Complete notes covering Workshop 4 of the University of Law's M&A Elective.
- Allocation or Risk
- Protecting the Buyer
- Warranties, Indemnities and Representations
- Protecting the Seller
- Disclosure Obligations and Buyer's Knowledge.
Buyer will want some REASSURANCES about the nature and state of the company/business that it is acquiring and
the possibility of recompense if the acquisition does not turn out as expected.
WARRANTIES AND INDEMNITIES will be included in the sale and purchase agreement so as to provide the
buyer with the comfort of possible recompense.
Share acquisition = Under English law, neither common law nor statute will protect the buyer through
implied terms in the contract
o Caveat emptor applies - need to provide for everything yourself
Asset acquisition = Buyer is not in as exposed a position as shares as it does not automatically assume all the
liabilities of the business
o May also have the benefit of limited warranties under Sale of Goods Act 1979 for some transferred
assets but should still incorporate express safeguards!
Whether transaction takes place as an asset or a share acquisition, there are two bases on which the agreement for
sale can be made which will attract the benefit of COVENANTS IMPLIED by English law. Implied by Law of Property
(Miscellaneous Provisions) Act 1994:
Full title guarantee… this implies that
(a) seller has the right to dispose of the property
(b) seller will do all it reasonably can, at its own expense, to pass to the buyer the title that it purports to give
(c) the property is free from all charges, encumbrances and third-party rights, other than those of which the
seller is unaware and could not reasonably be expected to answer
(d) Limited title guarantee… this implies that
- Covenants mentioned at (a) and (b) and also that since the last sale for value, the seller has neither created
nor allowed to be created any subsisting charge/encumbrance, and is not aware that anyone else has done.
Warranties
Purpose?
Warranties are a CONTRACTUAL UNDERTAKING made by seller of a particular state of affairs/CONTRACTUAL STATEMENT
about what is to be acquired
if untrue: not a right to rescind, but right to sue for damages.
Loss of bargain: The difference between market value now and market value had the warranty been true.
TWO main purposes:
1. To provide the buyer with some express contractual protection and to reduce the risk of Caveat Emptor
Note: generally, very little statutory protection for a BYR of shares
Warranties apportion the risk associated with a particular transaction:
o Seller accepts liability to the extent of the warranty
o Buyer accepts risk to the extent the warranties are not given / restricted / matters disclosed
2. Second, to elicit information about target from SLR during negotiations by forcing him to make disclosures (to
reduce his own exposure to liability) – a comeback.
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