SGS 4 (Warranties and Indemnities) Flashcards
What is a warranty?
a contractual statement of fact about the company or the business which the buyer is seeking to acquire. Breach of warranty gives rise to a claim for damages against the seller
What are the purposes of warranties?
MAIN to elicit information about the company or business being acquired.
Secondary provide potential redress for a Buyer in the event of a breach of warranty. Breach of contract claim. (nb requires, duty to mitigate loss and damages are compensatory)
What can be said about a warranty confirming that Buyer will purchase the entirety of the shares and they have been fully paid?
Do not change as buyer will not deal without such warranties included.
How far back should accounts go?
2-3 years, 6 is too onerous for Seller to disclose against and not relevant.
What standards should accounts be prepared to?
s.393 CA imposes a ‘true and fair’ standard on auditors. Can’t warrant a higher standard than that.
What is a book debt?
A receivable is money owed to the company and therefore an asset.
How would you modify a Book Debt clause?
‘the Target HAS RECEIVED payment of all invoiced debts within [30] days of the date of invoice.
Action of recovering debt is outside seller’s control as refers to money being recovered after completion date.
How would you change an IP clause that reads ‘and does not thereby infringe any IPRs of any third party’?
The Target has not received written notice from a third party alleging that it is infringing the party’s Intellectual Property Rights’
No longer forward looking and therefore acceptable.
What concepts should be considered for a litigation warranty?
Materiality (i.e. de minimis)
Threatened is too vague
Definition of litigation (does it include ADR?)
Why can’t a Seller warrant that employees will not leave? What warranty could they give?
Not within Seller’s control whether or not employees choose to leave as a result of acquisition.
The T has not received written notice from a Senior Employee stating his or her intention to terminate their contract of employment with the Target.’
What is an indemnity?
Promise by the Seller to reimburse the Buyer in respect of a specific liability which may arise in the FUTURE and gives the buyer a claim in debt.
Tax indemnities?
General (apportionment of tax liabilities)
specific (e.g. HMRC investigating employee status for unpaid tax)
Exclusion for tax liability provided for in completion accounts.
What is the tax consequence of making indemnity payments directly to the Target?
Zim properties
Target taxed on payment made by seller to target as chose in action
Wording of indemnity should be changed so payment made directly to buyer to avoid this happening.
What is the effect of paying an indemnity payment to the Buyer?
Adjustment
Buyer treated as paying less for target (lower base cost when disposes)
Seller’s consideration on selling reduced by amount paid under indemnity (capital gain reduced)
No Stamp Duty adjustment
‘So far as the Seller is aware’
Buyer and Seller amendments?
B: wants to widen by adding ‘having made all reasonable enquiries’.
S: wants to restrict by adding ‘having made all reasonable enquiries of named individuals’.
