Difficult dual role accountant’s office in million dollar transaction, but the court does not agree with disgruntled buyer Bookkeeping this morning

An auditor and advisory group assisted both buyer and seller during a company takeover. The buyer was dissatisfied with the significant losses at the acquired companies after the deal and sued the accounting and advisory group. The Court of Appeal in ‘s-Hertogenbosch states in appeal that the buyer has correctly stated that the auditor and advisory group were obliged to warn him if the information from the auditor and advisory group was unreliable and was obliged to carry out a due diligence investigation. advise if such a study was useful. However, too little has been provided by the buyer for the view that the information provided was unreliable or that due diligence was useful. Some of the buyer’s complaints are thus declared well-founded by the court, but in the end it does him no good.

Million dollar deal

The buyer had for more than 35 years been a customer of the auditor and consulting group, which had also previously assisted him with one or more other company takeovers. Since mid-2012, the accounting firm has also performed work for the seller. The audit and advisory group brought the two parties together to acquire the selling party’s businesses. In connection with this, the accounting and advisory group has provided financial information about the companies to the buyer. After three meetings between the two parties in April 2013, it was announced what price the seller demanded and what price the buyer was willing to pay. An agreement has been reached for a price of approximately 1.5 million euros. The price for the business premises of the sold companies is set at EUR 1.5 million, and EUR 1.00 has been agreed as the price for each individual company’s shares. The purchase agreement is signed by both parties. The buyer has requested and received a loan from Rabobank to finance the purchase price. The delivery of the business premises and shares took place on 3 July 2013. In the months that followed, the companies suffered significant losses.

Blame

The buyer then filed a lawsuit against the accounting and advisory group. In the appeal to the Court of Appeal, the buyer’s accusations against the auditors and advisory group are based on the fact that the information that the auditors and the advisory group gave him about the companies with a view to their takeover was incorrect and/or deficient. and that the Audit and Advisory Group has not indicated the need for an investigation to obtain reliable information.

The court finds that these allegations raise the question of whether the information provided was incorrect and/or incomplete and whether there was a need for (further) investigation and, if this was the case, whether it was by providing incorrect and/or incomplete information and/or failure to carry out the investigation, there is little damage. In the latter case, it is important whether the buyer would have renounced the purchase with correct and complete information or after an investigation that she states. However, the court of appeal first discusses whether and to what extent the auditor and advisory group was obliged to the buyer to provide reliable information and point out the need for a (supplementary) investigation. This investigation is called due diligence.

Measure

The court notes the following in this connection. The yardstick for assessing whether the audit and advisory group has failed is whether the audit and advisory group has complied with what could be expected of a reasonably competent and reasonably functioning auditor and tax specialist under the given circumstances. What could be expected from the auditors and advisory group must be seen in the light of the fact that it was an acquisition, that the auditor and advisory group would not advise on the purchase price, but that the buyer could trust that the auditors – or the advisory group would look after its interests, as auditors and the advisory group were used to doing as advisers to the buyer, and that the buyer could rely on the accuracy of the information about the party to be purchased, which the auditors and the advisory group in provided to the buyer in connection with the acquisition, unless the audit and advisory group had warned the buyer that the information was unreliable.

The following follows from this. The auditors and advisory group knew or should have known that the buyer was dependent for information about the companies on the information provided to him by the auditors and the advisory group. It also knew, or should have known, that this information was important to the buyer in deciding the takeover and the price. It appears from the parties’ declarations and from witness statements that the auditors and the advisory group themselves prepared or prepared the information. The audit and advisory group therefore knew what this information was based on.

Taking into account what could be expected of the Audit and Advisory Group in the circumstances, including the nature of its relationship with the Purchaser, the Audit and Advisory Group failed to meet with the Purchaser if it knew or should have known that the information it provided, was not reliable, but it did not point this out or warn the buyer about it. A general statement on or under the documents that no audit had been carried out was not sufficient in the circumstances. If the auditor and advisory group had intended to warn the buyer about the unreliability of the information with such a statement, it should have ensured that the buyer understood this statement as such due to its care. All the more so as it has not been disclosed or proven that the auditor and advisory group could reasonably assume that the buyer has taken into account that the information provided by the auditor and advisory group was or could be unreliable. It has not been asserted or proven that the auditor and advisory group has ascertained this.

In continuation of this, the view is that the audit and advisory group also failed to act if it had reason to believe that the due diligence had or could have an added value, and it did not make the buyer aware of this. In doing so, the Court of Appeal also takes into account the fact that due diligence is customary in takeovers such as the one in question, which is not or has been sufficiently contradicted. In short, this means that the auditors and advisory group should not advise the buyer about the price, but should ensure that the buyer could make a well-informed decision about the purchase.

The reliability of the information provided and the necessity or desirability of due diligence

However, the Court of Appeal ultimately concludes that what the buyer has put forward is not sufficient to establish that the information that the auditor and advisory group gave him with a view to the acquisition of the companies was incorrect or deficient.

The buyer also provided too little documentation to conclude that a due diligence would have been useful in this case, and the auditor and advisory group should therefore have recommended a due diligence.

While due diligence is generally customary in an acquisition such as this, the buyer may be expected to identify specific risks that such an investigation would have identified that it had not identified in advance and that were relevant to its decision on the acquisition. If such risks existed and these risks occurred later, the buyer must have become aware of them after taking over. If these risks have not materialized, the buyer has not suffered from the lack of due diligence.

In the appeal, the buyer did not state, or did not state sufficiently concretely, what insights a due diligence would have given about risks that were not identified in advance and which had a bearing on his decision about the acquisition.

The conclusion is therefore that no sufficient factual basis has been established or substantiated for the buyer’s accusations of non-compliance with the obligations arising from the commissioned work. The buyer correctly argued that the audit and advisory group had a duty to warn it if the information provided by the audit and advisory group was unreliable and advise it on due diligence if such investigation was appropriate. However, too little has been said to suggest that the information provided was unreliable or that due diligence was useful.

Court of Appeal ‘s-Hertogenbosch, ECLI:NL:GHSHE:2022:2089

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