56 mergers & acquisitions
Management buyouts – warranty issues addressed
On a typical management buyout (MBO) warranties are included in both a sale and purchase agreement (SPA) and an investment agreement (IA). They serve different purposes, writes solicitor Oliver Kelly of Lamport Bassitt
Warranties in an SPA are a price adjustment mechanism and/or a means of allocating risk for matters which come to light following completion.
In an IA, warranties usually relate to the business prospects of target and the business plan.
Warranties in the SPA
Warranties in an SPA seek to protect the buyer from undisclosed liabilities in target by seeking contractual assurance from the seller as to the state of target.
A key purpose of warranties in an SPA is to make the seller bring to the attention of the buyer points which are likely to concern the buyer. This is achieved by disclosing against the warranties. Disclosure also enables the parties to negotiate before
completion the impact such issues may have.
To the extent that warranties are disclosed against, the buyer takes the risk. To the extent that warranties are given and not disclosed against, the risk remains with the seller. Thus, the buyer receives some comfort that if a warranty is inaccurate or not disclosed against, he can bring a warranty claim against the seller for damages.
Warranties in the IA
Management are generally asked to warrant key information on which the investor is basing its investment, primarily the business plan.
Additionally, investors often require management to complete, and warrant, a management questionnaire.
Warranties in the SPA generally relate to historic information whereas in the IA they are generally looking towards future matters such as the business plan and forecasts.
Warranties in the IA also contain assurances from management that they have no knowledge of relevant, material, and undisclosed information that could impact on those
Buying and selling a business –
contract clauses to consider The decision to buy or sell a business can be a daunting one. Once you’ve decided to take the plunge the last thing you want are unexpected legal issues, writes Chris Felton, partner, dispute resolution team, Gardner Leader LLP
A crucial aspect of the sale process revolves around the giving of warranties by a seller to a buyer. These are statements of fact in relation to many aspects of the business, covering areas like property, employees, information technology, IP and other general commercial matters. Warranties are amongst the most contentious areas when it comes to drafting sale agreements. Unfortunately, they can also be the most difficult clauses to understand.
A buyer will want warranties to be wide-ranging, to cover as many eventualities as possible which might arise after completion. The seller will want these to be more restricted. They will also seek to cap their financial liability for any breaches of warranty which might
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arise later. Irrespective of whether the purchaser or seller ‘wins’ when it comes to what warranties are to be given, each individual warranty must be carefully and precisely drafted. The courts deal with disgruntled purchasers claiming various breaches of warranty on a daily basis.
The case of Sycamore Bidco Limited v Breslin and Dawson [2012] serves as a reminder of the importance of securely drafted warranty clauses. This involved a claim for breach of warranties relating to inaccurate company accounts. As well as seeking to claim for the breach of these warranties (a claim limited to £6 miilion under the sale agreement) Sycamore argued that the inaccurate warranties were also misrepresentations about the
business, upon which they relied when deciding to purchase (giving rise to a claim worth £16.75m). Whilst Sycamore were unsuccessful in proving this higher liability, the litigation was an unwanted and avoidable headache for the seller.
Relevant to warranties is the process of due diligence; the disclosure of information relating to the business by a seller. Whilst this is undertaken during the sale process, it is sensible for businesses in general to also consider this process periodically. A forensic look at your business will enable you to tidy up any overlooked issues (such as accounting and company records, IP and copyright matters over brochures, websites etc). The more confident you are as to the state of your business, the more certain you can be in the warranties you may be required to give, and inevitably the less likely you are to experience problems post- completion.
All disputes will always be case- THE BUSINESS MAGAZINE – THAMES VALLEY – SEPTEMBER 2013
assumptions or projections. These are usually restricted in scope to the management’s reasonable opinion.
Limitations
A seller will usually seek to cap liability at the amount of the consideration and may have exposure under the tax covenant and for environmental matters for up to seven years.
Typically, management try to cap their financial exposure for breach of IA warranties at one to three times salary. Their limitation period is normally in the range of one to two years.
A manager may also be a seller and, if so, is likely to have liabilities under both the SPA and the IA, albeit of very different natures.
As in all commercial transactions much depends on the strength of the negotiating positions and the outcome of negotiation.
Details: Oliver Kelly 023-8083-1902
oliver.kelly@
lamportbassitt.co.uk
specific. The importance of good legal and accountancy advice throughout the process cannot be overstated and it is vital that all warranties are accurately worded and confidently given following a thorough due diligence process. Failure to do so and it may be left for the courts to resolve.
Details: Chris Felton 01635-508080
www.gardner-leader.co.uk
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