Liability in M&A Deals for Fraud and Warranty Breaches

The recent decision by the NCC in a case involving two Dutch companies engaged in an M&A transaction has shed light on liability issues related to fraud and breaches of warranties. The case involved a claimant managed by a private equity firm based in Belgium, adding an international dimension to the dispute.

In December 2022, Welten Group B.V. purchased shares in Welten Holding B.V. from One Two Work B.V., a transaction that led to alleged breaches of warranties outlined in the Share Purchase Agreement (SPA). The Purchaser, backed by insurers from Dublin, Frankfurt, and Brussels, claimed that the Seller deliberately breached warranties to mislead them and induce the transaction, ultimately impacting the deal’s success.

The court ruled in favor of the Purchaser and the Underwriters, noting that the Group CFO’s actions were aimed at concealing the Group’s actual financial state to avoid jeopardizing the transaction. The CFO’s role in approving improper actions, coupled with the Seller’s omission to enquire or communicate about the inconsistencies, led to a finding that the Seller bore responsibility for the illicit conduct.

This deceptive behavior on the part of the CFO amounted to fraud under Dutch law, rendering the Seller liable for damages resulting from the breaches of warranties. Notably, the court rejected the Seller’s motion for disclosure of documents related to the earn-out provision, emphasizing the need for clear relevance and justification in such requests to prevent undue burdens on the opposing party.

The court’s focus on balancing the interests of both parties in accessing information while safeguarding against intrusive requests highlights the delicate nature of evidence disclosure in legal proceedings. By requiring substantiated facts and evidence to support document requests, the court aims to prevent fishing expeditions and ensure a fair process for all parties involved.

Overall, the case underscores the importance of transparency and integrity in M&A transactions, emphasizing the legal ramifications of fraudulent conduct and breaches of contractual obligations. As companies engage in complex business deals across borders, adherence to legal standards and ethical practices becomes paramount to mitigating risks and fostering trust and accountability in the corporate landscape.