Share Sale Unwound For Fraudulent Misrepresentation

When Hampson Industries PLC sold one of its subsidiaries in the early hours of 23 June 2010, there was an email on the chief executive officer's blackberry – apparently unread, although it was received on the previous afternoon - giving him formal notice that one of the subsidiary's main customers would be switching to another supplier by the end of August. The email was the culmination of various communications since April between the CEO, Kim Ward, and the customer, Cummins Turbo Technologies, in which Cummins had consistently said that its decision to end the relationship was final. In all that time Mr Ward kept the information to himself. He did not tell the other Hampson directors or other colleagues who were handling the sale of the subsidiary – despite the fact that he knew Hampson was providing profit forecasts to potential buyers, and those forecasts assumed a solid upward trend of sales to Cummins over the next three years, representing about 34% of projected turnover. Why did Mr Ward think this was unimportant? There may have been many reasons. The subsidiary was very small in the scheme of things for Hampson, a listed company with a market capitalisation at the time of £160m. The consideration was £2.5m. He claimed that he had suspected Cummins of posturing in order to get price-reductions – apparently a common tactic in the industry. In his recollection of the dialogue with Cummins their stance was rather less categorical. Anyway, even without Cummins the buyer might feel that there was enough value left in the business. As it turned out, the buyer was horrified when it learned of the facts and lost little time in suing for fraudulent misrepresentation. The court might have awarded damages; instead – and unusually – it found that the buyer was entitled to rescind the agreement (and in fact, Hampson had accepted that, if it lost, rescission was the appropriate remedy). To establish fraudulent misrepresentation it must be shown that a false misrepresentation was made dishonestly: that is, knowingly, or without belief in its truth, or recklessly – in other words, careless as to whether it is true or false. The person making the representation must have done so with the intent that it should be acted upon by the recipient. The fact that Mr Ward was not part of the negotiating team and did not himself deliver the forecasts did not matter; neither did the fact that the forecasts were essentially statements of...