GG132 Ltd v Hampson Industries sees the rarely-used remedy of rescission ordered following a share sale by listed company
This post was updated on 6 June 2011; see end of post.
The High Court has ordered that the sale by Hampson Industries plc (Hampson) of the entire issued share capital of a subsidiary (Subco) to GG132 Ltd (the Purchaser) should be rescinded because a fraudulent misrepresentation was made in order to induce the Purchaser to enter into the share purchase agreement (the Agreement).
The remedy of rescission requires that the Agreement be undone. Accordingly, Hampson will have to re-acquire the shares in Subco and reimburse the Purchaser with the original cash consideration of £2.5 million, and will have to make a contribution towards the Purchaser’s legal costs. The Purchaser and its backers are reported also to be seeking damages for the cost of running Subco whilst it was in the Purchaser’s ownership, and for the loss of opportunity of making a different acquisition.
It is rare that rescission is ordered as a remedy in cases involving the sale of an entire company or business. This rarity is because rescission requires that the parties be put back in the positions that they were in before the sale, and this is generally not possible to achieve (because, for example, the business is restructured or merged with another business after the sale). In this case, the fraudulent misrepresentation was discovered almost immediately after completion of the sale, with the result that rescission was possible.
The remedy of rescission is sometimes excluded by the contractual provisions of a share or business purchase agreement, although that exclusion is not effective where there has been fraudulent misrepresentation on which a party relied when entering into the agreement.
Background
Hampson is listed on the main market of the London Stock Exchange. Subco was an automotive parts manufacturing company that was wholly-owned by Hampson. The Purchaser was a company incorporated by private investors for the purposes of the acquisition. The sale of Subco to the Purchaser was completed in June 2010.
The fraudulent misrepresentation
The usual information memorandum describing Subco was prepared and circulated to potential purchasers. The Purchaser’s backers entered into negotiations to buy Subco. Whilst those negotiations were in train, a board director of Hampson (the Director) was told by a major customer of Subco that it was going to terminate its relationship with Subco. The result of that termination would be that Subco would be much less attractive to a potential purchaser. The sales forecasts in the information memorandum would be false and misleading if they did not reflect the customer’s intention to terminate the relationship.
The Director did not communicate the customer’s intentions to either Hampson or to the Purchaser. The sale of Subco to the Purchaser was completed. The following day the customer sent an e-mail confirming the termination of its relationship with Subco.
The Director maintained that he had believed that the customer was not intending to terminate its agreement with Subco, but instead was using the threat of termination to negotiate lower prices. The customer’s representatives maintained in court that it had been made clear to the Director from the start that the customer was definitely ending the relationship, and that evidence was preferred by the court. So the Director had known that the sales forecasts given to the Purchaser during the negotiations for the sale of Subco were false and misleading, but had not alerted any party to that fact, and had known that the Purchaser was relying on those forecasts. (The Director left Hampson shortly after the sale of Subco was completed.)
As a result, a fraudulent misrepresentation was made to the Purchaser and rescission of the share purchase agreement was the remedy granted by the court.
Hampson released a trading update on 21 April 2011 which can be read here. In that update, the Chairman states that “we are naturally disappointed and are very surprised at the outcome of this litigation, given the professional advice consistently received by the Board on this matter”. Hampson is considering whether to appeal.
UPDATE 6 June 2011: Following the court’s granting of the remedy of rescission, Hampson and the Purchaser have reached a commercial settlement (Hampson having decided not to appeal), and so the share purchase agreement will not be rescinded. The terms of the settlement can be read in Hampson’s RNS statement of 3 June 2011 here.
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