The outcome in the Candy Ventures case contrasts with another very recent High Court case (Jinxin v Aser), where the Court held that various alleged representations made by the sellers of a sports media rights agency (the MPS Group) (which were included in various presentations and reports commissioned by the sellers) were, at worst, “not forthcoming”, but that did not mean that the representations were false or dishonest. The claim against the sellers therefore failed.

Notably, it was relevant that:

• Financial forecasts included in business plans prepared by the seller’s advisers had been superseded by the point the SPA was signed. In other words, the court will look at the full circumstances and context when considering a claim for misrepresentation.
• The buyer obtained warranties within the SPA where there were specific matters on which it wished to rely. This is the normal approach when acting on the buy-side: ensure any matters or representations which are important are reflected in the terms of the SPA itself (making it easier to bring a claim for breach of contract/warranty etc.)

The key distinction between these two cases is that in Candy Ventures there were clear, demonstrably false representations made by the seller about the business; whereas in the MPS Group sale there were no such clear-cut false statements.

The importance of sales pitches/marketing materials:

This case is an important reminder to founders that even mere “sales pitches” and other marketing materials which include representations about the business and its prospects (such as regarding imminent investment or negotiations with prospective investors) must be accurate and verifiable as far as possible (as well as other information provided to sellers including financial forecasts and growth projections). Knowingly or recklessly making false statements that are intended to induce investment in such sales pitches can lead to claims on the basis of fraudulent misrepresentation. However, there is an important distinction to be drawn between statements made about the business in honest belief and false representations that are made dishonestly.

Contractual protection for non-fraudulent misrepresentations:

Although it is generally understood under English law that parties cannot ‘contract out’ of liability for fraudulent misrepresentation, founders and growth stage companies would still be well advised to ensure all contractual documentation includes appropriate ‘entire agreement’ clauses which seek to limit liability for representations not included in the contract itself.

The importance of due diligence and verification:

Even if an investor can subsequently bring a claim for fraudulent misrepresentation, as CVS did, many early stage growth companies will have limited assets against which the investor can enforce any court judgment/arbitration award (and the cost and time involved in bringing proceedings is also a barrier). Investors should therefore ensure that they conduct thorough due diligence and push for verification and evidence where key statements made by founders/businesses are crucial to the decision to invest.

In addition, investment documentation should include appropriate warranties for key matters of concern to the buyer. In the Jinxin case, the buyers sought – and received – warranties addressing “compliance with laws, bribery, litigation, accounts and financial matters, contracts and competition”. The Court noted that it was open to the buyers to require more than they did, including by way of further warranties and/or express representations in the SPA, or to not move forward with the transaction if these were not forthcoming. Therefore, investors should note that warranties and express representations in the SPA remain fundamental tools for contractual risk allocation and should be negotiated carefully.

Finally, investors should note that the later collapse of a business that they have invested in or the failure of optimistic growth forecasts may not in itself be enough to evidence fraud, again emphasising the importance of conducting thorough due diligence, especially in the complex field of international sports media rights.