The recent case of Sycamore Bidco Ltd v Breslin  EWHC 3443 (Ch), highlights the importance of precise drafting in ensuring that warranties and representations are only given where intended.
The case related to the sale of a company (the “Company”), where in the sale agreement (the “Agreement”), the sellers gave an express warranty that certain pre-transaction audited accounts (the “Accounts”) were accurate. After completing the purchase, one of the buyers claimed there had been errors in the Accounts which meant the Company’s turnover had been overstated.
The buyers brought a claim for breach of express warranty and also for misrepresentation on the basis that each express warranty should also be construed as a representation. A successful claim for breach of an express warranty was quantified in the region of £6 million, whereas a successful claim for misrepresentation was quantified in the region of £17 million.
The reason for the difference was because damages for a claim for misrepresentation aim to put the party back to its pre-contractual position, whereas damages awarded for a contractual claim for breach of warranty, aims to put the claimant in the position it would have been had the warranty not been breached. The consequence of this is that potential damages for misrepresentation may sometimes be far greater than those in a contractual claim for breach of warranty, as was the case here.
The outcome depended on whether the parties intended for each express warranty to also be a representation. The key to making such a determination was to be found in the way in which the Agreement had been drafted.
The Court determined that it was the intention of the parties, as reflected in the terms of the Agreement, for each express warranty to only be a warranty and not also to be a representation.
This case gives rise to several important considerations for those drafting corporate agreements:
Whether a statement is a representation or warranty is a matter of contractual interpretation to be decided on a case-by-case basis.
Precise drafting is the key to providing greater certainty.
If parties intend warranties to also be representations, they should be described as such.
If parties intend warranties to not be construed as representations, then all language referring to representations should be excluded from the agreement and a detailed ‘entire agreement’ clause excluding claims for misrepresentation should be contained in the agreement.
When a shareholder is required to appoint a proxy for an upcoming general meeting it will often be the chairman of that general meeting, as the default proxy, that is appointed. If the shareholder has provided clear instructions to the proxy about his voting preferences for a given resolution then the proxy is under a duty to vote in accordance with those instructions. However, when that proxy is also the chairman of a general meeting, there are additional obligations that most be borne in mind, in particular, the obligations of a chairman to ascertain the true meaning of any general meeting.
In a recent client matter the MH Corporate team was asked the following question by the chairman of a general meeting:
“If members wish to pass a special resolution at a general meeting, yet I am aware that a shareholder with over 25% of the voting rights, who has appointed me as his proxy for the meeting, would oppose the resolution, can the resolution still pass on a show of hands if no one at the meeting requests a poll vote?”
Although the Companies Act 2006 (“CA 2006”) is silent on this issue, the answer would be no. The resolution would be void. If a chairman has been appointed as a shareholder’s proxy and is aware of the shareholder’s voting preference on a particular resolution, then he is under a general duty to carry out the shareholder’s request.
Therefore, in circumstances where a shareholder could defeat a resolution that would otherwise pass on a show of hands, a chairman must, if the company’s articles of association allow him, call a poll vote even if it is not requested by any of the members at the general meeting
The obligation to ascertain the true meaning of any meeting was established in the case of Second Consolidation Trust Ltd v Ceylon Amalgamated Tea & Rubber Estates Ltd . In this case the chairman of a public company failed to call a poll vote, even though he had the power under the company’s articles to do so and held sufficient proxies to reverse a decision taken at a general meeting on a show of hands. The Court held that the chairman had acted in breach of his duty to ascertain the true sense of the meeting. A chairman must direct his mind to the real point of any meeting and this includes considering what effect his role as proxy will have on the outcome of any resolution.
As such, had the client gone ahead on a show of hands basis, not only would the resolution have been void under section 321 CA 2006 (which sets out a members right to demand a poll vote) but the shareholder who had appointed the chairman as his proxy could have brought an action against the chairman for breach of duty.
Although most of the chairman’s powers will be set out in a company’s articles, it is important to remember that a chairman also has a general duty to act reasonably and in good faith when exercising these powers. The common law imposes a duty to ascertain “the true sense of any meeting” and failing to do so could have serious consequences for both the company and the chairman.