Warranties Flashcards
(14 cards)
What points should you consider in relation to warranties when acting on the buy or sell side?
1 - Standard for warranties
2 - Qualification by Seller’s knowledge
3 - Repetition of warranties
4 - Cornerstone warranties
5 - Boxing / compartmentalisation
Commonly negotiated position for standard is “true and accurate” but buyer could push for “and not misleading”
Checked
On the buy side, what approach should you take to warranties if there is split exchange and completion
1 - require repetition of warranties
2 - require termination right
3 - require notification of breach
On the sell side, what approach should you take to warranties if there is split exchange and completion
Resist repetition of warranties
but it might be required if the buy side is using debt finance or W&I is being put in place.
If concede - updated DL (then buyer will have no claim for breach of warranty at completion).
What is a possible compromise position in relation to repetition of warranties?
Warranties are repeated at completion but the buyer’s only remedy if there is a breach of warranty after signing is to terminate the SPA (no right to damages).
Only a termination right for a material breach of warranty.
Could have only FWs repeated.
What type of sellers would typically not give business warranties?
- sellers who have no / limited involvement in the target business eg PE / institutional / trustee sellers
- trustee sellers may be restricted from giving extensive warranties under the trust deed
Checked
Additional warranties on the buy side
1 - contents of the disclosure letter
2 - business plan / budget / projections / forecasts
3 - management accounts
4 - condition of assets - esp if target businesses is asset based
5 - all necessary assets
6 - assets register
7 - confidential information - auction process
8 - sweeper warranty - decision of buyer
eg “The business plan has been honestly and diligently prepared and the seller believes it to be reasonable in all respects.”
Consider if you want the management accounts to be warranted, especially if the latest audited accounts were prepared some time ago.
Consider if you want an additional warranty that target owns or has the right to use all assets necessary for the effective operation of its business.
This is important to get where a pre-sale hive down of assets into target has been carried out by seller.
Seller’s pov - buyer itself should assess whether target has the necessary assets.
“sweeper warranty” on decision of buyer
That the seller is not aware of any facts that have not been disclosed in the DL which might affect the decision of the buyer to enter into the SPA.
Note that adequacy of IP is generally the most important of the IP warranties (as it should cover much of what is addressed more specifically in other warranties).
Potentially if there are one or two substantial assets of the target, you could seek a specific warranty on their value as at completion rather than relying on a general accounts warranty
What could the seller’s argument be to resist warranting the contents of the disclosure letter?
- shield not a sword
- purpose is to protect the seller - if DL is not accurate then it won’t operate so as to qualify the warranties and the buyer will have a claim for breach of warranty
Checked
Seller and buyer approach to notification of claims?
Seller pov:
Require buyer to give notice of a claim within a specified timeframe (eg within x BDs of becoming aware of the matter) and for the notice to comply with content requirements - with failure to comply meaning buyer cannot issue legal proceedings
Buyer pov:
Fine to agree to give notice of claims (inc content requirements) but failure to give notice and satisfy content requirements should not impact seller’s liability re that claim
Risk for buyer if claim is invalid for failure to satisfy notice requirements
What are points to consider from both the buy side and the sell side in relation to repetition of warranties?
- for whose benefit / who requires the CPs to completion (and who should therefore take the risk between signing and completion)
- generally a question of risk allocation
Matters to consider if the consideration is calculated by reference to net assets
Changes since the last accounting date warranty —> No material changes in assets or liabilities warranty will be crucial.
Should cover
1 - no material changes, and
2 - no reduction in value
What is the purpose of warranties?
1 - elicit disclosure
2 - allocate risk -> claim for breach of contract
What’s the relevance if warranties are also given as representations?
Buyer could choose to sue seller:
1 - in tort on the basis of misrepresentation
2 - in contract on the basis of breach of warranty
Different rights:
- measure of damages
- availability of rescission
Warranties to be construed independently
- could not offer at first on the sell side
This means ….
What is a possible compromise position in relation to notification of breach of warranty?
If the buyer becomes aware of a breach of warranty before completion it can choose to:
- terminate the SPA
- proceed to completion (but not claim damages).
[is the right]
Only a termination right for a material breach of warranty / that would have a MAE on target.
Would need an obligation on seller to notify buyer of a breach of warranty.
