Unit 4 - Risk Allocation

Question 1

Why would the buyer want some protection?

Answer 1

Transaction includes caveat emptor.
Buyer would want reassurances about the nature and state of the company/business that they are buying and the possibility of being able to have the ability to get the money back if the acquisition does not turn out they want it to be.

Question 2

How can the buyer protect themselves?

Answer 2

Warranties and Indemnities will be drafted in the SPA.

Question 3

How would the buyer be protected in a share acquisition?

Answer 3

Common law nor the statute will protect the buyer, instead, the buyer will be protected through implied terms of the contract

Question 4

How would the buyer be protected in an asset acquisition?

Answer 4

Buyer’s responsibilities is not assumed. May obtain limited warranties under SGA 1979 for transferred assets.

Question 5

What are the 2 bases which the agreement of a sale (asset or share) can be attract benefits for the buyer?

Answer 5

Benefits the buyer will receiver are from implied covenants from the English Law. The LPMPA 1994:
1. Full Title Gaurantee:
Implied that the seller has the right to pass the title to the buyer if its reasonable and the property is free from all charges.
2. Limited title gaurantee:
Implied that covenants since the last sale of the value, the seller is not allowed to create any charge or encumbrance and is not aware that anyone else has done it.

Question 6

What’s a warranty?

Answer 6

It’s a written gaurantee, promising to do or not to do something.

They are a contractual undertaking made by the seller on certain things.

Question 7

What’s the 2 main purpose of warranties?

Answer 7

Have an express contractual protection for the buyer, reduce Caveat Emptor

Get information from the seller during negotiations.

Question 8

What happens if the warranty is untrue?

Answer 8

Buyer does not have a right to rescind the warranty, but they will have the right to sue for damages.

Question 9

Can the buyer obtain damages for the breach of the seller’s obligations on warranties and indemnities?

Answer 9

Yes

Question 10

What damages can the buyer get?

Answer 10

Damages under breach of warranty. that is calculated under Hadley v Baxendale where the loss recoverable is not too remote.

Question 11

What’s the purpose of the damages?

Answer 11

To put the buyer back into the position when they would have been if the transaction occurred properly.

Question 12

How is damages calculated in a Share Acquisition?

Answer 12

difference between the value of the shares if the warranty had been true, and their actual value.

Question 13

How would the parties attempt to reduce uncertainty in qualifying losses?

Answer 13

Specifying in the agreement how the loss will be calculated if an event where the warranties were breached.

Question 14

What are the tax consequences?

Answer 14

If the payment is made under a warranty, it would be subject to s49 of the Taxable Chargeable Gains Act 1992.
Consideration that’s been paid to the seller is reduced to the amount made under the CGT. Whilst the buyer’s cost of buying or acquisition will be reduced too.

Question 15

What other claims can the buyer rely on besides damages under the breach of contract?

Answer 15

Breach of misrepresentation –> they can get remedy under this.

Question 16

What’s misrepresentation?

Answer 16

A misrepresentation is a false statement of fact made by one party to the contract to the other, which induces the other party to enter into the contract.

Question 17

When or How can misrep be formed?

Answer 17

Pre-contractual and contractual.

Question 18

What’s the benefits for the buyer to be able to rely on damages under misrepresentations?

Answer 18

Rescission - the buyer gets what they lost

Damages - puts the buyer back into the situation if the acquisition occurs correctly.

Question 19

What are the 3 different types of remedies for misrep?

Answer 19

Fraudulent Misrep
Negligent Misrep
Innocent Misrep

Question 20

What is Fraudulent Misrep and What remedies can you the buyer get under it?

Answer 20

The seller can’t exclude this misrep.
Buyer can rely on recission and damages. But the damages must be shown the maker had no idea of the truth, buyer would need to provide proof they had no idea.

Question 21

What remedies can you the buyer get under Negligent Misrep?

Answer 21

Recission–> court can award damages on this under s2(2) of Misrep Act.
Damages –> s2(1) Misrep Act 1967 –> calculated on a tort basis. Burden of proof is on the seller to show that they have reasonable grounds to believe that the statement was true.

Question 22

What remedies can you the buyer get under Innocent Misrep?

Answer 22

Rescission - court has the discretion to award damages in lieu of possession under s2(2) MA.
Damages - S2(2) of Mis rep –> court can award them damages if the court feels like the rescission is too drastic.

Question 23

How can the buyer obtain damages in lieu of possession under the innocent misrep?

Answer 23

The buyer’s right to rescind has been lost - Government of Zanibar v British Aerospace

Question 24

When will rescission will not be available?

Answer 24

1. If it’s impossible to restore the parties back to their pre-contract position
2. 3rd parties rights have been obtained
3. If the buyer (the innocent party knew about the misrep)
4. There’s delay in seeking relief and it was unreasonable.

Question 25

What’s an entire agreement clause?

Answer 25

This forms the agreement or what the agreement is all about.
It considers the situation of misrep.

Question 26

What’s the purpose of an entire agreement clause?

Answer 26

Exclude liability for misrep on anything that Led the parties to get into agreement.

Question 27

To what extent would the seller not be protected if there’s an entire agreement clause?

Answer 27

If there’s a claim against misrepresentation as mentioned in the case for Thomas Witter v TBP.

Question 28

What’s a non-reliance provision?

Answer 28

It’s a provision that outlines the buyer is aware that it can’t rely on any provisions that’s not contained in the contract.

Question 29

What’s the right of rescission?

Answer 29

Misrep are not caused unnecessary by an entire agreement clause.

Question 30

What does s.1 MA 1967 state?

Answer 30

Misrep has become a term of the CRT

Question 31

does a breach of warranty carry no right of rescission?

Answer 31

Yes, the remedy would be damages instead.

Question 32

If there’s a gap between the exchange and completion, what should the buyer do?

Answer 32

Buyer should put a clause allowing them to withdraw from the contract if they become aware that the seller has breached the warranty.

Question 33

If there’s a breach of warranty, should the seller do anything?

Answer 33

Yes, inform the buyer if they find something out that’s been inconsistent with the warranty.

Question 34

How you do form the measure of damages?

Answer 34

contract –> the loss is the difference between the value of shares if the warranty was true and the actual value.

Tort –> Buyer would be placed in their original situation before the agreement.

Question 35

What’s the purpose of an indemnity?

Answer 35

It’s to make the seller promise to reimburse the buyer if they breached or any liability.

Question 36

In terms of Tax indemnities, what do warranties normally cover?

Answer 36

They deal with target’s compliance with tax and VAT requirements.

Question 37

In terms of Tax indemnities, what do indemnities normally cover?

Answer 37

They cover specific tax charges that’s not provided in the account.

Question 38

Why is it advantageous for the buyer to deal with taxes

Answer 38

Buyer does not need to prove the unexpected tax liability is linked with the value of the shares.

Question 39

What’s the tax effect?

Answer 39

Zim Properties v Procter:

Buyer should put ‘Grossing Up’ clause with the relevant indemnity clause.

Question 40

Where does the Zim Properties v Procter does not apply to?

Answer 40

It does not apply to warranties.