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14 May 2019
The accepted approach of diminution in the value of a target company was unsuccessfully challenged in Oversea-Chinese Banking Corporation Limited v ING Bank NV ( EWHC 676 (Comm)).
Oversea-Chinese Banking Corporation Limited purchased the shares in ING Asia Private Banking Limited from ING Bank NV for $1.466 billion in 2010. It later emerged that ING Asia PB had exposure to Lehman Brothers Finances SA. When Lehman Brothers filed for bankruptcy in September 2008, the exposure crystallised at $14.5 million. The purchaser sued the seller for damages in that sum alleging that ING NV's failure to provide for the Lehman exposure in the accounts amounted to a breach of warranty.
The purchaser claimant accepted that the breach had not affected the value of the company, so the question for the court was whether it was entitled to recover the $14.5 million as damages. It argued that diminution in value of the shares was only a prima facie measure of loss and that other measures could be applied in specific circumstances. The purchaser submitted that breach of a "true and fair" accounts' warranty should be the amount recoverable under a hypothetical indemnity/specific warranty which would, it was said, have been negotiated in the share purchase agreement had the Lehman exposure been disclosed. The claimant said that it had lost the chance to negotiate a specific warranty or indemnity due to the non-disclosure.
The accepted measure of damages for a breach of warranty in a share purchase agreement is the diminution in value of the shares as a measure of loss. The judge held that there was no support in case law or academic texts for the claimant's alternative, novel argument based on a failure to give a "true and fair" view of the company's affairs. As a result, the purchaser could not claim for damages on the basis of the amount which could have been claimed under a hypothetical indemnity.
A claimant is entitled to be put in the position it would have been in had there been no breach of warranty, or to recover damages for its "loss of bargain" as a result of the breach. Since the breach had no impact on the value of ING Asia, something which the claimant itself acknowledged, no loss of bargain was suffered.
The claimant was not entitled to any recovery in respect of the $14.5 million loss.
The accepted diminution in the value argument put the claimant in the position that it would have been in had the breach not occurred; but to prove its claim, a purchaser can be faced with the unenviable task of demonstrating a diminution in value in shares in a private company. In addition, even where the claimant has spent more funds rectifying issues arising from a breach it will, it seems, be limited to the lesser, and what is often the less certain diminution in value measure.
The court was also clear that damages which could have been recovered under a hypothetical indemnity, which would have been negotiated had the 2008 accounts included provision for the potential liability to Lehman Brothers, is not recoverable as damages for breach of a warranty.
For further information on this topic please contact Geraldine Elliott or Emily Rome at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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