercise to be sure of what it is buying. The case also highlights the importance of using accurate descriptions when putting together the SPA.
How can BHW help
We regularly advise on business acquisitions and disposals and draft bespoke documents to reflect the intended sale. We are also experienced in undertaking due diligence exercises from small family run to multi-million-pound businesses.
If you have any questions surrounding the sale or purchase of a business or would like to discuss undertaking a due diligence process please give our Corporate and Commercial department a call on 0116 289 7000 or email [email protected].