The court has firmly rejected a professional negligence claim brought by an acquirer against the accountants who undertook due diligence on the target.
A group set up to acquire a premium health and fitness business brought a professional negligence claim against Ernst & Young LLP (“EY”) alleging that they relied on defective EY due diligence reports in acquiring Esporta Group Ltd and New Esporta Holdings Ltd in 2007. EY had produced financial and commercial due diligence reports with sensitivities, including downward revisions to new member growth forecasts contained in Esporta’s business plan supplied to the claimants as part of the vendor due diligence pack. The claimants alleged that EY was in possession of updated information that should have led it to reduce forecasts by more than it did.
The issues considered by the court included whether EY failed to take into account the latest available figures on membership numbers. If so, should this have led EY to alter its sensitivity analysis to show a more negative ‘most likely’ outcome? If EY had done this, would the claimants or their lenders have withdrawn from the acquisition process? What would a fair purchase price have been?
EY denied any breach of duty and contested causation and quantum in any event.
The court elicited that if the latest available membership figures had been taken into account, this would have led to a difference of only 0.8% EBITDA projected for 2007; this was immaterial. The claimants tried in court to make much of the date on which EY learned of updated figures, but Mr Justice Phillips held that the ‘shift’ in the claimants’ case was ‘an opportunistic and unprincipled attempt to rely on a minor and irrelevant change in EY’s account of the chronology’ to try to salvage a liability case without merit.
With regard to causation, it was accepted that the ‘but for’ test would be sufficient in this case. The judge found that it was highly unlikely that the claimants or their lenders would have withdrawn, had a more negative sensitivity been presented by EY. EY’s alleged failures in its reporting therefore made no difference to the claimants’ decision to proceed with the transaction.
The judge also found that the price paid by the claimants for Esporta, £474.3m, was so close to a fair valuation that they could not be said to have overpaid in any event.
Although this case creates no new law, the robust dismissal of an acquirer’s claim formulated on the basis of, at most, an immaterial technical breach of the engagement will be welcomed by advisors and their insurers.
EY was appointed at a late stage of the due diligence process, after agreements had been signed and a deposit paid. EY’s engagement was therefore limited in scope.
The comments on causation are also to be welcomed. It is often tempting for a claimant to view what might have happened with a degree of hindsight. The judge in this case had that firmly in mind and was not persuaded that the figures under the microscope at trial would have made any difference to those driving the transaction forward at the time.