Undoing an acquisition

In most cases the acquisition of a company cannot be undone easily. The Supreme Court recently ruled on the consequences for a share transaction of the annulment for error. This case underlines the importance of a good share purchase agreement (SPA), which (usually) excludes annulment for error.

In the SPA, the Seller guaranteed that the acquisition balance reflected a true and fair view of the Company's assets and earnings. But soon after the transaction, the veil was lifted: the Company turned out to be making a loss, while the Seller had promised a profit. After a few months, the Company even went bankrupt. Subsequently, the Buyer annulled the SPA for error: the Seller had drawn up an acquisition balance sheet that was too rosy, as a result of which the Buyer bought the Company on the basis of incorrect information.

In the event of annulment, the consequences of the nullified legal act which have already occurred must be undone. Specifically this means: shares back to the seller, purchase price back to the buyer. In case of the transfer of shares in a company, this is often complicated and undesirable. Usually such company is embedded in a larger concern and/or all sorts of strategic choices have been made that the seller may not support.

Moreover, in complex transactions, it may occur that information shared in advance may not be perfectly complete and accurate. Therefore most SPAs contain a clause that excludes any claim of error by either party. In this case, however, that was apparently not the case.

In case of annulment, the court may fully or partly deny its effect if the legal act is onerous to undo. This may be applicable when completely undoing the transfer of a business - especially one that has already gone bankrupt, such as the Company. If a party is then unfairly advantaged, the court can order it to pay compensation to the party that is disadvantaged.

In this case, the Seller argued that the Buyer was unfairly advantaged as a result of the annulment of the SPA. After all, the Seller had to repay the purchase price and received back shares in the insolvent Company. For the disadvantage suffered, the Seller demanded compensation as a counterclaim.

The appellate court ruled that the SPA had been validly annulled by the Buyer, but also awarded the Seller's counterclaim. As a result, the court reduced the purchase price for the shares to be repaid to the Buyer by "25% to avoid unfair advantage."

In the Supreme Court's view, however, the appellate court had assumed too easily that it would be onerous to undo the SPA. The mere fact that there has been a transfer of shares in a company is not sufficient for this. Further substantiation is required to argue that it would be onerous to undo a share transfer. Moreover, the appellate court did not (apparently) establish that there would actually be any unfair advantage to the Buyer in the event of such undoing.

The Buyer and the Seller have now been litigating for ten years and may continue to do so at the referral court. The Seller will have to prove that it is onerous to undo the SPA and that the annulment unfairly favors the Buyer. Parties to share transactions will in most cases prefer to exclude error as a ground for annulment, in order to be spared from this type of protracted litigation.