The sale of companies is a natural part of business, and a Share Purchase Agreement (SPA) is the contract that governs the private sale of shares in a company.

Disputes arise when a buyer, having bought a company, finds out the company is not exactly what they expected. The buyer may seek damages from the seller and, in certain circumstances, the buyer may seek to rescind the contract altogether.

This article summarises some of the common disputes that can arise following the sale of a company.

Completion accounts

Completion accounts are accounts of the company that detail its assets and liabilities at the date of completion. Where a SPA contains a completion accounts mechanism, the price paid by the buyer is calculated in accordance with the assets and liabilities on the date of completion. A SPA will often provide for such disputes to be referred to an expert accountant for determination.

Earn-out clauses

Earn-out clauses are commonly used in a SPA when a shareholder of the company being sold is also a director and they are to continue working for the company. An earn-out clause provides the purchase price is assessed by reference to the profits of the company after completion, to incentivise the smooth running of the company following completion of the sale.
Disputes often arise from vague or poorly defined terms leading to disagreements over whether the conditions of the earn-out provision have been met; disagreements over how the company is managed after the acquisition; disagreements over financial reporting; and the timing of earn-out payments.

Warranties

Sellers of a company will often agree to a number of warranties, a type of contractual promise as to a fact about the company, in a SPA. If the warranties given turn out to be inaccurate, and the sellers have not made a specific disclosure in relation to it, this gives grounds for a claim for breach of warranty.

The remedy for breach of warranty is damages, usually the loss to the recipient arising out of the warranty’s inaccuracy. Buyers should be alive to the fact damages for breach of warranty will be reduced to the extent that the claimant fails to mitigate its loss.

Sellers wishing to limit their liability can include various standard exclusion provisions that seek to limit the scope of post-sale claims. For example, a SPA will usually specify minimum or maximum thresholds for warranty claims.

Defences to a breach of warranty claim include the situation the buyer complains of was not covered by a warranty, so there is no breach, or any breach of warranty was not material so no liability can arise.

Misrepresentation

Misrepresentation arises where a seller made a false statement of fact that induced the buyer to enter into the SPA. To make a successful misrepresentation claim the buyer must show that a representation was made to them, before they entered into the contract, and that representation induced them to enter the contract, and they suffered loss as a result.

Rescission is a potential remedy. In some circumstances, a buyer will want to secure a freezing injunction against the seller to stop them dissipating the proceeds of sale before judgment is entered against them.

Defences to a misrepresentation claim include showing the buyer already had the relevant knowledge of the circumstances giving rise to the claim, or that one of the four necessary elements of the claim is missing, in other words there was no misrepresentation.

Other common causes of action

A buyer may pursue:

• Non-performance of obligations
• Non-fulfilment of a condition precedent
• Breach of a non-compete clause

How to bring a claim

The SPA will often provide a mechanism for resolving disputes aside from court, for example mediation, expert determination or arbitration.

If you have a claim, it is important to act quickly as the SPA will include notice requirements that must be strictly adhered to. Seeking legal advice at an early stage is key.

This article was first published in London Business Matters magazine in November 2024.

Disclaimer: The information on the TV Edwards website is for general information only and reflects the position at the date of publication.