Reverse‑Deceit in Management Buyouts: Presumption of Inducement, “True Value” Damages with Probabilistic Discount, and Backdated Assignments Upheld Absent Intent to Deceive

Case: Vald. Nielsen Holding A/S; Newwatch Ltd v. Baldorino & Ors

Citation: [2019] EWHC 1926 (Comm), Commercial Court

Date: 18 July 2019

Introduction

This judgment addresses an unusual iteration of transactional fraud: sellers claiming they were deceived into selling at an undervalue by the company’s own management during a management buyout (MBO). Updata Infrastructure (UK) Ltd’s management—Baldorino (Commercial Director), Bennett (Sales Director) and Mantell (Head of Finance)—partnered with private equity house LMS Capital to acquire the company in July 2009. The majority seller, Updata Europe A/S (owned chiefly by the Johnsen family), and minority seller Newwatch Ltd alleged they were misled during competitive bidding (LMS v. Mr Nielsen/e‑Kong).

The court found deceit and unlawful means conspiracy against the management defendants based on two core misrepresentations (20 April and 3 June 2009 emails), rejected the “forced sale means no loss” defence, assessed damages by reference to the company’s “true value” (adjusted for transaction constraints), upheld the validity of a backdated assignment under Danish and English law, and rejected a separate fiduciary duty claim (advanced only by Newwatch) for want of “special circumstances”.

Summary of the Judgment

Deceit and Unlawful Means Conspiracy: The court held that Bennett’s 20 April 2009 email and his 3 June 2009 email (copied in or bcc’d to the other defendants) contained fraudulent misrepresentations about Updata UK's forecasts and about parity of “factual data” disclosure between bidders. All three defendants were liable; the conspiracy claim succeeded but added nothing beyond deceit.
Inducement: Applying the evidential presumption in fraudulent misrepresentation, the court found the misrepresentations were an inducing cause of the sale on LMS’s terms.
Causation: The court rejected the argument that Updata Europe would have sold at the same price anyway due to bank pressure. Without the fraud, higher forecasts would have been disclosed; the bidding process would have generated a materially higher offer; and even on a single-bid hypothesis the bank would probably have allowed short additional time to realise fairer value.
Damages: Starting from “true value” at the transaction date, the court applied a principled discount to reflect transaction constraints (time pressure and bank considerations), then deducted the actual price: £6,518,652 (interest reserved).
Assignment: The backdated deeds assigning Updata Europe’s rights to Vald. Nielsen were valid. There was no intent to deceive the Danish supervisor/creditors; even if there had been, English illegality principles (Patel v Mirza) would not deny relief in the circumstances.
Fiduciary Duty: No fiduciary duty was owed by the directors to the shareholders on the facts. The Newwatch breach of fiduciary duty claim failed.

Key Facts and Issues

Ownership: Updata Europe (60%), Newwatch (12.4%), minority UK management and seed investor Nyegaard held the remainder.
Competing bids: LMS (with management) and Mr Nielsen (with potential backer e‑Kong). A data room was established; parity of information was a core process requirement pressed by the bank (Sparekassen Lolland) and EVs.
Two pivotal communications:
- 20 April 2009: Bennett sent Updata Europe a “Financial Overview” bearing pessimistic projections, stating LMS used these projections; in truth, management had more optimistic internal forecasts (the March 2009 “Weighted Budget” and Tenon materials) used to solicit PE funding.
- 3 June 2009: Bennett assured that “factual data” given to Tenon/LMS did not differ from the data room—this was wrong; he also attached an “Updated Kelso Presentation” repeating low “best‑case” figures inconsistent with management’s true expectations.
Assignment: Deeds (one Danish law, two English law) were signed in January 2011 but dated 19 November 2010. The supervisor had been appointed on 3 January 2011; appointment ended April 2011.
Claims: Vald. Nielsen (Updata Europe’s assignee) pursued deceit/conspiracy; Newwatch (which rolled over into the MBO vehicle) pursued equitable/fiduciary claims only.

Detailed Analysis

1) The Fraud Findings

(a) Representations and falsity

20 April email: In context (Mr Johnsen’s request for “latest budgets” post‑offer), the email objectively represented that the attached Financial Overview expressed the management’s current/genuine forecasts and that these were the projections used by LMS. That was false: management’s true current view was the March 2009 Weighted Budget (c. £6.07m EBITDA for FY10), reflected in Tenon’s IM/Data Pack given to the market, not the pessimistic “Financial Overview”. LMS had not been given the Financial Overview; it was given Tenon materials.
3 June email: Bennett’s assurance that the “factual data” given to Tenon/LMS did not differ from the data room was false; crucially, the Weighted Budget and pipeline detail were withheld. The updated Kelso slide still carried the low “best case” EBITDA (£3.348m) even though contracts had advanced and management’s forecast remained far higher.

(b) Dishonesty and intention

The court rejected the defendants’ rationalisations (“Tenon suite”, “proprietary to management”, “spoon‑feeding” Mr Nielsen). The contemporaneous materials, the deliberate crafting of the 3 June update to depress projections, the advice from Tenon (to disclose “ALL” info given to them) and the pattern of withholding supported a finding of deliberate deceit to secure the MBO on LMS’s terms and to hobble the rival bid.
All three defendants were liable: Bennett authored the emails; the others knew of, approved and adopted the representations (“manifest approval/adoption”).

(c) Inducement

Applying the presumption in deceit (BV Nederlandse v Rembrandt; Hayward v Zurich), the court found the misrepresentations were “actively present” in Updata Europe’s mind in deciding to accept LMS’s offer.
The argument that EVs could have asked more questions fails; in deceit it does not lie in a fraudster’s mouth to say the victim could have discovered the truth.

(d) Causation

The central “no loss because forced sale” defence failed on facts and law. Without deceit, the Weighted Budget and underlying data would have been disclosed; bids would have changed (by LMS or others) and/or the process would have been adjusted (including short timing flexibility from the bank). The suggestion that the same LMS price would have been accepted was improbable.
The court treated the primary causation question (“would EVs have entered the SPA on same terms?”) on the balance of probabilities, not as a loss‑of‑chance question. Allied Maples type reasoning was reserved for truly third‑party contingent steps.

2) Damages: A Valuation‑Led, Pragmatic Approach

The court applied Smith New Court: the starting point is the difference between true value at the transaction date and the price actually obtained. Recognising transactional constraints, it calibrated the “true value” recovery by a probabilistic discount to reflect the chance that full value could not be realised within the (short) timeframe—an exercise of quantification, not of causation.

Maintainable EBITDA: £5.8m (2010–2014, cross‑checked against contemporaneous LMS internal “base/conservative” projections adjusted for overhead errors). The court rejected both defendants’ over‑caution and claimants’ full £7m figure.
Multiple: 5x EBITDA (consistent with market and contemporaneous practice—e.g., Nielsen’s 5x; LMS’s 6.1x was applied to historic, not forward, earnings).
Control premium: 35% (empirical transaction evidence adjusted for leakage/outliers supported a mid‑30s premium).
Private company discount: 33% (agreed by experts).
Fair value of 60% stake (post control premium, private company discount): ~£15.6946m.
Transaction‑feasibility discount: 25% (to reflect time pressure and bank context—quantification, not causation).
Damages: 75% of fair value (£11.76345m) minus price received (£5.244798m) = £6,518,652 (interest reserved).

Crucially, the court rejected the “forced sale ⇒ no loss” thesis; compulsion was a spectrum, and even a pressured sale can cause loss measured by fair value less price obtained, suitably discounting for the chance that full value might not have been realised within the available window.

3) The Assignment: Backdating, Danish Supervisory Consent, and English Illegality

Updata Europe’s rights were assigned to Vald. Nielsen via three deeds signed in January 2011 but dated 19 November 2010. A Danish bankruptcy “supervisor” had been appointed 3 January 2011; appointment ended April 2011.

Danish law: Supervisor consent is intended to protect creditors but the lack of consent does not automatically invalidate a transaction; if supervision ceases without bankruptcy, the company is bound (expert evidence). Further, backdating is valid if it gives formal effect to an earlier oral agreement on the main terms; it is invalid only if done with deceitful intent towards a third party (invoking King Christian V, s.5‑1‑2 and Danish Supreme Court authority).
Findings of fact: An oral deal on the main terms had been reached on 19 November 2010; drafts were completed by 21/22 December with the material figures (notably the DKK 1m representing KPMG/HH debt); the January backdating reflected a genuine belief and was not intended to deceive the supervisor/creditors. The court rejected the expanded allegations of fraud on the assignment.
English illegality: Even if deceitful intent had been proven (it was not), Patel v Mirza’s proportionality test would not warrant denying enforcement—the alleged illegality was technical, caused no creditor prejudice, supervision ended quickly, and the defendants themselves had benefitted from recognising the assignment when procuring the post‑sale Deed of Rectification.

Result: The assignment was valid and enforceable; Vald. Nielsen had standing.

4) Fiduciary Duty: No “Special Circumstances”

Newwatch’s fiduciary claim failed. Applying Peskin v Anderson and Sharp v Blank, the court held:

Directors do not, by virtue of office, owe fiduciary duties to shareholders; such duties arise only in “special circumstances” akin to established fiduciary relationships (assumption of responsibility, entrustment, personal relationship of influence, or transactional dealings creating vulnerability).
Updata UK was not a family/quasi‑partnership; some family ties existed, but the relationships were strained; EVs guarded their own interests with their own advisers; management did not negotiate with EVs for the purchase of their shares (LMS did).
Information asymmetry is inherent in director–shareholder relations and does not itself create fiduciary duties. The deceit was actionable in tort; it did not bootstrap a fiduciary relationship where none existed.

Consequently, Newwatch (which rolled over) obtained no equitable account; the primary remedy lay in the deceit finding for the assignee of Updata Europe.

Precedents Cited and Their Role

Fact‑finding and memory: Armagas v Mundogas (The Ocean Frost), Grace Shipping, and Gestmin informed the judge’s document‑centric approach and caution about recollections 10 years after the events.
Deceit essentials: Derry v Peek (mental element); IFE v Goldman Sachs; Goose v Wilson Sandford (intention that the representee act); Peekay v ANZ (correction must be fair and explicit); Hayward v Zurich and BV Nederlandse v Rembrandt (inducement presumption and being “actively present” in the mind); Avon Insurance v Swire (substantial truth); Kriti Palm and Bradford Third Benefit (dishonest knowledge and “cocktail of truth”); Smith New Court (measure of damages; flexibility from transaction date rule).
Causation and quantification: Allied Maples, Wellesley Partners, Parabola, Vasiliou, AssetCo v Grant Thornton (analytical framework distinguishing causation from quantification; when to discount for probabilities; care with multiplication methods).
“Forced sale” valuation context: Cuckmere Brick, Silven Properties (mortgagee’s duty; fair market realisation duties), used to support the notion that a bank could not press an undervalue sale and would likely show limited flexibility.
Fiduciary duties to shareholders: Peskin v Anderson, Sharp v Blank, Percival v Wright, Re Chez Nico, and comparative authorities Coleman v Myers (NZ), Brunninghausen v Glavanics (NSW) framed the high threshold for imposing fiduciary duties outside exceptional facts.
Assignment/illegality: Danish law (Christian V, s.5‑1‑2) and the Danish Supreme Court’s 2014 case on immoral contracts; English illegality via Patel v Mirza (proportionality and public policy balance).

Legal Reasoning: Why the Court Reached These Conclusions

Construction of the communications: The judge read the 20 April and 3 June emails objectively in context. Requests for “latest budgets” immediately post‑offer, and an insistence on equal data room disclosure, meant that sending the old “Financial Overview” and asserting parity of “factual data” conveyed unambiguous factual messages which were false.
Dishonesty: The motive (securing the MBO, “kicking the Danes into touch”) and the deliberate crafting of the Updated Kelso Presentation to depress figures evidenced lack of honest belief. The “Tenon suite” explanation was post‑hoc and inconsistent with contemporaneous conduct and advice.
Reliance and causation: Fraud shifts the evidential burden, reinforced here by the representative nature of the communications. The bank’s actions were treated realistically, not as determinative: a tight, but flexible, timetable in which higher value could be realised.
Damages method: A principled blend of valuation orthodoxy (maintainable earnings x multiple ± control/minority adjustments) and pragmatic quantification (probability‑weighted discount) ensured compensation matched the real opportunity lost, not a speculative windfall or a “forced sale” nullity.
Assignment validity: The court separated (i) whether there was deceitful intent (a fact question), (ii) consequences under Danish insolvency rules (consent functions; effect of supervision ending), and (iii) proportional illegality under English law. That multi‑layered approach insulated a substantively fair assignment from technical objections.
Fiduciary duty restraint: The judge hewed to the orthodox English line: in the absence of a special undertaking of loyalty to shareholders in a specific dealing, tort remedies for deceit suffice; no need to stretch fiduciary law in standard MBO settings.

Impact and Significance

Reverse‑deceit paradigm: This judgment is a clear warning that management in MBOs who communicate forecasts to selling shareholders (or run a data room) must avoid deliberate under‑statement, selective disclosure, or misstatements about parity. Such conduct engages tortious liability even where fiduciary duties are absent.
Data room “factual data” assurance: The court construed “factual data” broadly to include management‑prepared budgets and pipeline assessments. Tick‑box parity assertions will be scrutinised closely; the safe course is to disclose what was given to other bidders/advisers.
Inducement presumption reinforced: In fraud cases, defendants will find it “very difficult” to rebut the presumption where the representation was apt to influence the decision. Here, the emails were sent at decisive moments and did influence the process.
Damages pragmatism: The court offers a template: start from fair market value at the transaction date, then apply a calibrated discount to reflect the practical probability of achieving that value in the actual transactional constraints. This avoids both over‑ and under‑compensation.
“Forced sale” arguments: Pressure from creditors/banks does not automatically extinguish loss; courts will interrogate the degree of compulsion, potential timing flex, and market dynamics.
Assignments and backdating: Parties who genuinely believe they are memorialising an earlier oral agreement can backdate without invalidity (under Danish law). Even where illegality is asserted, Patel v Mirza’s proportionality test may preserve enforceability, especially where denying enforcement would effectively immunise fraud.
Fiduciary duty boundaries: The case re‑affirms that ordinary MBO contexts, even with information asymmetries, do not automatically create fiduciary duties to shareholders. Claimants should frame their cases in deceit (as here) unless the “special circumstances” threshold is met.

Complex Concepts Simplified

EBITDA & maintainable earnings: EBITDA (earnings before interest, tax, depreciation and amortisation) is a proxy for performance. “Maintainable” EBITDA is the sustainable level a buyer expects for valuation, often averaging/projection‑adjusted and cross‑checked against pipeline/renewals.
Control premium & private company discount: Buyers pay more to acquire control (control premium). Conversely, shares in private companies are discounted for illiquidity and other factors compared to listed peers (private company discount).
Loss of a chance vs quantification: Where the question is “would the claimant have transacted on the same terms?”, courts decide on the balance of probabilities. Probabilities enter later: in quantifying how much of the true value could realistically have been achieved within constraints.
Backdating: Backdating a written contract to the date of an earlier oral deal is legitimate if it reflects a genuine earlier agreement on the main terms; it is invalid if done to deceive third parties (e.g., a court‑appointed supervisor or creditors).
Patel v Mirza proportionality: Even if an illegality is shown, enforcement may still be granted if denying the claim would harm the integrity of the legal system (e.g., by rewarding a fraudster) and where the illegality is minor/technical and caused no harm.

Observations on Witness Credibility and Litigation Conduct

The defendants were found unreliable on key issues; the court considered their presentation at an earlier strike‑out hearing (suggesting “deliberate” disclosure of the Weighted Budget) to have been misleading given the later admission that it was accidental.
By contrast, the court found Mr Nyegaard particularly impressive and treated his testimony as helpful and independent; Mr Johnsen and Mr Hildebrandt were broadly credible on reliance and causation; Ms Rana’s role in the late CD disclosure had, ultimately, little substantive impact.

Conclusion

This judgment is a measured, document‑rooted application of fraud principles to a management‑led acquisition. It confirms that:

Management who deliberately under‑state forecasts or misstate parity of disclosure in an MBO risk deceit liability—even absent fiduciary duties.
Courts will presume inducement in fraud, and will not be distracted by “could have asked more questions” defences.
“Forced sale” defences fail where, properly analyzed, the counterfactual process could have yielded a higher price; damages will be aligned with “true value” tempered by real‑world transactional probabilities.
Backdating to memorialise earlier oral terms is not per se improper under Danish law; even if illegality is alleged, Patel v Mirza favours proportional, not formalistic, responses—particularly where non‑enforcement would immunise fraud.
Fiduciary duties to shareholders remain exceptional; deceit, not equity, is commonly the right vehicle in information‑asymmetry MBO disputes.

Vald. Nielsen thus stands as a leading authority at the intersection of deceit, valuation damages, cross‑border assignment validity, and the limits of fiduciary duty in MBOs—offering practical guidance for corporate actors, advisers, and courts.