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The Sycamore Bidco case (Sycamore Bidco Ltd v Sean Breslin and Another  EWHC 583) (see also other articles ‘Knowledge and warranties – and how warranty negotiations can pan out’ and ‘Share sales: what’s the difference between ‘The Sellers warrant…’ and ‘the Sellers warrant and represent…’?’) has a cautionary message for minority shareholders who sign up to agreements by all shareholders to sell their company.
Often the sellers of a company are represented by one firm of lawyers who negotiate and agree the drafting for the deal, including the warranties, disclosures and indemnities and related exclusion or limitation clauses. But it can be advisable for the lawyers advising the sellers as a whole to advise all the shareholding sellers of potential ramifications for each individual seller, and if necessary for different shareholders to get independent legal advice.
In most share sales, the buyer will ask for all sellers to give warranties and indemnities jointly and severally, meaning that the buyer can go against any individual seller for the whole amount claimed. As a matter of law, each seller will be entitled to claim a contribution from any of the other sellers who have given the warranties and indemnities. And it is often sensible for them to formalise things by agreeing a contribution agreement between them. But there is always a risk that some of them might go bust and can’t be recovered against.
It is traditional for some categories of seller, eg trustees, to try to cap their potential liability under warranties and indemnities to a proportion of the claimed amount equal to the proportion of their shareholding, and in any event to no more than what they actually received for their shares in the first place. (And in the case of trustees, to limit liability to funds in the trust, in order to protect the trustees from having any personal liability against their own non-trust assets.)
It is sensible for any individual seller to try to cap their own liability in a similar way. If you are selling your 5% shareholding for £100,000 as part of a £2 million share sale you don’t really want the buyer coming against you with a £2 million claim. (If you are known to have assets, and if the other shareholders are known to be impoverished or hard to track down in terms of assets, the buyer is more likely to claim and seek to enforce against you).
If you have been a non-active investor, and are not in a position to have any input into the disclosure process, and have perhaps been forced to sell under a drag-along clause in a shareholders agreement (although funnily enough drag-along clauses are rarely at all clear about how things like warranties and other details of the deal should apply to each seller), you may be even more averse to taking on such risks, as you can’t assess the actual risk so well.
But in most cases the buyer will not want to agree any restrictions on whom it can claim against, and will say that if the sellers have a problem they need to sort it out between themselves. This can lead to a bit of tough negotiation. And this is where a conflict of interest can arise between different selling shareholders. Sometimes a half-way house compromise is for a significant part of the purchase price to be left in an escrow account until the results of any claims are known.
In the Sycamore Bidco case, the agreement did provide that one of the minority sellers should only be liable for a portion of any damages for breach of warranty. But this seller still got into trouble. This was because the warranty claim was strongly defended and enormous costs built up, including costs incurred by the buyer which the sellers were ordered to pay. This minority seller hadn’t been heavily involved in the legal process, indeed had really had no control over it, and argued that the costs would have been the same whether or not he had been involved in the proceedings. He therefore argued that none of this cost liability should be imposed on him, or at least that his proportion of this liability shouldn’t exceed his proportion of the sold shares (as had already been agreed in relation to the damages element).
But the judge said not. He ordered that all the defendant sellers should be jointly liable for the costs. So whereas this individual seller was liable to damages of under £300,000 he was liable (jointly with the others) for £millions in costs.
This is always a difficult situation to resolve. One option any sellers, particularly a minority seller like this, might want to consider in these situations is to take out legal costs insurance to cover themselves against the risks.