Selling a Business? Warts and All Disclosure is Vital

Share purchase agreements (SPAs) almost always contain warranties that require vendors to disclose any potential challenges or legal difficulties facing the relevant company of which they are aware. As a High Court ruling showed, any lapse in such disclosure can have grave financial consequences.

The case concerned the sale for over £10.9 million of a company that produced a software package that included an address lookup facility. Numerous warranties were contained in the SPA, by one of which the vendors confirmed to the purchaser that the company owned, or had licensed to it, all the intellectual property rights required to carry on its business.

In upholding the purchaser's subsequent breach of warranty claim, the Court found that the database on which the lookup facility was founded was principally derived from Royal Mail data that the company had obtained, under licence, from a third party. The company's use of the data had exceeded the terms of its licence, thereby infringing Royal Mail's copyright and/or database rights in a manner that was actionable.

There was conclusive evidence that the vendors were aware that the company was using the Royal Mail data in a manner that was almost certainly in breach of the relevant licence. The purchaser was awarded £3.5 million in compensation.