The recent High Court case of Triumph Controls – v – UK Ltd & Anor v Primus International Holding Company & Ors [2019] EWHC 565 (TCC) raises several important practice points on warranties and disclosure for parties to corporate transactions.

The case concerned the acquisition by Triumph of Primus’ aerostructure manufacturing business, including facilities at Farnborough in England and at Rayong in Thailand for c. US$76.5 million and claims totalling c. US$63.5 million that Triumph sought to bring against Primus for alleged breaches of warranties in the share purchase agreement for the acquisition (the SPA) concerning certain delivery and quality problems at the Farnborough site.

Disclosure standard

A key point in issue in the case was whether the delivery and quality problems at the Farnborough site had been fairly disclosed by Primus against the relevant warranties in SPA. If they had been fairly disclosed, Primus would have a complete defence to the relevant warranty claims.

As is usual on corporate transactions, the parties agreed a standard of disclosure in the SPA, which the disclosures against the warranties in the SPA made by Primus to Triumph in or under the disclosure letter would need to meet in order to constitute fair disclosure.

The agreed disclosure standard in the SPA was worded as follows: “fairly and clearly disclosed in writing in or under the Disclosure Letter (with sufficient detail to identify the nature of the matter disclosed).”

The disclosure standard, notably, did not require a disclosure made by Primus to include details of the extent or scope of the subject matter – a position that the recipients of warranties on corporate transaction commonly seek to negotiate – only the nature of it.

In the case, the Judge was satisfied that the specific and general disclosures made by Primus (including by general disclosure of the contents of the virtual data room populated by Primus in connection with the deal) revealed that there were significant and persistent quality and delivery issues affecting its key customers and that such matters were fairly disclosed.

The Judge rejected Triumph’s argument that that none of the documents referred to in the Disclosure Letter fairly disclosed the true and full extent of the operational situation, on the basis that this was not required by the agreed disclosure standard.

The key takeaway of this decision for buyers on M&A transactions, investors on equity fundraisings, or other recipients of warranties on corporate transactions, is to ensure that the negotiated disclosure standard in the transaction documents is sufficiently robust. Insisting that disclosures need to identify the scope or extent of the subject matter in order to be fairly disclosed can minimise the risk that matters can be fairly disclosed by simply disclosing their existence with no detail as to their extent.

Recipients of warranties need to bear in mind that courts will typically enforce a disclosure standard agreed between the parties and are unlikely to impose an overriding higher standard of disclosure.

Warranties concerning projections

A key warranty claim in the case concerned Primus’ alleged breach of a warranty that “so far as the Sellers are aware, the forward-looking projections relating to the Companies have been honestly and carefully prepared.”

Triumph argued that carefully prepared forward looking projections would have reflected certain matters in respect of the proposed transfer of production from Farnborough to Thailand by showing a significantly reduced rate of transfer of work to Thailand, lower composites production at Thailand, increased costs of sales and consequently significantly reduced forecasted revenues, income and profits.

While warrantors (such as the sellers on a M&A transaction, or the investee company or founders on an equity fundraising) should generally resist giving warranties that are forward looking, or warranting the accuracy of projections, it is more common for them to agree, in principle, to warrant the basis on which certain projections have been prepared (such as the business plan prepared by an investee company in connection with an equity fundraising).

In his judgment, the Judge set out several considerations on what a person should do to “carefully” prepare a forecast, including:

• considering the latest available financial and operational information up to the date of finalisation of the forecast;
• consulting with relevant members of management with appropriate operational and specialist knowledge;
• reflecting the forecasting practice in that particular business and industry; and
• documenting the basis of assumptions on which the forecast is prepared (all of which should be reviewed and challenged by someone independent of the person preparing the forecast).

These considerations are instructive for warrantors to consider when deciding whether or not to give a warranty that a certain projection is carefully prepared (or diligently prepared, or other similar formulations).

If a warrantor believes that a particular forecast they are being asked to warrant has been carefully prepared does not meet that standard based on the above factors, they can either revisit the preparation of the projection (to bring it more in line with the above factors) prior to giving the relevant warranty, or disclose the assumptions on which it is based or any deficiencies in the preparation of the forecast against the relevant warranty.

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