HP’s acquisition of Autonomy has featured heavily in the press recently, with suggestions that HP will be seeking legal redress in connection with the acquisition. What options are there for a bidder that gets a nasty surprise after its takeover offer succeeds? Here is a brief reminder of the normal position under English law for a UK takeover by way of a conventional offer where the target company is listed on the Official List or AIM.
This is generic commentary and does not relate specifically to the HP/Autonomy transaction.
No warranties from selling shareholders
Shareholders who accept the offer do not give any warranties about the business of the target: the warranties given in the form of acceptance are limited to ownership of the shares being sold and ancillary matters. There are cases where the bidder obtains additional warranties from some of the selling shareholders, but that would be unusual.
Misrepresentation Act 1967
The takeover offer will give rise to a contract between the bidder and the selling shareholders. It is conceivable, although unlikely, that one or more of the selling shareholders could have made representations to the bidder before the contract was made that the bidder has relied on.
If so, and if the representations were incorrect, the bidder would be entitled to claim damages from the seller under the Misrepresentation Act and, in principle, to ask the court to rescind the contract. Rescission is a discretionary remedy. Its purpose is to set the contract aside and put the parties in the position they would have been in if the contract had not been made. It is rarely granted. Damages for misrepresentation would be calculated on the basis of putting the bidder in the financial position it was in before the contract was made. This could include some or all of the following:
- recovery of expenditure wasted in reliance on the contract;
- compensation for other opportunities passed over in reliance on the contract; and
- compensation for loss of value caused by a post-acquisition fall in the market.
Damages would be likely to be calculated only by reference to the shares purchased from the misrepresenting shareholder, rather than the entire transaction.
The seller would not be liable for damages if it could prove that it had reasonable grounds to believe, and up to the time the contract was made did believe, that the facts represented were true (although in theory rescission would be possible).
The bidder may have a claim in tort for negligent misstatement if it relied on statements made by another person (such as an auditor or director) and suffered loss as a consequence. Recovery is only possible if the court finds that the person who made the statement has specifically assumed responsibility for the accuracy or completeness of the information in the context of the proposed takeover. In the Caparo case, which arose out of a takeover offer, the House of Lords decided that the target’s auditors did not automatically owe a duty of care to those who purchased shares in the target. In order for liability to be imposed there needs to be some special additional element to indicate that the auditor (or other person) has assumed responsibility to the bidder for ensuring the accuracy of the information.
A recommended bidder is usually provided by the target company with certain non-public information about the target under cover of a non-disclosure agreement. Typically, the agreement will state that the target gives no warranties or other assurance that the information is accurate or comprehensive. In any event, recourse against the target would hardly be attractive once it is owned by the bidder.
The offer document (or target’s response circular in a hostile bid) will include a statement that the directors of the target accept responsibility for the accuracy of the information about the target in the document, and a similar statement is usually included in other documents and announcements published in connection with the offer. Among other things, the offer document will include the target’s most recent financial statements, details of its material contracts and details of the target directors’ service contracts. Although arguably the responsibility statement is addressed to the target’s existing shareholders, it could go towards establishing that the target directors assumed a duty of care to the bidder. It would not necessarily follow, however, that the bidder had relied on the information. In any event, unless the target directors have the means to meet any claim or access to insurance, there may be little point in the bidder pursuing them.
A claim against a selling shareholder or target director in tort for deceit (in effect, fraudulent misrepresentation) could also be considered. No assumption of responsibility is required. The test is the same as for a claim under the Misrepresentation Act except that, in addition, the bidder would have to show that the relevant person knew that the statement was false (or was reckless as to whether it was true). This can be very difficult to prove.
Section 90A FSMA
There are specific statutory rules governing the ability of a buyer of shares in a listed or AIM company to rely on regulatory information published by that company through the normal recognised information services. Under section 90A of the Financial Services and Markets Act 2000, the company (i.e. the target) will be liable to a person who acquires listed or AIM shares in reliance on published information, and suffers loss in respect of the shares as a result of:
- any untrue or misleading statement in that published information; or
- the omission from that public information of any matter required to be included in it.
On the face of it this is wide, but liability depends on a “fraud” standard, so that the target company is liable only if the responsible individual at the company knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading (or, where information is omitted, knew the omission to be a dishonest concealment of a material fact). In addition, the claimant (i.e. the bidder) must have actually relied on the information in question, and must have purchased the shares at a time when, and in circumstances in which, it was reasonable for him to rely on that information.
As a result, there are a number of hurdles to be overcome in order to bring a successful claim under section 90A, and a claim would be more difficult to sustain where the information was out of date and/or the bidder had the opportunity to conduct its own due diligence. Most importantly, the section provides that, subject to certain limited exceptions, the liability attaches only to the company, and not to any other person. So not only are the directors of the target company immune from liability under the section, but the only party against whom a bidder can bring a claim is the target company. In normal circumstances, therefore, there will be no benefit to the bidder in bringing a claim under section 90A. If the target has become insolvent, the claim might at least enable the bidder to recover some money alongside other unsecured creditors.
Recovery by the target company
Once it owns the target company, the bidder’s appointees to the board could start proceedings against the former directors for breach of duty or otherwise (if it is worthwhile pursuing them). Even if the former directors can be shown to be in breach of their general directors’ duties, those duties are owed to the company and not to any other person. It is not possible to recover damages for breach of the duty of reasonable care, skill and diligence unless it can be shown that the company itself (as opposed to the bidder) has suffered loss. If, for example, the directors have negligently approved accounts that overstate the target’s revenue, profits or assets, or understate its liabilities, it will be difficult for the target company to show that it has suffered any loss. As regards the fiduciary duties, including the duty to promote the success of the company, the company has a broader right to equitable remedies which do not require proof of loss. The company might be able to require the director to account for profits earned as a result of the breach – for example, where he was paid a bonus because the accounts misleadingly showed that the company had achieved revenue or profit targets. The company may also have a contractual right to claw back a director’s bonus in such circumstances.
Under section 463 of the Companies Act 2006 a director of the target company will be liable to the target if the target suffers loss as a result of certain inaccuracies in the directors’ report or the directors’ remuneration report. As with section 90A of FSMA, the director must have known that the relevant statement was untrue or misleading, or been reckless as to whether it was untrue or misleading, or must have known that there had been dishonest concealment of a material fact. There will typically be difficulties both in proving the fraud standard and in demonstrating loss.
As noted above, claims may not be made directly against a target director under section 90A FSMA. The position is the same under section 463. It is, however, possible that, if a claim against the target can be sustained under section 90A or section 463, the target itself might be able to recoup some or all of its losses through a claim against those directors for breach of the section.
Section 397 FSMA and market abuse
Section 397 imposes criminal liability for certain false or misleading statements in connection with (among other things) the acquisition of shares. If criminal proceedings have been taken, the FSA has power to require the defendant to pay compensation to persons who have been affected by the breach, but there is no precedent for such powers being used in a takeover situation.
If a target director caused the company to publish information that he knew or could reasonably be expected to have known was false or misleading, he would commit the civil offence of market abuse. As with section 397, the FSA has the power to require the payment of compensation to victims, but such powers are rarely used.
The considerations will be different where the takeover is implemented by way of a cancellation scheme of arrangement. First, there will be no contract between the bidder and the target shareholders, which will prevent a claim under the Misrepresentation Act. There is also a problem for the bidder under section 90A FSMA since the section protects only those who have acquired, held on to or disposed of listed or AIM shares; cancellation schemes typically result in the bidder acquiring new target shares that have not been admitted to the Official List or AIM.
Claims against bidder advisers
A bidder may have a claim in contract or tort against its advisers if the bidder can show that it has suffered loss as a consequence of their negligence or default. This will depend upon their terms of engagement, which may in particular include limitations of liability.
There is no clear and easy path for a bidder to recover losses incurred on a public takeover. To make matters worse, market practice will typically limit the amount of due diligence that can be done. Prospective bidders must recognise this at the outset of a transaction, and proceed with caution.