Allocation of Risk
➪ Ws and Is
s.397 FSMA - misleading statements and practices offence (only relevant to share sales, not
business sales)
(1)applies to any person who -
(a)makes a statement, promise or forecast which he knows to be false or deceptive in a
material particular;
(b) dishonestly conceals any material facts whether in connection w/a statement, promise or
forecast made by him or otherwise; or
(c)recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is
misleading, false or deceptive in a material particular
(2)a person to whom subsect (1) applies is guilty of an on offence if he makes the statement,
rpomise or forecast or conceal the facts for the purpose of inducing, or is reckless to
inducing, another person -
(a)to enter or offer or enter into, or to refrain from entering or offering to enter into, a
relevant ag; or
(b) to exercise, or refrain from exercising, any rights conferred by a relevant instrument
Basically, caveat emptor. If a d’or is naughty/dishonest, then they may be guilty of an
offence under s.397 FSMA. However, B is left out in the dark w/no form of recourse. The
law punishes the S but doesn’t help the B so make B needs to make sure they do their DD and
get their Ws/DL and Is!
s.393 CA - Accounts to give true and fair view
(1)d’ors of a co must not approve accounts for purposes of this chapter, unless they are
satisfied that the give a true and fair view of the assets, liabilities, financial position and
profit or less -
(a)in the case of the co’s individual accounts, of the co;
(b)in the case of the co’s group accounts, of the undertaking included in the consolidation as
as whole, so far as concerns co’s s’ers
(2)Auditors carrying out their functions under this Act in relation to co’s annual accounts
must have regard to d’or’s duty under subsect (1)
Basically - d’ors under duty as S to give true and fair account of co via Ws and Is. In order to
avoid breach, d’ors must include statement re accounts saying “info give is a true and fair
view in accordance w/s.393 CA” to avoid breach. Nb. never say ‘true and accurate’ because
it is a higher standard and there are claims about this kinda stuff all the time. Accurate is too
high a standard for anyone to meet as would include being 1p off.
Ws -primary purpose is disclosure
-Always come hand in hand w/Disc Letter (‘DL’)
-contractual statement of fact given by S
-damages governed by normal contractual principles
-main purpose is to elicit info
-given for substantive aspects of T
, Is -promise by S to reimburse B if a specific liability arises
-remotes, forseeability, mitigation [ie. normal contractual principles]
not relevant
-purpose is financial redress
-given for specific areas of possible loss or liability which have been
discovered
-eg. doubtful debts, actual or potential litigation, e’ent or pension
liability [if not big]
Categories of W e’ees, tax, pension, stock, property, IP, corporate governance, contracts,
clients, customers, suppliers, compliance, litigation generally,
competition, accounts and finance, ownership of shares, ownership of
assets, P&M, environmental
Main categories Those which:
(i)red - related to matters over which the S has no control (and should
not give)
(ii) amber - the S can give in principle but should amend to limit
their effort
(iii) green - are vital to the B (and S must give to the deal)
Nb. you always have lots of tax Is
➪ -striking out or amending Ws if S is required to give a statement in
Negotiation/Qualifyi relation to something over which it has no control
ng Ws -in other cases, a W may be acceptable in principle but S’s solicitors
will want some amendments to drafting to get rid of ambiguity or
narrow scope [often to make them easier to disc against]
Limiting Is -S’s solicitors should ensure that the Is refer only to specific types of
risks
-S should not accept Is which are general in nature
➪ Tax covenant/Zim logic of making payments under I directly to T was that if any liability
was incurred it was T who would have to pay
Are there any tax consequences of providing for payment to be paid
this way?
-Yes Zim Properties says there could be potential tax consequences if
I payment is made to a T. T may be required to pay tax on entire
amount of payment when it is received
-HMRC has agreed that any payment under an I paid by a S to a B
will be treated as an adjustment to cons (same as payment under
Ws) Effect of this is:
(1)the B will be treated as paying less for T (so T will have a lower
base cost if and when it is eventually disposed of by the B) and
(2)the cons received by S will be deemed to have been reduced by the
amount paid under the I (so the S’s capital gain on sale of T will be
correspondingly reduced and if any tax has already been paid the S
may receive a partial tax refund)
Therefore it is v imp for Is to be given in favour of B not T
,➪ Split exchange (= doesn’t happen in majority of cases. Why might it be needed?
signing of AA, -s’er approval
parties formally -regulatory approval
agree to enter into -3rd party consent ... etc
trans usually by What contractual provisions might B want to see in acq ag (‘AA’)?
delivering and -exchange usually executed as a deed as no consideration is being
executing SPA) and given @ exchange so cannot be a contract
completion (= -conditions precedent in AA: details of cond, long-stop date,
closing, essentially obligation on B and S, ‘what if’ cl
formalities to How should T be run between exchange and compl:
conclude trans are -clauses re conduct of T, eg restrictions on capital expenditure,
performed) disposal of material assets, additional borrowing, issuing shares etc
...
When can Ws be given? @ exchange
Will Ws still be in force @ time completion? B will asked for them to
be repeated and will ask for right to rescind if there is material change
Who can bring a -clearly the B
breach of W claim? -in some circs, also a person who is not a party to ag may wish to and
be able to bring a claim:
(1)the benefit of Ws and Is in acq ag might be assigned to 3rd party if
agreed in Acq Ag
(2)Contracts (Rights of Third Parties) Act 1998 (‘CRoPTA’
-allows a 3rd party to enforce a term of contract if:
-the contract expressly provides it may; or
-the term purports to confer a benefit on it
The common response to CRoPTA is to exclude it so S can limit
liability
How are damages -breach of contractual
calculated for breach -contractual remedies seek to put the injured party they would have
of W claim? been in if there had been no breach - so w/Ws as if the W had been
true
-Must prove loss - tricky
-then also damages may be limited by remoteness (Hadley
Baxendale) and B’s duty to mitigate
Ensuring funds are -retention/escrow acc
there to meet a claim -deferred cons
-guarantee
-W and I insurance
, Misrep -defined as an ‘untrue statement of fact (or law) which one party
makes to another and which induces that other to enter into a
contract w/the person making the representation’
-offers B an alternative remedy to breach of W
Remedies include:
-rescission (for all types of W)
-damages (quantum depends on type of MR)
-Fraudulent MR: innocent party can rescind and claim damages.
Smith New Court cl may not be restricted to damages relating to
MV of asset - could get more
-Negligent MR: rescission and damages
-Innocent MR: rescind or damages in lieu of rescission and @ court’s
discretion
Other tortious negligent misstatement. Important because:
remedies -someone who is not party to a contract could possibly be made liable
to a B and scope of negligent mis extends to advice and opinion
whereas MR can only be statement of facts
vicarious liability:
- for fraudulent statements made by T’s e’ees
Barriers to MR -MR must be proved
-a representation will only ever amount to an MR if it is: material, a
statement of fact or law, untrue and induced the representee to enter
in the the contract
➪ Discs
= essentially have effect of qualify Ws and should also be considered w/Ws. Discs qualify
Ws so the S is not liable to breach of W
Nb. DL is split into general discs [first] then specific discs [latter part of letter]
Ws are in AA
Discs are in DL
Nb. never ever allow disc against an I -> the whole point of Ws is that they never disclose an
I
➪ Ws and Is
s.397 FSMA - misleading statements and practices offence (only relevant to share sales, not
business sales)
(1)applies to any person who -
(a)makes a statement, promise or forecast which he knows to be false or deceptive in a
material particular;
(b) dishonestly conceals any material facts whether in connection w/a statement, promise or
forecast made by him or otherwise; or
(c)recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is
misleading, false or deceptive in a material particular
(2)a person to whom subsect (1) applies is guilty of an on offence if he makes the statement,
rpomise or forecast or conceal the facts for the purpose of inducing, or is reckless to
inducing, another person -
(a)to enter or offer or enter into, or to refrain from entering or offering to enter into, a
relevant ag; or
(b) to exercise, or refrain from exercising, any rights conferred by a relevant instrument
Basically, caveat emptor. If a d’or is naughty/dishonest, then they may be guilty of an
offence under s.397 FSMA. However, B is left out in the dark w/no form of recourse. The
law punishes the S but doesn’t help the B so make B needs to make sure they do their DD and
get their Ws/DL and Is!
s.393 CA - Accounts to give true and fair view
(1)d’ors of a co must not approve accounts for purposes of this chapter, unless they are
satisfied that the give a true and fair view of the assets, liabilities, financial position and
profit or less -
(a)in the case of the co’s individual accounts, of the co;
(b)in the case of the co’s group accounts, of the undertaking included in the consolidation as
as whole, so far as concerns co’s s’ers
(2)Auditors carrying out their functions under this Act in relation to co’s annual accounts
must have regard to d’or’s duty under subsect (1)
Basically - d’ors under duty as S to give true and fair account of co via Ws and Is. In order to
avoid breach, d’ors must include statement re accounts saying “info give is a true and fair
view in accordance w/s.393 CA” to avoid breach. Nb. never say ‘true and accurate’ because
it is a higher standard and there are claims about this kinda stuff all the time. Accurate is too
high a standard for anyone to meet as would include being 1p off.
Ws -primary purpose is disclosure
-Always come hand in hand w/Disc Letter (‘DL’)
-contractual statement of fact given by S
-damages governed by normal contractual principles
-main purpose is to elicit info
-given for substantive aspects of T
, Is -promise by S to reimburse B if a specific liability arises
-remotes, forseeability, mitigation [ie. normal contractual principles]
not relevant
-purpose is financial redress
-given for specific areas of possible loss or liability which have been
discovered
-eg. doubtful debts, actual or potential litigation, e’ent or pension
liability [if not big]
Categories of W e’ees, tax, pension, stock, property, IP, corporate governance, contracts,
clients, customers, suppliers, compliance, litigation generally,
competition, accounts and finance, ownership of shares, ownership of
assets, P&M, environmental
Main categories Those which:
(i)red - related to matters over which the S has no control (and should
not give)
(ii) amber - the S can give in principle but should amend to limit
their effort
(iii) green - are vital to the B (and S must give to the deal)
Nb. you always have lots of tax Is
➪ -striking out or amending Ws if S is required to give a statement in
Negotiation/Qualifyi relation to something over which it has no control
ng Ws -in other cases, a W may be acceptable in principle but S’s solicitors
will want some amendments to drafting to get rid of ambiguity or
narrow scope [often to make them easier to disc against]
Limiting Is -S’s solicitors should ensure that the Is refer only to specific types of
risks
-S should not accept Is which are general in nature
➪ Tax covenant/Zim logic of making payments under I directly to T was that if any liability
was incurred it was T who would have to pay
Are there any tax consequences of providing for payment to be paid
this way?
-Yes Zim Properties says there could be potential tax consequences if
I payment is made to a T. T may be required to pay tax on entire
amount of payment when it is received
-HMRC has agreed that any payment under an I paid by a S to a B
will be treated as an adjustment to cons (same as payment under
Ws) Effect of this is:
(1)the B will be treated as paying less for T (so T will have a lower
base cost if and when it is eventually disposed of by the B) and
(2)the cons received by S will be deemed to have been reduced by the
amount paid under the I (so the S’s capital gain on sale of T will be
correspondingly reduced and if any tax has already been paid the S
may receive a partial tax refund)
Therefore it is v imp for Is to be given in favour of B not T
,➪ Split exchange (= doesn’t happen in majority of cases. Why might it be needed?
signing of AA, -s’er approval
parties formally -regulatory approval
agree to enter into -3rd party consent ... etc
trans usually by What contractual provisions might B want to see in acq ag (‘AA’)?
delivering and -exchange usually executed as a deed as no consideration is being
executing SPA) and given @ exchange so cannot be a contract
completion (= -conditions precedent in AA: details of cond, long-stop date,
closing, essentially obligation on B and S, ‘what if’ cl
formalities to How should T be run between exchange and compl:
conclude trans are -clauses re conduct of T, eg restrictions on capital expenditure,
performed) disposal of material assets, additional borrowing, issuing shares etc
...
When can Ws be given? @ exchange
Will Ws still be in force @ time completion? B will asked for them to
be repeated and will ask for right to rescind if there is material change
Who can bring a -clearly the B
breach of W claim? -in some circs, also a person who is not a party to ag may wish to and
be able to bring a claim:
(1)the benefit of Ws and Is in acq ag might be assigned to 3rd party if
agreed in Acq Ag
(2)Contracts (Rights of Third Parties) Act 1998 (‘CRoPTA’
-allows a 3rd party to enforce a term of contract if:
-the contract expressly provides it may; or
-the term purports to confer a benefit on it
The common response to CRoPTA is to exclude it so S can limit
liability
How are damages -breach of contractual
calculated for breach -contractual remedies seek to put the injured party they would have
of W claim? been in if there had been no breach - so w/Ws as if the W had been
true
-Must prove loss - tricky
-then also damages may be limited by remoteness (Hadley
Baxendale) and B’s duty to mitigate
Ensuring funds are -retention/escrow acc
there to meet a claim -deferred cons
-guarantee
-W and I insurance
, Misrep -defined as an ‘untrue statement of fact (or law) which one party
makes to another and which induces that other to enter into a
contract w/the person making the representation’
-offers B an alternative remedy to breach of W
Remedies include:
-rescission (for all types of W)
-damages (quantum depends on type of MR)
-Fraudulent MR: innocent party can rescind and claim damages.
Smith New Court cl may not be restricted to damages relating to
MV of asset - could get more
-Negligent MR: rescission and damages
-Innocent MR: rescind or damages in lieu of rescission and @ court’s
discretion
Other tortious negligent misstatement. Important because:
remedies -someone who is not party to a contract could possibly be made liable
to a B and scope of negligent mis extends to advice and opinion
whereas MR can only be statement of facts
vicarious liability:
- for fraudulent statements made by T’s e’ees
Barriers to MR -MR must be proved
-a representation will only ever amount to an MR if it is: material, a
statement of fact or law, untrue and induced the representee to enter
in the the contract
➪ Discs
= essentially have effect of qualify Ws and should also be considered w/Ws. Discs qualify
Ws so the S is not liable to breach of W
Nb. DL is split into general discs [first] then specific discs [latter part of letter]
Ws are in AA
Discs are in DL
Nb. never ever allow disc against an I -> the whole point of Ws is that they never disclose an
I
