SGS 4 – Warranties and Indemnities
Learning Outcomes
1. warranties and indemnities -> identify/distinguish/when it would be appropriate to use each of them;
2. critically evaluate warranties and indemnities from both the buyer’s and the seller’s perspective;
3. apply your drafting skills to negotiating warranties;
4. give preliminary advice to a client (buyer or seller) in relation to a simple tax schedule; and
5. recognise when there may be a delay between exchange and completion and understand the impact of such
delay on contractual protections.
LO1: identify/distinguish warranties and indemnities
Buyer can protect themselves in 2 ways:
(1) due diligence (investigating target or business)
(2) contractual protections (warranties + indemnities)
1) Purpose of due diligence?
Filter useful info re drawing up warranties and indemnities in the transaction doc
helps the buyer understand + assess the risks and liabilities of the biz/co he is acquiring.
Caveat emptor (buyer beware) In the absence of DD -> law provides very little protection if the business or
company turns out to be not what the buyer expected
2) Warranties (re operation of biz of target)
Definition:
contractual statement of fact by the Seller stating that a particular state of affairs exists at the time the
statement is made (i.e. in the PRESENT tense).
You draft it when an issue doesn’t exist but that may arise
Breach of warranty:
How can B recover claim?
→ governed by normal contractual principles on measure of damages (i.e remoteness; mitigation; and LOSS of
market value of target – so not ALL warranties will satisfy loss)
Purpose:
1. elicit information – so even if we’re not able to recover damages by proving loss -> at least we’re able to elicit
information.
2. provide potential redress for B in event of breach.
3) Indemnities
Definition
promise by the Seller to reimburse the Buyer re a specific liability which may arise in the FUTURE
You draft an indemnity clause when the issue already exists during investigation/DD
Breach of indemnity
The amount B may recover if claiming under a warranty drafted as being on an indemnity basis → calculated on
a pound for pound basis
no question of damages and therefore no question of mitigation or other principles of damages
Purpose
financial redress to B re future events should they arise (no court action)
simple debt collection
LO2: evaluate warranties and indemnities from Seller’s and Buyer’s perspective
(1) Shares
The Sale Shares constitute the whole of the issued and allotted share capital of the Company and are all fully paid. The
Subsidiary Shares constitute the whole of the issued and allotted share capital of the Subsidiaries and are all fully paid.
Comment
- a warranty is vital to buyer bcs it’s re title -> must be absolute + no qualification
- buyer will consider it essential that it is buying what it thinks it is -> Target + its subsidiaries and would
- warranty shows that:
(1) there are no liens, charges or encumbrances over the Sale Shares or the Subsidiary Shares and
(2) no agreement has been entered into to create such an interest
Learning Outcomes
1. warranties and indemnities -> identify/distinguish/when it would be appropriate to use each of them;
2. critically evaluate warranties and indemnities from both the buyer’s and the seller’s perspective;
3. apply your drafting skills to negotiating warranties;
4. give preliminary advice to a client (buyer or seller) in relation to a simple tax schedule; and
5. recognise when there may be a delay between exchange and completion and understand the impact of such
delay on contractual protections.
LO1: identify/distinguish warranties and indemnities
Buyer can protect themselves in 2 ways:
(1) due diligence (investigating target or business)
(2) contractual protections (warranties + indemnities)
1) Purpose of due diligence?
Filter useful info re drawing up warranties and indemnities in the transaction doc
helps the buyer understand + assess the risks and liabilities of the biz/co he is acquiring.
Caveat emptor (buyer beware) In the absence of DD -> law provides very little protection if the business or
company turns out to be not what the buyer expected
2) Warranties (re operation of biz of target)
Definition:
contractual statement of fact by the Seller stating that a particular state of affairs exists at the time the
statement is made (i.e. in the PRESENT tense).
You draft it when an issue doesn’t exist but that may arise
Breach of warranty:
How can B recover claim?
→ governed by normal contractual principles on measure of damages (i.e remoteness; mitigation; and LOSS of
market value of target – so not ALL warranties will satisfy loss)
Purpose:
1. elicit information – so even if we’re not able to recover damages by proving loss -> at least we’re able to elicit
information.
2. provide potential redress for B in event of breach.
3) Indemnities
Definition
promise by the Seller to reimburse the Buyer re a specific liability which may arise in the FUTURE
You draft an indemnity clause when the issue already exists during investigation/DD
Breach of indemnity
The amount B may recover if claiming under a warranty drafted as being on an indemnity basis → calculated on
a pound for pound basis
no question of damages and therefore no question of mitigation or other principles of damages
Purpose
financial redress to B re future events should they arise (no court action)
simple debt collection
LO2: evaluate warranties and indemnities from Seller’s and Buyer’s perspective
(1) Shares
The Sale Shares constitute the whole of the issued and allotted share capital of the Company and are all fully paid. The
Subsidiary Shares constitute the whole of the issued and allotted share capital of the Subsidiaries and are all fully paid.
Comment
- a warranty is vital to buyer bcs it’s re title -> must be absolute + no qualification
- buyer will consider it essential that it is buying what it thinks it is -> Target + its subsidiaries and would
- warranty shows that:
(1) there are no liens, charges or encumbrances over the Sale Shares or the Subsidiary Shares and
(2) no agreement has been entered into to create such an interest
