Clifford Chance

Here we consider a recent ruling that highlights the need for sellers to flag material issues in a virtual data room (VDR) as simply disclosing them in the VDR may not satisfy legal obligations. 

In a timely reminder for M&A participants, the Federal Court of Australia in Bridging Capital Holdings Pty Ltd v Self Directed Super Funds Pty Ltd (Trial) [2025] FCA 314 has provided guidance on what constitutes adequate disclosure under a share sale agreement (SSA) where a voluminous and complex virtual data room (VDR) is used.

The ruling highlights that when a sale agreement includes warranties that have the effect of promising that the information contained in the VDR is "true, complete and not misleading," simply placing information in the VDR may not be enough to meet the seller’s disclosure obligations. In some cases, the seller must actively draw the buyer's attention to material information contained in the VDR.

Background

The dispute arose from the sale of a financial planning business, structured with a two-tranche share transfer. The first tranche was completed in June 2021 for consideration of $2 million. However, the second tranche did not complete due to a dispute that led to oppression proceedings. A court-appointed valuer later assessed the value of the first tranche at just $282,239, prompting the buyer to initiate proceedings for breach of warranty.

At the heart of the case was the “all material information disclosure” warranties, which were:

• "All information contained in the Disclosure Documents is true and complete and not misleading."
• "Each Seller has disclosed to [the Buyer] all information known to the Seller about the Business, the Company and the Company Sale Shares, and which would be material to a reasonable Buyer."

The buyer alleged that several material issues affecting EBIT were not disclosed, including overstated recurring revenue and liabilities associated with certain acquisitions.

The data room defence

The sellers argued that the relevant information had been disclosed via VDR disclosures. The VDR was voluminous, it included a 417-page index and folder structures nested up to 20 layers deep. The sellers contended that they had provided “accurate and fair disclosure” under the SSA and sought to rely on limitation clauses that deemed the buyer to have knowledge of all disclosed matters.

The Court rejected this defence. It found that the sellers had failed to adequately flag key issues in bilateral communications, and that the VDR’s complexity rendered it unrealistic to expect the buyer to identify and interpret the relevant documents without being specifically directed to them. Stewart J stated:

"It may be accepted that the data room contained the necessary source documentation on which a person, upon careful and deliberate scrutiny after having them brought to their attention, could have relied to correct any misapprehension as to the recurring revenue figures. However, this is not a realistic possibility in the context of a share sale transaction in which there was a heavily populated data room and where there were pre-existing representations made bilaterally to the applicants, sometimes at odds with the source documentation. Simply put, the applicants were not put on notice as to those matters when, due to their materiality and in light of the ongoing discussion of revenue as informing the AEBIT-based purchase price, they would have had a reasonable expectation of being put on notice."

Key findings

Stewart J held that:

• the sellers’ reliance on “exceedingly technical disclosure” buried in a labyrinthine VDR was insufficient to meet the standard of “accurate and fair disclosure"
• the buyer had a reasonable expectation of being put on notice regarding material issues, especially where prior representations had been made that were inconsistent with the source documents, and
• the limitation clauses in the SSA did not shield the sellers from liability, as the Court found the disclosure to be inadequate.

Implications for dealmakers

This decision serves as a cautionary tale for sellers and their advisors. It reinforces that:

• disclosure obligations under broad information warranties require more than passive VDR uploads
• sellers must actively draw attention to material issues, particularly where prior representations may have created a misleading impression, and
• courts will scrutinise the quality and accessibility of disclosure, not just its existence.

In an era of increasingly complex transactions and data-heavy due diligence processes, this case is a timely reminder that effective disclosure is not just about volume and that it may be necessary to put a buyer on notice of material documents and information contained in the VDR.

Please contact David Clee or Nicole Backhouse for a deeper discussion on these issues.