Fraudulent warranty claims: no knowledge aggregation
30 June 2026
In Veranova Bidco LP v Johnson Matthey plc [2026] EWHC 1021 (Comm) the High Court dismissed a buyer’s claim concerning the fraudulent breach of a warranty given by the seller in a share purchase agreement (SPA) relating to the sale of a target company as the knowledge of different seller executives could not be aggregated and attributed to the seller to establish fraud.
Background. The warranties in an SPA are contractual statements about the state of aspects of the target business. A claim for breach of warranty will not arise if the seller has disclosed to the buyer the facts or matters that would otherwise give rise to a breach. The standard required for the disclosures to qualify the warranties is usually negotiated and set out in the SPA, with the definition of “disclosed” being critical.
A seller will usually seek to limit its liability by including various seller protection provisions in the SPA, such as qualifying warranties by the seller’s awareness. A buyer will often seek to include an express knowledge-attribution clause, which deems the knowledge of specified individuals to be that of the seller. The High Court has held that the knowledge of specified individuals could be aggregated as a matter of contractual agreement in assessing whether a knowledge-qualified warranty was false (Synthos Spolka Akcyjna v Ineos Industries Holdings Ltd [2026] EWHC 83 (Comm)).
Facts. V bought a pharmaceutical business, H, from J under a SPA. The SPA included a warranty that no key contract was being renegotiated in a way that could adversely affect H’s business (key contracts warranty).
After signing the SPA, V discovered that H had recently renegotiated a key supply contract with a customer, A (the supply contract). This happened after A had invoked a price-match clause in the supply contract following a third party making it a cheaper competing offer. A few days after the SPA was signed, H matched the third-party offer.
The disclosure letter stated that increased competition in the market had adversely affected H’s products and market share and that there were ongoing pricing discussions with A. The SPA required any disclosure to be made with sufficient detail to allow a reasonable buyer to make an informed assessment of the nature and scope of the matter concerned.
V argued that H had breached the key contracts warranty by renegotiating the supply contract and inadequately disclosing this. J argued that the disclosures, together with information provided during due diligence, were fair and qualified the key contracts warranty, and this conclusion was supported by certain statements and communications made to V during due diligence calls.
The SPA limited J’s liability by preventing V from bringing breach of warranty claims unless they arose from J’s fraud or wilful misconduct.
V claimed that the breach of the key contracts warranty arose from fraud as one or more senior executives (the executives) knew that it was false and that the knowledge of all four executives could be aggregated and attributed to J, relying on Synthos.
Decision. The court dismissed V’s claim in its entirety.
The court, however, agreed with V’s position in two important respects. The court found that the key contracts warranty was false when the SPA was signed as H had begun a renegotiation process to match the third-party offer and this could have an adverse effect on its business. The court also rejected J’s argument that its disclosure against the key contracts warranty was fair, finding that it had not disclosed specific details of the third-party offer made to A and the renegotiation of the supply contract by H.
General references in the disclosure letter to increased competition and ongoing pricing discussions were insufficient to enable a reasonable buyer to assess the nature and scope of the matter concerned as required by the definition of “disclosed” that was agreed in the SPA. J could also not rely on statements made during due diligence calls to show what had been disclosed. The reference to a “reasonable buyer” in the definition of “disclosed” imposed an objective test, indicating an intention to exclude reliance on anything outside of the SPA and disclosure letter, a restriction that was reinforced by the SPA’s entire agreement and non-reliance provisions.
Although J had breached the key contracts warranty, the court rejected V’s claim that the breach arose from fraud as required by the SPA. To establish fraud, it was necessary to identify a dishonest executive whose state of mind could be attributed to J. The mere fact that an executive was aware of facts that made the key contracts warranty false was not enough to establish fraud.
The court refused to widen the scope of warranty claims arising from fraud by holding that it was not permissible to simply aggregate the innocent states of mind held by different executives. However, the court noted that this is an area where there is no established authority and so permitted an appeal to the Court of Appeal, which is scheduled to be heard in April 2027.
The court distinguished Synthos as that turned on an express contractual knowledge-attribution clause that deemed the knowledge of specified individuals to be that of their company.
Comment. This decision provides a stark demonstration of the consequences for a buyer if it waives the right to bring a breach of warranty claim unless the breach arises from fraud. A buyer should refrain from accepting such a narrow and stringent proviso to bringing a warranty claim as this is likely to leave it without an effective remedy despite a breach.
The decision confirms that the test for proving a fraudulent breach of warranty is onerous and includes identifying at least one dishonest individual who knows that a warranty is false, is aware of the consequences of the falsity and whose state of mind can be attributed to the seller. A buyer will be in a better position if it has negotiated a specific knowledge-attribution clause in the SPA.
The outcome of the appeal will be awaited with interest. The use of warranty and indemnity (W&I) insurance in corporate acquisitions has increased dramatically in recent years but it is common for W&I policies to exclude breach of warranty claims arising from fraud. This is an area that will be affected if the Court of Appeal widens the test for bringing a claim for the fraudulent breach of a warranty.
The decision also highlights the importance of understanding how SPA provisions on warranties, disclosure standards and liability limits interact. It provides an important reminder that the standard of disclosure that is negotiated and the seller’s specific disclosures determine if the disclosures qualify the warranties and whether a buyer can bring a breach of warranty claim.
For sellers, the decision reiterates the dangers of making inadequate disclosure by using generic and imprecise language. It is a useful reminder that the parties should not seek to rely on statements or communications outside the SPA and ensure that anything they wish to rely on is included in the SPA.
The case also highlights the importance of ensuring that the procedural aspects of an acquisition are given sufficient attention and are resourced properly. Legal and business management teams must work closely to ensure that the principals are fully involved in the warranty and disclosure process and appreciate the significance of what they are agreeing to in the SPA.
Term sheet and management warranties: enforceability
28 May 2026
In Hoffman and another v Finalto Group Ltd and another; Finalto (IOM) Limited v Hoffman [2026] EWHC 921 (Comm) the High Court held that an equity term sheet (the term sheet) created binding obligations to issue management equity despite definitive documents never having been agreed and that the warranties in a management warranty deed (the management deed) constituted actionable representations despite non-reliance wording.
Background. A term sheet is a preliminary agreement that outlines the key commercial points agreed between the parties in relation to a proposed investment in a company. Although the key commercial terms of a term sheet are often non-binding, important sections addressing confidentiality, exclusivity and legal costs are drafted to be legally enforceable.
In a share sale and purchase agreement (SPA), a buyer of shares will usually expect the seller to provide warranties about the target company. In some transactions, senior management may also give warranties to the buyer in a separate management warranty deed. If a warranty is breached, the buyer can claim for contractual damages, which are usually measured by the reduction in the value of the shares caused by the breach.
A buyer will often seek to have warranties given as representations to allow claims for misrepresentation against the seller. To succeed, the buyer must show that the seller made a false statement of fact that the buyer relied on and that induced it to enter into the SPA. The misrepresentation may be incorporated in the SPA or arise during negotiations. Damages for misrepresentation can exceed those for a breach of warranty because the court may conclude that, without the misrepresentation, the SPA would not have been entered into.
The courts have held that a warranty is not, without more, also a representation (Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch); Idemitsu Kosan Co Ltd v Sumitomo Corp [2016] EWHC 1909 (Comm)). A seller will usually attempt to ensure that this remains the position in the SPA, but a buyer will seek to ensure that the warranties are also given as representations in the SPA.
Facts. P and G entered into a conditional SPA in which P agreed to sell all of its shares in F to G. The term sheet and the management deed were entered into alongside the SPA.
The term sheet, which was signed by G and the CEO and chief operating officer of F (together, C), set out C’s proposed equity participation F’s holding company after the acquisition and a corporate reorganisation. The term sheet stated that it was legally binding, subject to the terms being reflected in a definitive agreement.
The acquisition completed but the relationship between G and C deteriorated with neither the corporate reorganisation nor the definitive agreement having been completed. G instructed its lawyers to stop work on the matter.
C claimed that G was in breach of the term sheet by failing to procure the issue of management equity to C. G argued that its only unconditional obligation under the term sheet was to negotiate a definitive agreement in good faith and, in the absence of this, the term sheet had no binding legal effect.
G also counterclaimed that C had made fraudulent misrepresentations during the acquisition of F. It alleged that warranties given by C in the management deed were false representations that had been made fraudulently and induced G to acquire F and enter into the term sheet. G sought rescission of the term sheet and damages in deceit.
Decision. The court found in favour of C and dismissed G’s counterclaim for fraudulent misrepresentation.
The court held that the language in the term sheet meant that it was binding but would be superseded by a definitive agreement, not that it would only become binding if a definitive agreement were concluded. The contrary interpretation would render the term sheet non-binding, contradicting the purpose of the legal effect clause in the term sheet. The obligations set out in the term sheet strengthened this conclusion and the good faith negotiation obligation reinforced G’s binding commitments. G’s decision to cease work on the matter constituted a repudiatory breach, as a result of which C was entitled to damages.
On G’s counterclaim, the court reiterated the decisions in Sycamore and Idemitsu, accepting that a warranty does not, without more, constitute an actionable representation. However, the court identified four reasons why the relevant warranties given by C in the management deed could constitute representations that G relied on to induce it to enter into the acquisition:
- The nature of the statements in the management deed was consistent with providing information that was unlikely to be within G’s knowledge.
- Drafts were seen by G before the final documents were agreed.
- The management deed and accompanying disclosure letter were executed before the SPA.
- The management deed contained provisions implying that statements within it could be representations, including a clause that excluded liability for non-fraudulent misrepresentation.
Despite this, the court held that the representations were not shown to be false or made fraudulently.
Comment. The decision is an important reminder that parties should devote appropriate time and attention to drafting and understanding the legal consequences of preliminary agreements such as term sheets, confidentiality agreements and exclusivity agreements. A preliminary agreement that states that it is binding will be binding even where it also states that it is subject to a subsequent definitive agreement. Clear and unambiguous drafting is essential to distinguish between binding and non-binding provisions. The decision also confirms that a party that simply ignores a duty to negotiate in good faith in a binding preliminary agreement risks a claim for repudiatory breach of contract.
The decision also highlights that warranties can amount to actionable pre-contractual representations and reiterates the importance of accurate and consistent drafting in the main transactional documents, particularly for the seller of a business, which will not wish to be exposed to a greater measure of damages by inadvertently giving the warranties as representations. A seller must ensure that an SPA or management warranty deed removes any scope for the warranties to be considered as having been given as representations. An express acknowledgement from the buyer that it has not relied on anything else other than the warranties and a comprehensive entire agreement clause should help to prevent a buyer bringing a misrepresentation claim with its potentially greater measure of damages.
Auditors and fraud: no duty to warn individual shareholders
28 May 2026
In The Wine Enterprise Investment Scheme Ltd (in liquidation) v Crowe UK LLP [2026] EWHC 692 (Ch) the High Court held that an auditor owed no duty to report suspected fraud directly to individual shareholders and refused the company permission to amend its pleadings to advance that case, finding that it had no real prospect of success.
Background. Auditors usually state in their engagement letter that they owe duties only to the company and to the company’s shareholders collectively. This reflects case law that has established that an auditor owes a duty to the company appointing it and its shareholders collectively, but not to individual shareholders (Caparo Industries plc v Dickman [1990] 2 AC 605).
Where fraud is suspected, the auditor has a duty to report it to the company’s management and, if management is implicated, the auditor may need to report it to an appropriate third party (Sasea Finance Ltd v KPMG (No 2) [2000] 1 All ER 676).
A resigning auditor must give written notice to the company (section 516, Companies Act 2006) (2006 Act). They must provide a statement to the company explaining the reasons for doing so (section 519, 2006 Act) (section 519). The company may share these reasons with the shareholders (section 520, 2006 Act). Company directors may be required to call a general meeting to consider the explanation for the resignation and circulate a written statement to the shareholders (section 518, 2006 Act). The resigning auditor must also notify Companies House and either a recognised supervisory body or the Financial Reporting Council (sections 521 and 522, 2006 Act).
Facts. W was placed into voluntary liquidation. W claimed to hold more than £4.5 million in cash, but liquidators were unable to locate any of W’s assets. New liquidators were appointed and W, acting by the new liquidators, brought a negligence claim against its former auditor, C, who had given unqualified opinions in relation to audits for W from 2012 to 2018.
The liquidators claimed that C had failed to detect that W’s directors had operated a Ponzi scheme using a fictitious offshore entity. W argued that C should have identified serious irregularities, refused to sign off the accounts and exposed the wrongdoing earlier to avoid financial losses suffered by W.
W sought to amend its pleadings to argue that C should have promptly reported suspected fraud directly to shareholders when the directors were suspected of involvement, and that C should have resigned and included details of the fraud in its resignation statement.
C admitted substantial breaches of duty, including failing to obtain sufficient evidence about offshore entity but not for the extent of loss suffered by W.
Decision. The court refused W permission to amend its pleadings on the basis that the amendments introduced new causes of action that were time-barred and had no real prospect of success.
The court found that although C had committed serious and repeated audit failings, the dishonesty of W’s directors was the main cause of loss and it awarded nominal damages of £101,000 to W.
Most of W’s claim failed on causation because W was controlled by dishonest directors, so reporting concerns to W would not realistically have prevented the loss. The court rejected W’s argument that C should have resigned and communicated directly with its shareholders.
The court noted that neither the 2006 Act nor the International Standards on Auditing (UK) (ISA) impose a duty on an auditor to report suspected fraud directly to shareholders, even where the only two directors are implicated. Sections 518 to 522 of the 2006 Act do not establish a direct shareholder-reporting route but instead contemplate resignation communications being made through the company and Companies House. ISA 240 and ISA 260 do not require communication with shareholders but only refer to the issue in explanatory material. C’s letter of engagement also limited its duties to shareholders collectively, not individually, which ran counter to any wider duty of direct communication to shareholders.
The court further noted that an auditor can request, but not compel, directors to call a meeting to explain their resignation, and that implicated directors are unlikely to disclose their own wrongdoing. The company, not the auditor, is responsible for sending copies of resignation statements to shareholders and, here, there was no evidence that shareholders would have accessed a resignation statement through Companies House promptly, or at all.
Even if C had resigned, any section 519 statement of reasons would likely have been brief and guarded rather than a detailed statement of suspected fraud. Once fraud was suspected, obligations under the Proceeds of Crime Act 2002, together with data protection and defamation risks, restricted what could realistically be disclosed to shareholders.
The court held that C did not owe a direct duty to report the suspected fraud to individual shareholders, following Caparo. The court also held that Sasea is not an authority for auditors having to report fraud directly to shareholders; at most it established a duty to warn the directors or another relevant third party if the auditor uncovers fraud that could seriously harm the company.
Comment. The decision confirms that there is no duty in English law for an auditor to report directly to individual shareholders. It also confirms that there is no duty for an auditor to bypass management and report suspected internal fraud directly to individual shareholders. The decision is also a stark reminder that where all of the directors have acted fraudulently, arguing that the auditor should have reported the fraud to the same directors will fail on causation. In addition, the decision shows the difficulties of attempting to materially amend a claim and plead an alternative ground late in a hearing, which the court is unlikely to entertain.
Acquisitions: concurrent obligations
30 April 2026
In Textor v Iconic Sports Eagle Investment LLC [2026] EWCA Civ 355 the Court of Appeal held that a seller's obligation at completion to deliver share transfer documents and the buyer's obligation to pay the purchase price in a share sale were concurrent despite the wording in the agreement making the payment "subject to" the seller's compliance with its delivery obligations.
Background. Share and asset purchase agreements customarily require the seller to deliver share or asset transfer documents to the buyer at completion. The buyer's primary obligation at completion is to pay the consideration for the target shares or assets and it is common for this to be made subject to the seller's completion obligations in the relevant share or asset purchase agreement.
Despite this approach, the obligations of the seller and buyer in a share or asset sale agreement are mutual and concurrent obligations. The courts have held that "subject to" wording is insufficient to rebut the presumption that delivery and payment are concurrent conditions (Doherty v Fannigan Holdings Ltd [2018] EWCA Civ 1615).
In a share sale, an option agreement can be used to grant a party the right, but not the obligation, to buy or sell shares at a pre-set price within a specific period.
Facts. The completion obligations in an option agreement (the option agreement) gave I the right to require T to purchase some or all of I's shares in a multi-club sports holding company on specified terms for a specified price.
Clause 3.2 of the option agreement (clause 3.2) required I, on completion, to deliver share transfer documents to T. Clause 3.3 of the option agreement provided that, subject to I complying with clause 3.2, T was to pay the specified option price.
T argued that its payment obligation was conditional on I first delivering share transfer documents. The High Court rejected this argument. T appealed.
Decision. The court dismissed the appeal.
The court unanimously rejected T's interpretation. It held that the High Court was right to recognise a presumption in sale and purchase agreements that delivery and payment are concurrent conditions, as the transaction was an exchange, with neither party being required to perform first and accept the risk of the other's non-performance. That principle was expressly recognised and applied to share sales in Doherty.
The option agreement provided for a straightforward sale and purchase with a fixed completion date and place, strongly indicating that delivery and payment were to occur simultaneously. This presumption was particularly strong given the open concerns that T might be unable to meet his payment obligation.
The wording making T's payment obligation "subject to" I's compliance with clause 3.2 was insufficient to rebut the presumption of mutuality in the circumstances. Although the wording provided that T was obliged to pay on receipt of the documents from I, no reasonable person with background knowledge of the parties would understand that I was required to deliver even if T did not pay at the same time. The court considered the case difficult to distinguish from Doherty and, if anything, was an even clearer case of concurrent obligations.
A separate issue concerning whether I was ready, willing and able to perform was remitted to the High Court.
Comment. The decision is a reminder of the strong presumption in an acquisition agreement that delivery and payment are concurrent obligations regardless of the standard approach of making the latter subject to the former. In practice, this means that a buyer cannot assume that it only has to pay for the shares or assets after the seller has delivered the share or asset transfer documents. If this is likely to be unsatisfactory for a buyer, it must ensure that the completion clause in the relevant agreement includes clear and comprehensive drafting over and above the usual "subject to" wording to rebut the presumption that delivery and payment obligations are concurrent obligations.
Director disqualification: misconduct and insolvency
30 April 2026
In Secretary of State for Business and Trade v Greensill [2026] EWHC 639 (Ch) the High Court has dismissed an application for strike out in director disqualification proceedings, rejecting the argument that a causal link is needed between the proposed misconduct of the director and the insolvency of the company for disqualification.
Background. The Company Directors Disqualification Act 1986 (1986 Act) sets out the circumstances in which a person may be disqualified from acting as a director of a company.
The 1986 Act aims to maintain business integrity by ensuring that directors perform their duties honestly and lawfully, and with regard to the interests of the company's shareholders, creditors, customers, employees and, in some circumstances, the public.
The Secretary of State can initiate disqualification proceedings under section 6 of the 1986 Act (section 6).
The court must disqualify a person from being a director where it is satisfied both that:
- The person is or has been a director of a company that has either become insolvent or has been dissolved without becoming insolvent (section 6(1)(a), 1986 Act) (section 6(1)(a)).
- The person's conduct as director makes them unfit to be concerned in the management of a company (section 6(1)(b), 1986 Act) (section 6(1)(b)).
The minimum period of disqualification under section 6 is two years, and the maximum period is 15 years (section 6(4), 1986 Act).
Facts. G applied for disqualification proceedings brought against him by the Secretary of State under section 6 to be struck out.
G argued that, for disqualification under section 6, the Secretary of State had to prove that the conduct under section 6(1)(b) that allegedly made the director unfit caused the company's insolvency. Evidence had not been provided to enable the court to reach that conclusion.
Decision. The court dismissed the application. It rejected G's argument, stating that to accept the requirement for connectivity between the conduct and the insolvency would distort the scheme of the legislation.
Sections 6(1)(a) and 6(1)(b) are freestanding pre-conditions with no causal link between them. Section 6(1)(a) is concerned with the status of the individual director and section 6(1)(b) deals with the director's conduct.
Section 6(1)(a)(ii) applies to a company that has been dissolved without becoming insolvent and so it cannot be a precondition of section 6 that the conduct must be linked to insolvency, as G had argued.
Section 6(1A) does not mandate proof of conduct connected with insolvency as a threshold, but simply clarifies that such conduct, if it occurs, is part of the conduct to be considered.
Although the requirement in section 12C of, and Schedule 1 to, the 1986 Act means that the court must have regard to the extent of a director's responsibility for the causes of a company's insolvency, this is only one of several matters to be considered when assessing unfitness to be a director. The weight attributed to this factor will depend on all of the particular circumstances.
The practical difficulties in applying a non-trivial connectivity test make it improbable that Parliament intended it for a summary process.
Comment. The decision clarifies how sections 6(1)(a) and 6(1)(b) interact in disqualification proceedings and confirms that a director can be disqualified even where their conduct did not cause the company's insolvency.
Director breach of duty: undermining board-backed transaction
30 April 2026
In Gardner Aerospace Holdings Ltd v Upton [2026] EWHC 555 (Ch) the High Court held that a company director breached his statutory duties under sections 171, 172 and 175 of the Companies Act 2006 (2006 Act) by covertly seeking to frustrate a critical board-backed transaction and instead acting in his own interests.
Background. Company directors must comply with the general duties imposed on them by the 2006 Act including:
- The duty to act in accordance with the company's constitution (which includes the articles of association and company resolutions) and only exercise powers for the purposes for which they are conferred (section 171, 2006 Act) (section 171).
- The duty to act in good faith to promote the company's success for the benefit of its members as a whole (section 172, 2006 Act) (section 172).
- The duty to avoid situations where the director's personal interests conflict, or potentially conflict, with the company's interests (section 175, 2006 Act) (section 175).
The National Security and Investment Act 2021 (2021 Act) permits the government to scrutinise and intervene in corporate acquisitions, investments or takeovers that could threaten UK national security (see feature article "National Security and Investment Act 2021: taming the M&A dragon"). The 2021 Act mandates the notification of corporate transactions in 17 sensitive sectors and allows voluntary reporting for others. The Investment Security Unit (ISU), a part of the Cabinet Office, is responsible for operating the 2021 Act.
Facts. U was the director and interim CEO of two companies, GA and GG.
GA and GG entered into a transaction that required a Chinese state entity to increase its indirect control over GA through a debt-for-equity swap (the transaction). The transaction triggered a requirement for government approval under the mandatory notification regime in the 2021 Act due to GA and GG's military and dual-use activities.
GA's board considered that the transaction was essential to secure the refinancing of bank facilities and relieve intercompany debt, without which GA and GG would have faced potential insolvency.
U supported the transaction in public but, in private, he acted in his own interests to undermine and frustrate it. This included acting with a view to securing continued employment under new ownership rather than prioritising the transaction.
GA and GG brought an action against U for breach of his statutory directors' duties.
Decision. The court held that U had breached his statutory duties under sections 171, 172 and 175. U had breached his contractual duties to perform his role faithfully, use his best endeavours to protect GA and GG's business, and keep the board fully informed by:
- Covertly lobbying Members of Parliament to oppose the transaction and expressing a preference for government refusal of the transaction under the 2021 Act.
- Sending an unsolicited remedies letter to the ISU proposing divestment and exaggerating compliance concerns in other communications with the ISU.
- Approaching potential acquirers and encouraging lobbying for divestment without board authorisation.
- Undermining assurances given to GA's bank about shareholder funding commitments by falsely linking uncertainty to the 2021 Act process.
The court found that U had acted to further his own interests of securing continued employment under new ownership, rather than furthering the interests of GA and GG. U knew that his actions directly contradicted the board's agreed strategy and would risk insolvency if successful, yet he pursued them without disclosure.
The court accepted that U had genuine concerns about the national security implications of the transaction but considered that this did not justify his conduct. It found that U had exercised his powers for improper purposes and placed himself in a position of conflicting personal interests.
The question of causation and quantum was deferred to a subsequent hearing.
Comment. The court's decision was unsurprising as the director clearly used his position to undermine and frustrate the transaction rather than help to implement it, as well as failing to act in good faith to promote the interests of the company and putting himself in a situation where his personal interests conflicted with the company's interests. The decision emphasises the importance of directors not pursuing their own private individual agenda but acting in accordance with decisions and strategy determined collectively by the board of directors.
This briefing is published on behalf of the Corporate Transactions UK team. If you would like to discuss any of the information featured in this briefing, please reach out to your usual Ashurst Perkins Coie contact.
Additional Information
The articles in this briefing were written for and first published in 2026 editions of PLC Magazine, the leading publication for business lawyers in the UK.
Author: Shan Shori