Drafting the Acquisition Agreement: Contractual Protections
A. Apportioning liability
Seller will be assuming a lot of risk in a share purchase
On a share sale, seller will want a ‘clear break’ and pass on all the risk to the buyer – ‘caveat emptor’ (‘buyer beware’)
Buyer will want risk of unexpected liabilities to be on Seller by way of Warranties and Indemnities
o Warranty – statement of fact given by Seller re company
o Indemnity – promise by S to compensate B if certain circumstances arise – debt claim
Seller has 3 protections:
1. Negotiation of warranties & indemnities (to narrow their scope - specific);
2. Disclosure Letter (re warranties, not indemnities!)
3. Limitation clause (vendor protection provisions; contractual position)
B. Disclosure
Work in tandem w/t warranties
Disclosure qualifies warranties so that S not liable for breach of warranty
Buyer will want to only qualify Ws that have been “fairly” disclosed in Disclosure Letter
Example: Planning Permission
o “All buildings of Target have all necessary planning permissions”
o Suppose one of the building’s extension’s was not granted a PP
o Risk for S -> local authority to require B to take down extension and allow B to sue S for damages bcs that
would cost B money
o Here -> S can disclose that the particular extensions does not have planning permission and is free from
liability for breach of warrant
Warranties can either be subject to:
(1) matters disclosed in Disclosure Letter; or
(2) matters fairly disclosed in Disclosure Letter
When is a disclosure effective?
o Previous common law position -> disclosure had to be ‘fair’
Levison
“Merely making known the means of knowledge which may enable the other party to work out certain facts and
conclusions will be insufficient needs to be ‘sufficiently precise’
Daniel Reeds
“Fair disclosure requires some positive statement of the true position and not just a fortuitous omission from which the
buyer may be expected to infer matters of significance.”
New Hearts Limited
“Mere reference to a source of information, which is in itself a complex document, within which the diligent enquirer
might find the relevant information, would not satisfy the requirements of a clause providing disclosure.” -> You need to
flag the issue.
…BUT THEN…. The common law position changed: Infiniteland case:
Held: no universal standard of disclosure
Disclosure does not always have to be ‘fair’ to be effective:
-> It depends on wording of the acquisition agreement
Example: S decided not to disclose the HMRC dispute on the basis that B already knows about it from its DD exercise?
Seller gives warranty
Seller knows warranty is untrue
Seller does not disclose against the warranty
*Buyer, through different sources, knows true state of affairs before completion takes place
Can the buyer bring a warranty claim? - Infiniteland case:
If parties agree in contract that:
1. B can’t sue B can’t bring a claim
2. B can sue B can bring a claim
If contract is silent B can probably sue
BUT: court can penalise B on damages awarded if knowledge of breach influenced price
Buyer’s knowledge
Take care re type of knowledge referred to:
A. Apportioning liability
Seller will be assuming a lot of risk in a share purchase
On a share sale, seller will want a ‘clear break’ and pass on all the risk to the buyer – ‘caveat emptor’ (‘buyer beware’)
Buyer will want risk of unexpected liabilities to be on Seller by way of Warranties and Indemnities
o Warranty – statement of fact given by Seller re company
o Indemnity – promise by S to compensate B if certain circumstances arise – debt claim
Seller has 3 protections:
1. Negotiation of warranties & indemnities (to narrow their scope - specific);
2. Disclosure Letter (re warranties, not indemnities!)
3. Limitation clause (vendor protection provisions; contractual position)
B. Disclosure
Work in tandem w/t warranties
Disclosure qualifies warranties so that S not liable for breach of warranty
Buyer will want to only qualify Ws that have been “fairly” disclosed in Disclosure Letter
Example: Planning Permission
o “All buildings of Target have all necessary planning permissions”
o Suppose one of the building’s extension’s was not granted a PP
o Risk for S -> local authority to require B to take down extension and allow B to sue S for damages bcs that
would cost B money
o Here -> S can disclose that the particular extensions does not have planning permission and is free from
liability for breach of warrant
Warranties can either be subject to:
(1) matters disclosed in Disclosure Letter; or
(2) matters fairly disclosed in Disclosure Letter
When is a disclosure effective?
o Previous common law position -> disclosure had to be ‘fair’
Levison
“Merely making known the means of knowledge which may enable the other party to work out certain facts and
conclusions will be insufficient needs to be ‘sufficiently precise’
Daniel Reeds
“Fair disclosure requires some positive statement of the true position and not just a fortuitous omission from which the
buyer may be expected to infer matters of significance.”
New Hearts Limited
“Mere reference to a source of information, which is in itself a complex document, within which the diligent enquirer
might find the relevant information, would not satisfy the requirements of a clause providing disclosure.” -> You need to
flag the issue.
…BUT THEN…. The common law position changed: Infiniteland case:
Held: no universal standard of disclosure
Disclosure does not always have to be ‘fair’ to be effective:
-> It depends on wording of the acquisition agreement
Example: S decided not to disclose the HMRC dispute on the basis that B already knows about it from its DD exercise?
Seller gives warranty
Seller knows warranty is untrue
Seller does not disclose against the warranty
*Buyer, through different sources, knows true state of affairs before completion takes place
Can the buyer bring a warranty claim? - Infiniteland case:
If parties agree in contract that:
1. B can’t sue B can’t bring a claim
2. B can sue B can bring a claim
If contract is silent B can probably sue
BUT: court can penalise B on damages awarded if knowledge of breach influenced price
Buyer’s knowledge
Take care re type of knowledge referred to:
