Think before you warrant - success for former shareholders in breach of warranty claim
April 20, 2017
Paul Kitcatt and 11 others v MMS UK (Holdings) Limited (1) Publicis Groupe SA (2)
Fox Williams have succeeded in a claim brought by the former shareholders of Kitcatt Nohr Alexander Shaw Limited (“Kitcatt Nohr”) against MMS UK (Holdings) Limited (“MMS”), a subsidiary of major global advertising and public relations company, Publicis Groupe SA (“Publicis”).
The claim was for breach of a buyer warranty given by MMS and three named individuals under a share sale and purchase agreement dated 1 March 2011 (“SPA”) and breach of a collateral contract entered into in December 2012. These claims were brought in order that the former shareholders could recover the deferred consideration due to them under the SPA, which was tied to the performance of what had become Kitcatt Nohr Digitas (“KND”) following the acquisition of Kitcatt Nohr by MMS and the subsequent merger of Kitcatt Nohr and Digitas UK, a subsidiary of Digitas Inc (another company owned by Publicis).
During the acquisition process, the former shareholders negotiated warranties designed to protect them against matters of which they were unaware, which might have an adverse effect on the future performance of KND and therefore on their deferred consideration. The judge found that the three named individuals who gave one such warranty were each in breach of that warranty because, at the time of completion, they were all aware of certain facts and circumstances which could reasonably be expected to have a material adverse impact on the future earnings of what was to become KND, namely that work from Procter & Gamble (“P&G”), Digitas UK’s largest client, had either already been lost or would soon be lost to other agencies in the Publicis group.
The loss of P&G work had disastrous consequences for KND. Accordingly, shortly after the acquisition in 2011 and during the course of 2012, the former shareholders sought assurances from senior personnel within Digitas and Publicis that their entitlement to deferred consideration under the SPA would not be prejudiced. The former shareholders believed that an agreement was reached in December 2012 that adjustments would be made to the mechanism in the SPA for calculating the deferred consideration such that the impact of the loss of work from P&G would be taken into account. However, at the end of the earn-out period, Digitas and Publicis refused to pay any deferred consideration to the former shareholders, claiming instead that no agreement had in fact been reached. MMS and Publicis ran the same defence at trial.
The judge disagreed with MMS and Publicis and found that an agreement had been reached. He concluded that such agreement effectively compromised the former shareholders’ claim for breach of the buyer warranty and that, under the 2012 Agreement, the former shareholders were entitled to deferred consideration in the sum of £2.6 million, plus interest. MMS has also been ordered to pay the great majority of the former shareholders’ costs of the proceedings.
A further commentary on the proceedings can be found at: http://www.campaignlive.co.uk/article/kitcatt-nohr-alexander-shaw-founders-win-publicis-groupe-case/1429555