“Misleading and deceptive conduct” isn’t limited to consumer protection. This protection also holds true in M&A, where sellers must ensure that a buyer is not misled or deceived about the nature of the business or company—and critically, its actual worth and value.
In 2022, the NSW Supreme Court looked at this issue in the context of the sale of a pharmacy in Sydney’s Queen Victoria Building.
QVB Pharmacy Pty Ltd v Le [2022] NSWSC 1612 (1 December 2022)
Facts
A contract was signed to sell a pharmacy located in Sydney’s Queen Victoria Building. During negotiations, the seller provided financial information to the buyer, who then handed them to a professional valuer to value goodwill. The seller also shared additional documents, such as script analysis reports, that showed the total payments from the Pharmaceutical Benefits Scheme and script sales.
Confident in the valuation they received, which was formed based on the seller’s information, the buyer made an offer. The offer included $750,000 for goodwill. The confidence was short-lived. After completion of the sale, the buyer gained access to the source documents, and it didn’t take long to realise that the reality was starkly different from the figures in the financial records.
The Argument
The buyer argued that the financial statements provided during the negotiations contained “inaccurate, wrong, or false” information, constituting misleading and deceptive conduct.
The buyer asserted that it would have refrained from purchasing the business if it had known the actual state of affairs. Following this revelation, the buyer pursued damages from the seller for its misleading and deceptive conduct.
The Defence
The seller noted that the financial statements were unaudited, and that it was never asked to vouch for their accuracy. Moreover, it did not give any warranty or representation that the financial reports were true and correct or accurate.
The seller denied all allegations of providing false or misleading information, stating that it had relied on its accountant to prepare the financial documents. The seller also pointed to several clauses in the contract where the buyer acknowledged that the decision to buy the business was based on its investigations and review of information and did not rely on warranties or representations – unless explicitly stated in the contract. In other words, if it isn’t stated in the contract, tough luck for the buyer.
The seller argued that if the buyer had noticed any inconsistencies in the documentation, it was the buyer’s responsibility to investigate and clarify these discrepancies.
The Decision
The Court referred to the 2007 case of ACCC v Telstra Corporation Ltd, which established a two-step analysis:
- Determine if the facts convey the alleged representations.
- Ascertain if the conveyed representations are false, misleading, or deceptive or carry the potential to mislead or deceive – a question rooted deeply in factual evidence.
Notably, the intention to mislead or deceive was considered immaterial.
The Court observed that the seller, understanding that the buyer would rely on their veracity, supplied all the information and documents needed for the transaction. Simply replying on its accountant to prepare the documents and claiming no intent to deceive was deemed irrelevant by the Court.
The Court dismissed the seller’s claim of unfamiliarity with documents like “end of day history”, “script analysis reports”, and the content of BAS statements. The Court also pointed out that the seller knew the buyer was procuring a business valuation based on the information provided.
Significantly, the Court clarified that the clause about the buyer conducting its own investigations and relying on its own enquiries doesn’t shield the seller from liability. The buyer leaned on the accuracy of the information provided and the seller knew this.
The Court also examined the possible liability of the selling agent. It was acknowledged that he persuaded the buyer to make the purchase, but the agent’s role was limited to transmitting documents from the seller to the buyer. Due to ambiguity around the selling agent’s role as a “concurrent wrongdoer” and the fact that the claim against him was settled privately, the Court declined to comment further.
Agreeing with the buyer, the Court concluded that the transaction would not have occurred if accurate information had been provided – there would be no transaction. In calculating damages in this “no transaction case,” the Court identified a disparity between the goodwill payment and its actual value, amounting to $748,114. Furthermore, the buyer was also entitled to compensation for the interest paid on finance for the purchase ($275,138.63), recognised as a separate damages category. The total damages ordered against the seller amounted to $1,027,163.52, in addition to the buyer’s legal costs.
Takeaways
This case reminds us that buyers and sellers have critical responsibilities during due diligence. Sellers need to ensure that the info they’re giving out is accurate (and not blindly so), while buyers must do their homework to verify information. Just because a buyer is doing due diligence doesn’t give the seller a free pass to provide dodgy data.
And let’s not forget about the professionals involved. Sure, accountants and agents can help a lot, but the buck stops with the seller and buyer at the end of the day. Everyone involved in these high-stakes deals must understand what they’re dealing with and understand their role and responsibility.
In a nutshell, this case is a reality check for anyone involved in business acquisitions. It drives home the point that prudence with information, doing your homework, and understanding the data is critical. The cost of getting it wrong can be huge.