Selling Cyprus Company Shares: The Importance of Pre-Sale Due Diligence
If you are considering selling Cyprus company shares, it is important to make sure not only that the contract is correctly drafted but also that all statements – so called warranties - given by the seller in the contract, are true and correct. Or else you may face very high damages awarded by court.
This is all the more so following the latest case of Equitix EEEF Biomass 2 Ltd v Fox [2021] [2021] EWHC 2531 (TCC) decided by the UK High Court on 27 September 2021 (Equitix). Although the contract for the sale of a Cyprus company shares does not have to be governed by English law, such contracts often are. And when it comes to enforcement in Cyprus courts, English law is persuasive and can also be binding in the absence of prevailing Cyprus law.
In Equitix the buyer of shares of an energy company discovered that a number of the sellers' warranties were false. These warranties included the target company’s compliance with its environmental permit, the condition of its plant and equipment, the status of its material contracts, and the reasonableness of the projections and forecasts in the Target's financial model.
The court awarded damages of £11 million. The damages were the full amount of the liability cap under the SPA, assessed as usual for breaches of warranties of quality and by reference to the diminution in the value of the shares attributable to the falsity of the breached warranties.
Importantly, the court rejected the sellers' argument that the buyer's damages should be reduced due its failure take "…all reasonable action to mitigate any loss suffered…". The court found that even though the contract required the buyer to mitigate, the onus was on the sellers to show an unreasonable failure to mitigate and it was not enough to show that the steps the sellers proposed would be reasonable. The words "all reasonable action" meant action it would be unreasonable not to take. The sellers had failed to establish any breach by the buyer of the contractual duty to mitigate any loss suffered.
This new case brings into focus the importance for the sellers to ascertain that all warranties in the contracts of sale of shares are true.
At Consulco Law we have many years of expertise advising buyers and sellers on pre-sale due diligence. Please do get in touch and our experts will be happy to assist you.