5. CONTRACTUAL PROTECTIONS
BUYER’S CONTRACTUAL PROTECTIONS
Limited rights under SGA but - B receives no common law/statutory protection if it turns out
purchase was not what they thought it was – Caveat Emptor
o Important to consider on share sale b/c all assets and liabilities are purchased
WARRANTIES
= contractual statement of fact about the co./business, which, if untrue, gives rise to a
contractual claim for damages against S; two purposes:
o Elicit information about the co. or business being acquired by forcing S to disclose
against inaccurate warranties in the DL – cannot sue
o Provide contractual redress to B in event of a breach of warranty
Drafting Acquisition Agreement (AA)
Where private treaty sale, B produces first draft - likely to contain extensive + wide-ranging
warranties inc:
o T’s property interests
o Pension Liabilities
o IP Rights
o Workforce
o Financial Matters
o Trading Contracts
o Litigation
o Tax history and liabilities (on share sale)
BS will want to cover areas of concern/issues highlighted in DD process – warranties
should cover substantive aspects of T
Where auction, S produces first draft - likely to contain fewer (but still some so as not to
adversely affect price – less contractual protection = lower price)
Where private equity S in auction, likely to give very few warranties
INDEMNITIES (B prefers – less to prove)
= promise made by S to reimburse B (not T as per Zim Properties) if particular
circumstances arise (loss by B or T) - gives B claim in debt
o i.e. remoteness, foreseeability, mitigation not relevant
o offer to B of financial redress – more favourable to B
Likely to cover: Doubtful debts / Employment + pension liabilities / Actual or potential
litigation / Tax liabilities
tax warranties + indemnities may be included in schedule to AA, or separate doc e.g. tax
covenant/indemnity/deed
tax – share sale you take all liabilities
, CATEGORIES OF WARRANTIES
Warranty relates to matters over which Seller has no control and should not give
Warranty that Seller can give in principle but should amend to limit their exposure (generally
by making more precise)
o E.g. litigation – limit to a certain value
Warranty that Seller must give or the buyer will be unwilling to do the deal
o As to title over assets/shares, and that there are no charges
Approach to considering adequacy of warranties
1. What is purpose of warranty?
2. What category does the warranty fall into?
3. Why would you want to change the warranty?
4. How would you change the warranty?
TYPES OF WARRANTIES & INDEMNITIES
SHARES – WHOLE OF ISSUED AND ALLOTTED SHARE CAPITAL + FULLY PAID
B seeks warranty that shares are exactly as expected, i.e. it is purchasing all allotted shares
in co. (+ any subs) - thus will not have to worry about any minority interests in the company.
VITAL to B – deal will not go ahead without this warranty.
The warranty that it is getting all shares in T and that S owns all the shares in issue in T will
be required to be given without qualification.
warranty that shares are paid up also required - if not fully paid up, B responsible for paying
these up once it has purchased the shares
o enables B to ensure they are paid up, or make S pay up the shares if they are not
SHARES / ASSETS – NO THIRD-PARTY INTERESTS
The warranty that the shares/assets are solely legally and beneficially owned + there are no
charges, liens or encumbrances (i.e. third party interests in the shares) required by B
o Ensures S has the right to sell T, and is able to pass good title, such that B is free to
do with T as it wishes following the sale.
VITAL to B - deal will not go ahead without this warranty.
o It should be given without qualification.
o If there are any charges etc. against the shares at Companies House (or yet to be
registered), this should be disclosed by the seller.
IP RIGHTS
BUYER’S CONTRACTUAL PROTECTIONS
Limited rights under SGA but - B receives no common law/statutory protection if it turns out
purchase was not what they thought it was – Caveat Emptor
o Important to consider on share sale b/c all assets and liabilities are purchased
WARRANTIES
= contractual statement of fact about the co./business, which, if untrue, gives rise to a
contractual claim for damages against S; two purposes:
o Elicit information about the co. or business being acquired by forcing S to disclose
against inaccurate warranties in the DL – cannot sue
o Provide contractual redress to B in event of a breach of warranty
Drafting Acquisition Agreement (AA)
Where private treaty sale, B produces first draft - likely to contain extensive + wide-ranging
warranties inc:
o T’s property interests
o Pension Liabilities
o IP Rights
o Workforce
o Financial Matters
o Trading Contracts
o Litigation
o Tax history and liabilities (on share sale)
BS will want to cover areas of concern/issues highlighted in DD process – warranties
should cover substantive aspects of T
Where auction, S produces first draft - likely to contain fewer (but still some so as not to
adversely affect price – less contractual protection = lower price)
Where private equity S in auction, likely to give very few warranties
INDEMNITIES (B prefers – less to prove)
= promise made by S to reimburse B (not T as per Zim Properties) if particular
circumstances arise (loss by B or T) - gives B claim in debt
o i.e. remoteness, foreseeability, mitigation not relevant
o offer to B of financial redress – more favourable to B
Likely to cover: Doubtful debts / Employment + pension liabilities / Actual or potential
litigation / Tax liabilities
tax warranties + indemnities may be included in schedule to AA, or separate doc e.g. tax
covenant/indemnity/deed
tax – share sale you take all liabilities
, CATEGORIES OF WARRANTIES
Warranty relates to matters over which Seller has no control and should not give
Warranty that Seller can give in principle but should amend to limit their exposure (generally
by making more precise)
o E.g. litigation – limit to a certain value
Warranty that Seller must give or the buyer will be unwilling to do the deal
o As to title over assets/shares, and that there are no charges
Approach to considering adequacy of warranties
1. What is purpose of warranty?
2. What category does the warranty fall into?
3. Why would you want to change the warranty?
4. How would you change the warranty?
TYPES OF WARRANTIES & INDEMNITIES
SHARES – WHOLE OF ISSUED AND ALLOTTED SHARE CAPITAL + FULLY PAID
B seeks warranty that shares are exactly as expected, i.e. it is purchasing all allotted shares
in co. (+ any subs) - thus will not have to worry about any minority interests in the company.
VITAL to B – deal will not go ahead without this warranty.
The warranty that it is getting all shares in T and that S owns all the shares in issue in T will
be required to be given without qualification.
warranty that shares are paid up also required - if not fully paid up, B responsible for paying
these up once it has purchased the shares
o enables B to ensure they are paid up, or make S pay up the shares if they are not
SHARES / ASSETS – NO THIRD-PARTY INTERESTS
The warranty that the shares/assets are solely legally and beneficially owned + there are no
charges, liens or encumbrances (i.e. third party interests in the shares) required by B
o Ensures S has the right to sell T, and is able to pass good title, such that B is free to
do with T as it wishes following the sale.
VITAL to B - deal will not go ahead without this warranty.
o It should be given without qualification.
o If there are any charges etc. against the shares at Companies House (or yet to be
registered), this should be disclosed by the seller.
IP RIGHTS
