This page contains a Flash digital edition of a book.
Law


it is not often that such an irregular event occurs. Most of the time, particularly in the context of an investment round or acquisition, the warranties that are given will cover the event that has arisen.


This can be particularly significant for entrepreneurs themselves, as the usual situation is that the shareholders of a company give the warranties to the counterparty personally. Accordingly if the warranties are found to have been breached it is the entrepreneur personally, and not the company, who is liable for the damages caused by that breach – and their personal assets, or their proceeds from the sale of the company, that are on the line.


Misrepresentation


Having failed in their first two arguments, AWS argued that SGL had been aware at the time of signing the contract that Geri was leaving. By behaving as though she was fully committed to the contract, SGL had enticed AWS into signing a contract that they would not otherwise have signed. If the court found that SGL had indeed induced AWS to enter into the contract by making false representations to them, that would constitute a misrepresentation – which would give AWS the right to rescind the contract.


The argument turned on the fact that, on 4 May 1998, all five Spice Girls turned up to and participated fully in a photoshoot to create promotional material for the “Spice Sonic” scooters. This was two days prior to the final agreement being signed between AWS and SGL, but after the time at which everyone within SGL was clear that Geri would be leaving the band – rendering all of the promotional material they were creating useless. The argument that the judge accepted was that by


taking active part in the shoot, knowing that the promotional material (under the contract) was intended to be used until March 1999, the Spice Girls were representing to AWS that the lineup of the band would remain unchanged until at least that time. As they knew this to be untrue, and as using the material generated by the shoot was a significant factor in AWS agreeing to sign the contract, misrepresentation was proven and AWS won the case.


This type of situation may arise for entrepreneurs as well. Of course, in the process of doing a deal, entrepreneurs will have to take certain steps to help that deal along –allowing counterparties access to staff and records, for example. Those should not constitute misrepresentations. The issues arise where the parties discuss, or take steps towards, the plans following the deal. Being ambitious about those plans is unlikely to be a problem, but an entrepreneur who knows that they cannot be delivered but agrees to go along with them (or, worse, takes active steps towards them) is likely exposing themselves to a misrepresentation claim.


An


entrepreneur who knows that his product can’t be sold in a particular territory, or that a key staff member is leaving, should not silently go along with a counterparty’s plans that depend on those sales or that person.


The SGL case contains facts that most entrepreneurs will not have to deal with – sponsorship deals and photoshoots are unlikely to be of direct application to the majority of businesses. The arguments that were made, however, demonstrate the three arguments that a counterparty will consider if they discover that an entrepreneur has withheld material information from them – that the fact not disclosed constituted a breach of a term of the contract, or a breach of a warranty, or that the fact of non-disclosure itself was a misrepresentation.


That is not to say that all facts, if not disclosed to the counterparty, will fall into one of those three categories – certainly the less significant a matter is to the overall business, the less likely it would be to come under any of those headings. But where a fact is material, unless he and his advisers have examined non-disclosure from all of these angles, honesty will be the entrepreneur’s best policy.


David Willbe is counsel in the Corporate Group in the London Office of Crowell & Moring, an international law firm.


Top Right: Simon Fuller managed the Spice Girls throughout the peak of their success. 47 entrepreneurcountry


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60