Skeletons in the corporate cupboard may dramatically reduce the value of shares but their existence must generally be fully disclosed prior to a sale. The vendor of a care home business found that out to his cost when he was ordered to pay more than £8 million in damages to the purchaser.

The case concerned the sale for over £30 million of two companies which, together with a wholly owned subsidiary of one of them, owned a portfolio of seven care homes. Ten days before the sale, one of the homes was the subject of an unannounced inspection by the Care Quality Commission (CQC).

Concerns raised by the CQC following the inspection mostly arose in relation to the home’s COVID-19 policies and addressed questions of governance and the safety of residents. The CQC imposed a number of conditions on the home’s registration as a service provider. Amongst other things, the admission of any new residents was prohibited without the CQC’s consent.

After proceedings were lodged, the High Court noted that none of that was disclosed to the purchaser prior to the sale, as it should have been. The purchaser only found out about the CQC intervention a few days after the sale went through. The non-disclosure involved breaches of warranties contained in the share purchase agreement (SPA) and misrepresentation. The vendor accepted that it was to be treated as fraudulent and that damages should be assessed on that basis.

Ruling on the matter, the Court noted that the home’s CQC rating was downgraded from ‘good’ to ‘inadequate’ shortly after completion of the SPA. Local authorities responded by ceasing to place residents in the home, which the purchaser eventually decided to close.

The Court found that, on the date of the SPA, the home had no more than bricks and mortar value. The purchaser was awarded damages to reflect the difference between the sum it paid for the companies and their actual value at the date of the SPA. Further damages were due in the light of the additional risk faced by the purchaser in relation to other homes in the portfolio. The purchaser’s overall award came to £8,602,423.