Corporate Law Update

• The court refuses to allow a buyer of shares to amend its claim due to a backlog of cases caused by the Covid-19 pandemic
• The FCA has publicly censured an individual for permitting misleading statements in AIM admission documentation
• The Financial Conduct Authority is consulting on minor amendments to its Listing Rules
• The Institute of Directors is calling for an extension to the current relaxation of wrongful trading laws

Covid-19 is affecting the way people conduct their business, retain their staff, engage with clients, comply with regulations and the list goes on. Read our thoughts on these issues and many others on our dedicated Covid-19 page.

Court denies further claims under SPA due to Covid-19 pandemic

The High Court has refused to allow the buyers of shares in two companies to amend existing claims to incorporate new allegations, in part because the backlog of cases stemming from the Covid-19 pandemic would make listing a new trial date difficult.

What happened?

Scott v Singh [2020] EWHC 1714 (Comm) concerned the sale of a controlling shareholding in two companies which conducted road haulage businesses. In each case, the share sale agreement (SPA) provided for part-payment of the price on completion of the sale, with part of the price deferred for a period and additional payment due some time later.

Three months after completion, the buyers’ solicitors wrote to the seller alleging that there had been misrepresentations and breaches of warranties given under the SPAs. Six months later, the buyers commenced proceedings against the seller.

Following a case management hearing, the buyers applied to amend the particulars of their claim. In particular, they asked for permission to include a more substantial list of matters in respect of which the seller had allegedly made misrepresentations. They also asked for permission to add new claims where information had come to light that had given rise to greater loss.

The amended particulars of claim included new allegations of negligent misrepresentation, fraudulent misrepresentation, negligent misstatement, breaches of both express and implied terms of the SPAs, and breach of directors’ duties.

The seller argued that the amendments to the buyers’ claims would, in effect, result in a new case where no new information had come to light, and they should therefore be struck out.

What did the court say?

The court allowed some of the amendments but not others.

The judge adopted a two-stage approach:

• Did any of the new claims have a real prospect of success?
• If it did, would allowing the new material and the new claims cause the original trial date to be lost? If it would, did the requirements of justice nonetheless permit the buyers to bring their amended and new claims?

In some cases, the amendments were founded on existing material in buyer’s claim. These had a reasonable prospect of success and would not upset the trial timetable, and so the judge allowed them.

Other amendments had no realistic prospect of success and the judge simply dismissed them.

Some of the amendments had a prospect of success, but they would have required a marked increase in preparatory time to enable them to be heard. There would have been a need for significantly increased expert evidence, and the seller would have needed to recast significant parts of his defence.

Allowing the amendments would not have caused the trial to be elongated, but it was not likely that the parties would be ready for the scheduled trial date. The trial would therefore have to be relisted at a time when the court system was trying to overcome a backlog of cases postponed due to the on-going Covid-19 pandemic.

It had been open to the buyers to make the new allegations in their initial claim, but they had not raised them until later when they applied to amend their claim. It was not, therefore, in the interests of justice to allow the amendments.

What does this mean for me?

The judgment shows the importance of addressing all possible claims with a chance of success the first time around.

This is particularly relevant during the on-going Covid-19 pandemic, which has caused cases in the courts to mount up. With tighter restrictions on people gathering being introduced in England from Monday, logistical difficulties caused by the virus do not appear likely to disappear soon. Although there is scope to amend claims at a later stage, the court ultimately retains discretion to refuse amendments, and so a claimant should not count on being able to amend its claim in any substantial respect.

A claimant buyer should investigate the affairs of its new acquisition thoroughly and assess the likely success of any claims it may have in relation to its purchase. These might include some or all of the following.

• Breach of warranty. A claimant buyer should comb through every warranty in the SPA to check which may have been breached. It is possible that the same set of circumstances could constitute a breach of multiple warranties. Every relevant warranty should be listed in the buyer’s claim.
• Misrepresentation. The buyer should consider whether it has a potential claim in misrepresentation. In some circumstances, this may provide better recovery than a claim for breach of warranty. However, since Idemitsu Kosan Co Ltd v Sumitomo Co Corp [2016] EWHC 1909 (Comm), the scope for bringing claims in misrepresentation on a share sale is much narrower. A claimant buyer will not be able to launch a misrepresentation claim based on a contractual warranty and will instead need to rely on some pre-contractual statement made by the seller.
• Indemnity claims. Indemnities normally cover matters which the parties have identified before signing, so it is unlikely they will catch undiscovered issues. But it is always worth checking the wording of an indemnity to see whether it is wide enough to cover some of a buyer’s claim.
• Breach of duty. If the matter giving rise to the loss could amount to a breach of duty by the former directors of the acquired company, it may be worth considering whether the company can bring proceedings directly against those directors.
• Fraud. Generally speaking, if the seller has acted fraudulently, a claimant buyer may have claims, or be able to recover damages, that would otherwise be unavailable to it. For example, the buyer may be able to bring proceedings in the tort of deceit, and any contractual limitations on the amount the buyer can recover under the SPA will not apply if the seller has acted fraudulently. However, fraud can be notoriously difficult to prove, and a claimant buyer should not allege it without firm evidence.

At the same time, a buyer should recognise when a claim is unlikely to succeed. In this case, the buyers tried to bring a claim in negligent misstatement, arguing that the seller breached a duty of care to them. However, the courts have repeatedly found that a sale of shares will rarely create the kind of relationship between a buyer and a seller required to establish a duty of care.

Other items

• FCA issues public censure for misleading statements. The Financial Conduct Authority (FCA) has publicly censured an individual in connection with misleading statements in the AIM admission documentation for a company of which he was the Chief Executive Officer. The FCA initially imposed a fine on the individual, but the individual had since demonstrated serious financial hardship. The FCA therefore decided to impose a public censure and to prohibit the individual from performing any function in relation to any regulated activities going forward.
• FCA consults on changes to Listing Rules. The FCA has published Quarterly Consultation No 29, in which it is proposing minor changes to Chapter 8 of its Listing Rules to replace stray references to “equivalent documents” under the old Prospectus Directive Regime with references to “exempted documents” under the Prospectus Regulation.
• Institute of Directors calls for extension to wrongful trading suspension. The Institute of Directors has publicly called for the Government to extend its temporary relaxation of wrongful trading laws. Under the Corporate Insolvency and Governance Act 2020, until 30 September 2020, the court must assume on any wrongful trading application that a company’s directors are not responsible for any worsening of the financial position of the company or its creditors, creating a presumption that no wrongful trading has taken place. The Institute has not suggested a new expiry date for the relaxation.