Kitcatt v MMS UK Holdings Ltd [2017 EWHC 675]
Think (about warranties) before you buy!
More often than not, warranties given by the sellers in a share purchase agreement attract the most attention. However, the case of Kitcatt v MMS UK Holdings Ltd demonstrates that buyers must also think carefully before giving any warranties to the sellers.
Kitcatt Nohr Alexander Shaw (“Kitcatt”) was an advertising and marketing agency. The Claimants, being the shareholders of Kitcatt, entered into a share purchase agreement (the “SPA”) to sell the entire issued share capital of Kitcatt to the first defendant, MMS UK (Holdings) Limited (“MMS”), which was a subsidiary of the second defendant, Publicis Groupe (“Publicis”). Publicis wanted MMS to acquire Kitcatt so that it could merge Kitcatt with another subsidiary, Digitas, creating KND.
The deal included an earn-out provision, meaning part of the total consideration the Claimants were to receive was linked to the future performance of KND. As the buyer, MMS warranted that it was not aware of any facts or circumstances that could reasonably be expected to have a material adverse effect on the future operating income and/or revenue of KND. The sole remedy for breach of this warranty was an adjustment to revenue for the purpose of calculating the deferred consideration.
Due to a dramatic loss of work, the revenue of KND dropped to the extent that the deferred consideration for the Claimants was reduced to nil. The Claimants’ case was that the employees of Digitas knew, but failed to disclose, that more than half of Digitas’ UK earnings came from one client, P&G, that access to that work was controlled by other agencies within Publicis, and that Digitas was being cut-off from that work.
The Claimants further alleged that in email correspondence with MMS in December 2012, MMS had already agreed that the earn out consideration payable under the SPA should be adjusted to £2.6 million to take account of the loss of P&G work (the “2012 Agreement”).
MMS subsequently refused to pay any deferred consideration to the Claimants.
The Judge found that there was a breach of warranty. It was not disclosed to the Claimants that the proposed business structure would cut Digitas, and consequently KND, from the P&G work. He also stated that it was obvious that the loss of a major client was capable of having an adverse impact on future performance. The Claimants would therefore be entitled to damages.
Separately, as to the 2012 Agreement, the Judge concluded that there was a binding contract between the Claimants and MMS in the emails on the basis that all elements of a legal contract were present. Consequently, the Claimants were entitled to the agreed adjustment amount for the deferred consideration, being £2.6 million.
The case demonstrates the importance of warranties as a method of protection and that buyers need to be no less careful when giving them. If sellers are giving warranties they should be sure to analyse them carefully, especially in relation to earn-out provisions. It also emphasises the significance of full disclosure, and that it is vital to disclose against warranties to prevent any claim. And of course beware of what is said in emails as they can be contractually binding.