Misleading conduct in a sale process – liability beyond the sale agreement

In the recent decision of Cargill Australia Ltd (Cargill) v Viterra Malt Pty Ltd (Viterra), the Supreme Court of Victoria considered how conduct (including silence) during a sale process may be misleading under s 18 of Australian Consumer Law (ACL).

The decision is rare case law on Australian private M&A and an important development for private M&A transactors, given the Court found the seller was liable for:

• representations made outside the sale agreement, eg in the information memorandum;
• misleading conduct in procuring a higher bid from the buyer; and
• damages above the cap on claims despite customary limitations in the sale agreement

Facts of Cargill v Viterra

In 2009, Viterra acquired malt-producer Joe White Maltings Pty Ltd (Joe White). Joe White used improper practices which ‘substantially underpinned’ its earnings, including:

• altering laboratory produced test results to change malt specifications;
• falsely representing that the malt used certain varieties of barley; and
• using additives to accelerate production in breach of customer agreements.

In 2013, Viterra commenced a sale process for Joe White. Cargill participated in the process and was given typical marketing and due diligence information about Joe White. The improper practices were not disclosed.
Cargill made a bid of $405m and then increased its bid to $420m after being told there were other bids ‘at that level’. Unbeknown to Cargill, the next highest bid was $335m.

Cargill signed a share purchase agreement (SPA) and just before completion became aware of the improper practices but was unable to abort the deal as it was not made aware of extent and impact of the materiality of the improper practices. Cargill completed the transaction and made claims for: (i) misleading and deceptive conduct under ACL;
(ii) the tort of deceit; and (iii) breach of warranties under the SPA.

Cargill alleged that Viterra:

• Represented during the sale process (including by omission) that Joe White’s performance was due to customer contracts and lawful malt production, including through general statements in the information memorandum about Joe White’s quality assurance standards.
• Represented there were other competing bids to inflate the sale price.
• Breached the SPA warranties, including business records being complete, information in the data room being accurate and no default under material contracts.
• Failed to disclose the extent of the improper practices and the significance of their impact even after Cargill notified Viterra it had become aware of improper practices.

Cargill claimed damages in relation to various losses including the difference between the price it paid for Joe White (including its $15m price increase once informed of competitive bids ‘at that level’) and its true value at completion.

Decision

The Court found Cargill suffered loss, and awarded damages, of $169m, being the difference between the price paid and the true value of Joe White.

• Disclaimers and ‘no reliance’: The Court found that disclaimers both in the information memorandum and sale agreement by Viterra and a ‘no reliance’ acknowledgment by Cargill (ie that Cargill had not relied on anything outside the SPA warranties) were not effective in relieving Viterra from liability. The Court emphasized that the whole of the conduct of the parties was relevant, with only one input being the disclaimers and ‘no reliance’ provisions, and found that:
  • Viterra’s representations were intentionally misleading; and
  • Cargill had relied on the representations, notwithstanding the disclaimers and even though Cargill was a sophisticated counterparty.
• Caps and collars in the SPA: Although the SPA included customary limitations on claims, including de minimis and basket thresholds, and a maximum cap on liability, the Court held that these provisions only applied “in the absence of fraud”. The limitation of liability framework did not apply here because deceit had been made out.
• Apportionment of liability: Viterra tried to argue that some of the liability should be apportioned to Cargill for ignoring the disclaimers and failing to verify the information or conduct independent investigations. However, the Court refused to apportion liability, essentially because of Viterra’s conduct.

What this means for a seller

• A robust and well-planned process is essential to reducing the risk of claims, particularly extra-contractual claims. This includes taking reasonable care when preparing marketing and due diligence materials, and answering due diligence questions. Reasonable enquiries should be made of subject matter experts (such as the financial, operational and business people) within the seller and target.
• Consider whether there has been sufficient sell side due diligence to be able to safely make representations in marketing materials, due diligence and warranties. Allow for a genuine warranty verification process with the subject matter experts.
• In some situations, there may be opportunities to structure a process to quarantine or at least minimise liability for misleading and deceptive conduct.

What this means for a buyer

• Being clear about the information being relied on can assist in subsequent claims.
• Consider the broader risk allocation settings in a transaction including contractual protections (and if relevant warranty and indemnity insurance), liability caps and collars and exceptions to them for various eventualities including fraud.
• A carefully considered and tailored buy side due diligence process is essential in maximizing a buyer’s risk and liability position. Spend time understanding the seller’s process including what due diligence was conducted by the seller, who was involved in putting together sale and due diligence materials etc. Blindly relying on the seller’s process may weaken a buyer’s position including if extra-contractual
• claims arise.