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Navigating Share Purchase Agreement (SPA) Disputes - An In-depth Guide

Author: Nicola Sharp  27 March 2024
4 min read

Disputes over share purchase agreements (SPAs) arise after the buyer has bought the business, and found out it is not exactly what they thought. Common scenarios include;

  • The business is not performing as well as the buyer expected.
  • The buyer discovers an environmental liability that they were not aware of.
  • The tax liabilities of the business are higher than the buyer was made aware of.

Those are a few examples, but there are all sorts of problems that a buyer may discover once they take the reins of a new business.

These unexpected challenges may lead the purchaser to seek damages from the seller, if the business is not deemed as valuable as the buyer thought when it agreed the purchase price.

In the most serious cases, the buyer may seek to rescind the contract altogether. 

Common Causes of Action that Buyers Pursue

Breach of Warranty

Usually an SPA dispute involves a breach of warranty. For example, the seller has provided a warranty to the buyer that the accounts are a true and accurate reflection of the financial position of the business. When a buyer gets into the business, they may start to question if the business is as profitable as they thought, and query whether this warranty was true. 


Misrepresentation

Another common cause of action is misrepresentation, where the buyer alleges that the seller made a false statement of fact that induced them to enter into the contract. This is more complicated than a breach of warranty claim, which follows the principles of breach of contract. Instead, the buyer must show that (i) a representation was made to them, (ii) before they entered into the contract, and (iii) that representation induced them to enter the contract and (iv) they suffered loss as a result. 

Freezing Injunctions

The reason buyers may seek a cause of action in misrepresentation is to pursue a rescission remedy, or because they are concerned that they have been defrauded out of the purchase price. In some circumstances, a buyer will want to secure a freezing injunction against the seller to stop them dissipating the proceeds of sale before judgment is entered against them. Bringing the claim in fraudulent misrepresentation (or deceit) is a stronger claim to justify a freezing injunction. 

The other actions that a buyer may pursue include;

  • Non-performance of obligations
  • Non-fulfilment of a condition precedent
  • Breach of a non-compete clause    

Remedies Available to the Buyer 

Damages

The remedy for breach of warranty is damages. But damages are complicated to calculate and often require the services of a forensic accountant. That’s because damages are calculated (in the context of a share sale) by comparing the difference in value between:

  1. The value of the shares with the warranty being true; and
  2. The value of shares given the true position.

That means that the loss is dependent on the impact of the breach of warranty on the market value of the shares. Necessarily, there is often a level of speculation in this calculation. The buyer is unlikely to receive pound-for-pound compensation.

Rescission

Rescission is potentially available in misrepresentation claims. If the misrepresentation is negligent or fraudulent in nature then the buyer may seek rescission, but the remedy is not available for an innocent misrepresentation. 

If recession is awarded, then the buyer is put back in a position as if the contract had never existed. That means that the buyer recovers the full purchase price, and returns the shares. 

Defences Available to a Seller

The defences available to a seller include:

  • The buyer already had the relevant knowledge of facts or circumstances giving rise to the claim.
  • There was no misrepresentation. One of the four necessary elements of the claim is missing.
  • There was no breach. The situation the buyer complains of was not covered by a warranty.
  • Any breach was not material so no liability can arise. 

The seller cannot be liable for circumstances that the buyer was aware of when they entered the contract. That is why the due diligence process is so thorough, and the disclosure letter is long and detailed. Those mechanisms protect the seller from potential claims later down the line. 

If the relevant information that gave rise to the claim was contained in the data room, or in the disclosure letter, that will defeat a breach of warranty claim brought by the buyer.

Pitfalls in SPA Disputes

SPA disputes are complicated and fact specific and each claim will have its own potential for pitfalls. Here are a few to be aware of.

Deferred Consideration

Depending on how a given deal is structured, the SPA may include an agreement for deferred consideration. The buyer pays the consideration over a period of time, and paying the balance depends on the performance targets of the business being met and key individuals remaining in the business.

If a claim is afoot, then buyers are tempted to withhold the deferred consideration when it falls due. This can be a risky strategy. Depending on the circumstances, the seller may still be legally entitled to the deferred consideration, despite the claim against them. 

If that is the case, the buyer may face counterclaims, statutory demands and even a winding up petition for withholding deferred consideration. 

Limitations on Quantum

The SPA will usually specify minimum (de minimis) or maximum thresholds that apply to warranty claims. For example, the buyer may be precluded from bringing a claim that is less than £100,000, or more than £15 million.

Given the complexity of these claims, calculating loss is often the job of a forensic accountant, which can take months to finalise. The buyer does not need to give an accurate figure on loss from the outset, but they must be confident that it falls within the range permitted by the SPA.

Notice Requirements

The SPA will include notice requirements that must be strictly adhered to. These requirements protect the seller from the uncertainty of potential claims for perpetuity, that relate to issues beyond their tenure at the company.

The notice requirements will usually include a time limit by which to notify the seller of any potential claim. That’s usually 6,12, or 18 months from the date of completion, but the parties are free to decide an appropriate time limit.

The clause will also specify the information that must be included in a notice in order for it to be deemed valid. That will usually include;

  1. which warranty or warranties have allegedly been breached.
  2. an estimate of the amount of the claim.
  3. the details that give rise to the claim.

A buyer must comply precisely with the notice requirements and failure to do so could extinguish the entire claim. 

How to Bring a Claim in SPA Disputes

If you are considering bringing a claim arising out of an SPA, the key consideration is to act quickly. You may need an urgent freezing injunction, and in any event, you will need to comply with the notice requirements. Seek legal advice at an early stage.

It often takes time to gather the necessary evidence required for an injunction, and calculating the estimated loss is complex. In order to give yourself the best chance of success, engage a lawyer early to consider the merits of your claim.

At Rahman Ravelli, our expert SPA dispute lawyers have extensive experience of these sorts of disputes and can advise you on an urgent basis. 

 

 

Nicola Sharp C 09983

Nicola Sharp

Partner

nicola.sharp@rahmanravelli.co.uk
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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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