Decision Inc Holdings Proprietary Limited & Anor Stephen Garbett & Anor

The court construed and applied warranties in a share sale agreement (SPA) and awarded damages for a breach of the warranty as to prospects. The key warranties in issue were clause 19.1.2 (no material adverse change in turnover, financial position or prospects since the accounts date) and clause 20 (financial and other records do not contain material inaccuracies). The court held that the documents relied on as "pipeline" and forecasts were not "records" within clause 20 and so did not give rise to liability under the records warranty. By contrast, on the objective baseline/actual test for a material adverse change the court found that the sellers had, as at the effective date, mis‑stated the Company’s prospects in a way that was materially adverse and that would have led a reasonable buyer to renegotiate the price. The purchasers’ knowledge and the contractual notice requirements were considered and rejected as defences. Damages were assessed by valuing the Company "as warranted" and "as actual" and awarding the difference (with account taken for unpaid consideration), resulting in judgment for the Claimants for £1.31m.

Background and parties: Decision Inc Holdings and its assignee purchased Copperman Consulting Limited from the two defendants by SPA effective 12 October 2018. The purchasers later alleged breaches of SPA warranties: (i) clause 19.1.2 (no material adverse change in turnover, financial position or prospects since the accounts date) and (ii) clause 20 (financial and other records contain no material inaccuracies).

Nature of the claim: The Claimants sought damages for breach of those warranties and relied on several pipeline documents, forecasts and invoice schedules produced in the course of negotiations. The Defendants pleaded that the Claimants knew the true position (clause 10.7) or that notice under clause 11.4 was defective.

Issues for decision:

• Whether the documents complained of fell within the warranty of "Records" in clause 20 and whether they were inaccurate;
• Whether, as at the Effective Date, there had been a material adverse change in turnover and/or prospects under clause 19.1.2;
• Whether the purchasers had actual knowledge such as to defeat the claim (or to engage clause 10.7) and whether the notice under clause 11.4 was defective;
• If liability, the appropriate measure and quantum of damages.

Court’s reasoning: On the records warranty the court adopted an orthodox distinction between underlying accounting/ledger records and management analyses/forecasts: the pipeline documents, management forecasts and invoice schedules were not "records" within clause 20 and, even if they had been, they were found to be accurate records of the sellers' beliefs rather than inaccurate accounts. On the material adverse change (MAC) warranty the court adopted an objective three‑stage approach (establish baseline expectation, establish actual position at the relevant date, assess materiality by asking whether a reasonable buyer would have required a renegotiation or withdrawal). The court emphasised the buyer’s strategic horizon and that for this target a short‑term hiccup could still be material because of the firm’s high operational gearing and reliance on a small number of large projects.

The judge analysed the four principal prospective contracts (BBC, TfL, Nidec, Kerry), concluded that the sellers’ optimism as to their near‑term revenue was not one a reasonable seller would have shared, and accepted the experts’ revised forecast of actual expected EBITDA. The purchasers did not have actual knowledge of the true deterioration at completion; the August invoice schedule was misleading and did not give them actual knowledge. The contractual notice was held sufficiently informative for SPA purposes. For quantum the court applied the agreed valuation mechanic (compare "as warranted" and "actual" values), used the parties’ negotiated multiple of 6.43, adjusted historic EBITDA for agreed items and awarded the difference subject to accounting for unpaid consideration, yielding judgment for £1.31m.

Procedural posture: First instance determination in the Companies Court (Chancery Division). The judgment addresses construction of SPA warranties, proof of MAC, defences of knowledge and notice and the valuation/quantum exercise.

The claim succeeded in part. The court held that: (i) the documents relied on (management forecasts, pipelines and invoice summaries) were not "records" within clause 20 and no breach of the records warranty was made out; (ii) there was no material adverse change in turnover but there was a material adverse change in the Company’s prospects as at the Effective Date because the reasonable baseline expectations were materially higher than the true expected outturn; (iii) the Claimants did not have actual knowledge of the downturn at completion and the Defendants’ defences based on knowledge or defective notice failed; (iv) damages were assessed by comparing the value "as warranted" with the value "as actual" (using the agreed multiplier 6.43 and adjusted EBITDA), and the Claimants were awarded £1.31m. The court gave judgment for the Claimants for that sum.