Given the nature of many of our clients’ assets, particularly in the power sector, environmental issues are often the focus of due diligence and subsequent warranty and indemnity negotiations. The recent case of MDW Holdings Ltd v Norvill  EWHC 1135 (Ch), in which the High Court upheld a buyer’s claim that the sellers had breached various environmental warranties in a share purchase agreement, is a salutary reminder of the importance of certain key contractual provisions in share purchase agreements.
In October 2015, MDW Holdings (the “Buyer”) agreed to purchase the entire share capital of G.D. Environmental Services (the “Company”) from the Norvill family (the “Sellers”). The Company provided waste management services and, as part of such services, was required to comply with the terms of various waste effluent permits and consents. Prior to the sale, waste effluent discharges exceeded the permitted levels and the Company not only failed to rectify this but also falsified test results. This situation and the consequential breach of the relevant regulations, were not disclosed to the Buyer as part of its due diligence process or by way of the disclosure letter.
Following the completion of the SPA, the Company was notified of possible legal action by the regulator for breaches of the terms of the effluent consents. Consequently, the Buyer claimed against the Sellers on two grounds, being (i) breach of warranties in the SPA and (ii) pre-contractual misrepresentation. The Buyer argued that the Company avoided the costs of environmental compliance, resulting in an unlawful increase in its profits and thus in the value of its shares.
The Court ruled that the Sellers breached the warranties given that they were engaging in non-compliant practices regarding the discharge of effluents, the breaches of the effluent consents, the falsification of figures and the failure to provide a true and fair view of the Company’s state of affairs.
The Court also rejected the Sellers’ various contractual defences, namely:
- The Buyer’s claim was not time-barred because the Buyer’s claim notice (while served within the 2 year limitation period) failed to adequately summarise the amount claimed. On the facts, the notice was sufficient and the wording in the SPA concerning notice – being that the notice should “…summarise the nature of the Claim (in so far as it is known to the Buyer) and, as far as is reasonably practicable, the amount claimed….” – set a low threshold which had been met. In addition, the SPA included the usual Buyer protection that the warranty limitations did not apply if the Claim “….arises or is delayed as a result of dishonesty, fraud, wilful misconduct or wilful concealment by the Sellers, their agents or advisers…”, which clause the Court confirmed the Buyer could rely upon.
- The Buyer had actual knowledge of the matters giving rise to the claim (the SPA provided that the Sellers have no liability in respect of any Claim “… to the extent the Buyer has actual knowledge of the matter, fact or circumstance giving rise to the Claim and actual knowledge that such matter, fact or circumstance represented a breach or potential breach of such Warranty…”. There was no disclosure of the matters giving rise to the breach of warranty in the disclosure letter or as part of the Sellers’ original response to the Buyer’s due diligence enquiries. Accordingly, based on the evidence presented to the Court, the Buyer did not have actual knowledge of matters giving rise to the claim.
The Court found that the Sellers had made an actionable misrepresentation in their written due diligence response, particularly, that there were no ongoing investigations, etc. by any regulatory authority. The SPA included a fairly typical “entire agreement” clause which excluded pre-signing “….discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings…”. The Court concluded that this wording did not evidence any agreement to exclude representations or any reliance on representations and, as such, the Buyer had an actionable misrepresentation.
CONCLUSION AND COMMENTS
There are several key points for buyers and sellers to take from this case:
- If the parties intend to exclude actionable misrepresentation, clear and explicit language needs to be included in the agreement including:
- wording acknowledging the buyer is not relying on, and the seller is not making, any representations;
- an express exclusion of liability for misrepresentation; and
- an express waiver of all non-contractual remedies;
- A failure to disclosure key information, or to provide false responses to a buyer’s due diligence questionnaire, is highly likely to give the buyer grounds to bring a claim for breach of warranty, irrespective of the warranty limitations. From a seller’s perceptive, make sure you carry out a detailed, effective and open disclosure exercise in preparing the disclosure letter.