Trust is good, control is better

This statement by Lenin, when he founded a new secret service in 1921, has been the adage within M&A for years. Thorough due diligence, combined with guarantees in the purchase contracts, form the basis of this control. In a recently published judgement by the Netherlands Commercial Court (NCC) regarding the sale of the secondment agency ‘Welten’ to Straco, the accuracy of the 100-year-old adage is proven once again.

What is going on?

The seller, a subsidiary of One Two Capital, may have received tens of millions too much for the sale of Welten (for €100 million). According to the buyer (Straco), in the period prior to the transfer (23 February 2023), the CFO of Welten unlawfully shifted costs and made an incorrect provision for holiday entitlements. The aim was to conceal a less profitable financial situation in 2022, as a result of which the financial results were presented too rosily.

Fraud and breach of guarantees

The NCC ruled that the actions and knowledge of the CFO can be attributed to the seller and qualifies his actions as fraud (deceit in the sense of article 3:44 paragraph 3 of the Dutch Civil Code). According to the NCC, there was deliberate provision of incorrect information and deliberate concealment of facts with the aim of persuading the buyer to enter into the transaction. This means that the seller violated certain guarantees.

Due to the determination of fraud, the limitations and exclusions of liability included in the sales agreements do not apply. The seller is therefore fully liable for the damage suffered by the buyer as a result of the breach of guarantees, in particular the guarantees that all information in the data room was correct and not misleading.

Due Diligence is essential, but not a panacea

Intentional deception by the seller can undermine even the most careful investigation. That is why guarantees are so essential, as some issues only come to light after the sale. On the one hand, this prevents sellers from being careless in their duty to provide information, and on the other hand, it provides buyers with the certainty that they can later invoke these guarantees in court if the duty to provide information has been intentionally violated.

€34.4 million in damages

According to Straco, the value was €65.6 million. One Two did not comment on the value and limited itself to saying that the calculation commissioned by Straco was ‘flawed’. The court considers it probable ‘that the buyer (..), would only have offered a purchase price based on this lower EBITDA’ and invites Straco to conduct a ‘hypothetical process of renegotiation’ to present the outcome to One Two for a response.

To be continued, no doubt...