Commercial Court decision confirms corporate dishonesty cannot be assembled from the innocent states of mind of different executives

The Commercial Court has dismissed a multi-million-pound fraud claim relating to the sale of the Johnson Matthey Health Business, in which the buyer alleged that the sellers were in fraudulent breach of certain warranties contained within the SPA: Veranova Bidco LP v Johnson Matthey Plc [2026] EWHC 1021 (Comm). 

In many modern M&A transactions, the buyer takes out warranty and indemnity ("W&I") insurance and, in return, waives its right to bring warranty claims against the seller – except to the extent that those claims arise from the seller's fraud or wilful misconduct. The deal is straightforward in theory: the buyer's warranty risk is transferred to an insurer for most purposes, and the seller is exposed only for deliberate wrongdoing.

The present judgment demonstrates how formidable a hurdle the fraud exception can be. Despite finding that a warranty had been breached without being adequately qualified by disclosure, the court dismissed the claim in its entirety: the terms of the SPA precluded any claim in negligence or for simple breach of contract, and the buyer's fraud claim (pursued with what the court described as "relentless aggression") was found to be "implausible, improbable and wholly unsupported by the evidence".

The judgment contains important guidance on the test for fraud in the context of a breach of warranty claim: it is not possible to "aggregate" knowledge of facts and knowledge of falsity in a corporate entity where such knowledge is held by different individuals. The court held that a single, identifiable individual must have known the relevant facts, known enough about the warranty to appreciate that those facts were material to it, and known (or been reckless as to whether) the warranty was false. 

The decision is a stark illustration of the risk run by a buyer whose only route to a successful warranty claim is by invoking the fraud exception.

Herbert Smith Freehills Kramer LLP, alongside Simon Rainey KC, David Caplan KC and Ruihan Liu, acted for the successful defendants, Johnson Matthey Group.

Background

The claim arose out of the sale of the Johnson Matthey Health Business to the claimant, Veranova Bidco LP, an affiliate of Altaris LLC (a US healthcare-focused private equity fund). The sale took place pursuant to an SPA signed on 16 December 2021, with completion on 31 May 2022. 

The SPA provided that, if the buyer entered into a W&I insurance policy before completion, it agreed not to make any business warranty claim against the sellers — except to the extent that the claim arose or was increased directly as a result of the sellers' fraud. 

The claim alleged breach of two warranties in the SPA:

1. The "Ordinary and Usual Course Warranty": that since the applicable accounts date, the Health Business had been carried on in the ordinary and usual course consistent with past practice, without any material alteration to the nature, scope or manner of the businesses.
2. The "Key Contracts Warranty": that none of the companies was currently renegotiating any material term of any key contract which, upon conclusion, would have an adverse or detrimental effect on the businesses.

One of the Health Business's major products was buprenorphine hydrochloride ("BHCL") and its largest customer by value was Alvogen Inc. The supply agreement between them contained a "price adjustment clause" entitling Alvogen to initiate pricing discussions if it received a bona fide competing offer from a third-party manufacturer at least 8% below the prevailing price under the agreement, with the likely effect that the Health Business would be required to match the offer or lose the business.

In October 2021, while the sale process was underway, Alvogen invoked the price match clause on the basis of an offer from Chr. Olesen Synthesis A/S to supply BHCL at around US$8/g — much lower than the US$16/g then being charged to Alvogen (the "Olesen Offer"). By 13 December 2021, the offer had been verified as bona fide. The SPA was signed three days later.

The Disclosure Letter disclosed, against both warranties, that increased competition in the BHCL market had adversely impacted the Health Business's market share and pricing, that pricing discussions with Alvogen were ongoing, and that the projected financial impact could not be quantified.

By virtue of the W&I insurance waiver, Veranova could only succeed if it could prove fraud or wilful misconduct. It sought to do so through the conduct and state of mind of four senior executives (the "JM Executives").

Decision

The Commercial Court (Mrs Justice Dias) dismissed the claim in its entirety.

The Ordinary and Usual Course Warranty: not breached

The court rejected the claim that price negotiations following the Olesen Offer put the business outside the ordinary and usual course. For a business like the Health Business, where price erosion was a feature of the commercial landscape, such negotiations were very much in the ordinary and usual course, and consistent with past practice given that Alvogen had triggered the price match clause at least once before. The warranty was inapt to cover price negotiations contemplated by existing contractual arrangements and which had taken place on a previous occasion: there was no breach of the Ordinary and Usual Course Warranty.

The Key Contracts Warranty: breached, and disclosure incomplete

The court found that the invocation by Alvogen of the price match clause on 18 October 2021 marked the initiation of renegotiations within the meaning of the Key Contracts Warranty.

There was also found to be an adverse or detrimental effect on the business. At US$8/g, the Health Business would barely cover its production costs of BHCL and the conclusion of negotiations would threaten the viability of one of the manufacturing sites being sold. As at 16 December 2021, it could not realistically be denied that the conclusion of the negotiations would have an adverse and detrimental effect on the Health Business, irrespective of whether it could yet be finally quantified.

The facts were found not to have been adequately disclosed: there is a material difference between disclosing general pricing pressure and increased competition on the one hand, and on the other hand disclosing negotiations around a price representing a sudden 50% reduction with a direct impact on revenues and material consequences for the operation of manufacturing sites.

The fraud test: rejecting "composite fraud"

Veranova's primary case was rejected; this stated that, once a warranty is shown to be false, it is sufficient to prove that any JM Executive knew the underlying facts - without needing to show that the same individual also knew that those facts rendered the warranty false. The court rejected this without hesitation: the defendant must not only know the facts but must also know or be reckless as to the terms of the warranty and their falsity. Without that, there cannot be conscious dishonesty.

The law does not recognise any concept of "composite fraud": a fraud claim will not lie where a statement is made by a person who honestly believes it to be true, merely because another person knew the statement to be false. As the Court of Appeal confirmed in Stanford International Bank Ltd v HSBC Bank plc [2021] EWCA Civ 535, dishonesty alleged against corporations must be evidenced by the dishonesty of one or more natural persons – one cannot circumvent the requirement of subjective dishonesty in a single individual.

The court accepted the claimant's so-called "first alternative" formulation: to establish fraud, Veranova needed to show that at least one JM Executive: (i) knew the facts which made the Key Contracts Warranty false; (ii) had sufficient knowledge of the terms of the warranty to be able reasonably to appreciate that their factual knowledge was relevant to it (or was reckless about what warranties were given, in the sense of simply not caring); and (iii) knew, or was reckless as to whether, the warranty as qualified by disclosure was false. This is a high hurdle: it is inherently unlikely that senior executives of a company would be reckless in this sense. If there is fault, it is far more likely to be negligence than recklessness.

Application to the JM Executives

Only one of the JM Executives was found to have known of the Olesen Offer and all of the relevant facts — however, the court was not satisfied on a balance of probabilities that he had been given any specific briefing on the Key Contracts Warranty or that he had sufficient knowledge of its terms to appreciate that his factual knowledge was relevant to it. He also knew that a proper disclosure process was in place led by experienced external lawyers; he trusted his team to conduct that process properly and was entitled to do so. A failure to check whether specific disclosures were adequate is not the same as conscious awareness that a warranty is false. 

None of the other JM Executives impugned had knowledge of the Olesen Offer and the other relevant facts, and, accordingly, there could be no finding of conscious dishonesty by any of them.

Conclusion

The court dismissed the claim in its entirety. None of the four JM Executives was found to have been guilty of fraud, wilful misconduct or conscious dishonesty. The court made clear that all four left the proceedings “without a stain on their characters”. Indeed, the allegations were held to be “implausible, improbable and wholly unsupported by the evidence”. 

The court also expressed concern about the manner in which the case had been pursued: claims in fraud had been progressively withdrawn during the proceedings, yet the remaining allegations were advanced with “relentless aggression”. The court endorsed the criticism that this was a case in which the claimant had "donned its fraud detection goggles, turned the sensitivity up to high and attributed a dishonest motive to every interesting feature in the landscape" (per Mann J in Mortgage Agency Services Number One Ltd v Cripps Harries LLP [2016] EWHC 2483 (Ch)).

Note: This decision is subject to an appeal to the Court of Appeal which will be heard in April 2027.