Authors
Corporate transactions, disclosure and warranties: The High Court has engaged with the argument that an allegedly false statement contained in a draft disclosure letter produced during the course of transaction negotiations may amount to a misrepresentation.
Case context
Veranova Bidco LP v Johnson Matthey plc and others [2025] EWHC 707 concerned the sale of shares in a health business for a reported £325m in consideration. This involved the parties negotiating a sale and purchase agreement (SPA) and a disclosure letter.
In an SPA, warranties are typically provided from the seller (or other warrantor) to the buyer. These are a series of statements concerning the state of the target company and its business/assets.
If a warranty is untrue, the buyer may be able to bring a contractual claim against the seller and claim damages, which are usually assessed to be the difference in the value of the business of the target company had the warranty been true (although this is not always the case and further advice should always be sought in respect of potential warranty claims).
In order for the seller to mitigate the risk of claims for breach of warranty, disclosures are typically made against the warranties and contained in a separate disclosure letter. Disclosures are statements about the target company or business that do not fully align with the statements contained in the warranties. The SPA will contain a clause providing that a buyer cannot bring a claim for breach of warranty if such matter is disclosed, providing such disclosure meets the relevant standard of disclosure as set out in the SPA. It is therefore said that the disclosure “qualifies” the warranty accordingly.
In this case, the Claimant (the buyer), brought a claim for fraudulent misrepresentation when, following completion, it discovered that before the SPA and disclosure letter were signed, one of the target company’s customers had received an offer to supply a pharmaceutical product at a much more competitive rate than that at which the target company had been supplying at the time. Consequently, the customer had a right within its contract with the target company to switch suppliers, and the target company had a right to negotiate a requote with the customer at a lower price.
It was discovered that, four days after the parties signed the SPA and disclosure letter, the target company matched the competing offer.
The claim
The Claimant’s arguments were as follows:
- The seller had neither disclosed the competing offer nor the fact that the customer had triggered its contractual right to switch supplier.
- The seller’s statements in drafts of the disclosure letter that “no competing offer … had been notified” and that it was “not possible to qualify the impact of ongoing price negotiations” had been relied on by the Claimant when entering into the SPA and such statements amount to representations[1] (for the purpose of a fraudulent misrepresentation[2] claim), which were intentionally false.
The defence
The Defendant sought a summary judgement or to strike out the allegation based on the following reasoning:
- The draft disclosure letter could not give rise to actionable representations, only a breach of the warranties. There is caselaw that states that an SPA (and drafts of the SPA) cannot contain representations for the purposes of misrepresentation.
- The disclosure letter was merely a framework to set out the warranties. An express statement was also included that said, “the disclosure of any matter hereby shall not imply any representation …”, and so the disclosure letter and any preceding drafts could not contain any misrepresentations.
The Court’s view
The question for the Judge was whether the Claimant had a real prospect of success at trial or whether it had reasonable grounds to bring a claim. The Court concluded that whether the draft disclosure letter contained actionable representations was a question of fact that required a full trial and investigation. The Court:
- Highlighted that “there is no “rule” about what can or cannot amount to a misrepresentation when parties exchange what are to become contractual documents”
- Emphasised that “only agreeing to provide a warranty will not, without more, amount to making a representation of fact.”
- Stated that “there is nothing inherently absurd or implausible about saying that a disclosure letter provides factual information upon which the recipient might reasonably rely, just because its primary contractual function will be to qualify the content of the warranties.”
Lessons learned
While the case remains ongoing, the Court’s commentary remains a cautionary tale for sellers.
It is important to remember the risk of disputes arising where representations are intentionally or inadvertently made.
Sellers should seek to disclose all relevant information which may relate to any of the warranties in an SPA to their lawyers and continue to keep them updated as the transaction negotiations continue. Transparency is key to avoid disputes. If there is any doubt as to whether information should be disclosed, sellers should seek advice from their lawyers on the matter.
To discuss any of the issues raised in this article, please contact our Corporate and Commercial Disputes team.
[1] Representations are statements of opinion which may not become terms of the contract, or statements made by one party which may have induced the other party to enter into the contract.
[2] Fraudulent misrepresentation occurs where a false representation has been made knowingly or recklessly as to its truth.
Authors