LAW AND ECONOMICS

 

Making sense of the disclosure of latent defects in financial statements and company acquisition contracts

 

 

Cornelius Kilian

Former Interim Researcher at the European Academy (EURAC). Centre for Financial Planning Law, University of the Free State

 

 

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ABSTRACT

This paper analyses the statement made by the South African Appeal Court Judge Holmes in the Phame v Paizes (1973) case and, using economic and unique South African legal principles, it examines the true legal nature of a contract to regulate company acquisitions.¹ Two solutions are offered for financial managers in South Africa: (1) the contract to regulate company acquisitions is a forward contract and (2) the difficulty in identifying latent defects should not be grounds for reducing the price paid for a company or enterprise in the South African legal system.

JEL: G34, K20

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Accepted July 2009

 

 

Endnotes

1 I am grateful to Dr. David Levey and two anonymous referees for useful and helpful comments on an earlier draft of this contribution.
2 The quality of a company is observed by means of reliable financial methods or ratios which are capable of being compared with those of other companies in the same economic sphere. Bloomfield (2000) states that these methods or ratios must be universally acclaimed, otherwise good company qualities become just another synonym for hoodwink. Steiner (1998) indicates that these methods usually make use of profitability to calculate investment attractiveness.
3 My inclusion.