Merger & Acquisition Warranty Claims and Post-Acquisition Disputes

M&A Warranty Claims and Post-Acquisition Disputes

At the Jonathan Lea Network, we help small and medium-sized enterprises (SMEs) navigate the often complex disputes that arise after mergers and acquisitions (M&A) transactions. Buyers and sellers alike can find themselves facing warranty claims, misrepresentation, fraud, earn-out payments, or post-acquisition disputes.

Our specialist dispute resolution team combines in-depth technical expertise with a commercial, pragmatic approach, ensuring your interests are robustly protected while seeking to achieve an efficient and cost-effective resolution.

Common Types of Post-Acquisition Disputes

Even with a carefully drafted share purchase agreement (SPA) or asset purchase agreement (APA), disputes between buyer and seller are not uncommon. These disputes often involve:

Breach of Warranty Claims

A warranty is a contractual statement of fact about the target business, usually made by the seller and relied upon by the buyer. If a warranty turns out to be untrue and the buyer suffers loss, they may bring a claim for breach of warranty.

Examples include warranties about the accuracy of accounts, tax compliance, or absence of litigation.

We advise both buyers seeking to claim compensation for undisclosed liabilities, and sellers defending claims that may or may not have merit. Many claims turn on whether the warranty was properly disclosed against and whether the buyer’s loss is properly quantified.

Misrepresentation and Fraud

In addition to contractual claims, buyers sometimes allege that they were induced into the transaction by a false statement of fact, known as misrepresentation, which can arise under common law, the Misrepresentation Act 1967, or as a fraudulent misrepresentation.

Fraud claims are particularly serious, with the potential to unwind the transaction entirely, and can give rise to punitive damages and reputational harm. We have experience advising on the high evidential bar that claimants must meet and on robust defence strategies.

Earn-out Disputes

An earn-out mechanism is often used to bridge a valuation gap, with part of the purchase price payable later if the business achieves agreed performance targets.

Disputes often arise over how the earn-out is calculated, whether the buyer has interfered with the business in a way that prejudices the seller’s ability to achieve the targets, or whether the seller has manipulated results.

We act for sellers pursuing rightful earn-out payments and buyers defending against inflated or unmerited claims.

Breach of Confidentiality and Restrictive Covenants

SPAs and APAs often impose post-completion undertakings, such as confidentiality obligations, non-compete clauses, or non-solicitation provisions.

We assist parties enforcing these undertakings, or defending against overreaching and unreasonable restrictions that might unlawfully restrict trade or employment.

Our Approach

Post-acquisition disputes are highly fact-specific and often emotionally charged. We start with a detailed analysis of the SPA, disclosure letter, and due diligence documents, combined with forensic examination of the facts and financial impact.

We aim to resolve disputes wherever possible through negotiation or mediation, but we are equally ready to pursue litigation or arbitration if necessary. Our focus is always on protecting your business interests while maintaining an eye on proportionality and cost.

Relevant Case Law and Precedents

The English courts have developed a substantial body of case law on post-acquisition disputes, which informs how claims are assessed and valued. Here are some key precedents:

Breach of Warranty

Infiniteland Ltd v Artisan Contracting Ltd [2005] EWCA Civ 758

• This case examined how disclosure and knowledge provisions in a share purchase agreement (SPA) affect a buyer’s ability to bring a breach of warranty claim. The court confirmed that whether a breach of warranty has occurred and whether the buyer can claim damages, depends not only on whether the warranty was technically breached, but also on how the SPA defines effective disclosure and addresses the impact of the buyer’s knowledge.
• A central issue was whether information made available during due diligence but not clearly disclosed in the disclosure letter, was sufficient to prevent a breach of warranty claim. It held that valid disclosure can exist even without formal explanation, so long as the disclosure meets the agreed contractual standard. It also emphasised that a buyer’s actual knowledge of a matter does not automatically bar a warranty claim unless the contract expressly states so. Likewise, imputed knowledge, such as that of the buyer’s accountants, will not be attributed to the buyer unless clearly provided for in the SPA.
• This ruling emphasises that breach of warranty claims depend not just on the accuracy of warranties but also on how the disclosure clauses, knowledge provisions, and contract wording interact. It highlights the need to clearly define disclosure and the role of knowledge in liability, as any ambiguity will usually be interpreted against the party trying to escape liability.

New Hearts Ltd v Cosmopolitan Investments Ltd [1997] 2 B.C.L.C 249

• This case clarified the standard of ‘fair disclosure’ required in share purchase agreements, particularly in relation to warranty claims.
• The case concerned a seller who attempted to rely on a general reference to the target company’s accounts in the disclosure letter to defend against a claim for breach of a warranty concerning the net assets of the company. The court held that such a general reference was insufficient, stating that fair disclosure requires the seller to positively and particularly bring the buyer’s attention to any matter being disclosed. A mere reference to a source of information, especially one that is complex, does not satisfy the requirement, even if a diligent enquirer might uncover the relevant issue. Instead, the disclosure must clearly identify the nature and scope of the matter. The judge emphasised that it is not enough for sellers to rely on the buyer’s ability to investigate; the responsibility lies with the seller to ensure that any potential issues are highlighted explicitly.
• This ruling reinforces that fair disclosure must be specific and detailed, and that vague or indirect references will not shield the seller from liability for breach of warranty.

Misrepresentation and Fraud

Smith v Land & House Property Corp (1884) 28 Ch D 7

• This case established that a statement of opinion can amount to a misrepresentation if it implies an assertion of fact that is false. While opinions are generally not actionable in misrepresentation, the court held that this changes where the person expressing the opinion has special knowledge or access to information not available to the other party.
• In such cases, the opinion is not viewed in isolation, it carries with it an implicit assurance that the speaker has reasonable grounds for their belief. If those grounds do not exist, or if the speaker knows facts that contradict their stated opinion, then the opinion may be treated as a factual misrepresentation. This case broadened the scope of actionable misrepresentation by recognising that statements framed as opinions can mislead, particularly where one party holds superior knowledge.

Derry v Peek (1889) 14 App Cas 337

• This case concerned fraudulent misrepresentation. The case arose when the directors of a tramway company issued a prospectus claiming that the company had statutory authority to use steam-powered trams instead of horses. In reality, the company’s application for this authority was still pending and was eventually refused, leading to the company’s winding up. Investors who purchased shares based on the prospectus sued the directors for deceit.
• The central issue was whether the directors were liable for fraudulent misrepresentation, that is, whether they knowingly made a false statement, did not believe it to be true, or were reckless as to its truth. The House of Lords held in favour of the directors, finding that they had honestly believed the statement was true at the time it was made and therefore were not fraudulent.
• This ruling established that to prove fraud, the claimant must show that the defendant acted dishonestly or recklessly with knowledge of the statement’s falsity. Mere carelessness or negligence does not suffice.

Earn-out Disputes

Porton Capital Technology Funds v 3M UK Holdings Ltd [2011] EWHC 2895 (Comm)

• This case highlighted the importance of the buyer’s obligation to act in good faith and not to deliberately frustrate an earn-out mechanism. Buyers must genuinely pursue their contractual duties, such as actively marketing the product and diligently seeking regulatory approvals, rather than taking actions that undermine the seller’s ability to earn additional payments. Courts will closely examine whether the buyer’s conduct meets these obligations and balance the interests of both parties when assessing reasonableness and consent.

Breach of Confidentiality and Restrictive Covenants

Faccenda Chicken Ltd v Fowler [1987] Ch 117

• This case concerned the use of confidential information by former employees. The Court of Appeal distinguished between “mere” confidential information, which an ex-employee may use after leaving, and trade secrets, which remain protected even after employment ends. The court held that during employment, an implied duty of fidelity prevents disclosure of confidential information, but this duty narrows significantly upon termination unless there are express contractual terms protecting the information. In this case, Mr. Fowler, a sales manager, left Faccenda Chicken to start a competing business, using sales information such as customer details and pricing. The court found that this sales information did not amount to a trade secret and was not protected after termination, dismissing the employer’s claim.
• The judgment emphasised the importance of employers including clear, reasonable restrictive covenants in contracts to protect sensitive information post-employment. It also highlighted factors to consider when determining the protectability of information, such as the nature of the employment, the confidentiality of the information, and the employer’s efforts to maintain secrecy.

By applying these and other authorities to your circumstances, we can give you clear advice on the merits and risks of your position.

Why Choose Jonathan Lea Network?

• Specialist expertise in SME-focused M&A disputes
• Commercial and pragmatic advice, tailored to your business priorities
• Transparent costs and flexible fee structures
• Track record of successfully resolving claims through negotiation, mediation, and litigation
• Approachable, responsive service from experienced solicitors who speak your language