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SPA breach of warranty claim successful for non-disclosure

25 April 2017

The claimants in Paul Kitcatt & 11 Ors v (1) MMS UK Holdings Ltd ('MMS') (2) Publicis Groupe SA ('Publicis') [2017] EWHC 675 (Comm) were successful against MMS in an action for breach of warranty in a share purchase agreement (SPA).

The claimants were owners and managers of an advertising agency, Kitcatt Nohr Alexander Shaw Limited ('KNAS') who sold their shares in the business to MMS, a subsidiary of Publicis. Publicis then intended to merge KNAS with a UK subsidiary called Digitas. A warranty in the SPA was that MMS and three Digitas employees were not aware of any facts or circumstances that could reasonably be expected to have a material adverse impact upon the operating Income and/or revenue in 2012 or 2013. A breach of that warranty entitled the claimants to an adjustment to the calculation of deferred consideration under the agreement.

The claimants argued that MMS and the Digitas employees failed to disclose that more than 50% of Digitas’s UK earnings came from a single client and that other agencies were seeking to cut Digitas from access to such income. As a result, the claimants would be entitled to nil deferred consideration. The court held that there had been a breach of warranty and that an agreement had been reached between the parties that the deferred consideration should be adjusted to £2.6 million. 

This case put under the microscope the warranties entered into by parties to a share purchase agreement and the knowledge of the key people in the organisations at the time. Buyers/sellers should think carefully about the warranties they enter into and at what cost. 

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