Acquisitions: Contractual Comforts

Unlike say for a consumer, the buyer of shares or assets be warned; the law provides no statutory or common law protection as to the nature and extent of the assets or liabilities you are acquiring. It is therefore usual for the buyer to negotiate certain forms of contractual protection into the purchase agreement for peace of mind. While undoubtedly any such protection would be robustly negotiated between the parties, it is the subject of warranties and indemnities that is anathema to many.

A brief explanation for the uninitiated; warranties are contractual statements as to the condition of the target company or business, a breach of which will give rise to a successful claim in damages if the buyer can show that the warranty was breached and that the effect of the breach reduced the value of the company or business so acquired.

An indemnity, however, is a promise to reimburse the buyer in respect of a particular type of liability should it arise. Both of these forms of contractual protection seek to allocate risk between the parties.

Now while indemnities are reserved for known liabilities and therefore rarely conceded, warranties can be numerous and can make up the bulk of a purchase agreement. You can therefore take the view that the less warranties a seller agrees to, the less chance there is of recourse from the buyer. This should however not get in the way of making a deal.

Warranties are intended to compliment due diligence and give the buyer confidence in the transaction; it allows the buyer to form a view of the company or business that they are acquiring. To this end, while negotiation over the warranties is expected, this should be proportionate and within reason if said warranties are considered boilerplate and uncontroversial. Where there is a known issue, the seller is encouraged to formally disclose against the warranty to defend against a later claim.

While a seller may take a commercial view not to disclose against a warranty or seek to have a warranty qualified or removed entirely, the unexplained culling of standard warranties is rarely accepted unless there was an imbalance between the parties. At worst it can affect the trust between the buyer and the seller and put the entire deal in jeopardy. At Machins, we can advise you on alternatives that can reduce your risk without upsetting the buyer.

Please contact Sing Li, Solicitor on 01582 514 356 or [email protected] if you would like to discuss the matters raised in this article or any other aspect of commercial law.