Officer tried to sell company using misleading income figures

Buying and selling businesses can be fraught with difficulties as highlighted in a recent case before the High Court.

It involved a company that wanted to sell one of its subsidiaries. A Chief Operation Officer was appointed to oversee the sale and a purchaser was found.

The officer prepared an information memorandum which described the products manufactured by the subsidiary, listed its main customers and provided figures for actual and projected income.

However, while the negotiations were still continuing, one of the subsidiary’s most important customers telephoned the officer saying that it was taking its business elsewhere.

The officer did not tell the purchasing company about this and the sale went ahead.

When the purchaser discovered what had happened, it took legal action to have the purchase agreement rescinded on the basis that it had been misled about the figures and should have been informed in advance that a major customer was withdrawing its business.

The officer denied that there had been any deception. He said that he had not believed that the customer would take its business elsewhere. He had regarded it as merely a negotiating strategy to obtain lower prices.

However, the customer’s representatives gave evidence that when they had told the officer that they were withdrawing their business, he had asked them not tell anyone as it would make it impossible for the sale to go ahead.

The court held that the officer had intended to fraudulently misrepresent the true position and so the purchaser was entitled to rescind the purchase agreement.

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