Procuritas and former managing partner acquitted in Gram Equipment case

The case in brief

In January 2018, Kg BidCo ApS (a special purpose vehicle (SPV) ultimately owned by private equity fund FSN Capital GP V Limited) acquired the shares in Kolding-based production company Gram Equipment from Green Magnum (a Luxembourg SPV ultimately owned by Procuritas Capital Investors IV GP Limited). Kg BidCo had claimed that irregularities had taken place in Gram Equipment in the period up to the transfer and therefore commenced arbitration proceedings against the sellers, Green Magnum, later in 2018.

In its award from 2020, the tribunal held Green Magnum liable to Kg BidCo for breach of warranty as a result of accounting irregularities committed by the former day-to-day management of Gram Equipment. Green Magnum did not have sufficient funds to comply with the award and therefore went bankrupt. In December 2019, Kg BidCo filed a lawsuit with the Maritime and Commercial High Court over the same claim, bringing proceedings against i) the former CEO and CFO of Gram Equipment, ii) Procuritas Capital Investors IV, and iii) Procuritas Partners and its former managing partner, and claiming payment of approximately EUR 87.5m.

It is that case which has been decided today by the Maritime and Commercial High Court, acquitting all of the defendants.

The decision in brief

The Maritime and Commercial High Court found that members of the former day-to-day management of Gram Equipment knew about and had contributed to the alleged irregularities. In relation to the former managing partner of Procuritas Partners, the Maritime and Commercial High Court was satisfied that he did not know and ought not have known about the irregularities and also that he had not breached his duty of disclosure in relation to Kg BidCo. The former managing partner and Procuritas Partners were therefore acquitted.

The Maritime and Commercial High Court also found that Procuritas Capital Investors IV could not be held liable for actions taken by the day-to-day management of Gram Equipment and that there were no grounds for holding that the corporate structure as such was unusual for private equity funds. Further, the Maritime and Commercial High Court stated that for the conclusion of the SPA with Green Magnum, Kg BidCo had been assisted by several professional advisors and that the corporate structure, including the consequences in terms of liability, would have been clear to Kg BidCo, given that Kg BidCo itself is part of a private equity fund structure. The Maritime and Commercial High Court was not satisfied that there were any such extraordinary circumstances as to allow a setting aside of the corporate structure.

Despite the Maritime and Commercial High Court's conclusion that members of the then day-to-day management of Gram Equipment had acted in such a way as to incur liability, the claims against them were nonetheless dismissed, the Maritime and Commercial High Court finding that Kg BidCo had failed to prove having suffered a loss. Kg BidCo believed that the true value of Gram Equipment at the time of transfer was EUR 16.3m, but the Maritime and Commercial High Court did not concur, finding instead, on the basis of an expert opinion, that the company was worth EUR 60.2m at the time of the transfer. Therefore, and since Kg BidCo had already been paid a W&I insurance sum of EUR 50m, the Maritime and Commercial High Court held that Kg BidCo had suffered no loss.

The Maritime and Commercial High Court also found no basis for holding Procuritas Capital Investors IV liable for enrichment, given that no loss had been suffered.

The Maritime and Commercial High Court’s judgment was not unanimous, with two of its five members dissenting in favour of a compensation award to Kg BidCo of approx. EUR 18m.

Want to learn more?

The judgment, 1,375 pages long, describes at length a number of circumstances of material importance to the M&A market in general and to transactions involving private equity funds and SPVs in particular, as well as management liability and professional liability of advisers.

We will be delving into the judgment at a brunch seminar at Kromann Reumert Friday, 24 November 2023, 9.00 - 11.30 CET, with a special focus on:

1. The Gram Equipment judgment – what is the case about, and why did the Court rule as it did?

2. Lessons learnt - key takeaways going forward?

3. M&A transactions in the future – advice from a litigator's perspective

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If you have any questions or need advice about the judgment and its consequences, feel free to contact us anytime.

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