A few months ago, the Court of Appeals highlighted the pitfall of a not uncommon scenario, that of experienced and sophisticated business people relying on the representations of others but which are later found to be less than truthful. In Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., the court dismissed the fraud claims of former shareholders of a Latin American mobile telephone company because those shareholders ignored obvious concerns that arose in the course of the sale of their shares that should have put them on notice of potential problems. Not only were those issues not addressed, but those shareholders released the company and remaining shareholders from liability in connection with the sale. The outcome of this case underlines the fact that experienced and sophisticated parties must do their own due diligence no matter what they are told.
The facts are somewhat complicated but can be summarized as follows: Plaintiffs held a majority interest in an Ecuadorian company which sought funding from a Mexican company, Telemex Mexico, controlled by billionaire Carlos Slim. The funding was provided and a new entity was formed which was owned by the plaintiffs and Telemex. The parties agreed that in the event that there were additional transfers to different entities, plaintiffs could swap their interest from the old entity to the new entity on terms to be agreed. Following a subsequent transfer, plaintiffs tried to negotiate the terms for the transfer of their ownership interest into the new entity. Encountering resistance from Telemex, plaintiffs opted to just sell their interest outright and did not receive any interest in the new entity.
Eight years later, plaintiffs sued claiming to have been defrauded. Plaintiffs claimed that they were given incomplete and bogus information of the new entity’s value. Had they known the true state of affairs, they alleged, they would have forced a transfer or sold their interests at a far higher price. Under the agreement by which plaintiffs sold their interests, they agreed to release the other shareholders and the new entity from any claims in connection with the agreement. The remaining shareholders and their entities also provided plaintiff with no warranties related to the business’ state of affairs.
In dismissing plaintiffs’ claims, the Court of Appeals faulted the plaintiffs for agreeing to broad release language while not pursuing the information they acknowledged not receiving. The court refused to give any credence to the plaintiff’ arguments that they were mislead and could not have known the true value of what they gave up. The court determined that plaintiffs were sophisticated entities engaged in complex businesses and transactions who made conscious decisions not to investigate the information they were provided. That plaintiffs were aware that they were given incomplete information from a partner they no longer trusted further highlighted the need for plaintiffs to undertake their own due diligence, which they did not do. Only if the release was itself procured by some fraud would plaintiffs be able to proceed, and that was something that the plaintiffs could not establish.
Not long ago, we successfully represented a company in defending against the claims of a shareholder who alleged similar claims. The issues are always complex and a thorough investigation of the underlying facts and arguments must be examined prior to deciding on a litigation process.