Buying a business – why cutting corners is a bad idea

by The Corporate and Commercial Team

23-04-2014

Mega transactions involving huge companies (with huge teams of very expensive lawyers) tend not to end up in front of the courts very often. So for a large transaction to end up a judicial spotlight is quite unusual.

What is even more unusual is that it involves a matter which, in a smaller transaction, would normally be picked up and dealt with by a standard due diligence exercise and some decent commercial drafting.

The matter involved a businessman called Mr Shanley. He licensed some software to what was then Halifax General Insurance Services. Halifax General Insurance Services was then purchased by Lloyds TSB Insurance Services. Lloyds continued using the software. Mr Shanley objected to this and claimed that Lloyds did not have a licence to use the software.

The High Court and then the Court of Appeal agreed. The court ruled that Lloyds could not rely on having an implied licence to use the software following the acquisition.

What makes this case even more unusual is that Mr Shanley also tried to claim that Halifax had been using the software outside of the terms of the licence. In order to try and win this element, he relied on a document which he later admitted he had forged. His claim against Halifax therefore failed, but the court held that this did not mean that his case against Lloyds collapsed as well. The court saw the two issues as entirely separate and dealt with them accordingly.

The purchase of a business, large or small, is a significant undertaking. While legal fees for investigating the business (known as due diligence) may seem an unnecessary expense in the grand scheme of things, particularly if they do not throw up anything that needs to be dealt with, the consequences of not doing those enquiries could be substantial. Cutting corners is always risky and in some cases can be extremely expensive.


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