The High Court has recently considered what "careful preparation" of forward-looking projections entails. Its decision was in the context of a breach of warranty claim brought by the buyer of three companies under a share purchase agreement.
The claimants (the Buyers) were part of a multinational aerospace and defence manufacturer and service provider. The defendants (the Sellers) were part of a multinational manufacturer of complex metal components. Under the terms of a share purchase agreement entered into in March 2013, the Buyers acquired the shares in three subsidiaries of the Sellers, one based in the UK and two in Thailand.
The target business was a loss-making business, but future projections indicated that it would become profitable within a few years. This was dependent, in part, on the successful transfer of labour-intensive processes from the UK to Thailand.
Some six months after completion, the financial performance of the purchased companies was reported as significantly worse than forecast, mainly due to operational issues in the UK and transfer delays from the UK to Thailand. Shortly after, the UK business lost its "NADCAP" industry accreditation which it needed to continue operating. Subsequently, the Buyers brought proceedings for breach of various warranties in the share purchase agreement, including the warranty that: "So far as the Sellers are aware, the forward-looking projections relating to the Companies have been honestly and carefully prepared."
The Buyers argued that forward-looking projections prepared on this basis would have reflected various matters which were not taken into account, including a significantly reduced rate of transfer of work to Thailand, lower production in Thailand, increased costs of sales and significantly reduced forecasted revenues, income and profits. The Sellers argued that they had prepared the forward looking projections honestly and carefully, but had not warranted their accuracy.
The term "carefully prepared" was not a defined term in the share purchase agreement, nor was it a recognised accounting term. The plain and natural meaning of the words was that the forward-looking projections were warranted to have been prepared with care by those who had the required skills and knowledge. Experts for the parties had agreed a forecaster would have undertaken the following to produce a "carefully prepared" forecast:
- considered the latest available financial and operational information up to the date of finalisation of the forecast;
- consulted with relevant members of management with appropriate operational and specialist knowledge;
- reflected the forecasting practice in that particular business and industry; and
- documented the basis of assumptions and ensured that the assumptions were subject to a process of review and challenge carried out by somebody independent of the preparer of the forecast.
The court held that, on the facts, the forward-looking projections had not been carefully prepared. Carefully prepared projections would have included various adjustments and the effect of those adjustments would have been to show delayed profitability for the target business in the UK and Thailand. The Buyers were, therefore, entitled to damages based on the difference between the price agreed and what the price would have been, using the same method of calculation, had the forward-looking projections been properly adjusted, subject to the contractual cap of US$15 million.
A seller is unlikely to warrant the accuracy of forward-looking projections. However, a buyer may require some comfort as to the standard of care with which any forward-looking projections have been prepared by the seller. This case provides an indication of what careful preparation of such projections involves. A seller warranting projections on this basis should ensure that they are prepared to the requisite standard.
Triumph Controls UK Ltd v. Primus International Holding Company  EWHC 565