In the first instalment of this series, we looked at the state of the MedTech sector, the capital being poured into it and how and why those circumstances – brought into even sharper relief by the Covid-19 pandemic – appear primed to give rise to feelings of buyer’s remorse. In this instalment, CYK partner Sam Roberts, looks at what buyer’s remorse will look like through the lens of the law.
There are various way to buy into a business. Purchasers acquiring a company lock, stock and barrel, will usually buy the entire issued share capital through a sale and purchase or share sale agreement. Alternatively, new investors into existing companies (where the existing investors are staying put) will enter into some form of share subscription agreement. Whatever the form of investment, the seller or existing shareholder will usually give the buyer or investor representations and warranties as to what it’s buying.
If a representation or warranty turns out to be false, the buyer may well have a claim. A claim for misrepresentation may allow the buyer to unwind the transaction, and a claim for breach of warranty may entitle the buyer to damages. Both types of claim are subject to a host of additional caveats and hurdles (which will be touched on later), but the key point for prospective buyers of, or buyers into, MedTech businesses, is that the warranties and representations should go to the heart of the technology itself.
In any share sale or investment, there will be an imbalance of knowledge. An investor into a start-up may just be providing capital, but may also be providing useful expertise to the founder. A buyer of the entire business will no doubt be planning to run the company post-acquisition. Regardless, however, no one will know the ins and outs of the technology better than the founders and their team. Where the future success of the business, and therefore the investment, depends on disruptive and innovative technology, there may be a particularly steep learning curve for the investor to get to grips with the technology.
Does the investor really have to make the effort to get into the nuts and bolts? Can’t they just rely on the contractual warranties or representations? There are three key reasons why the effort should be made.
First, investors may derive comfort from technical demonstrations, but these can be a ‘black box’: if all the investor sees is the input and the output, do they truly know that A became B as a result of the tech? Or does the technology always perform so reliably outside ideal, controlled conditions? The agreement will usually also provide that no other warranties are given or representations are made save for those expressly set out in the agreement – so while the demo may have been impressive, unless there is fraud involved (on which, see our next instalment), it may also be legally irrelevant.
Second, even a successful breach of warranty claim has its limitations. Quite aside from the time and cost involved in pursuing a case through the courts, the claim may not get the buyer what it wants. The claim will be for the difference in value between what the investment should have been worth (which is usually what was actually paid) and what it is actually worth, but that may not be enough to compensate the buyer. First, the buyer may be contractually barred from claiming any consequential losses, such as expected future growth in the value of its investment, or loss of profits. Second, the seller’s liability may also be capped to the amount of consideration paid by the buyer for (or to buy into) the business.
Third, a claim for misrepresentation may theoretically allow the buyer to unwind the investment, but in reality this will often to be impossible to achieve and representations will rarely go into the level of detail, specificity, or even relevance to the technology at the heart of the business for them to be of any use to the buyer (this is usually the role of warranties).
While all of the above point to the importance of thoroughly assessing the technology before investing, there is a counterintuitive sting in the tail to this sort of ‘deep dive’: some investment agreements will limit liability in respect of any issues of which the buyer or investor had knowledge. If looking under the bonnet reveals issues that give the buyer pause, then the warranties may not provide any recourse at all.
These considerations will typically apply in any case of buyer’s remorse. Next week, we will look at how fraudulent behaviour on the part of the seller can remove some of the obstacles to obtaining redress.