Sellers beware – most warranty disputes in mergers and acquisitions include claims for breach of accounts or information warranties.
Sellers sometimes fall into the trap of giving wide or inappropriate accounts or information warranties, even after carefully negotiating other more specific warranties. This could expose them to warranty claims despite having undertaken a time-consuming (and sometimes expensive) negotiation and disclosure process.
In this article, we discuss these two common types of warranties in Sale and Purchase Agreements.
Warranties regarding the accuracy of the accounts of a business being sold are obviously critical to underpin the buyer’s financial due diligence and understanding of the business.
Generally, “true and fair view” warranties should only be given in respect of audited accounts because unaudited accounts may not be prepared to this standard.
For unaudited accounts, consider using the following warranty instead:
“The Accounts have been prepared with due care and attention and do not materially misstate the financial position of each of the Group Companies as at the Accounts Date or their performance for the financial period ended on the Accounts Date.”
Sellers should resist giving management accounts warranties unless the buyer places material reliance on them. The latter is more likely to be the case if several months have passed since the last full year balance sheet date of the target business or group.
Management accounts are often prepared for different purposes or to different standards. Sellers should tailor or soften the wording of management account warranties to reflect this. For example:
“The Management Accounts have been prepared by the Sellers with due care and attention and, so far as the Sellers are aware, show with reasonable accuracy the state of affairs, profit or loss of each of the Group Companies as at and for the period in respect of which they have been prepared and the Buyer acknowledges that they are not audited or prepared on a statutory basis.”
Try to avoid giving warranties about balance sheet items to the extent that these items will be accounted for in post-completion price adjustments. Doing so could expose sellers unnecessarily and is especially unfortunate if care has been taken to agree on detailed accounting principles to determine the post-completion price adjustments. Inventory and debtor warranties, in particular, are often the subject of disputes. Obviously, sellers should also ensure, with express clauses, that they are not liable for warranty claims to the extent that the subject matter is accounted for in the initial purchase price or subsequent adjustments.
Sellers should try to avoid giving warranties to the effect that they have disclosed all information that the buyer would require to determine whether to acquire the business or companies. This is open-ended and subjective to the buyer.
Sellers should be able to warrant that, in all material respects, their disclosures are accurate and they are not aware that any disclosed information is misleading in any material respect or any material information has been excluded from the disclosure materials.
If sellers are in doubt about whether matters have been fairly disclosed, then they should include specific matters in a disclosure letter or schedule that supplements the disclosure materials. Disclosure letters provide a good process and discipline to ensure that all relevant disclosures have been made by the sellers to the buyer to minimise liabilities.
With firm negotiation and a diligent process, sellers will be protected from unexpected claims and buyers should be comfortable to proceed with transactions.
Author: Brendan Wykes
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.