Non-contracting selling shareholder held liable for fraudulent misrepresentation
The High Court held in Ivy Technology Ltd v Martin  EWHC 1218 (Comm) that a seller who was not party to the share purchase agreement (SPA) and had very limited contact with the buyer and their representatives, was liable for false representations made in negotiations.
Facts of the case
Mr Bell and Mr Martin each beneficially held 50% of the shares in several companies that made up 21Bet. In April 2019, Ivy Technology Ltd entered into an SPA with Mr Martin for the sale and purchase of the entire issued share capital of 21Bet. Mr Martin was stated to be the sole beneficial owner of the shares.
Mr Bell was not a party to, or even mentioned in, the SPA. Mr Bell never directly communicated with Ivy and only attended one meeting with Ivy’s representatives. Furthermore, the SPA contained a clause which stated that the agreement did not confer any rights, obligations or liabilities on any third party not named in the SPA.
Mr Martin gave various warranties under the SPA including that 21Bet had no liabilities it could not pay when due, and that a schedule setting out 21Bet’s assets and liabilities gave a true and fair view of 21Bet’s financial position (the “Warranties”).
Shortly after it acquired 21Bet, Ivy discovered that in actuality the companies had significant outstanding liabilities and a number of the income streams set out in the schedule did not exist. 21Bet was consequently unable to meet its debts as they fell due and was wound up.
Ivy argued that Mr Martin and Mr Bell had fraudulently misrepresented the profitability of 21Bet and had breached the Warranties.
The High Court held that as Mr Bell was not a party to the SPA, he was not liable under it for the breach of Warranties. However, the High Court held that Mr Bell (along with Mr Martin) was liable for fraudulent misrepresentation. Mr Martin had misrepresented 21Bet’s profitability to Ivy during negotiations and it was held that he had acted as Mr Bell’s agent in making these statements.
Previous case law indicated a principal may be liable for their agent’s false representations made in negotiations that the principal had given the agent actual or ostensible authority to carry out. In Mr Bell’s witness statement, he confirmed that he had told Mr Martin to “just get on with a sale if that is what he considered best”. The High Court held that this amounted to Mr Bell expressly giving Mr Martin authority to negotiate the sale and make any representations he considered appropriate.
Moreover, Mr Bell approved the terms of the SPA, Mr Martin regularly updated Mr Bell on the negotiations with Ivy and, as 50% beneficial owner, Mr Bell was very much commercially part of the transaction, despite of his lack of contractual presence
It was further found that at the one meeting Mr Bell did attend, he had made false representations.
Significance of the case
This case highlights that a selling shareholder cannot avoid the risk of liability by not being included as a party in the share purchase agreement and not being actively involved in the negotiation process. It is highly recommended that selling shareholders obtain legal advice to avoid such situations.
Krystina Tang, Trainee Solicitor