In this episode, we’ll run through the general themes of last year’s cases relating to misleading and deceptive conduct in a business sale. Understanding what hit the courts in 2016 gives us an overview of examples of what can go spectacularly wrong in this area, and a few insights into the ways we can all protect ourselves from the many traps in the sales and acquisitions environment whether you’re a professional adviser or a business who is looking to buy or get ready for sale.
00:59 Kicking Off the Series
02:55 Top Three Lessons from 2016
04:30 An interesting year for accountants and brokers
05:23 Interesting Cases for Directors
07:07 What’s Up Next?
Kicking Off the Series
Let’s kick off then with the themes coming out of the courts in 2016. And to kick it all off, we’ll talk about the very meaty area of misleading and deceptive conduct.
There were some really strong themes emerging in 2016 in relation to information being provided by vendors and their advisors, which led to some large judgments being awarded by the court against vendors and their advisers. And sorry, I just want to take a stop here and explain some terminology along the way.
Some of the people listening to this podcast will be all over the terminology of vendors and purchasers. But for people who aren’t, let’s explain. Vendors are the people who are selling the business, and I’ll use the term vendors throughout our podcast interchangeably together with the word sellers. So vendors are sellers. And on the other side of each business sale transaction, sitting across the table from our vendor or our seller, is our buyer or our purchaser. So we’ve got our vendors and our purchasers. Or you might call them our sellers and our buyers. It doesn’t matter what terminology we use to refer to them but I just wanted to make it clear from the outset what we’re talking about.
So anyway getting back to the themes from 2016. As I said, misleading and deceptive conduct or the areas misrepresentation provides some important lessons for both vendors and their accountants and their brokers. So the claim of misrepresentation or misleading and deceptive conduct often comes as a result of having poor systems in place in the business that’s looking to be sold. Some of the cases that we saw in 2016 related to intentionally misleading actions. But others of the cases simply involved staff or business software that incorrectly reported or recorded key financial information.
Top Three Lessons from 2016
So the lesson from the 2016 misleading and deceptive conduct cases for vendors is:
- To ensure that they seek good quality advice leading up to a sale in relation to how to ensure their systems and people are recording information correctly.
- Get advice during the transaction on how to provide financial and other information that is requested so that it isn’t done in a way that allows someone to draw incorrect assumptions or to mount a claim that the information is misleading. Because often the line is a bit grey as to what is misleading and what isn’t.
- To be very careful during due diligence about what you say and what information you provide and how you say it or how you provide it. There are a number of cases in which vendors ended up being victorious in defending cases alleging misleading and deceptive conduct in the figures they had provided. Simply because even though the original figures were inaccurate further information that they’ve given during due diligence had rectified any original inaccuracies. So you can see the theme arising out of this is that due diligence is an important point of the transaction both in ensuring that you don’t create risk by providing information that is inaccurate or misleading, but also in enabling you to remedy any initial financial information that might have been seen as misleading.
An interesting year for accountants and brokers
For accountants and brokers, it was an interesting year with a number of cases including professional advisers as they were the ones to have actually communicated that information to the purchasers. So 2016 acted as a reminder for advisers in this area to be careful about their roles. Be careful about information that you’re passing on and ensure that it’s clear that you will not warranting the accuracy of that information.
So in some future episodes of The Deal Room podcast, I’m going to talk about some of these cases in further detail so that we can provide clearer information for accountants and brokers and other advisers acting in sale and purchase transactions about what has gone wrong in the past, where the risks potentially are for them and what you can do to protect yourself. So stay tuned for those episodes where we go through this information in more detail.
Interesting cases for Directors
But back to the high level themes of 2016. We also saw some interesting cases that involved individual directors of companies personally. And I think it’s really important to draw attention to these cases because it reminds us all of the high stakes that can be involved in this sales environment. We have warranties and indemnities that often form part of business sale or share sale purchase and sale transactions. And what this means is that individuals who have provided personal warranties or personal guarantees that relate to these warranties in the sale need to be really careful about the ramifications to them personally. Because whilst in the past they may have had the separate entity of a company or another type of business structure to hide behind or to veil and protect them from risk involved in conducting the business, sometimes the documents that form part of the sale transaction act to pierce that veil by personal guarantees that are imported into these situations.
So this is where it becomes critical for business owners who are involved in the sale managers and advisers to understand the risks that they are dealing with. And it really was highlighted by some of these actions that we saw in 2016 against the individual directors of the companies that related to the sale.
Thank you for listening to this episode. You just heard an overview of the 2016 cases that hit the courts relating to misleading and deceptive conduct in a business sale and discuss the important lessons for sellers, their accountants, and their brokers.
What’s Up Next?
Up next, in episode 3, we will delve a bit into the details of these cases. We’ll identify important reminders for purchasers and their advisers in the area of misleading and deceptive conduct, employment issues, and reasonableness and enforceability of restraints, among other things.
And finally if you liked what you heard, we’ll give you a bottle of Moet to celebrate with us on this launch. Just head over to iTunes and leave us a fabulous review. We have six bottles of Moet that are chilling for the first six stellar reviews for this podcast. In order to get your bottle of Moet, after leaving us a review in iTunes, pop us an email to promotions[at]aspectlegal[dot]com[dot]au with your name and Australian postal address. This offer is open for everyone listening in Australia and closes August 31, 2017. Hang tight for the last episode in this three-part podcast launch series. See you at number three!
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