Following a nine month trial in 2019, Mr. Justice Hildyard released a summary of his conclusions at the end of January 2021 regarding the proceedings brought by Hewlett-Packard (“HP”) (as well as a number of related entities) against Dr. Mike Lynch and Sushovan Hussain arising out of HP’s acquisition of Autonomy in 2011 for approximately $11.1 billion. HP’s essential complaint was that it was induced into acquiring Autonomy by dishonest statements and omissions in Autonomy’s published information, and other false representations made personally by Lynch (Autonomy’s founder) and Hussain (Autonomy’s former CFO).
In an unusual step and because his final judgment is likely to be considerable, Mr. Justice Hildyard issued a summary of his findings in which he concluded that HP had “substantially succeeded” in its claims. The Judge also reached clear conclusions on the liability of Lynch and Hussain for fraud under the Financial Services and Markets Act 2000 ("FSMA"), common law and the Misrepresentation Act 1967 (applying the civil standard of proof on the balance of probabilities).
Mr. Justice Hildyard’s final judgment, which he advised will be of considerable length, is eagerly anticipated and will no doubt be considered in great detail when it is released. In the meantime, those engaged in corporate transactions (and their legal advisers) should take note of three general points of importance highlighted by the summary.
1. The first issue relates to the reliance that may be placed on information provided in the context of due diligence in corporate transactions. Mr. Justice Hildyard made a very clear distinction between two hypothetical scenarios:
(a) A scenario in which a buyer is not aware at the time of an acquisition of matters of which it subsequently complains, but which it might have been expected to unearth and probe prior to acquisition; and
(b) A scenario in which a buyer is aware, before an acquisition, of matters of which it subsequently complains.
Mr Justice Hildyard found that the former scenario is no defence to a FSMA or civil fraud claim because the buyer might be said to have reasonably relied on the information provided to it and it was wrong to think that the principle of "caveat emptor" applied. He stated that the latter scenario is different because the buyer could not be said to have reasonably relied on what it saw and read. It follows that a seller in due-diligence should give thought to ensuring that information provided to a buyer is clearly presented and that sellers should be up front about and explain any matter or issue that might not be immediately clear on the face of such information to potential buyers.
2. The second is that HP was able to bring a claim against the defendants through what is termed a “dog leg claim”. Since a claim by HP against Autonomy (under Schedule 10A of FSMA) would have been of no benefit to HP as they now owned Autonomy, Autonomy admitted liability to HP, and Autonomy was then able to sue the Defendants for loss. Accordingly, sellers of a business should understand that proceedings pursuant to FSMA can still be brought against them post-transaction and that they cannot benefit from any general protections afforded by the separate legal personality of the business being sold.
3. The final point is more abstract and goes to the potential implications of comments made by the buyer of a business as to the business it intends to acquire and the reasons for the acquisition. Mr. Justice Hildyard stated that he had, “provisionally determined that even if adjusted to take account of the fraud, HP would still have considered Autonomy….. a suitable acquisition whereby to effect transformational change” and that he, “would expect the quantum to be substantially less than is claimed”. In this respect it is noteworthy that Mr. Justice Hildyard chose in his summary, to include reference to a description attributed to Meg Whitman (who became CEO of HP) of Autonomy’s technology as, “almost magical”. It seems likely that this description had an impact on Mr. Justice Hildyard’s statements as to the quantum of the claim, something that buyers who are contemplating claims post acquisition will want to be aware of when it comes to making public comments.
Zeyd Anwar was a contributing author to this Insights post.