Court entertains argument that statements in draft disclosure letter amounted to misrepresentations
03 April 2025The High Court has entertained the argument that an allegedly false statement contained in a draft disclosure letter produced during the course of transaction negotiations may have amounted to a misrepresentation.
The decision follows an application for summary judgment and strike-out and so does not create binding precedent on the point. The case will proceed to a full trial. However, the judge’s comments are interesting and the ensuing decision, if a full trial takes place, will be one to watch.
What happened?
Veranova Bidco LP v Johnson Matthey plc and others [2025] EWHC 707 (Comm) concerned the sale of shares in a health business.
As is usual on a share sale, the parties negotiated:
- a sale and purchase agreement (SPA), which contained a number of warranties, given by the sellers to the buyer, about the state of the target business; and
- a disclosure letter, which set out the respects in which the warranties were not true.
For more information on disclosure on the sale of a business, see box below titled “What is a disclosure letter and how does disclosure work?”.
Following completion, the buyer discovered that, before the SPA and disclosure letter were signed, one of the target company’s customers had received an offer to supply a particular pharmaceutical product at a significantly better price than that at which the target had been supplying.
That had, in turn, triggered a contractual right for the customer to switch supplier and a right for the target company to requote to supply that product at a better price. Indeed, four days after the SPA and disclosure letter were signed, the target company matched the competing offer.
The buyer alleged that the seller had not disclosed the competing offer or the fact that the customer had triggered its contractual right to switch supplier.
More than this, the buyer pointed to statements that had appeared in drafts of the disclosure letter before it was signed. These included that “no competing offer … had been notified” and that it was “not possible to qualify the impact of ongoing price negotiations”.
The buyer alleged that these statements were representations on which it had relied when entering into the SPA. It also alleged that the statements were intentionally false. It therefore brought a claim in fraudulent misrepresentation.
The sellers resisted the claim, arguing that it had no prospect of success. They gave two reasons:
- case law showed that an SPA cannot contain representations, and trading drafts of SPAs does not give rise to representations based on contractual warranties. The same approach should apply to disclosures in a disclosure letter, which merely served to frame the warranties; and
- in any case, the disclosure letter contained an express statement that “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 sellers applied to the court for summary judgment in their favour or to strike out the buyer’s claim on the basis that it had no merit.
The key question for the court at this stage was not whether the sellers had in fact made misrepresentations. Rather, the judge needed to decide whether the buyer had a real prospect of succeeding in its claim at a full trial or whether it had no reasonable grounds for bringing its claim.
What is a disclosure letter and how does disclosure work?
On the sale of a business, the buyer and the seller will enter into a sale and purchase agreement (SPA). This is the case whether the buyer is acquiring the shares in a target company (or other legal entity) or the assets and undertaking of the seller’s business.
Typically, the SPA (or, in some cases, a separate warranty deed) will contain a series of statements by the seller to the buyer, mainly concerning the state of the target business (although some will relate to the seller itself). These are known as the warranties and are contractual promises that the business is in the state described.
The basic premise is that, if a warranty is untrue, the buyer can sue the seller for breach of contract and claim damages for any drop in the value of the business (this is a slight over-simplification but describes the core concept).
The breadth and detail of the warranties is a matter of negotiation. The stronger the buyer’s bargaining position, the more extensive a warranty suite it may be able to obtain (although, often, the warranty suite is dictated by the warranty and indemnity (W&I) insurance coverage available, as noted below).
In some cases, a seller will refuse to give warranties relating to the target business. This includes (for example) if the seller is an institutional investor. In this case, the buyer may need to obtain the warranties from someone else, such as existing management (often in a separate warranty deed, as noted above).
It has in recent years become common for a buyer to put W&I insurance in place. This means that, if there is a breach of warranty, rather than claiming against the seller, the buyer can claim under an insurance policy. This avoids taking a credit risk on the seller and facilitates transactions by providing a seller with a “clean break” post-sale.
Warranties are normally framed in very broad terms, such as the following (again, these are simplifications, but they illustrate the principle):
- the Company is not party to any legal proceedings;
- the Company is not in breach of any material contract to which it is a party; and
- the Company has not given notice to terminate the employment of any employee.
Often, warranties are so broad they cannot be true (or are simply untrue, even if very specific). To deal with this, the seller can usually make disclosures. These are statements of fact about the target business or its activities that contradict the statements set out in the warranties.
Disclosures are usually set out in a separate disclosure letter (although, in some jurisdictions, they may appear in the SPA itself). The disclosures “qualify” the warranties, such that the buyer cannot claim for breach of warranty in respect of a disclosed matter.
The buyer can, however, still claim under the warranty in relation to anything that has not been disclosed.
For example, the seller may warrant that the target company is not party to any legal proceedings. The seller might then disclose that the target company is currently being sued by a supplier for non-payment of an invoice. The buyer will not be able to bring a claim for a breach of warranty on the basis of this matter, because it has been disclosed.
However, if it later transpires that an employee has claimed against the target company for (say) harassment and this was not disclosed before signing, the buyer will be able to sue for breach of warranty of the “no legal proceedings” warranty, because that warranty will not be qualified.
What did the court say?
The court reflected on a line of cases that have considered the extent to which contractual warranties (as opposed to disclosures in a disclosure letter) can amount to representations.
These cases can, at times, seem inconsistent, but the judge drew them together into a single principle: giving a contractual warranty does not, without more, amount to making an actionable representation.
In other words, the fact that parties negotiate warranties and include them in a signed SPA does not automatically mean that the seller is making a series of representations on the same terms.
But it is possible, in certain circumstances, that a seller could make a representation in the same terms as, or similar terms to, a contractual warranty. However, this would require the conditions for a misrepresentation to be satisfied:
- it would need to be a statement of fact;
- it would need induce the other party into entering into the SPA and so, in this sense, would need to be made before the SPA is signed; and
- it would need to be untrue.
In the judge’s view, it was not implausible to suggest that this is at least possible in relation to disclosures set out in a disclosure letter. There was potentially a distinction between a warranty, which is a promise and not a statement of fact, and a disclosure, which, although intended to pare back the scope of a warranty, is essentially a communication of facts to a buyer.
The judge noted that, although a disclosure letter serves a purpose of qualifying the warranties (and so, in that sense, to “fix” the terms of the SPA), that does not mean this is its only purpose.
The court saw no reason why a disclosure letter could not have a second purpose of providing information to a buyer, with the secondary effect of potentially giving rise to representations.
The judge had some sympathy for the seller’s argument that the words “the disclosure of any matter hereby shall not imply any representation …” prevented the disclosure letter from containing representations, but noted that, as a matter of English law, this kind of statement may not be effective to exclude fraudulent misrepresentations.
The court therefore allowed the case to proceed to a full trial.
What does this mean for me?
It is important to remember that, as a decision on a summary judgment or strike-out application, this case has limited precedent value. The court’s decision at this stage is only that the case is arguable.
However, the decision to allow it to proceed to a full trial opens up the susceptibility of a seller on a business sale to making representations to a buyer – whether intentionally or inadvertently.
The distinction is relevant, because, depending on the true value of the business being acquired and the price paid for it, a claim in misrepresentation can provide greater compensation than a claim for breach of contract. If the misrepresentation is fraudulent, the buyer may be able to unwind the sale entirely.
The risk of this is arguably greater with disclosures than with contractual warranties. Contractual warranties are often broad in their language and usually negotiated between the parties (with any W&I policy and its coverage and pricing also of relevance). They are, therefore, more in the nature of a risk apportionment mechanism and less likely to be characterised as information or facts communicated by a seller to a buyer.
Moreover, warranties generally sit within a contractual context that is crafted carefully to avoid claims in misrepresentation.
As a result, trading drafts of warranties within an evolving SPA mark-up is unlikely to give rise to parallel representations.
Disclosures are different. They are not typically negotiated in the same way as warranties. A buyer might comment on the language of disclosures, but this is normally to ensure they are detailed or specific enough to allow the buyer to decide how to respond, or to clarify ambiguities.
Fundamentally, a disclosure is a means by which the seller or other warrantor informs a buyer of respects in which a warranty will not be true. It does so by communicating facts. In this sense, disclosures are unilateral statements by the seller or other warrantor and a response to the buyer’s enquiries.
The process of disclosure often forms the final stages of a buyer’s due diligence exercise. The way in which a buyer reacts to a disclosure is, in principle, no different from how it reacts to information disclosed during due diligence (e.g. by including conditions or indemnities in the SPA).
In fact, on UK transactions, it is common for the transaction data room – the backbone of the due diligence exercise – to be disclosed in its entirety (albeit still subject to a predefined standard of disclosure).
The prospect that disclosures – even in a draft disclosure letter – could form parallel representations is potentially significant. We will be monitoring this matter closely and intend to report on the judgment following a full trial, if one goes ahead.
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