Share purchase agreement provides safety to both the buyer and the seller on the share purchase. However, in case of any fraudulent activity, can you rescind a share purchase agreement? know what the experts are willing to say.
The business world is filled with selling and buying shares. When a person purchases a particular amount of shares in a business they often make sure that it is transparent and doesn’t have any form of liabilities. But in some cases, liabilities including tax may come up after the transaction. This may turn out to be a major drawback for the buyer. This is where a share purchase agreement comes into action.
What Is a Share Purchase Agreement?
The share purchase agreement is signed between the buyer and the seller. It is a legal contract that acts as approval of the sale and the terms and conditions that were mutually agreed upon by both parties during the sale. Technically speaking, the share purchase agreement as per companies act 2013 is proof for both the seller and the buyer that the shares have been sold/bought legally.
Contents of a Share Purchase Agreement
Share purchase agreement comprises all the terms and conditions that were discussed between the buyer and the seller while finalising the deal. In most of the share purchase agreements, the following data will be presented:
- Name of the company
- Par value of shares
- Name of purchaser
- Document or any form of warranties provided by the seller and the purchaser
- Employee benefits and bonuses
- Number of shares being sold
- Details of the transaction
- Identification agreement for unforeseen costs
Can You Rescind a Share Purchase Agreement?
As we previously discussed, a share purchase agreement assures that the buyer and the seller are conducting this purchase of shares on mutual agreement and consent from both the parties.
In some cases, the seller may not provide all the details to the buyer at the time of purchase. At this point, the buyer stands liable. This will not be entertained by the principles of law. In this scenario, the buyer can easily rescind a share purchase agreement.
To rescind a share purchase agreement, a person has to be induced to enter into a contract due to a fraudulent misinterpretation of another party. The buying party can rescind a share purchase agreement or clean damage.
However, the intention to deceive has to be proved.
On rescinding the shares will be reverted to the seller who is obliged to repay the amount for those shares.
Certain actions may revoke the right to withdraw.
- if the party making the false statement confirms the contract / behaviour in a way that is inconsistent with the intent of the withdrawal (such as fraudulent misrepresentation)
- Or if the party cannot be returned to its original position. (Example: If the company signs a new contract or is reorganised)
- Delays in withdrawing from the contract after the deception is discovered can also hamper the right to withdraw.
Real-Life Example of Rescinding a Share Purchase Agreement.
To get a deep understanding let’s see a real-life example where the court supported rescinding the share price agreement
Elson Precision Holdings Ltd (buyer) entered into a share purchase agreement with Hampson Industries plc (seller) under which it agreed to acquire a share of the Seller (target).
The sale was negotiated by the seller`s finance director and the interim managing director of target and, as part of its due diligence, income and customer forecasts were provided to the buyer.
These forecasts included anticipated growth in demand from a major customer of the target who represented between 34% and 40% of the target’s annual turnover. Remember this point, it is very important!
The sale process started in the summer of 2009 with the circulation of an information memorandum and, over time, additional information (including customer forecasts) was provided to the buyer.
In April 2010, just after the parties agreed on the final terms for the sale of the target, the main customer informed the CEO of the seller that they were planning to terminate its supply arrangement with the seller.
This data was not passed on to the team negotiating the sale who continued to provide the buyer with forecasts and other information reflecting an ongoing relationship with the customer.
A formal written notice terminating the vendor agreement was given by the seller on 22 June 2010.
The sale was completed on 23 June following which the team negotiating the transaction learned of the customer’s written termination and promptly informed the buyer.
The share purchase document at the time of drafting did not include any form of warranties, assuring that the forecast made to the customer was true. The statement in the forecast and all the related documents were not taken into consideration as a breach of warranty.
Equally, the agreement included an entire agreement clause based on actions that support innocent or negligent misrepresentation.
The Judgement
This issue was taken to court and the judge concluded that, while the CEO had not himself given the erroneous forecasts to the buyer or instructed anyone else to facilitate the buyer. As per the law, the CEO was completely aware of the forecast provided to the buyer and the fact that it was false and embedded with false information.
Effectively, he kept silent about the termination even though he knew the buyer would reply to the erroneous forecasts.
Based on these grounds, the judge ordered that the buyer had the right to rescind the sales and purchase agreement based on fraudulent misrepresentation.
How Vakilsearch Can Help You With a Share Purchase Agreement?
Vakilsearch gives you easy access to verified lawyers who will render a professional service at all costs. You can check the progress of your work at any time through the forum. A team of experienced business consultants can contact you by phone if you have any questions about the process. Our team ensures smooth and seamless interaction with professionals.
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