THE BOTTOM LINE
- A seller was ordered to pay over €10 million in damages for breaching financial warranties in a Share Purchase Agreement (SPA), highlighting the severe financial consequences of providing misleading information to a buyer.
- The court rejected the seller’s argument that the buyer should have discovered the issues during due diligence, affirming that a seller’s duty to provide accurate information is paramount, especially in cases of intentional misrepresentation.
- Damages were calculated based on a hypothetical renegotiation, where the court determined the likely purchase price reduction had the true financials been known, providing a clear framework for valuing such claims.
THE DETAILS
This final judgment from the Netherlands Commercial Court (NCC) concludes a significant M&A dispute between Welten Group (the Purchaser) and One Two Work (the Seller). After the acquisition, the Purchaser discovered that the target company’s profitability had been inflated through improper accounting practices, specifically incorrect cost deferrals and holiday accrual provisions. An earlier interim judgment had already established the Seller’s liability for this breach of financial warranties, finding the misrepresentations were deliberate. In this final ruling, the court focused on quantifying the damages and firmly rejected the Seller’s request to reconsider its liability, stating the initial decision was not based on an “unsound foundation.”
The court’s approach to calculating damages is particularly insightful for dealmakers. Instead of a simple loss calculation, the NCC determined the financial harm by simulating the most likely outcome of a price renegotiation if the true financial picture had been disclosed before the deal closed. The court started with the original 8.2x EBITDA multiple from the deal. It then adjusted the EBITDA downward by nearly €1.25 million, carefully distinguishing between misrepresentations that structurally affected future earnings (which were included in the damage calculation) and pure, non-recurring accounting errors (which were excluded). This methodology resulted in a €10.24 million reduction in the enterprise value.
This case provides crucial lessons for executives and legal counsel involved in M&A transactions. A key takeaway is the court’s firm stance on due diligence responsibility. The Seller argued the Purchaser was contributorily negligent for not uncovering the misrepresentations in the data room. The court dismissed this defense, reasoning that a seller who intentionally breaches warranties cannot shift the blame to the buyer for failing to uncover the deception. The ruling underscores the high standard for sellers to provide complete and accurate information. The final award consisted of the €10.24 million damage figure, reduced by a €6.75 million insurance payout the Purchaser had already received, plus over €136,000 in additional damages for increased financing costs incurred by the Purchaser.
SOURCE
Source: Rechtbank Amsterdam
