Sycamore Bidco Ltd v Breslin & Anor

Contractual warranties in a share sale agreement do not become representations merely because they concern facts known to the parties before completion. The agreement must contain language or structure giving them that additional character. In accounts litigation, accounting substance governs over transaction form. Compensation for lost future business is not turnover because it does not represent payment for services rendered. A material misclassification may breach an accounts warranty even if it does not alter profit or net assets, particularly where turnover is commercially significant. For damages, the court must value the company as warranted and as it actually was at the transaction date. The purchaser’s hypothetical response to accurate information may assist that valuation, but is not itself a separate causation test.

Sycamore acquired the shares in Gissings Group Ltd, whose principal operating subsidiary was Gissings Advisory Services Ltd. It later alleged that the 2007 accounts overstated turnover by including compensation received from Liberata and AXA, and by including sums connected with commissions and client rebates. It also alleged breaches of contractual warranties concerning accounts, contractual breaches and potential repayment liabilities.

Sycamore advanced alternative misrepresentation claims based solely on the warranties in the share sale agreement. The defendants disputed both the contractual breaches and the characterisation of the warranties as representations. A separate claim concerned additional consideration said to be payable following tax relief on long-term incentive plan payments.

1. Misrepresentation. The warranties were contractual warranties only. Their language, the structure of the agreement, the distinction between warranties and representations, and the contractual liability limits all pointed against dual characterisation. The court declined to follow the reasoning in Invertec Ltd v De Mol Holding BV [2009] EWHC 2471 (Ch). The misrepresentation claims therefore failed.
2. Accounts warranty. Under UK GAAP and FRS 5, substance governed over form. The Liberata compensation was compensation for lost future income, not payment for services rendered, and could not properly be included in turnover. Its inclusion materially misstated turnover and breached warranty 4.1. The absence of a related-party transaction note also breached that warranty. The AXA sum was similarly not properly turnover, but its misclassification alone was immaterial.
3. Other warranties. The six client rebate sums probably remained due, but the evidence did not establish a material breach of warranty 2.3 or a breach of warranty 3.12. Mr Brooks’s policy of withholding rebates from lost clients was, however, a fact likely to cause future material contractual breaches and constituted a limited breach of warranty 2.3. The Bank of New York and Rotch claims failed on the evidence.
4. Knowledge and damages. Knowledge acquired by management while acting for GAS was not automatically attributed to Sycamore merely because the individuals became its directors before completion. The correct measure was the difference between the value warranted and the actual value at the transaction date. The court valued the business at £12m and assessed damages by reference to the agreed or applicable purchase price, subject to further argument on the precise figure and tax gross-up.
5. LTIPs claim. The contractual machinery made the additional consideration payable once the relevant relief had been obtained. Any later repayment issue was governed by the agreement or the general law. The contractual waiver also excluded set-off of warranty claims against the LTIPs payment.

First-instance decision. No prior appellate decision is stated in the judgment.