An introduction to warranties

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In the warranty section of a share purchase agreement the seller gives certain warranties regarding the target company and its business. Warranties are e.g. given in respect of financial statements, taxes, commercial contracts, employees and compliance. Some warranties states a positive fact such as “the company owns the patents set forth in Schedule 1” whereas others states a negative fact such as ”the company is not involved in any disputes” or ”none of the material customer contracts contain any change of control clauses”. Another common issue when drafting a warranty clause is if the warranty shall relate to the present situation only or also to the past, e.g. ”the company is not and has not during the last three years been involved in any disputes”.

In some cases the seller knows that a given warranty is true, e.g. he knows that the company holds the required permits for the two petrol stations it operates. But in other cases the seller cannot be sure or is of the opinion that he cannot be sure if the warranty given is true or not. For example, if the Target operates 100 petrol stations, he may claim that he cannot be sure if the target company at all times has the required permit for each station. But if one of the stations don’t have a permit and this results in costs, either the seller or the buyer needs to pick up the cost. If the seller give the warranty, he will pick up the cost, and if he does not give it, the buyer will pick up the cost. This is a question of risk allocation. Sometimes the seller may need to give a warranty which he does not know if it is true or not.

Another way to address the situation where the seller claims that he does not know for sure if the warranty is true or not is to qualify the warranty by using the concept of “Seller’s Knowledge”. If a warranty is qualified by Sellers Knowledge, it is only if the circumstances giving rise to a warranty breach were known to the seller at the time the warranty was given, that the seller is liable for the breach. Another way to express it is to say “as far as the seller is aware, the company is not involved in any disputes”.

The warranties are normally given as of the day the seller and the buyer enters into the share purchase agreement (Signing Date). If closing of the deal takes place at a later date than the signing, there is also a question if the warranties shall be made as of the Signing Date only or also as of the date of the closing. In the latter case, it is reasonable that the seller on the closing date updates the disclosures made against the warranties.

For more information, please contact Oskar Belani.

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