Agreement & Contract

Can A Share Purchase Agreement Be Rescinded?

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The world of business is characterized by the continuous buying and selling of shares. When someone buys a particular number of shares in a business, they ensure that there is no liability attached to their transaction. However, in some cases, liabilities may come up in the form of taxation after the transaction. This could become a significant drawback for the buyer.

The Meaning Of The Share Purchase Agreement

A share purchase agreement is signed between the buyer and seller. It is a legal agreement between the two parties which acts as approval of various sales & terms conditions that are mutually agreed upon by the two parties. As a matter of fact, the Share Purchase Agreement Companies Act of 2013 serves as the evidence for both the parties, the seller and the buyer, that the shares have been sold/bought legally.

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Share purchase agreement consists of various terms & conditions that are discussed between the buyer and seller when the deal was finalized. Most of the share purchase agreements have the following data presented:

  • Name of the company
  • Par value of shares
  • Name of purchaser
  • Document or any form of warranties provided by the seller and the purchaser
  • Employee benefits and bonuses
  • Number of shares being sold
  • Details of the transaction
  • Identification agreement for unforeseen costs

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Is It Possible To Rescind a Share Purchase Agreement?

Well, a share purchase agreement establishes that the buyer and the seller are conducting this purchase of shares on mutual agreement and consent from both the parties.

Sometimes, it is possible that the seller may not give all the details to the buyer when the purchase is done. In that situation, the buyer stands liable. This won’t be entertained by the law principles. In such a scenario, the buyer can quickly rescind or annul a share purchase agreement.

In order to rescind a share purchase agreement, a person should be induced into a contract due to a wrong interpretation of another party. The buying side can rescind or annul a share purchase agreement or clean damage.

However, it has to be proved that the intention was to deceive.

When the shares are rescinded, they will be reverted to the seller who is obliged to repay the amount for those shares.

 There are some actions which may revoke the right to withdraw.

In case, the party which makes the false statement establishes the contract /behaviour in a way that is not consistent with the intent of the withdrawal (such as wrong misrepresentation)

Or in case the party cannot be restored to its original position. (Suppose: If the company signs a fresh contract or is re-organised)

A delay in withdrawing from the contract after the deception is discovered. This too can obstruct the right to withdraw.

Real-Life Example of Rescinding a Share Purchase Agreement.

In order to understand it better, let’s see a real-life example where the court supported rescinding the share price agreement

It so happened that Elson Precision Holdings Ltd (the buyer) initiated a share purchase agreement with Hampson Industries plc (the seller) wherein it agreed to buy a share of the Seller (the target).

This sale was negotiated by the financial director of the seller and the interim (temporary) managing director of target and, as part of its due process, income and customer predictions were provided to the buyer.

The forecasts consisted of the growth in demand, which came from a major customer of the target who represented between 34% and 40% of the target’s annual turnover.

The process of selling began in the summer of 2009 with the provision of an information memorandum and, during the passage of time, added information (including customer forecasts) were provided to the buyer.

In April 2010, soon after the two parties decided on the final terms for the sale of the target, the primary customer told the CEO of the seller that they are thinking to terminate their supply arrangement with the seller.

This was not told to the people who were negotiating the sale, who continued to provide the buyer with predictions and various other information reflecting an under-the-process relationship with the customer.

An official notice informing the termination of the vendor agreement was given by the seller only on 22 June 2010.

The sale got completed on 23 June after which the negotiating team learned of the customer’s official termination and promptly told the buyer. 

When the share purchase document had been drafted, it did not include any forms of warranties, establishing that the forecast given to the customer was true. The forecast statements and all the other documents were not considered as a breach of warranty.

Also, the agreement consisted of an entire agreement clause based on actions that favour innocent or negligent misrepresentation.

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The Judgement Of The Court

This issue was referred to the court and the judge ruled that, while the CEO had not himself given the wrong predictions to the buyer or instructed anyone else to make the buyer carry on. As per the principles of law, the CEO totally knew forecast which was provided to the buyer and also the reality that it was wrong and embedded with untrue information.

Despite that, he kept quiet about the discontinuation even though he knew the buyer would reply to the erroneous forecasts.


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