Unit 4 - Risk Allocation Flashcards
Why would the buyer want some protection?
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.
How can the buyer protect themselves?
Warranties and Indemnities will be drafted in the SPA.
How would the buyer be protected in a share acquisition?
Common law nor the statute will protect the buyer, instead, the buyer will be protected through implied terms of the contract
How would the buyer be protected in an asset acquisition?
Buyer’s responsibilities is not assumed. May obtain limited warranties under SGA 1979 for transferred assets.
What are the 2 bases which the agreement of a sale (asset or share) can be attract benefits for the buyer?
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.
What’s a warranty?
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.
What’s the 2 main purpose of warranties?
Have an express contractual protection for the buyer, reduce Caveat Emptor
Get information from the seller during negotiations.
What happens if the warranty is untrue?
Buyer does not have a right to rescind the warranty, but they will have the right to sue for damages.
Can the buyer obtain damages for the breach of the seller’s obligations on warranties and indemnities?
Yes
What damages can the buyer get?
Damages under breach of warranty. that is calculated under Hadley v Baxendale where the loss recoverable is not too remote.
What’s the purpose of the damages?
To put the buyer back into the position when they would have been if the transaction occurred properly.
How is damages calculated in a Share Acquisition?
difference between the value of the shares if the warranty had been true, and their actual value.
How would the parties attempt to reduce uncertainty in qualifying losses?
Specifying in the agreement how the loss will be calculated if an event where the warranties were breached.
What are the tax consequences?
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.
What other claims can the buyer rely on besides damages under the breach of contract?
Breach of misrepresentation –> they can get remedy under this.
What’s misrepresentation?
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.
When or How can misrep be formed?
Pre-contractual and contractual.
What’s the benefits for the buyer to be able to rely on damages under misrepresentations?
Rescission - the buyer gets what they lost
Damages - puts the buyer back into the situation if the acquisition occurs correctly.
What are the 3 different types of remedies for misrep?
Fraudulent Misrep
Negligent Misrep
Innocent Misrep
What is Fraudulent Misrep and What remedies can you the buyer get under it?
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.
What remedies can you the buyer get under Negligent Misrep?
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.
What remedies can you the buyer get under Innocent Misrep?
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.
How can the buyer obtain damages in lieu of possession under the innocent misrep?
The buyer’s right to rescind has been lost - Government of Zanibar v British Aerospace
When will rescission will not be available?
- If it’s impossible to restore the parties back to their pre-contract position
- 3rd parties rights have been obtained
- If the buyer (the innocent party knew about the misrep)
- There’s delay in seeking relief and it was unreasonable.
What’s an entire agreement clause?
This forms the agreement or what the agreement is all about.
It considers the situation of misrep.
What’s the purpose of an entire agreement clause?
Exclude liability for misrep on anything that Led the parties to get into agreement.
To what extent would the seller not be protected if there’s an entire agreement clause?
If there’s a claim against misrepresentation as mentioned in the case for Thomas Witter v TBP.
What’s a non-reliance provision?
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.
What’s the right of rescission?
Misrep are not caused unnecessary by an entire agreement clause.
What does s.1 MA 1967 state?
Misrep has become a term of the CRT
does a breach of warranty carry no right of rescission?
Yes, the remedy would be damages instead.
If there’s a gap between the exchange and completion, what should the buyer do?
Buyer should put a clause allowing them to withdraw from the contract if they become aware that the seller has breached the warranty.
If there’s a breach of warranty, should the seller do anything?
Yes, inform the buyer if they find something out that’s been inconsistent with the warranty.
How you do form the measure of damages?
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.
What’s the purpose of an indemnity?
It’s to make the seller promise to reimburse the buyer if they breached or any liability.
In terms of Tax indemnities, what do warranties normally cover?
They deal with target’s compliance with tax and VAT requirements.
In terms of Tax indemnities, what do indemnities normally cover?
They cover specific tax charges that’s not provided in the account.
Why is it advantageous for the buyer to deal with taxes
Buyer does not need to prove the unexpected tax liability is linked with the value of the shares.
What’s the tax effect?
Zim Properties v Procter:
Buyer should put ‘Grossing Up’ clause with the relevant indemnity clause.
Where does the Zim Properties v Procter does not apply to?
It does not apply to warranties.
