OpinionMar 14 2017

Learning 'caveat emptor' the hard way

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Before making an expensive purchase, it is wise to ensure that you are getting exactly what you think you are buying.

It is a lesson that Affinity, the purchaser of Wealth at Work Group (WAW), has had to learn the hard (and costly) way.

In November 2016, Affinity was forced to throw in the towel in its High Court action against five former WAW consultants who had refused to sign new contracts with Affinity when it had acquired WAW in May 2016.

As was widely publicised at the time, Mr Justice Jay found that in relation to two defendants, the no-dealing and non-solicitation restrictive covenants relied on by Affinity were unreasonable and therefore unenforceable.  

Affinity discontinued the claim against the other three defendants, presumably before the Judge could reach the same decision in relation to those covenants.

Call it caveat emptor, call it common sense, but if you fail to do your due diligence, you will pay the price.

The case bears many notable similarities with the equally well publicised 2012 decision in the dispute between Towry Law and Raymond James and others.

In both cases the dispute arose from an acquisition of an existing adviser firm, which resulted in a number of disgruntled, key individuals joining a different firm.

Both companies that were acquired offered whole of market, independent advice; and the acquirers (Affinity and Towry Law) relied heavily or exclusively used their own discretionary funds.

For the clients of the acquired entity, that meant a radical change in practice. The defendants in both cases chose not to go with the discretionary fund model.

Another telling similarity was that the acquiring entity adopted aggressive tactics in the litigation, which put considerable financial pressure on the individual defendants.

Towry’s case was pleaded in such a way that each one of the individual defendants was theoretically liable for the totality of the £6m + damages claimed, which vastly exceeded the resources of any one individual defendant.

In the Affinity case, Affinity withheld over £500,000 from the five individual defendants during the dispute.

Both judges had no hesitation in expressing dissatisfaction in the conduct of each claimant, ordering costs on the punitive, indemnity basis, which amounts to a heavy extra burden.

However the most significant similarity is that both Affinity and Towry Law failed to get to grips with the true effect of the restrictive covenants that they sought to enforce. Towry’s evidence in court was that they considered the non-solicitation covenants they relied on were practically the same as non-dealing covenants.

They are not, and Towry lost. In the Affinity case, they failed to recognise that the covenants were worthless; they were simply unenforceable because they were unreasonable.

Both parties either failed to take appropriate advice or got the wrong advice, prior to embarking on the acquisition and the subsequent costly litigation.

That failure is hard to understand. In acquisitions of this nature, the crown jewels are the book of business that each adviser brings to the table. If the acquiring entity has no means to secure that book of business, it is unlikely that they will get what they pay for.

This is especially so in circumstances where the acquisition will lead to a radical departure from the existing business model. Clients will want to stick with what they are comfortable with, both in terms of their adviser and the type of investments offered.  

Call it caveat emptor, call it common sense, but if you fail to do your due diligence, you will pay the price.

The false economy of failing to obtain the right advice at the right time cost Towry and Affinity very dear and is a lesson to any other would-be acquirers. 

Robert Campbell is a partner at international law firm Faegre Baker Daniels