Purchase agreement amended: seller hides information

Sellers regularly paint a rosier picture than reality warrants. This applies not only about concealing the damage history of a used car or stating that the 1970s house does not contain asbestos, but also in the market for businesses. The buyer of a business that does not meet the expectations outlined by the seller can undo (destroy) the sale. The buyer can also claim damages from the seller or ask the court to adjust the purchase price.

Removal of the penalty disadvantage

When acquiring companies, reversing the sale is not practical. Consider the situation where the company is (partly) already integrated into the buyer’s company. In that case, the buyer can also ask the court to amend the purchase agreement. The judge can then deduct from the purchase price the amount the buyer “overpaid” as a result of the misrepresentation. Legal experts then talk about lifting the penalty of error.

Supreme Court ruling

Recently, the Supreme Court issued a judgment, giving guidance on how to adjust the purchase price. The intention is to remove the penalty disadvantage. In this case, the buyer and seller assumed a purchase price based on the operating result (earnings before interest and taxes, EBIT) for 2008, plus a multiplier.

In 2009, it turned out that the seller had concealed many customer terminations from the buyer in 2008. The declining customer base affected revenue in 2009, which fell 14 percent. Moreover, the operating profit (EBIT), which served as the basis for the acquisition price, falls even more sharply because part of the costs are fixed. The buyer claimed a part of the purchase price back from the seller as a waiver of the compulsory disadvantage.

The judgment shows that the court has a great deal of discretion to adjust the purchase agreement. In this case, the 2008 valuation can be taken as a benchmark. The discount on the purchase price will be higher than the 14 percent drop in turnover, due to the partially fixed costs. It is waiting for the court to complete the arithmetic for the exact outcome.

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