Buyers awarded damages for failures in share purchase agreement
The buyers of three companies have been awarded damages for breach of warranty under the share purchase agreement (SPA).
The case involved companies that manufactured complex metal components for aircraft. The buyers were Triumph Controls UK Ltd and Triumph Group Acquisition Corp; the sellers were Primus International Holdings, Primus International Inc and Primus International Cayman Co (2019).
In March 2013, following negotiations and the submission of financial forecasts, Triumph agreed to purchase the share capital of the three Primus companies, one in the UK ("Farnborough") and two in Thailand.
The SPA contained several operational and financial warranties.
Following the acquisition, Triumph discovered a significant shortfall in the companies' expected revenue, mainly due to operational issues and delivery arrears at Farnborough. In October 2013, the companies' financial performance was significantly worse than forecast.
Triumph asserted that, despite having provided substantial financial support and extra management input, the three companies remained in debt and the purchased shares were worthless. They sought damages for breaches of the SPA.
The High Court ruled in their favour. It held that the SPA provided that: "so far as the sellers are aware, the forward-looking projections relating to the companies have been honestly and carefully prepared."
Primus had not warranted accuracy, only careful preparation. The term "carefully prepared" was not defined in the SPA. The plain and natural meaning of those words was that the projections were warranted to have been prepared with care by those who had the required skills and knowledge.
Those projections had not been carefully prepared because Primus had failed to consider key operational and financial assumptions.
As a result, the three companies' known operational and financial position had not been adequately modelled. Proper preparation of the projections to reflect the three companies' net present value and true profitability would have resulted in a lower purchase price.
Compensation was awarded based on the difference between what the three companies as warranted would have been worth and what they were actually worth.
Please contact Sing Li if you would like more information about the issues raised in this article or any aspect of contract law and share purchases.