The recent dispute between Daichii Sankyo Company Limited and Singh Brothers has reignited several interesting questions on buyer seller dynamics in M & A transactions. In 2008, Daiichi had bought the Singh brothers' 34.82% stake for US$ 2.4 billion. The total deal value was US$ 4.6 billion. Problems emerged soon after the acquisition, when Ranbaxy's plants came under scrutiny by the US Food and Drug Administration, and Department of Justice. This article throws light on key points to be borne in mind from a seller's and buyer's standpoint.
Legal Obligation to disclose: The explanation to Section 17 of the Indian Contract Act 1872 ("Contract Act") provides that mere silence is not fraud, unless there is a duty to speak, or unless it is equivalent to speech. Hence, there is no general duty to disclose facts that are, or might be equally within the means of knowledge of both parties. However, sellers need to be careful about making disclosures and pre-contractual statements; dishonest statements would clearly fall under the purview of fraud, if these have been relied upon.
Effect of Due Diligence by Buyer: The Contract Act states that, if the party whose consent was taken had the means of discovering the truth with ordinary diligence, such a contract would not be considered as being vitiated for lack of free consent. However, Courts have held that the mere placing of a document on record of a company does not lead to the conclusion that every officer thereof had the means of discovering the truth merely by virtue of the document being on the records, and would depend on the facts and circumstances of each case.1 Further, it has also been held that merely providing documents that might bring the buyer's attention to a matter was insufficient and that the particular breach must be expressly brought to the attention of the buyer.2 From a seller standpoint, they should always keep a record of all the information that was provided in the due diligence data room to a buyer.
Entire Agreement Clause: To exclude liability for misrepresentation, an entire agreement clause should be inserted stating that the contract represents the whole agreement between the parties, in relation to the subject matter of the transaction, and that the buyer acknowledges that it has not relied on any representations that are not included as warranties. Therefore, a properly drafted entire agreement clause would effectively operate to exclude innocent or negligent misrepresentation claims, and it is not uncommon to include a carve out for fraud.
Viability of Rescission as a remedy: Rescission is a remedy against misrepresentation but may be of limited value in the context of a share sale or a business sale, where the company or business is to be carried on as a going concern following its acquisition. The requirement of rescission as per law is that parties should be able to restore back to their original position. This may not be possible once the closing of the sale or business sale has taken place. In addition, the buyer, may lose its right of rescission, if post the discovery of misrepresentation it takes any action that acts to affirm the contract. Ordinarily, the buyer will continue to run the target company or the acquired business while it is considering its rights. This may effectively work as an act of affirmation of the contract. In all practicality, therefore rescission may not be a viable remedy post completion of the transaction. However, it is a practical remedy where there is an interval between contract and completion. If, prior to completion, it is found that the warranted circumstances do not exist, either because they never did, or because of a change which occurs in relation to the target company or business, it is normal for the buyer to be given an express right to rescind.
The concept of providing second level of arbitration, if either party is dissatisfied with the first arbitration (also known as 'two-tier arbitration' process) has been the bone of contention for long and strongly debated for and against. The issue has been finally settled by the Supreme Court of India by holding that two-tier arbitration is neither prohibited under the Arbitration and Conciliation Act, 1996, nor lies against the fundamental public policy of India. Indian promoters and sellers may need to consider two-tier arbitration clauses particularly in case of foreign seated arbitration as the grounds for challenge of enforcement of a foreign award have been reduced to fundamental policy of Indian law, which excludes patent illegality or mere breach of a statute, and has been affirmed by a series of judgments by the Delhi High Court recently including the Cruz City decision and the Daichii decision.
1 World Sport Group (India) Pvt. Ltd vs The Board of Control for Cricket in India decided on 20 December, 2010 (https://indiankanoon.org/doc/1588217/)
2 See New Hearts Ltd v. Cosmopolitan Investments Ltd, (1997) 2 BCLC 249
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