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24 September 2019
Warranty and Indemnity (W&I) insurance is being used more and more widely across the breadth of global M&A activity to provide protection to buyers for breaches of warranty. Whilst the W&I insurance policy will govern how and what claims can be made by buyers, there is considerable case law relating to the measure of damages for breach of warranty. In particular, case law has confirmed that the normal measure for damages is the difference between the value of the shares "as warranted" and the value of the shares "as is" (i.e. their actual value).
This approach was reaffirmed in two recent cases.
In Oversea-Chinese Banking Corp Ltd v ING Bank NV  EWHC 676, unusually, the buyer did not allege that the value of the shares purchased would have been different had the relevant warranty not been breached. Instead, the claimant submitted that the general rule for calculating damages could be departed from in appropriate circumstances, and in particular that damages could be assessed by reference to a hypothetical indemnity and the amount which could have been claimed under the hypothetical indemnity. This argument was rejected by the judge, which indicates the difficulty that buyers may face in making a breach of warranty claim where there has been no diminution in value of the purchased shares. For full analysis of this case please see our Litigation Blog.
In 116 Cardamon Ltd v MacAlister & Anor  EWHC 1200 (Comm), the High Court found that there had been a breach of warranty by the seller and that the actual value of the target company was essentially nil. The Court also found that the value of shares as warranted exceeded the purchase price paid under the SPA, agreeing with the buyer that "the company might have been sold at something of an undervalue" as a result of a need for a quick sale, amongst other factors. As the SPA contained a cap on liability (equal to the purchase price) the buyer was awarded the full purchase price in damages. This case demonstrates that whilst the Court will take the purchase price as a starting point for valuing the warranted value of shares, it will not take that price as conclusive without considering other factors. This obviously has a knock-on effect on the quantum of damages due for breach of warranty and consequently the quantum of indemnity payable under a W&I policy.
For further information on this topic please contact Sarah McNally, Andrew Cooke or Joanna Giza at Herbert Smith Freehills LLP by telephone (+44 20 7374 8000) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.
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