Federal Court Clarifies Standards for Due Diligence Disclosure

The Federal Court’s Take on Accuracy and Fairness in Due Diligence Materials

Case: Bridging Capital Holdings Pty Ltd v Self Directed Super Funds Pty Ltd (Trial) [2025] FCA 314 

Key Takeaways

• For sellers: Ensure that the scope of information warranties and the disclosure standard clearly support the nature, extent, and volume of material disclosed in the data room.
• For buyers: Be cautious when accepting broad or large data room disclosures, particularly where it may be difficult to identify specific breaches of warranties or correcting materials. If such disclosures are accepted, it is crucial that due diligence is conducted thoroughly and rigorously.

Overview

In an acquisition deal, there is often a due diligence stage where the seller discloses information to the buyer regarding the performance and viability of the business. The purpose of this stage is to qualify the warranties given under the sale and purchase agreement. These warranties offer protection to the buyer if the seller’s representations are false, inaccurate, or misleading.

The decision in Bridging confirms the principle that simply populating a data room with extensive materials may not, by itself, be sufficient to enable a seller to rely on disclosure limitation provisions or to correct misrepresentations made during the sale process.

The Federal Court affirmed the need, in some instances, for the seller to actively bring material documents in the data room to the buyer’s attention to constitute a good due diligence process and complete disclosure of all material information.

Background of the case

In 2021, Bridging Capital Holdings Pty Ltd (Buyer) entered into a share sale agreement (Sale Agreement) to acquire the shares in a financial planning business (Business) owned by Self Directed Super Funds Pty Ltd (Seller).

The Buyer alleged that, during negotiations, the Seller misrepresented the adjusted EBIT (Earnings Before Interest and Tax) of the Business. EBIT was a key metric used by the Buyer to adjust the purchase price.

The Seller attempted to correct the misrepresentation by including documents (e.g. bank statements, explanatory emails, and correspondence from the Business’ accountant) in a densely populated data room with a 417-page index of folders. These correcting documents were not reviewed, and the discrepancy went unnoticed by the Buyer and its advisers.

The Buyer commenced proceedings against the Seller, alleging that the Seller’s representations regarding the EBIT adjustments during the due diligence stage were misleading or deceptive (or likely to be), and in breach of several warranties in the Sale Agreement.

The warranty claim

The relevant warranties in this case included a warranty that the Seller had disclosed to the Buyer all information about the Business and the sale shares that would be material to a reasonable buyer.

The Seller opposed the Buyer’s warranty claim, arguing that the underlying materials uploaded to the data room were sufficient to allow the Buyer to verify the Business’ financial performance, thereby correcting any misleading representations.

The decision

While the Court accepted that the data room did contain the necessary source documents to correct the Seller’s misrepresentations, the Court ultimately found that the Seller breached the “all material information disclosure” warranty. The decision was based on the rationale that it was neither reasonable nor realistic to expect the Buyer to locate specific source documents in a heavily populated data room and thereby sufficiently correct the misrepresentations made regarding the adjusted EBIT.

The Buyer had a reasonable expectation to be notified of corrections that materially impacted the purchase price. Simply uploading documents into a data room was not sufficient to constitute disclosure. The Court held that the correcting information was not accurately or fairly disclosed by the Seller, who could not subsequently rely on the disclosure limitation in the Sale Agreement. As a result, the Court ordered the Seller to compensate the Buyer for the full amount of its loss.

Key takeaways

This decision is a stern warning to sellers that attempts to correct misrepresentations made during sale processes via documents uploaded to a data room—rather than through direct notice to the buyer—will not be sufficient to avoid contractual liability, especially where the data room is heavily populated.

It serves as a reminder to both parties in an acquisition deal of best practices for due diligence and disclosure through a data room:

• For sellers: Ensure that the scope of information warranties and the disclosure standard clearly support the nature, extent, and volume of material disclosed in the data room.
• For buyers: Be cautious when accepting broad or large data room disclosures, particularly where it may be difficult to identify specific breaches of warranties or correcting materials. If such disclosures are accepted, it is crucial that due diligence is conducted thoroughly and rigorously.