Saxby v UDG Healthcare (UK) Holdings Ltd  EWHC 144 (Ch)
On 5 February 2021, the High Court handed down Judgment dismissing a fraudulent misrepresentation claim relating to a missed earn‑out target on a share sale. The case contains some salutary lessons in the context of business acquisitions and is also another example of the courts successfully conducting a fully remote trial in the world of COVID‑19.
The claimants were manager‑shareholders in an events management company operating in the pharmaceuticals sector. In late 2010, they and the other shareholders sold their business to the defendant, a large publicly listed company.
The business was to be merged with the defendant’s own pharma events business and the claimants were to stay on in senior management roles. Part of their consideration was deferred and contingent on hitting a three‑year earn‑out target. This was based on the performance of the combined entity as well as potential anticipated savings from synergies.
At the end of the three‑year earn‑out period, the performance target was not met. The claimants therefore missed out on their deferred consideration.
They claimed that they had been induced to enter the transaction by fraudulent misrepresentations made by the defendant during the sale process about the financial state and prospects of its own events management business. Numerous misrepresentations were alleged, many of which were said to be fraudulent or, alternatively, negligent. The trial was limited to issues of liability, not quantum, but on one valuation basis the claimants potentially sought damages and interest in the order of £8 million.
The main focus of the case was a meeting that took place in late 2010 about one month before the sale agreement was signed and completed. At this meeting, representatives of the defendant gave a PowerPoint presentation to some of the claimants and another shareholder in their business including about the finances and prospects of the defendant’s event management business.
One of the factual issues the Court had to determine was whether (as the defendant contended) this meeting was to present a genuine commercial earn‑out following adverse due diligence findings about the claimants’ business or whether (as the claimants contended) the earn‑out was a “soft” one. The Court determined that it was the former.
In rejecting the claim, His Honour Judge Klein, sitting as a Judge of the High Court, concluded that the presentation did contain some misrepresentations on what he referred to as “points of detail”. However, the majority of the alleged misrepresentations were not made out – including the major one that the earn‑out target had been represented to be “soft” or “easy to achieve” – and none were found to have been fraudulent.
The Judge further found that the claimants had in any event not relied on any of the misrepresentations that had been established. He found that the evidence suggested the claimants had not been paying attention to the points of detail in the meeting, that they were experienced businesspeople capable of financial analysis (one being a chartered accountant) and that there were other factors that impelled them to enter into the transaction.
A notable feature of the case is that the claimants did not perform any due diligence of the defendant’s events management business before they entered into the contract. Part of the claimants’ case was that the opportunity to do so was denied by the defendant. Again, the Judge found otherwise.
Also notably, the judgment contains a reference to the fact that the defendant, during the contractual negotiation stage, refused the claimants warranties about its projections.
Whilst there was an “entire agreement” clause, it did not extend to include “no reliance” provisions relating to representations. The dispute serves as a useful illustration of why parties in business acquisition settings might well wish to seek robust contractual provisions covering not just the extent of warranties but also whether they are entitled to rely on non-contractual representations they are making to one another.
From a litigator’s perspective, the case is also an interesting example of the Court’s approach to witness evidence in the context of a commercial dispute some time in the past. Here, as mentioned, the key event was a single meeting, the tenth anniversary of which occurred during the course of the trial. Citing well‑known cases beginning with Gestmin SGPS SA v Credit Suisse (UK) Ltd  EWHC 3560 (Comm), His Honour Judge Klein approached the witness evidence by testing it against the contemporaneous documents and probabilities and giving real weight to the latter. This was in light of the well‑documented potential unreliability of human memory recognised in cases such as Gestmin.
In this case, this approach led the Judge to conclude that he could attach no weight to the claimants’ evidence except where it was contrary to their interests, corroborated by contemporaneous documents or reinforced a conclusion he would have reached in any event. This was because he found that the claimants had developed their case and then tried to rationalise what they recalled to fit that case. The more they did so, he said, the stronger their belief became that what they had rationalised is what they actually recalled. This was precisely the sort of thing to which the warning in Gestmin applied.
The Court also rejected the claimants’ expert evidence in its entirety.
It is all the more notable that the Judge reached his conclusions in the context of a lengthy trial involving cross‑examination of witnesses and expert witnesses giving evidence from the UK and the US that was held fully remotely due to the second COVID‑19 lockdown. In a postscript at the conclusion of the judgment, the Judge recorded that the trial nonetheless ran (relatively) smoothly and that it was “as fair as a face to face trial would have been”.
James Potts QC and Seamus Woods represented the successful defendant.
They were instructed by Pinsent Masons LLP.