Provide more info
or run the risk of
having to pay for it

The "eternal question" of the responsibility to provide information in connection with the selling of companies has been brought up in a Court of Appeal ruling.

Guarantees after due diligence?

For those unaccustomed to this area of law it may seem strange that a buyer would first spend several weeks doing extensive research on the company to be bought, a so called due diligence examination, and then demand guarantees from the seller about the very same issues he has just examined, where he has the knowledge and the possibility to appraise the situation on his own.

Doesn´t the buyer have a responsibility for what he has discovered during the examination? And what is the responsibility of the seller for the information and the way in which this has been conveyed to the buyer and the buyer´s team? These questions were all brought to a head in an interesting ruling by the Court of Appeal for western Sweden.

The acquisition of shares

In October 2007 Anelea Sverige AB (Anelea) sold all shares in its subsidiary Rationell Parkeringsservice (RPS) for SEK100 million to Europark AB. Part of the acquisition was the company ParkSmart AB, which among its other operations ran a parking garage at Åre. This garage had been in service since 2006, and was currently operating at a substantial loss. It was the single most unprofitable part of RPS.

Prior to the acquisition Europark performed a standard-type due diligence examination of the target company. As part of this, they demanded to see a list of the fifteen most unprofitable parts of the company. The so called Åre contract was not on this list.

Lack of warranty

Europark maintained that there was a lack of warranty, and thus demanded compensatory payment. Anelea on the other hand claimed that even if the contract did not appear on the list, Europark had received knowledge of these losses in other ways. According to Anelea this information was conveyed in the accounts that had been made available to Europark before the acquisition as well as in an email message, which had been handed over during a meeting.

Furthermore, the contract had been mentioned in another meeting between the parties prior to the acquisition.

The Court of Appeal concluded that the Åre contract had indeed been mentioned during the meeting, but that there was no way of establishing specifically what had been said. Finally, regarding the accounts which had been made available to Europark in connection with the due diligence examination, the court of appeal concluded that there were figures indicating that the contract was running at a loss, but this fact was ruled to be of minor importance.

Thus, the deciding circumstance was that in spite of a direct demand from Europark, Anelea had not listed their most unprofitable contract in the list of unprofitable operations. In this situation, Anelea could not defend themselves by stating that Europark had been given other files containing information which could show that the Åre contract was running at a loss.

Europark was awarded the right to a reduction of the price of the company corresponding to almost SEK7 million.

Questions of evidence

Under normal conditions a buyer cannot claim compensation for a fault when it must be concluded that he was aware of this at the time of the acquisition. However, when the seller has made a warranty pledge, he has the burden to prove that there is no fault. This is made clear by the ruling of the Court of Appeal, since the evidence Anelea claimed in this case was not considered sufficient to show that Europark were aware of the Åre contract.

Conclusions and remarks

At the sale of a company where the acquisition contract includes warranties the seller has a substantial responsibility to provide accurate information prior to the acquisition. While it can be expected that the buyer assumes responsibility for the information he has gathered in the due diligence examination, the compilation of computer files and the answers to questions asked must be delivered accurately, and they must reflect the actual conditions.

The consequences of a warranty structure in terms of burden of proof create a particular risk for the seller, and also a need for completeness and accuracy in the information given, in order for the buyer to be regarded as fully informed of relevant circumstances in the company.

In English law particular demands are placed on the seller for so called disclosures to have an alleviating effect in connection with the responsibility for information given. The practical consequence of the ruling of the court of appeal may be that a similar demand is stipulated in Swedish law, and that additional information must be both accurate and precise if it is to compensate for a lack in answers given to the buyer´s questions during the due diligence process.

Thus, anyone selling a company has every reason to present all the information the potential buyer requests and which the seller has access to regarding the matter at hand.