Warranties, Indemnities and Representations for a Safer Business Sale

Warranties, Indemnities and Representations

What are they? What’s the difference between them? Why does this matter when buying or selling a company?

What are representations?

Representations are statements of fact or promises given by a seller/sellers in a contract which are fundamental to the formation of the contract.  If the statement or fact is untrue, this engages the Misrepresentation Act 1967 and allows a buyer to rescind (or terminate) the contract.

What are warranties?

Similar to representations, warranties are statements of fact given by a seller/sellers at the date of entering into the share purchase agreement as to the condition of the target company or business.  However, warranties would not usually be fundamental to the formation of the contract and any remedy lies solely in damages.  A warranty can be untrue but not give rise to a claim if a buyer has not suffered a loss.

What are indemnities?

Indemnities are promises to hold a contracting party harmless or to indemnify/reimburse a buyer in respect of the cost of a loss relating to a specific circumstance.  It can be for a specific known problem or may cover any known liability which may result.

What are the differences?

Warranties

• They only give rise to a successful claim if a buyer can show the warranty was breached and the effect of that breach is that the value of the company or business it acquired is reduced.
• Any damages will be to put a buyer in the position it would have been had the warranty been true
• A claim will be subject to the normal contractual requirements relating to the remoteness and foreseeability of the loss and the buyer’s attempt to mitigate the loss
• A seller can disclose any known issues against the warranties
• Warranties will be subject to the limitations and seller protections included in the share purchase agreement

Representations

• Very similar to warranties, but they allow a Buyer a right to terminate the agreement as a remedy, rather than pursue a seller for breach of warranty

Indemnities

• The purpose of an indemnity is to move the risk of a matter from a buyer to a seller and provide a buyer with pound for pound compensation
• Usually more appropriate to cover specific risks which are of particular concern to the buyer eg. historical tax liabilities and litigation claims, etc
• May be used where a breach of warranty may not give rise to a damages claim
• A buyer may avoid issues regarding the quantum of loss which may arise in a warranty claim, ie. mitigation and remoteness
• Usually, indemnities are not subject to the limitations set out in the share purchase agreement
• They are not subject to disclosures made by a seller

Why does this matter when buying or selling a company?

A seller should always seek to avoid giving representations, as this allows the buyer an additional remedy, ie. the right to terminate the contract.

Indemnities should only be given by a seller in relation to specific, identified issues/liabilities.

Warranties should not be given as indemnities or on an indemnity basis.  It’s very important to look out for this in a share purchase agreement as, with clever drafting, this is not always obvious.

It is important to seek legal advice in relation to any warranties, representations and indemnities in a share purchase agreement, whether you are a seller or a buyer.

If you have any questions on any of the above, please get in touch with a member of the Corporate Team by emailing corporate@mlplaw.co.uk or calling 0161 926 9969 and we will be able to talk through your specific needs and our various flexible pricing options.