Share purchase agreement

Question 1

· The main provisions in an acquisition agreement relating to a share sale will include:

Answer 1

• Shares. A description of the shares in the Target to be sold to the buyer.
• Consideration. The price that the buyer is going to pay for the Target. It will also be necessary to detail the form that the consideration is going to take, if it is not all going to be paid in cash. You will learn about different forms of consideration in the second half of this knowledge stream.
• Conditions precedent. There may be one or more conditions that must be satisfied before the transaction can be completed. It may, for instance, be necessary to obtain shareholder and/or regulatory consent. There will often be an obligation on one or both parties (depending on the particular conditions) to be proactive in taking actions to ensure that the conditions are satisfied –this can be referred to as using their “reasonable” or “best” endeavours, depending on the agreed standard that is to be applied. Where there are one or more conditions precedent, the provisions in the agreement should also provide for a long stop date for the satisfaction of the conditions and set out what will happen in the event that a condition precedent is not satisfied.
• Arrangements for completion. Completion may occur at the same time as signing of contracts in a corporate transaction. This is referred to as simultaneous signing and completion. However, where one or more conditions precedent need to be satisfied, then signing and completion will need to be split. The acquisition agreement will be signed when it is executed by the parties and it will be completed following satisfaction of the conditions precedent. The acquisition agreement will set out in detail the matters that need to be dealt with at completion, including the production of stock transfer forms in relation to the shares being bought, the handing over of the Target’s statutory books and records and title documents, the discharge of any relevant charges over the shares and/or the Target’s assets, the appointment and resignation of directors and the actual payment of the consideration. This section of the acquisition agreement acts as a checklist for the solicitors organising completion in order to ensure that all the necessary steps are taken.
• Pre-completion undertakings (‘gap controls’).
• Where signing and completion are split, the buyer may seek undertakings from the seller to ensure that the business of the target is carried on in the ordinary course and that the value of the target is protected. These undertakings are more significant when the period between signing and completion is long and/or where warranties are not repeated at completion.
• Warranties.Warranties are statements of fact, which the seller makes in relation to specific aspects of the Target. The seller warrants that the statements are true at the time the statements are made. If the warranties are subsequently found to be untrue by the buyer, the buyer will have a contractual claim against the seller for breach of warranty (subject to the usual requirements of proving loss, foreseeability and the requirement to mitigate). Warranties are given on signing and may be repeated at completion.
• Indemnities. Indemnities are promises made by the seller to reimburse the buyer for any loss it suffers in connection with a specific liability which may arise in the future. In a share sale, a buyer will almost always expect to see a set of indemnities dealing with any unexpected tax liabilities that arise as a result of the Target’s activities prior to completion.
• Seller protection provisions. Seller protection provisions are included in the acquisition agreement in order to limit the seller’s liability for breach of warranty claims. The provisions usually contain an upper limit on any claim for damages that can be brought by the buyer (“cap”/“de maximis”) and a lower level below which claims cannot be brought(“de minimis”). The seller protection provisions usually also contain a detailed procedure that must be followed by the buyer in order to bring a claim (including time limits for the notification of claims).
• Boilerplate clauses. These are the general routine clauses found in most types of commercial contracts. Boilerplate clauses deal with the way in which the contract operates and regulate, control and modify the rights and obligations of the parties. They are usually found towards the end of the agreement.
• Example clauses include entire agreement notice provisions, governing law and jurisdiction, assignment and non-assignment and exclusion of third-party rights.
• Entire agreement clause. This is a boilerplate clause which (if effective) prevents the parties to the agreement from raising claims that statements made during the contract negotiations which were not included in the final agreement (pre-contractual statements) constitute additional terms of the agreement and also seek to prevent a party bringing an action for misrepresentation.
• Restrictive covenants. In the context of a share sale, the purpose of restrictive covenants is to protect the value of the Target, by preventing the seller(s) taking certain actions which could be detrimental to the Target (for example, setting up a new business in competition with the Target’s business) for a period of time post-completion.

Question 2

• Buyer’s contractual protections:

Answer 2

· Warranties and indemnities
· Title guarantee
· Restrictive covenants
· Additional contractual protections will be needed if there is split signing and completion

Question 3

What is a warranty?

Answer 3

· A warranty is a statement of fact about the company or the business which the buyer is seeking to acquire which, if untrue, gives rise to a claim for damages against the seller.

Question 4

What is an indemnity?

Answer 4

a promise made by the seller to reimburse the buyer if a particular circumstance arises and, if triggered, seeks to give the buyer £ for £ protection for the relevant matter.

Question 5

· Where the company is being sold by a group of individuals, the position is more complicated. A seller’s liability as a warrantor can be:

Answer 5

• Joint and several meaning each seller assumes the obligation collectively (on behalf of all those bound) and individually (for himself). The buyer may then sue any one or more of the sellers for the whole or part of the loss.
• Several meaning each seller is liable for an agreed specified proportion of the potential damages. Here, the buyer must bring proceedings against individual sellers for their share.
• Joint is the same as if the parties were liable jointly and severally. However, the death of a party who is jointly liable will release his estate from liability. A further disadvantage for the buyer is that in order to bring proceedings against joint parties, the buyer must issue proceedings against all of them.
  · The buyer will therefore want to ensure that the warranties are given by all the sellers on a joint and several basis so that the buyer has a right of action against all or any of the sellers and can choose whom to pursue.

Question 6

Title gurantee?

Answer 6

• Title guarantee is a guarantee of the seller’s quality of ownership (like property). In the event of a breach of any of the terms of the title guarantee, the buyer can sue the seller for the breach. Under the Law of Property (Miscellaneous Provisions) Act 1994, using the key phrases “full title guarantee” or “limited title guarantee” imports certain statutory covenants for title into the acquisition agreement.

Question 7

• Selling with full title guarantee means that the following covenants are implied:

Answer 7

• the seller has the right to sell the asset; and
• the asset is free from all charges and incumbrances and other rights exercisable by third parties other than those which:
• are disclosed in the contract; and
• it did not

Question 8

When is limited gurantee given?

Answer 8

• Limited title guarantee may be given by sellers who have little relevant knowledge of the asset, or have a limited interest in the asset, such as:
• trustees; and
• personal representatives.
• Limited title guarantee is similar to full title guarantee but there is no guarantee by the seller that the property is free from all third-party rights, charges and incumbrances. Instead, this is replaced by a guarantee that the seller has not since the last sale created any incumbrances over the asset and is not aware that anyone else has done so since the last sale.

Question 9

What are restrictive covenants?

Answer 9

• The seller will usually be expected to give undertakings, in the form of restrictive covenants, to refrain from competing in a business similar to that which is being sold.
• Restrictive covenants are also an effective way of protecting know-how and confidential information so it is important to understand how they work before looking at the steps the buyer should take to protect know-how and confidential information of the Target.

Question 10

· When drafting restrictive covenants, there are three issues to bear in mind:

Answer 10

• The covenants will be unenforceable unless they are reasonable for the protection of a legitimate interest of the buyer (such as the protection of trade secrets);
• The covenants must be reasonable in (a) geographical scope; (b) business scope; and (c) duration. There are no general guidelines as to what would be considered reasonable and which can be followed. Each covenant must be considered by reference to the particular facts of the individual case; and
• If the agreement is found to be anti-competitive, it might give rise to fines under applicable Competition Law.

Question 11

• The following covenants are usually given by the seller in the acquisition agreement to protect the buyer’s interests:

Answer 11

• not to compete with the target business for a specified period and within a specified geographical location;
• not to solicit existing customers for a specified period and within a specified geographical location;
• not to solicit employees for a specified period and within a specified geographical location;
• not to solicit existing suppliers for a specified period and within a specified geographical location;
• not to disclose confidential information/know-how relating to the business; and
• not to use the name of the business or any similar name.

Question 12

• Protection of know-how?

Answer 12

· The term ‘know-how’ is used here to describe confidential commercial information and trade secrets. The directors and employees of the target will possess know-how by virtue of the knowledge and expertise they have acquired from doing their jobs.
· A number of parties could also be in possession of know-how relating to the target. These might include (1) the seller (2) other group companies of the seller and (3) individuals working for the seller. In addition, there may be one or more individuals who have been involved in running the target but who are leaving their employment for one reason or another (possibly retirement) at the time of completion.
· If there are persons in possession of knowledge and expertise relating to the target and they are in a position to exploit this knowledge and expertise to the detriment of the target after completion, then the buyer will need to take additional precautions - by way of restrictive covenants - in relation to all relevant parties.

Question 13

• Restricting the activities of the seller and the seller’s group of companies.?

Answer 13

· Where the seller is the holding company of a group of companies, the seller may be required to undertake to use its best endeavours to ensure that its other group companies comply with restrictive covenants. Where the seller is just one of a number of subsidiaries of a large holding company then, depending on the bargaining strength of the parties and the perceived risks involved, the buyer may be able to negotiate further protection by requiring the holding company to enter into the acquisition agreement in order to guarantee compliance by every company in the seller’s group.

Question 14

· The seller’s solicitors will want to ensure that their client’s exposure under the acquisition agreement is reduced to a minimum. The seller’s solicitors will generally seek to achieve this in three ways:

Answer 14

• negotiation - seeking to amend, or even strike out, those of the warranties which are too broad in scope and/or cover matters outside the control of the seller and, where possible, avoiding indemnities altogether (or limiting their scope as far as possible);
• disclosure - disclosing against those of the remaining warranties that are incorrect or inaccurate; and
• limitation - including a series of seller protection provisions limiting the seller’s liability under the acquisition agreement.

Question 15

How can a seller seek to avoid liability for breach of warranty?

Answer 15

· The seller can seek to avoid liability for breach of warranty by making disclosures against the warranties. Disclosures essentially have the effect of qualifying the warranties. Warranties and disclosures must therefore be considered together. Everything formally disclosed should be recorded in the disclosure letter.

Question 16

Who is the disclosure letter written by and what does it set out?

Answer 16

· The disclosure letter is a letter written by the seller and addressed to the buyer. In that letter, the seller sets out the details of any matters which make the statements of fact - given in the form of the warranties - untrue.

Question 17

· There are effectively two types of disclosure that can be found in a disclosure letter. What are these?

Answer 17

• General disclosures
• Specific disclosures

Question 18

What are specific disclosures?

Answer 18

· Specific disclosures are the disclosures usually found in the latter part of the disclosure letter (usually referred to as the ‘back-end’ of the disclosure letter).
* The specific disclosures are those that relate to the specific warranties given – as in the example on the previous page.

Question 19

Whatb are general disclosures?

Answer 19

• General disclosures are disclosures which are usually found at the beginning of the disclosure letter (often referred to as the ‘front-end’ of the disclosure letter).
  · General disclosures usually relate to searches of public registers that the buyer should complete prior to completion, such as searches of the Register of Companies and the Land Registry.
  · The seller will usually seek to ensure that anything that the buyer could have found out by conducting such searches is deemed to have been disclosed. The buyer may seek to resist such general disclosures or may seek to make them as narrow as possible.
  · It is also increasingly the case that the seller seeks to ensure that the full data room is deemed to be disclosed and for a buyer to accept this.

Question 20

• What happens if the acquisition agreement does not specify that disclosure must be fair?

Answer 20

the question of whether or not disclosure effectively qualifies the warranties in any acquisition agreement will depend upon the level of disclosure that the buyer has agreed to accept.

Question 21

• What if the seller does not wish to disclose anything?

Answer 21

· A seller who fails to disclose a relevant matter in relation to the warranties may have a claim made against it by the buyer for breach of warranty.
· A claim for misrepresentation is also a possibility.
· A seller who fails to disclose relevant matters in connection with a sale of shares may also be criminally liable under s.89 Financial Services Act 2012.
* The buyer does not want this – does not give them any compensation
* Deterrent in the eyes of the seller but often no benefit to the buyer
· The seller may also, in this situation, have to consider the provisions of the Fraud Act 2006. This could be relevant if:
* a warranty is given, which is false; and
* the seller has given such warranty dishonestly, intending to make a gain for itself and/or cause loss to the buyer.
- This may constitute the criminal offence of fraud which is punishable by up to 10 years’ imprisonment and/or a fine.

Question 22

• What is ‘fair’ disclosure?

Answer 22

· “Merely making known the means of knowledge which may enable the other party to work out certain facts and conclusions will be insufficient.”
· “Fair disclosure requires some positive statement of the true position and not just a fortuitous omission from which the buyer may be expected to infer matters of significance.”
· “Mere reference to a source of information, which is in itself a complex document, within which the diligent enquirer might find the relevant information, would not satisfy the requirements of a clause providing disclosure.”

Question 23

Normal liability rules in share sales and how will sellers seek to limit them?

Answer 23

Under the normal limitation rules, this will mean that the seller is exposed to being potentially sued for any size of claim, without qualification or limitation (subject to the normal contractual rules on loss and damages), for up to 6 years (or 12 years if the acquisition agreement is executed as a deed).
o The seller’s solicitors will therefore wish to introduce terms seeking to limit their client’s exposure. They will generally do this by including a set of limitation clauses in the acquisition agreement. These are known as seller protection clauses or limitation of liability clauses (or sometimes vendor protection clauses).

Question 24

Cap on liability?

Answer 24

o The seller will want to include a clause in the acquisition agreement that places a maximum cap on its liability otherwise it is exposed to any size of claim, including a claim for more than the price that the seller was paid for the Target.
o The seller will therefore want to ensure that there is a monetary cap on its liability so that it cannot be held liable to pay the buyer more than a certain amount – in a bilateral sale this can be set at the purchase price (although it is common to see it set at substantially less than the purchase price). In auction sales and particularly large transactions, it is more likely to be set at less than the purchase price.
o Most buyers are willing to accept such a limitation but will usually seek to have the full purchase price as the monetary cap. If the buyer does accept a liability cap, then it should try to ensure that this limitation does not apply to protect the seller in relation to any claims which arise as a result of dishonesty, fraud or wilful concealment by the seller. The buyer will also seek to provide that the cap applies only to warranty claims rather than all claims (including indemnity claims) under the acquisition agreement.
o Where a buyer obtains warranty and indemnity insurance the cap may be as low as £1.

Question 25

o The seller will also want to impose a de minimis threshold for claims. Both parties usually agree that the expense incurred and the inconvenience caused in pursuing claims cannot be justified if the claim is below a certain threshold. There are usually two elements to a de minimis provision:

Answer 25

 Basket
 Individual claim threshold

Question 26

What is the basket threshold?

Answer 26

• Firstly, a minimum threshold will be agreed between the parties meaning that the buyer cannot bring any claims unless the aggregate value of those claims is at least the amount of the threshold (also sometimes referred to as the “basket”). This threshold is usually in the region of one per cent of the consideration paid for the Target but this will depend on the size and nature of the transaction. Suppose, for example, that you are acting on a transaction where the consideration is £5,000,000 - the de minimis threshold will usually be agreed in the region of £50,000. This means that the buyer cannot claim against the seller unless the claims it has are worth £50,000 or more.

Question 27

What is the individual claim threshold?

Answer 27

• The second element the seller may want to include is a minimum threshold (sometimes known as a “disregard” or “throw-away”) for the amount of each individual claim that will count towards the de minimis basket. For example the seller may suggest that each individual claim must be worth £1,000 or more to count towards the de minimis basket. This means that the buyer can never bring any claims worth less than £1,000. However, once the claims it has which are worth £1,000 or more together add up to £50,000 then the buyer can bring the claims against the seller.
• Once that threshold has been exceeded the buyer will usually insist on a right to recover the whole amount not just the amount of the claim which exceeds £50,000.

Question 28

• Time limits?

Answer 28

o The seller protection provisions usually also contain a detailed procedure that must be followed by the buyer in order to bring a claim (including time limits for notification of claims).
o Usually, the buyer will be under an obligation to notify the seller of a claim within a reasonable time. It is generally accepted practice for parties to agree a time limit of between one and two years in respect of non-tax warranties.
o The theory behind having time limits is that once one complete audit has been carried out on the target following completion, any problems should have come to light.

Question 29

• Tax liabilities?

Answer 29

o Prior to 1 April 2010, HMRC could bring corporation tax claims up to six years from the end of the accounting period within which the tax liability arose. This six-year time limit still remains in respect of careless behaviour (although since 1 April 2010, HMRC’s assessment time limit has been reduced to four years for ‘innocent’ matters).
o A period ending on the sixth anniversary of the end of the accounting period in which completion occurs (for simplicity, more usually seven years after the completion date), has in the past generally been agreed for tax warranties and indemnities and it continues to be the case given HMRC’s period of assessment for careless reporting remains as six years.

Question 30

o Other seller protections that sellers will often want in the acquisition agreement include clauses that:

Answer 30

 the seller will not be held liable if the loss is covered by the Target’s insurance, provision in its accounts or if there is a right of recovery from another third party;
 the seller will not be held liable for losses arising as a result of changes in legislation, tax rules or accounting policy after the date of the agreement, or for acts or omissions of the purchaser
 claims are deemed to be withdrawn unless legal proceedings are issued and served within a reasonable period from notice of the claim(s); and
 the buyer is not entitled to recover damages more than once in respect of the same loss.

Question 31

• Conduct of claims?

Answer 31

o If a third party makes a claim against the Target, which may give rise to a breach of warranty or indemnity claim against the seller, the seller will ultimately bear the liability if the third party is successful. The seller will therefore want conduct of the claim made by the third party because it may think that the buyer will not defend the claim as vigorously as it would normally because it will be able to recover its loss from the seller whatever the outcome of the claim by the third party.
o However, the buyer will probably want to retain control of the claim because it will be concerned about the potential damage that such a claim could do to the reputation of the Target and to the relationship (if there is one) with the third party. If the buyer allows the seller control of the claim the seller is likely to defend the claim as vigorously as possible – it may not be concerned about the Target’s reputation and/or relationship with the third party.

Question 32

• Who can bring a breach of warranty claim?

Answer 32

· The buyer, as a party to the acquisition agreement, will be able to bring an action against the seller in the event of a breach of warranty.
· There may also be some circumstances where a person who is not a party to the agreement may wish to bring a claim. For example, following completion, there might be a reorganisation of the corporate buyer’s group and the target might be transferred within the buyer’s group so that it is no longer directly owned by the buyer. Alternatively, the target might be sold on to a third party not connected to the buyer’s group.

Question 33

· There are two possible ways in which a person who is not a party to the acquisition agreement might nevertheless be able to bring a claim against the seller:

Answer 33

• Assignment; or
• Contracts (Rights of Third Parties ) Act 1999 (‘CRTP’).

Question 34

How can assignment be used to bring a breach of contract claim to the seller?

Answer 34

· First, the benefit of the warranties and indemnities in the acquisition agreement might be assigned to the third party if that is permitted by the agreement. It is unusual for the seller to agree to such assignment to an external third party except, for example, where the buyer needs the assignment as part of the security for the bank which is providing some or all of the finance to the buyer for the acquisition. However, intra-group assignments are usually acceptable and are often included.
· If such an assignment is required by the buyer for any other reason, then the buyer will generally try to ensure that there is an express provision in the acquisition agreement to allow such an assignment. The seller will try to resist such a clause. The outcome of this will depend on the bargaining power of the parties. If, however, assignment is permitted then, under equitable principles, an assignee cannot recover from the debtor (in this case the seller) more than the assignor could have recovered had the assignment never taken place.

Question 35

· CRTP allows warranties and indemnities to be given for the benefit of third parties. CRTP allows a third party to enforce a term of a contract if:

Answer 35

• the contract expressly provides that it may; or
• the term purports to confer a benefit on it.

Question 36

• How are damages calculated for breach of warranty?

Answer 36

· If a warranty is untrue, the buyer’s remedy is for breach of contract. Any award of damages would seek to put the buyer in the position in which it would have been if there had been no breach; in this case, the position in which it would have been had the warranty been true.
· To recover damages, the buyer must prove loss. In the context of an acquisition agreement, this will mean that the buyer must establish that the value of the target has been diminished by the breach of the warranty.
· Even where loss is proved, the damages will be limited by the general rules of remoteness and the buyer’s duty to mitigate its loss.

Question 37

· To avoid any problems arising as a result of remoteness issues, the buyer may seek to insert a contractual term stipulating how damages should be calculated or providing for a fixed amount to be paid if the contract is terminated. However, care must be taken to ensure that the term is not deemed to be a penalty and therefore unenforceable. In Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67, the Supreme Court held that a clause may be an unenforceable penalty if :

Answer 37

• It is triggered upon breach;
• There is no justification for the clause;
• It is extravagant or unconscionable.

Question 38

When is breach warranty awarded on an indemnity basis?

Answer 38

· Where a particular warranty is regarded as being fundamental the buyer may even try to stipulate that damages for breach of this warranty should be awarded on an indemnity basis. This is where a specific warranty is backed by an indemnity. If you are advising the seller, this is clearly something that you should resist.

Question 39

· There are a number of different ways to seek to manage the risk that funds are not available to meet any claim:

Answer 39

• Retention or Escrow Account
• Guarantee
• Deferred Consideration
• Warranty and Indemnity Insurance

Question 40

• Retention/escrow account:

Answer 40

The buyer pays into a separate account (which is usually held in the joint names of the buyer’s solicitors and the seller’s solicitors, but which may alternately be an escrow account administered by a bank) a proportion of the consideration, which may be refunded to it (in whole or in part) if it later makes a successful warranty claim. The consideration remaining in the account after a certain period of time has expired (often the warranty limitation period) is then paid to the seller. The interest accrued in the account will usually be paid to the parties in proportion to the amount they received from the retention account.

Question 41

• Deferred Consideration:

Answer 41

The buyer agrees to pay part of the consideration on a given future date or when agreed criteria are met. The cost of a breach of warranty in the intervening period may then be offset against such deferred consideration payable.

Question 42

• Guarantee:

Answer 42

If the seller is a subsidiary, the parent company may guarantee any obligations undertaken by that subsidiary.

Question 43

• Warranty and indemnity insurance?

Answer 43

· The seller may take out insurance cover against possible warranty and/or indemnity claims (although this has become less common over the years). More typically, buyers purchase warranty and indemnity insurance to cover breach of warranty claims that they would have been able to bring against the seller if the financial/time limitations in the sale and purchase agreement did not apply. Warranty and indemnity insurance products have become more established over the years and are now a reasonably common feature of corporate transactions. A detailed disclosure exercise and disclosure letter will still be required even where this insurance cover is put in place not least because the insurers will want to be confident that a thorough process has taken place.

Question 44

• Subsequent adjustments to the consideration

Answer 44

· If the buyer makes a successful claim against the seller under the warranties then this will be treated as an adjustment to the purchase price (and wording should be included in the SPA to confirm that this is the intention). The effect of this is that the seller will be regarded as having received less consideration. This reduces the gain the seller made on the sale, and the seller’s tax liability (if any, i.e. assuming no reliefs apply) will be reduced accordingly. The buyer’s base cost for the acquired company or business will also be reduced potentially increasing the gain and the buyers tax liability on a future sale.
· Where part of the consideration is held in a retention account instead of being paid to the seller, HMRC will still treat the seller as having received the total amount of the consideration (including the amount in the retention account) on the date of completion and will tax the seller accordingly. If the seller does not ultimately receive the whole of the consideration because the buyer does make a successful claim against the seller which is paid out from monies from the retention account, this is treated as a subsequent adjustment to the consideration in the same way as a payment under a warranty.

Question 45

Indemnity and tax?

Answer 45

the risk with an indemnity given in favour of the Target is that any payment made under it by the seller may be treated as a disposal by the Target of a chose in action, with the Target accordingly charged to tax on the whole of the proceeds.

· Where an indemnity payment is paid by the seller to the buyer however HMRC have confirmed in Extra-Statutory Concession D33 that the payment will be treated as an adjustment to the consideration in the same way as a payment under a warranty – therefore avoiding the tax charge.

Question 46

• Breach of warranty or misrepresentation?

Answer 46

· Where the buyer has a choice between a breach of warranty claim and a misrepresentation claim, the choice made will depend on the remedies available for each and the limitations on liability for each.

Question 47

• Remedies for misrepresentation?

Answer 47

· main remedies for misrepresentation are the equitable remedy of rescission and the remedy of damages.
· Which of these remedies is available, and how the damages are calculated, depends on the categorisation of the misrepresentation (innocent, negligent or fraudulent).
· In the case of a private acquisition where signing and completion happen simultaneously, it is very unlikely that the remedy of rescission will be available. By the time the misrepresentation has been discovered, even if it is discovered very quickly, rights will almost certainly have been acquired by third parties and in any event it will not be possible to restore the parties to their pre-contractual positions.
· However, where there is a gap between signing and completion, provided the misrepresentation comes to light before completion, a court may well take the view that it is still possible to restore the parties to their pre-contractual positions and so order rescission.

Question 48

• Limiting liability for misrepresentation?

Answer 48

· Despite the legal remedies available for misrepresentation, in the context of a private acquisition, the parties will almost always include wording in the acquisition agreement to limit or exclude liability for misrepresentation by way of an entire agreement clause.

Question 49

What is an entire agreement clause?

Answer 49

· An entire agreement clause (or non-reliance clause) is a ‘boilerplate’ provision that is found in many written agreements and has been subject to extensive judicial scrutiny. Such a clause will contain a statement that the written contract constitutes the entire agreement between the parties and supersedes any prior agreements or negotiations. As this statement alone is insufficient to exclude liability for misrepresentation, and clear wording is required, the clause has developed over time to include (often all three of) the following additional elements:
* an express exclusion of liability for misrepresentation;
* a non-reliance statement (an acknowledgement by the parties that they have not relied on any representation outside the agreement, reliance being a key ingredient of misrepresentation); and
* a statement limiting remedies for misrepresentation to those available for breach of contract which has the effect of excluding all remedies for misrepresentation whether made in the pre-contractual period or in the agreement itself (this has the effect of excluding the remedy of rescission and changes the measure of damages available).
· The clause will usually include a confirmation that it is not intended to exclude liability for fraudulent misrepresentation. This wording is intended to prevent the courts from finding that the restriction of liability for misrepresentation is ineffective for unreasonableness under UCTA.
· An entire agreement clause is considered standard practice and is usually accepted by the buyer.

Question 50

What is needed in an entire agreement clause to negate misrep claims?

Answer 50

the High Court held that an entire agreement clause in a share purchase agreement which did not have wording to negate reliance or exclude liability for misrepresentation was not effective to exclude misrepresentation claims.
· It held that clear words are needed to exclude misrepresentation claims and an entire agreement statement that sets out the scope of the agreement is not sufficient.
· Instead, what must be shown is:
* “clear wording establishing an intention to go beyond defining the scope of the contractual agreement and exclude other claims.”

Question 51

A company is acquiring a private limited company (‘Target’) from a plc (‘Seller’). The parties are negotiating the acquisition agreement. The buyer’s solicitors have included the following warranty in the acquisition agreement as follows:

‘None of the employees will resign from their employment following completion’

You are acting for the seller. What is the best advice for the seller in relation to the warranty?

The Seller should give the warranty but disclose against it.

The Seller will have to give the warranty without qualification as the buyer will insist on this.

The Seller should refuse to give the warranty as it relates to matter outside the Seller’s control.

The Seller should qualify the warranty by making it subject to the Seller’s awareness.

Answer 51

The Seller should refuse to give the warranty as it relates to matter outside the Seller’s control.

Correct
Correct. This the best advice for the seller although it is unlikely that the buyer will accept this.

Question 52

A company is being sold by a corporate seller and two individuals. The two individuals own 10% each of the shares in the Target and the corporate seller owns the remaining 80% of the shares. The buyer’s solicitor has included a provision in the draft acquisition agreement that the warranties are given by all the sellers on a joint and several basis. The individuals would like to minimise their liability for breach of warranty.

What is the best advice to the two individuals in respect of their liability for breach of warranty?

The individuals should insist that the warranties in the acquisition agreement are given on a joint basis only to limit the amounts they will contribute if there is a successful warranty claim.

The individuals should enter into an express contribution agreement with the corporate seller setting out the amounts they will contribute if there is a successful warranty claim.

The individuals can rely on the provisions of the Civil Liability (Contribution) Act 1978 to determine the amounts they will contribute if there is a successful warranty claim.

The individuals should insist that the warranties in the acquisition agreement are given on a several basis only to limit the amounts they will contribute if there is a successful warranty claim.

Answer 52

The individuals should enter into an express contribution agreement with the corporate seller setting out the amounts they will contribute if there is a successful warranty claim.

Question 53

A company is acquiring a private limited company (‘Target’) from a plc (‘Seller’). The Target’s finance director has decided to resign with effect from completion of the acquisition. The finance director’s employment contract has the following clause.

‘The Director undertakes that they will not for the period of two years immediately after termination of their employment, carry on or be engaged in any business which is similar to and competes with the business carried on by the Target at the date of termination.’

Which of the following statements represents the best advice for the buyer in relation to the enforceability of the clause?

The clause will be enforceable as it is reasonable in geographical scope; business scope and duration.

The clause is enforceable as it is reasonable for the protection of a legitimate interest of the target.

The clause is unenforceable as it is unreasonable in geographical scope; business scope and duration.

The clause is unenforceable as it the duration of two years is likely to be considered unreasonable.

Answer 53

The clause is unenforceable as it the duration of two years is likely to be considered unreasonable.

Question 54

4 months ago, your client bought an online clothing retail business. The following clause was agreed in the business purchase agreement:

“The Seller shall not be liable for any Claim unless:​

1. the amount of the Claim when aggregated with all other Claims made on the same occasion or previously is equal to or exceeds £75,000, in which case the Seller shall be liable for the excess only; and​
2. the amount of any individual Claim is equal to or exceeds £7,000.​

“Claim” means a claim for breach of any of the Warranties.”

Your client has already identified 2 claims against the seller in relation to breaches of warranty for £46,000 and £40,000 and has now, in addition, identified a claim in relation to an indemnity given by the seller to your client for £6,000.

What advice should you give to your client about the value of the claims it is able to bring against the seller?

Your client is able to bring claims in relation to £92,000.

Your client is able to bring claims in relation to £86,000.

Your client is able to bring claims in relation to £17,000.

Your client is able to bring claims in relation to £11,000.

Answer 54

Your client is able to bring claims in relation to £92,000.

Correct. Whilst the other options might sound plausible, they are each incorrect. Your client has met the individual and aggregate thresholds in relation to the breach of warranty claims so is free to pursue those claims under the acquisition agreement. The £6,000 is an indemnity claim. As the definition of ‘Claim’ only covers breach of warranty claims, your client is free to bring the indemnity claims free of de minimis restrictions.

Question 55

Your client is selling its adventure holiday business and is in the process of agreeing the acquisition agreement with the buyer. The current draft includes the following wording:

“Warranties are subject to matters disclosed by the Seller”

What advice should you give to your client in relation to the current wording?

Your client should amend the wording to ‘fairly disclosed’ to ensure the standard of disclosure required of it is clear to avoid a breach of warranty claim.

Your client should accept the wording however case law requires that your client will need to make fair disclosures to avoid being subject to a breach of warranty claim.

Your client should accept the wording and should make the disclosures as wide as possible without being subject to a breach of warranty claim.

Your client should accept the wording but should make disclosures as full as possible to avoid being subject to a breach of warranty claim.

Answer 55

Your client should accept the wording but should make disclosures as full as possible to avoid being subject to a breach of warranty claim.

Correct
Correct. Whilst the other options might sound plausible, they are each incorrect. A seller should always be advised to make disclosures as full as possible in order to avoid a breach of warranty claim. Changing the standard of disclosure from ‘disclosed’ to ‘fairly disclosed’ does make the standard for effective disclosure clear but would benefit the buyer rather than the seller. Case law does not require that disclosures must be ‘fair’ to be effective in all circumstances but instead states that it depends on the wording agreed by the parties in the acquisition agreement.

Question 56

You are acting for a plc (‘Buyer’), which is proposing to purchase all of the shares in private limited company (‘Target’) for £50,000,000 pursuant to a share purchase agreement (the ‘SPA’) to be entered into with the corporate seller (‘Seller’). The draft SPA contains a warranty that there is no pending litigation involving the Target, subject to any fair disclosure made by the Seller. The Buyer has just been informed by one of its suppliers that the Target is likely to be the subject of a large claim for breach of contract (the ‘Litigation’). However, it has not received any disclosure of this from the Seller.

Which one of the following statements is the best advice to give to the Buyer in

connection with its proposed purchase of the Target?

The Buyer could ask for a specific indemnity against liabilities arising as a result of the Litigation, but this would typically be subject to any fair disclosure that the Seller may then make to the Buyer.

As the Litigation relates to the period prior to the Buyer acquiring the Target, this liability would remain with the Seller.

If the SPA contains a buyer’s knowledge provision, the Buyer may be prevented from making a warranty claim against the Seller because it was aware of the Litigation before signing.

As long as the Seller does not disclose the Litigation to the Buyer before completion of the deal, the Buyer should always be able to claim full damages arising from the Litigation by making a claim against the Seller for breach of warranty

Answer 56

If the SPA contains a buyer’s knowledge provision, the Buyer may be prevented from making a warranty claim against the Seller because it was aware of the Litigation before signing.