Buying a Company? Do You Really Know What You Are Taking On?

When buying a company, professional advice is always absolutely necessary so that you have a full understanding of exactly what you are taking on. In one case that proved the point, the purchaser of part of a global management consultancy group claimed to have found itself facing millions in unexpected tax liabilities.

The purchaser paid £41 million, less certain deductions, for two companies within the group. However, after the share purchase agreement (SPA) was signed, it claimed to have discovered that two overseas subsidiaries of one of the companies it had paid for owed a total of more than £3.4 million in tax. The group had provided warranties that the tax affairs of the purchased companies were in order.

The purchaser launched proceedings against the group, seeking damages for alleged breach of those warranties or an indemnity in respect of the alleged tax liabilities. Its case was, however, struck out by a judge on the basis that it had not notified the group of its claim in accordance with the terms of the SPA.

In dismissing the purchaser’s challenge to that ruling, the Court of Appeal rejected arguments that two letters it had sent to the group achieved compliance with the SPA’s notice provisions. The letters, which were no doubt broadly worded in order to keep the purchaser’s options open, did not identify the particular warranties or other provisions of the SPA relied upon and had thus left real room for doubt as to the nature of the claim.