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Question 1

What is the de minimis limit for warranty claims?

Answer 1

Prevents the buyer from bringing claims for trivial amounts, disregarding claims below a certain amount so they don’t count towards the basket.

Connected claims may be regarded as a single claim for purposes of the de minimis limit. In 2024, the London market trend for the de minimis was less than 0.1% of equity value

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Question 2

What is the buy-side approach regarding the de minimis limit?

Answer 2

Ensure threshold is suitably low and resist de minimis applying to indemnity claims and claims under the tax covenant

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Question 3

Define the term ‘basket’ for warranty claims.

Answer 3

A minimum financial limit for aggregate claims that must be exceeded before any warranty claims can be brought

The 2024 London market trend for the basket was less than 1% of equity value.

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Question 4

What is a tipping basket or excess only / deductible?

Answer 4

Whether the seller is liable for the full amount or only the excess above the threshold once it is reached

Excess / deductible mean the same thing

Buy side - tipping
Sell side - excess only

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Question 5

What does ‘cap’ stand mean in the context of seller’s liability?

Answer 5

An overall financial cap on the seller’s liability

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Question 6

What is the buyer’s position regarding the cap?

What is the seller’s position regarding the cap?

Answer 6

The cap should be set at the total purchase price / enterprise vale and include:
* All consideration paid or payable by the buyer under the SPA - eg inc deferred consideration
And
* Any financing provided by the buyer to discharge the target’s debt

Could push for breach of title FWs / FWs to be uncapped (but subject to a time limit).

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Seller’s position

Resist the cap including:

• the amount of any external debt
• the amount of any earn-out consideration unless and until the earn-out payments are actually made
• more generally, any amounts not actually received by the seller

The enterprise price may not reflect what the seller will receive - eg if external debt.

If debt is owed to a third party, meaning the seller will not actually receive those funds, the seller should resist the cap including the amount of that external debt.

The seller will want the cap to be at a maximum set at the amount it has actually received, and ideally less.

It may be difficult to quantify the cap if the consideration includes shares / debentures of the buyer.

Question 7

If the SPA is signed under hand, what is the statutory limitation period for bringing claims?

And for indemnities?

Answer 7

6 years from breach

So 6 years from:
- signing, for warranties given at signing, and
- completion, for warranties given at completion.

For indemnities - depending on the drafting, the cause of action would typically arise on the date the seller breaches its covenant / obligation to pay.

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Question 8

If the SPA is signed as a deed, what is the statutory limitation period for bringing claims?

Answer 8

12 years from breach

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Question 9

What is the typical argument for the time period limitation for business warranties from the buy-side?

Answer 9

1 / 2 years from completion

Time period should be long enough for 1 / 2 full audit cycles to be completed after completion under the buyer’s ownership.

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Question 10

What time period could the sell-side argue for tax warranties for a UK target?

Answer 10

4 years

On the basis the normal statutory time limit that HMRC can assess the target’s tax liability is 4 years after the end of the relevant accounting period (but extended to 6 years if the loss of tax was caused by carelessness).

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Question 11

What are the three types of knowledge in the context of warranties.

Answer 11

Actual
Constructive
Imputed

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Question 12

What is constructive knowledge?

Answer 12

Knowledge you ought to have

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Question 13

What does imputed knowledge of the buyer refer to?

Answer 13

Knowledge on the part of its agents or advisers that the law may attribute to the buyer

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Question 14

List some customary limitations in warranty claims.

Answer 14

• Issue of proceedings
• Preventing double recovery
• Disregard of post-completion acts
• Limited to matters arising during seller’s ownership
• Disregard of changes to legislation
• Conduct of claims
• Recovery against a third party (e.g . counterparty or under insurance)

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Question 15

What is a sellside approach to the issue of proceedings?

Answer 15

Buyer must issue proceedings within a specified period of time after giving notice of a claim.

• to avoid buyer sitting on a claim
• even if a short time period is included, the buyer could presumably ask the court to stay legal proceedings once commenced

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Question 16

What approach would typically be agreed for the time period for claims related to contingent liabilities?

And what should the seller also require?

Answer 16

The time period for issuing legal proceedings after notifying of a claim that relates to a contingent liability would only begin to run once the contingent liability has crystallised.

Seller pov:
- also require that if the contingent liability does not become an actual liability within a specified period of time of notice of the claim being given, the seller will have no liability re the claim.

Purpose - ensure the seller is not exposed to claims re contingent liabilities indefinitely

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Question 17

What are the risks for the buy-side when dealing with multiple sellers?

Answer 17

• taking a credit risk against each individual seller (assuming they each cap their liability to their individual proportion of the sale proceeds)

Sellers that are individuals:
Could be untraceable or not good for the money

Sellers that are corporates:
Could be liquidated or distribute its assets

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Question 18

On the sell side what approach would you take to the financial cap on liability where you have multiple sellers in the context of warranty claims?

Answer 18

Each seller may seek an individual financial cap on their overall liability for warranty claims that is set at the amount of the purchase price they received for their shares

Buy side could resist cap and say it’s a sell side problem or require escrow arrangements to be put in place

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Question 19

What is the New Hearts standard of disclosure?

Answer 19

“fairly disclosed (with sufficient details to identify the nature and scope of the matter disclosed)”

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Question 20

What are the key takeaways from New Hearts?

Answer 20

• If the SPA requires all disclosures to be fair, a general disclosure would still need to satisfy that standard
• If general disclosures are required to be fair etc as per the New Hearts standard, then just referring to a document (esp a complex document) in order to disclose an issue is unlikely to be sufficient

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Question 21

What was omitted from the disclosure letter in the Daniel Reeds case?

Answer 21

The absence of an important license.

And there was a warranty that the company had all licences necessary to carry on its business etc.

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Question 22

What are the key takeaways from Daniel Reeds?

Answer 22

If the SPA requires disclosures to be fair (as was the case in Daniel Reeds), then disclosure will require some positive statement of the true position, and an omission will not be sufficient.

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Question 23

What are the key takeaways from Levison v Farin?

Answer 23

Even if the SPA does not expressly require disclosures to be fair (as was the case in Levison v Farin), common law requires that a disclosure must be sufficiently precise.

For example, in order to disclose against a warranty that there has been no material adverse change in the net assets of a company, it would not be sufficient to disclose that the founder / CEO of the company was unwell.

That would not be a disclosure of the actual drop in net assets value.

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Question 24

What are the key takeaways from Infiniteland?

Answer 24

The wording of the SPA is paramount.

1 - The adequacy of disclosure must be measured against the requirements of the SPA into which the parties have entered.

2 - There is a risk for the buyer of accepting general disclosures if the New Hearts standard is not applied to general disclosures.

In which case, a general disclosure of information provided to the buyer’s advisors may be sufficient (and general disclosures in general).

3 - It is important for advisors carrying out DD to properly report all findings to their client - including lawyers from a risk perspective.

Question 25

What was the background re the Infiniteland case?

Answer 25

- The SPA just said “save as set out in the Disclosure Letter” without applying the New Hearts standard. - A general disclosure was made of information / documents provided to the buyer’s accountants - A general disclosure was made of a matter that you would reasonably expect to come to the knowledge of the buyer’s accountants from the documents provided to them in the ordinary course of carrying out their DD. Checked

Question 26

What are the key takeaways from Eurocopy?

Answer 26

Where a buyer has actual knowledge of a matter not disclosed and brings a claim for breach of warranty: 1- It may be estopped from bringing the claim for breach of warranty. 2 - It may not be able to prove that it suffered any loss (on the basis that it would have factored the matter into the purchase price it paid the seller). Risk causation not proved / no loss as a result of the breach. This is the case even if the express terms of the SPA provide that the buyer’s actual knowledge will not prevent a claim for breach of warranty or reduce the amount recoverable. Checked

Question 27

Why do PE sellers prefer lockbox?

Answer 27

It gives certainty of price at completion and certainty of the amount they can distribute to LPs following completion

Question 28

What is the seller’s position regarding the cap?

Answer 28

Seek a lower cap than the purchase price (more market). Could push for 10% equity value or less on the basis of what is market. Checked

Question 29

What are the key ways in which a seller can limit its liability under the warranties

Answer 29

- limit the scope of the warranties - eg limit the time frame covered to a look back period, qualify by seller’s awareness, materiality, threshold amounts - disclosure - financial limits - de minimis, basket, cap - time - buyer’s knowledge - other customary limitations make objective - reasonably be expected to Checked

Question 30

What is the seller’s position regarding the cap?

Answer 30

Resist the cap including the amount of any external debt that is owed to a third party meaning that the seller will not actually receive those funds.

Question 31

What approach should the buy side take where there are multiple sellers?

Answer 31

Insist on joint and several liability.

Question 32

What is the risk for the buyer if it agrees a contractual limitation period that is longer than the applicable statutory limitation period?

Answer 32

A technical risk that the seller may raise the applicable statutory limitation period as a defence. This is because the Limitation Act 1980 is silent on whether parties can agree to lengthen / shorten or wholly dis apply a statutory time period. Buyer’s options to mitigate the risk: - execute SPA as a deed (safest option but may not be practicable) - include express wording in the SPA that the seller will not raise the statutory time limit as a defence

Question 33

What did the judges consider (obiter) on the buyer’s knowledge in Infiniteland.

Answer 33

- whether the buyer’s actual knowledge includes or excludes imputed knowledge (actual knowledge of buyer’s agents / advisors) - judges had different views - in Infiniteland the buyer’s accountant had actual knowledge of the matter As the court decided that there was no breach of warranty, the judges’ comments on the knowledge of the buyer were obiter.

Question 34

MAC

Answer 34

Could take the form of - CP to completion - termination right for buyer Could be general or specific

Question 35

MAC from a buyer’s perspective

Answer 35

- ideally want a walk away right (esp if a long gap between signing and completion) - could seek a general MAC in the first instance - no link to a particular event - eg a drop in earnings / profit - ideally want the subjective right to determine in its own opinion whether a MAC has occurred -> possible compromise “acting reasonably” or “in good faith” - if buyer has a specific concern - include a specific MAC to cover the concern specifically in addition to a general MAC - as it may be easier to enforce a specific MAC - could push for it to be a MAC if a general market event occurs AND target is affected disproportionately to others in its industry

Question 36

MAC from a seller’s perspective

Answer 36

- MAC reduces deal certainty - resist inclusion of MAC entirely OR resist a general MAC but accept a specific objectively quantifiable MAC where it is precisely defined what will constitute a MAC eg - defining MAC by reference to specific monetary amounts that are substantial in the context of the transaction size - excluding reference to “future prospects” of target - ensure general market events are excluded from being a MAC (commonly negotiated position) Nb that the wording of excluded general market conditions is often industry specific -> specific - sets out thresholds which constitute a MAC - eg a reduction in EBITDA of £x

Question 37

Conditions

Answer 37

- Antitrust - Regulatory - Foreign direct investment / national security - Industry specific regulatory / licensing requirements specific consents may be required depending on the nature of the target business - eg if the target operates in the utilities, telecommunications, mining, nuclear, financial services industry

Question 38

Seller’s approach to limitations on liability in the context of indemnities?

Answer 38

- ensure the the seller’s liability under indemnity claims is limited by the same limitations on liability that apply to business warranty claims OR that there are separate limitations on indemnity claims (eg conduct of claims, cap, time limit)

Question 39

What should a sell side approach to limiting its liability for different claims be?

Answer 39

1 - a separate cap on its liability for different types of claims (in effect - extra hurdles for claims) eg business warranty claims- [10% or less of equity value?] tax deed claims - any claim under the SPA or tax deed - typically the purchase price 2 - an overall cap on all liability under the SPA and tax deed 3 - a cap on indemnity claims 4 - the general limitations of liability (eg conduct of claims), should apply to ALL claims under the SPA (usually not the tax deed as there would typically be provisions for tax deed claims in the tax deed) If an indemnity was not subject to an express contractual time period limitation, then the statutory limitation period would apply.

Question 40

What approach is typically taken for setting the time period for tax warranty claims / claims under the tax deed?

Answer 40

To link the time period limitation to the period in which the relevant tax authorities can issue an assessment of the target’s liability to tax.

Question 41

What time period could the buy-side argue for tax warranties for a UK target?

Answer 41

7 years In practice, just push for 7 years from completion, as the buyer should ensure that it has 6 years from the end of the accounting period current at completion.

Question 42

Buyer’s action / inaction

Answer 42

Buyer pov - could try to narrow drafting / ensure not vague - a claim could be caused by the buyer but it could be cleaning up the seller’s mess Push for carve-out for a claim arising after completion as a result of action / inaction by the buyer’s group, where the claim arises: - in the ordinary course of target’s business - pursuant to a legally binding commitment created on / before completion by the target co

Question 43

Exclusion of liability for a claim arising at the request / direction / acquiescence / consent of the buyer

Answer 43

Buyer pov: - seek to narrow language

Question 44

What would a sell side approach typically be in relation to the buyer’s rights against third parties?

Answer 44

- require the buyer to pursue rights against third parties rather than just relying on the seller being liable - exclude the seller’s liability where the target has a *right of recovery* against a third party

Question 45

What would a buy side approach typically be in relation to the buyer’s rights against third parties?

Answer 45

- resist on the basis that the buyer should be able to pursue the seller if it has a *right of recovery* against a third party but cannot actually recover

Question 46

What would a commonly negotiated compromise position typically be in relation to the buyer’s rights against third parties?

Answer 46

That the seller’s liability is excluded where: - target has a right of recovery against a third party - amount is actually received by target - obligation on buyer to procure the target uses best efforts to pursue rights against third parties (important for seller)

Question 47

What would a sell-side approach typically be in relation to the conduct of third party claims?

Answer 47

- that the seller should have conduct of third party claims likely to give rise to a claim against the seller - so that it can minimise its liability for claims that arise from claims made by a third party The seller will want to ensure that claims against third parties are properly pursued and the buyer doesn’t just rely on being able to claim against it.

Question 48

What would a buy-side concern typically be in relation to the conduct of third party claims?

Answer 48

To protect the *goodwill* of the target business and not harm business relationships

Question 49

Mitigation

Answer 49

Seller’s pov: - include an obligation on the buyer to mitigate losses -> should apply to any indemnities given by the seller

Question 50

What drafting approach should the buy-side typically take to restrictive covenants?

Answer 50

- draft individual restrictions that can be reduced / struck out by means of the blue pencil test if necessary (and taking care when using defined terms) - to assist to ensure enforceability, you should permit holding a small equity stake (up to 3%) in a competitor for investment purposes - > as a restriction on a person being “interested” in Tillman v Egon was held by the court to include a shareholding (regardless of the size) and therefore unreasonable

Question 51

What is the difference between warranties and indemnities

Answer 51

- if you get warranties on an indemnity basis, you would not have to prove loss - an indemnity claim is not *automatically* subject to the same restrictions as a claim for damages - eg remoteness and mitigation - it remains a matter of construction exactly what the seller has agreed to indemnify against - so if the seller agrees to indemnify against “loss” and the triggering event is a breach, then in the absence of express wording to the contrary, the courts will presume that the parties only intended to cover loss that would have been recoverable as damages after mitigation and remoteness (The Eurus; Maple Leaf v Rouvroy; ENe v Petrobas)

Question 52

From a buy side perspective when might seeking an indemnity be appropriate?

Answer 52

- when you might have problems proving loss - when the buyer is aware?

Question 53

Difference between US and UK market practice

Answer 53

- giving warranties on an indemnity basis is US style market practice - not common in UK practice

Question 54

From a buy side perspective what drafting approach would you typically want to take for an indemnity?

Answer 54

- ensure that the indemnity is “on demand” - an indemnity will be construed against the person seeking to rely on it (if there is ambiguity) - you need to be explicit and precise about the subject matter of an indemnity - ensure the indemnity expressly covers losses, liabilities and costs “on demand” - at common law, an action in an indemnity does not normally arise until the buyer has met the liability or cost in respect of which the indemnity has been given - but the parties can agree that the action can arise before the payment has been made

Question 55

From a sell side perspective what drafting approach would you typically want to take for an indemnity?

Answer 55

- require the buyer to comply with procedural requirements in order to claim under an indemnity - eg requirement to notify the seller of the claim with reasonable detail and conduct of any proceedings