Article / 1 May 2025
In this month’s update we:
In the recent case of Veranova Bidco LP v Johnson Matthey plc [2025] EWHC 707 (Comm), the High Court dismissed an application for summary judgment of whether statements made in a draft disclosure letter could amount to actionable representations. The Court held that the claimant’s action for fraudulent misrepresentation had a reasonable prospect of success, and whether the draft disclosure letter contained actionable representations was a question for trial.
Although only a preliminary hearing, the Judge’s comments on the nature of disclosure letters and the resulting implications for misrepresentation claims, are potentially significant.
It is standard practice in an M&A transaction for a seller to give warranties (contractual promises or assurances) to the buyer about various aspects of the target business. If a warranty turns out to be untrue, the buyer may have a claim for damages.
One of the principal ways in which a seller can try to limit their liability for breach of warranty is to “disclose” against it. A seller will not be liable for a warranty claim to the extent that the circumstances constituting the breach are disclosed in advance to the buyer (and in accordance with an agreed standard of disclosure). Disclosures will usually be set out in a disclosure letter from the seller to the buyer, with a draft letter being continually updated throughout the transaction.
A seller will typically view a disclosure letter as a means of protecting itself from liability and will not want the buyer to have any additional claims based on the disclosed information alone. A disclosure letter will, therefore, often contain an exclusion clause along the lines that the disclosure of any matter will not amount to any representation or warranty that is not expressly given in the acquisition document.
The case concerned the sale of a health company by Johnson Matthey (the Seller) to Veranova Bidco (the Buyer). During negotiations for the acquisition, one of the target company’s most important customers (Alvogen) triggered a price review mechanism allowing it to switch suppliers for a pharmaceutical product if the company failed to match a competing price offer. A few days after the share purchase agreement was signed, the target company matched the competing offer (at a significantly lower price than it had been charging).
After completion of the acquisition, the Buyer alleged that it had been misled about the target company’s relationship with Alvogen. It brought various claims against the Seller, including for breach of warranty and for fraudulent misrepresentation (or deceit).
The misrepresentation case was based on a draft of the Seller’s disclosure letter which stated that no competing offer had been notified to Alvogen and that it was not possible to qualify the impact of ongoing price negotiations. The Buyer claimed that these statements had been made fraudulently (as the Seller was aware that they were untrue at the time) and that they amounted to representations that it had relied on when acquiring the company.
The Seller applied for summary judgment of the Buyer’s misrepresentation claim on the grounds that:
The High Court dismissed the summary judgment application on the basis that the Buyer’s fraudulent misrepresentation case had a real prospect of success at trial.
The Judge concluded that there was no legal “rule” about what can or cannot amount to a representation when parties exchange what are to become contractual documents. The only established principle in this respect was that the provision of a warranty would not, without more, amount to a representation of fact.
Although the Judge acknowledged that the primary contractual function of a disclosure letter was to qualify the warranties, he did not consider it inherently implausible for a disclosure letter to also provide factual information which the recipient might reasonably rely on. Whether the draft disclosure letter in this case contained actionable representations was a question for trial that would require an investigation of all of the relevant facts.
Despite being a preliminary hearing, this decision may be of concern to sellers as it leaves open the possibility of statements in a disclosure letter being construed as representations and, therefore, being susceptible to claims for misrepresentation. A buyer may then be able to sue for breach of a warranty (when the disclosure has not successfully qualified the warranty) and/ or for misrepresentation (if the disclosure itself is untrue).
It is worth noting, however, that the Buyer in this case was alleging deceit by the Seller and this was relevant as to whether the Seller could effectively exclude misrepresentation claims. The Judge acknowledged that without fraud, the contractual arrangements (i.e. the exclusion clause in the disclosure letter and provisions in the share purchase agreement) may well have prevented the Buyer from claiming misrepresentation in relation to the disclosure letter. This may be of some comfort to sellers going forward.
In any event, the case is a useful reminder to sellers of the importance of ensuring that any statements in a disclosure letter meet the agreed disclosure standard and that the sellers believe that all disclosed information is true and accurate.
We await the outcome of the full trial (if it proceeds) with interest.
The London Stock Exchange (LSE) has published a discussion paper – Shaping the Future of AIM – seeking feedback from market participants on the overall functioning and positioning of AIM and on specific proposals for changes to the AIM Rules.
AIM has been a central feature of UK capital markets for over 30 years, providing early access to capital for growth and founder-led companies. The discussion paper aims to generate debate with the objective of AIM retaining its “Jewel in the Crown” status and remaining the leading European growth market.
This review marks another step in the ongoing evolution of UK capital markets, including the adoption of new UK Listing Rules in 2024, the upcoming reform of the UK public offers regime, and the introduction of PISCES (a new market for the secondary trading of shares in unquoted companies).
Section 2 of the discussion paper seeks feedback on the overall market framework and the products and services that support AIM companies and their investors.
The LSE’s top priority is to increase the flow of capital into AIM and to maximise liquidity by ensuring that this capital comes from a diverse range of sources. With that in mind, the LSE is asking for views on the current package of fiscal incentives which are designed to encourage investment into AIM. These include EIS, VCT, ISA inclusion and Business Relief available to investors in qualifying AIM companies. The LSE also welcomes suggestions for additional interventions to support the flow of capital into AIM.
As for AIM’s regulatory design, the LSE confirms its view that the nominated adviser (Nomad) role is central to AIM’s success. However, it is seeking views on how that role should evolve to reduce costs and to ensure that Nomads continue to provide value for companies. This will involve highlighting areas of the admission process where there is duplicative work between the Nomad, lawyers and reporting accountants.
In relation to corporate governance, the LSE has already received feedback that some AIM companies do not feel that they have an appropriate choice of code for their stage of development. It is seeking views on whether, as an alternative to existing codes, the LSE could offer a simplified list of corporate governance requirements and what those key requirements should be.
Section 3 of the discussion paper seeks engagement on how the LSE can evolve the AIM Rules to reduce unnecessary administrative burdens and cost, whilst maintaining aspects that remain important for investor confidence. Key proposals include the following:
Responses to the discussion paper are requested by 16 June 2025. The LSE will then consider any feedback before consulting on any proposed AIM Rule changes.
The High Court has refused to remove a shareholder’s name from the company’s register of members, despite that registration being in breach of the company’s articles of association and in excess of the directors’ powers. The shareholder was a person dealing with the company in good faith when the share transfer was registered, meaning that the company could not rely on the directors’ excessive use of powers to contest the registration.
In Jusan Technologies Ltd v Uconinvest LLC [2025] EWHC 704, Jusan Technologies Ltd (the Company) had agreed to sell some of its shares out of treasury to another company, Uconinvest. (The shares were being held in treasury following a buy-back from another shareholder.)
The Company’s articles of association prohibited its directors from registering a share transfer until the transferee of the share had entered into a deed of adherence agreeing to be bound by any shareholders’ agreement currently in force. At the time of the proposed transfer, the Company and its shareholders were parties to a shareholders’ agreement (the SHA). This meant that Uconinvest was required to execute a deed of adherence to the SHA before the share transfer was registered. The SHA included a compulsory deed of adherence that not only had to be signed by Uconinvest as transferee, but also by the Company and its other shareholders.
Uconinvest duly executed the deed of adherence, with the Company and one of the other shareholders doing the same. Despite the remaining shareholder failing to execute the deed, the Company proceeded to update its register of members to reflect the share transfer to Uconinvest.
Some time later, the Company brought an action to rectify the register of members so as to remove Uconinvest as a shareholder. This was on the basis that the deed of adherence was not effective, meaning that Uconinvest had not become a party to the SHA and the share transfer had been registered in breach of the articles of association.
Uconinvest argued that even if the transfer had been registered in breach, it was protected in its dealings with the Company under section 40 of the Companies Act 2006. This section protects third parties dealing with a company in good faith where the directors act beyond their powers.
The Court dismissed the Company’s application for rectification of the register despite finding that the directors had acted without authority when registering the share transfer to Uconinvest.
In relation to the directors’ breach, the Court held that the Company’s articles of association required a legally effective deed to bind Uconinvest before the directors had power to register the share transfer. As the deed of adherence was conditional on all parties executing it and one of those parties failed to do so, the deed was not legally binding. This meant that when the Company’s directors registered the transfer, they did so without authority and in excess of their powers.
The Court held, however, that the Company could not rely on this breach to contest the share registration and remove Uconinvest’s name from the register. This was because section 40 of the Companies Act 2006 applied to the transaction and, on that basis, the directors were deemed to have unlimited powers to bind the Company in favour of a person dealing with it in good faith.
The Judge confirmed that section 40 could apply as much to a shareholder as to an unrelated third party, provided that the shareholder was a party to a transaction with the company and the shareholder was acting in good faith. Good faith was to be presumed unless the contrary was proved, and the fact that a person was aware of a limitation on the directors’ powers did not automatically mean that they were not acting in good faith.
As regards the nature of its “transaction” with the Company, Uconinvest had, unusually, negotiated its acquisition of shares directly with the Company (as it had acquired the shares out of treasury). This amounted to a transaction with the Company, and the registration of those shares by the directors was not a standalone act, but the final stage in the acquisition process.
On a practical level, this case illustrates the importance of all parties fully understanding a company’s proscribed procedure for the transfer of shares, whether that procedure is detailed in the articles of association, a shareholders’ agreement or a similar document.
It is not unusual for an incoming shareholder to have to sign a deed of adherence where there is a shareholders’ agreement in play. However, it is more unusual for all other shareholders to also be required to sign the deed before the share transfer can be registered. That effectively gives the other shareholders a right of veto over the share transfer, even if it is a “permitted transfer” under the articles of association or the shareholders’ agreement.
This case also provides useful clarification that section 40 of the Companies Act can be used to save a transaction between a company and its shareholders. Reliance on section 40, however, is limited to where a person is dealing with the company in good faith. Uconinvest was fortunate that it satisfied the “dealing” test as it had purchased the shares directly from the Company. If, as is more commonly the case, it had acquired the shares from an existing shareholder, the registration of the shares alone would not have amounted to a transaction with the Company, and section 40 would not have prevented the transfer from being unwound.
First published in Accountancy Daily.
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