The recent Federal Court decision in Bridging Capital Holdings Pty Ltd v Self Directed Super Funds Pty Ltd [2025] FCA 314 has brought into focus the established practice on M&A transactions in Australia of allowing the entire contents of a data room to qualify warranties given under a sale and purchase agreement (provided they comply with the contractual disclosure standard). The case ultimately turned on whether misrepresentations made in the sale process were corrected by documents uploaded to the data room, and it should not be seen as a departure from established practice here in Australia.
The dispute
In 2021, Bridging Capital (whose sole shareholder and director was Mr Moses) (Buyer) entered into a share sale agreement (SSA) to acquire a financial planning business conducted through two companies, Exelsuper and Exelsuper Advice (Companies). The Companies were owned by Self Directed Super Funds (SDSF) and Mr Harris (Sellers). During negotiations, Mr Harris misrepresented to Mr Moses the adjusted EBIT of the Companies, which was the key metric used by the Buyer to determine the purchase price.
Mr Harris subsequently attempted to correct the misrepresentation by including documents (bank statements, explanatory emails and an email from the Companies’ accountant) in a densely populated data room with a 417-page index of folders. The correcting documents were not reviewed, and the discrepancy went unnoticed by Mr Moses and his advisers.
After paying $2 million for a 45% interest in the Companies, a dispute arose between the parties. Bridging Capital initiated oppression proceedings and succeeded. The Court ordered the Sellers to repurchase the shares for $282,239 - the fair value determined by a court appointed assessor.
The Buyer then brought further proceedings alleging that, amongst other things, Mr Harris’ representations as to the EBIT adjustments throughout due diligence were in breach of a number of warranties in the SPA.
Warranty claim
The breach of warranty claim ultimately turned on whether financial information about the Companies was adequately disclosed in the due diligence process.
The relevant warranties included a warranty that the Sellers had disclosed to the Buyer all information known about the business, the Companies and the sale shares that would be material to a reasonable buyer. This was referred to by Stewart J as the "all material information disclosure warranty".
The Sellers argued that the underlying materials they had uploaded to the data room were sufficient to allow the Buyer to verify the Companies’ actual financial performance and qualified any misleading representations. Although Stewart J accepted that the data room contained the necessary source documents to correct the misrepresentations, he was otherwise wary of this argument in circumstances where those source documents had not been specifically brought to Mr Moses’ attention. Further, Stewart J was of the view that Mr Harris had been “deliberately deceptive” in using the data room as the medium for correcting such misrepresentations.
Findings
The Court ultimately found that the Sellers had breached the "all material information disclosure warranty" because:
It was not realistic for the Buyer to find source documents in a heavily populated data room to correct representations about adjusted EBIT made directly in person by the Sellers.
The Buyer had a reasonable expectation to be notified about corrections that materially impacted the purchase price.
Simply uploading documents in the data room did not lead to that information being disclosed in accordance with the "all material information disclosure warranty".
The Court then considered whether the warranty breach had been cured in accordance with the disclosure limitation and found that:
The correcting information was not "accurately and fairly disclosed" (which was the contractual disclosure standard for the disclosure limitation) in the data room.
The Sellers couldn’t rely on the disclosure limitation when they had otherwise failed to comply with the level of disclosure required in the "all material information disclosure warranty" (which Stewart J found to be the same as the contractual disclosure standard).
It is notable that, despite the contractual disclosure standard being wider than customary (“fair disclosure” is typically defined with reference to the facts and circumstances in the disclosure material being fully, fairly and specifically disclosed with sufficient details to identify clearly and accurately the nature and the scope of the matter disclosed), the Court still found against the Sellers in light of their misrepresentations.
The Court ordered the Sellers to compensate the Buyer for the full amount of its loss of $1,717,761, being the difference between the $2 million the Buyer paid for the first tranche of shares, and the $282,239 it had recovered in its oppression claim.
Key takeaways
The decision serves as a timely warning to sellers that any attempt to correct misrepresentations made during a sale process through documents in a data room, rather than by way of specific notice to the buyer, will not be enough to avoid contractual liability. It should not be seen, though, as a shift from the established practice here of disclosing the contents of a data room, towards the US practice which prohibits such disclosure.
It also serves as a reminder of good hygiene on both sides of a deal when it comes to disclosing the data room:
For sellers: although not helpful in the circumstances of this case, ensure that the scope of information warranties and the disclosure standard clearly support disclosing the contents of the data room
For buyers: Be cautious of accepting broad data room disclosures where it may be difficult to identify specific breaches of warranties. Where such disclosures are accepted, ensure the due diligence exercise is conducted thoroughly on such disclosures.