When buying or selling shares in a company, one of the most critical components of the Share Purchase Agreement (SPA) are the warranties. But what are warranties in a Share Purchase Agreement and why do they have an integral role in protecting both the buyer and the seller during and after the transaction.
Warranties are statements of fact made by the seller (and sometimes the buyer) about the state of the business at the time of the sale. Some of the most frequently included warranties in an SPA include:
- Title and ownership: The seller confirms they own the shares and have the right to sell them.
- Accounts: The financial statements provided are accurate and fairly represent the company’s position.
- Compliance: The business complies with all relevant laws and regulations.
- Contracts: There are no undisclosed material contracts or obligations.
- Litigation: There are no ongoing or threatened legal proceedings.
Warranties are a form of protection for the buyer. They ensure that the buyer is not misled and that they are purchasing what they believe they are. For example, a warranty might state that the company has no outstanding litigation and disputes. If this turns out to be untrue and there is an outstanding dispute involving a substantial about of money, the buyer could face unexpected costs and the warranties give them a legal route to recover those losses. However, claims for breach of warranties are often subject to certain limitations.
These include:
- time limits;
- financial caps;
- conduct of claims; and
- buyer’s knowledge.
The seller also has further protection through the use of a disclosure letter. A disclosure letter sets out specific disclosures that qualify a warranty and the effect of this is that the buyer cannot claim for breach of warranty in respect of any matter that has been properly disclosed in the letter.
These clauses are often heavily negotiated. Buyers typically want broad and detailed warranties to cover as many risks as possible. Sellers, meanwhile, aim to limit their exposure by narrowing the scope. Whether you’re buying or selling, it’s crucial to understand what you’re agreeing to and to seek professional advice to ensure your interests are protected.
How Moore Barlow can help
We have expert business and corporate transactions solicitors dedicated to providing exceptional legal services to our clients. With years of experience and a deep understanding of the complexities of corporate law, we are committed to helping businesses achieve their goals and navigate the legal landscape with confidence. We offer tailored solutions that are designed to meet the unique needs of each client, and our team of experts is always available to provide guidance and support throughout the entire transaction process.
