Share sale unwound for fraudulent misrepresentation

Tony Forster

When Hampson Industries PLC sold one of its subsidiaries in the early hours of 23 June 2010, there was an email on the Chief Executive officer’s Blackberry – apparently unread, although it was received on the previous afternoon – giving him formal notice that one of the subsidiary’s main customers would be switching to another supplier by the end of August.

The email was the culmination of various communications since April between the CEO, Kim Ward, and the customer, Cummins Turbo Technologies, in which Cummins had consistently said that its decision to end the relationship was final. In all that time Mr Ward kept the information to himself. He did not tell the other Hampson directors or other colleagues who were handling the sale of the subsidiary – despite the fact that he knew Hampson was providing profit forecasts to potential buyers, and those forecasts assumed a solid upward trend of sales to Cummins over the next three years, representing about 34% of projected turnover.

To establish fraudulent misrepresentation, it must be shown that a false misrepresentation was made dishonestly: that is, knowingly, or without belief in its truth, or recklessly – in other words, careless as to whether it is true or false.  The person making the representation must have done so with the intent that it should be acted upon by the recipient.

It was a matter of showing that Mr Ward knew the forecasts were misleading and decided to stay silent in order that the buyer would rely on them. The standard of proof is the civil standard of the balance of probabilities (more likely than not, as opposed to the criminal standard, which is beyond all reasonable doubt), but since it is generally less likely than not that the CEO of a listed company would act in this way, powerful evidence of Mr Ward’s knowledge and intention was required. In fact, the judge appears to have had no hesitation in finding the necessary degree of dishonesty on Mr Ward’s part. The facts spoke for themselves.

Perhaps as much as anything the case illustrates the danger of overestimating the difficulty of proving dishonesty and assuming that, when it comes to evidence, there is usually a grey area because behaviour is open to interpretation and people have different recollections of the events.

The agreement contained no representations or warranties about customer-supplier relationships or the future potential of the business. Various boilerplate exclusion clauses precluded actions for innocent or negligent misrepresentation. No amount of boilerplate, however, can protect a seller in a case of fraudulent misrepresentation.

Erlson Precision Holdings Ltd v Hampson Industries PLC [2011] EWHC 1137 (Comm)

Tony Forster
DDI – 0117 9453 040
tforster@metcalfes.co.uk

 

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