When small print’s not charming

Recent reports in the press that Hewlett-Packard has called in the Securities & Exchange Commission, the SFO and even the FBI in relation to what it claims to be “serious accounting improprieties” at Autonomy have brought into sharp focus the principle of caveat emptor on any business acquisition.

But to what extent can an emptor caveat? And does the HP/Autonomy spat give practitioners cause to pause and dust down their precedents?

There is a tried and tested process involved in any acquisition that goes broadly like this: fact-find, draft warranties, receive disclosures against those warranties, consider the import and either ‘take a view’ or negotiate indemnities (depending on the relative bargaining strength of buyer and seller).

Having undertaken such a rigorous process might offer little solace to a buyer if their due diligence processes fail to unearth errors or misstatements, however made, but to put it simply, as far as the buyer is concerned there is no substitute for pre-contract investigations. 

It would be a perverse buyer indeed that enters into a sale and purchase agreement expecting to make a claim against the sellers. The whole transactional process from the point of view of the buyer is geared towards establishing the facts, eliminating the risks but providing a fallback position, just in case. A prudent seller will provide the buyer with as much information as possible, honestly and in good faith.

It is curious, but sale and purchase agreements never - or very rarely - contain any reference to the basis on which a business has been valued.

Business brokers talk of multiples, sales and purchase usually talk of the purchase price. They may contain some form of ‘reckoning up’ provisions relating to net ­assets, but that’s it.

If, for example, a business has been valued on the basis of a multiple of EBITDA, why not more explicitly state this and require a £1 for £1 (or £5 for £1 etc, depending on the multiple) reimbursement from the seller to the buyer in the event that it transpires that the EBITDA calculation was flawed or otherwise inaccurate? Such a reimbursement mechanism could, and arguably should, fall outside the limitations regime. This is unorthodox, but a ‘basis for consideration’ warranty is wholly logical.

Acting for a seller I might more closely examine the ‘entire agreement’ clause tucked away at the back of a sale and purchase agreement. Such clauses, if properly drafted and when coupled with a non-reliance provision, can exclude liability for all non-fraudulent misrepresentation, but they do not all do this and many precedents, being buyer-friendly, do not include such a clause. UCTA 1977 applies so any exclusion clause does have to be ‘reasonable’. Given the greater burden on a buyer in proving fraud or deceit, such an entire agreement clause could afford significant protections to a seller.

In short though, for lawyers and other professionals it will be business as usual, although we await the outcome of the present litigation with interest.