M+A: When can a seller remain silent?

Due diligence investigations

If you engage in a due diligence investigation and the buyer/its advisers request information, whether in the form of a document or the answer to a question, then you need to be aware that the law requires your response must constitute full and fair disclosure of all relevant facts and circumstances: Fraser v NRMA Holdings Ltd (1995) 55 FCR 452.  A seller’s refusal to provide such disclosure may not only prejudice the negotiations in relation to the drafting of the sale agreement but may potentially expose it to a claim for misrepresentation, which if proved, will sound in damages.

Disclosure & share sale transactions

Putting to one side the seller’s legal obligation to make full and fair disclosure it makes good commercial practice to do so for no other reason than once the buyer holds those shares (particularly in circumstances where that shareholding entitles it to representation on the target company’s board) its appointee to the board will have access to all the information relating to the target company including any advice previously given to the company by its advisers. The point is that eventually the buyer will come to learn where all the skeletons are buried, so a prudent seller is well advised to tell all prior to completion of the share sale agreement.

Disclosure in asset sale transactions

In the case of an asset sale the situation is more complicated largely because the law recognises that in certain instances it does not impose an obligation on the seller to bring certain information to the attention of the buyer regardless of whether such conduct may be considered sharp practice.

Silence

The law recognises that misconduct by silence can occur in at least two situations:

  1. complete failure to disclose a fact/circumstance; and
  2. misconduct by half-truth (the idea that if I had told you the full story the message would be different from the impression conveyed by communicating only part of the facts to you).As Barrett J explained in Vitek v Estate Homes Pty Ltd [2010] NSWSC 237 at [34] in instances where parties are engaged in arm’s length commercial negotiations, there is no generally prevailing legal requirement that one party not take advantage of superior knowledge; much less is there a requirement to surrender the advantages that superior knowledge entail. In Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458, Gleeson CJ said at 475:

“Where parties are dealing at arms’ length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause that other party to take a different negotiating stance. This does not in itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice.”

Barrett J went on to say at [35] that in cases dealing with misleading or deceptive conduct under the Trade Practices Act (now the Australian Consumer Law)  the courts have made it clear:  “that the factor that may give rise to a requirement to break silence – in the sense that failure to do so will be misleading or deceptive – will be found in the whole of the circumstances in which silence is maintained. The most often quoted statement of the relevant principles is probably that of the Full Federal Court in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. The matter was summarised thus by Handley JA (with whom Hodgson JA and Gzell J agreed) in Metalcorp Recyclers Pty Ltd v Metal Manufactures Ltd [2003] NSWCA 213; (2004) Aust Contract R 90-186:

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