#10216 - Representations V Warranties

Types of Disclosure (Prep Task + Workshop Task)

Standard of Disclosure/adequate disclosure?

1. Levison v Farin = There was no disclosure letter and the clause was given “Save as Disclosed”. A clause in this form is primarily designed and intended to require a party who wishes by disclosure to avoid a breach of warranty claim to give specific notice for the purpose of the agreement. Protection by disclosure will not normally be achieved by merely making known the means of knowledge which may or enable the other party to work out certain facts and conclusions. Therefore, disclosure needs to be in a formal form either specific or general disclosure; formal disclosure limits liability if it does not leave the buyer to work it out for themselves.

2. Infiniteland Ltd v Artisan Contracting Ltd = the standard of disclosure needs to be agreed on by the parties in the SPA and therefore how sufficient the disclosure is will depend on what was agreed on the SPA (e.g. full, clear and accurate). The seller will want a low standard of disclosure whereas the buyer will want a higher standard to make sure it gets as much info as it can.

Buyer’s Knowledge?

1. Infiniteland Ltd v Artisan Contracting Ltd = There is a difference between actual and imputed knowledge

2. Eurocopy v Teesdale = The actual knowledge of the buyer does not necessarily effectively enable the buyer to bring a claim against the seller for information that is later discovered. Eurocopy puts a question mark on the actual knowledge of the buyer to bring a claim for breach of warranty.

Standard of disclosure:

Minimum (seller friendly) “save as disclosed” (levison)
Middle “Fully, clearly and accurately” (Infiniteland)
Maximum (Buyer friendly)
“Fully, clearly and accurately disclosed, (with significant details to identify the nature & scope of the matter disclosed)” (New Hearts)

Breach of warranty: Overview

identify the relevant warranty
is there a breach of warranty on the face of it?
Is there an effective general disclosure –does it meet the necessary standard?
Is there an effective specific disclosure – does it meet the necessary standard?
Does the buyer’s knowledge have any effect?
Is the seller’s liability limited in the contract?

Jurisdictional variations

How does the allocation of risk differ in civil code jurisdictions?

In English Law the principle of Caveat Emptor reigns over the relationship of risk between the parties. In Civil Code Jurisdictions under the principle of Good Faith the parties ought to disclose to each other relevant information which may affect the contract. There is also a higher level of statutory guarantees and warranties that will be implied in the contracts. Important to contact local counsel to determine what the domestic rules are & how they affect the transaction.

How does this affect the due diligence process?

As a result of the principle of Good Faith and the higher number of statutory protection in civil law jurisdictions the DD process will be shorter.

How does this affect the drafting of the warranties?

As a result of the principle of Good Faith and the higher number of statutory protection in civil law jurisdictions the drafting of the SPA will be shorter.

Representations v Warranties

	Warranty P.83	Representation P.85	Indemnity P.88
Meaning	Awarrantyis a contractual statement of fact. If it is not true the receiving party has a claim for breach of contract. Purpose: 1. Protection for the buyer. 2. Use to obtain more information from seller through disclosure.	Arepresentationis a statement of fact, which is relied upon by the receiving party and induces him to enter into a contract. It is normally pre-contractual and not a contract term but may be repeated in the contract.	An Indemnity is a promise to reimburse the buyer in respect of a designated type of liability which may arise in the future. Seller will refuse to give indemnities.
Breach	1.ContractualDamages (Hadley v Baxandale) It is sometimes hard to show loss but allows loss of bargain (leads to higher damages for good bargains). B must establish its loss under normal contractual principles. The remedy for breach of contract is damages which aim to put the receiving party into the position that he would have been had the contract been performed correctly. 2.If the breach is fundamental to the contract this may be a repudiatory breach and the receiving party may have the right to terminate the contract, with damages assessed at the point of termination. However, unlike with a representation, the contract is not undone as though it never existed.	1. Equitable Damages(at court’s discretion) 2. Rescission Where a false representation has been made and the receiving party relies on it the receiving party may have a claim for misrepresentation. The contract may then be rescinded. This means that the receiving party may set the contract aside and be awarded damages to put him back in the position he was in before the contract, as though it had never existed. A misrepresentation is a false statement/representation made one party to the contract which induces the other to enter into the contract.	Reimbursement for 1. Damages 2. Rescission There is no duty to mitigate loss (the duty may, however, be incorporated into the contract) On a share sale, there is no need to assess any reduction in the value of the shares; the recipient of the indemnity simple receives an amount equal to the actual liability e.g. if target Co. has an outstanding debt owed to it, the Buyer could seek an indemnity against the possibility of the debt becoming bad.
What protections are implied in acquisitions	None, the buyer buysCabeat Emptor, but Possibly some protection under the SGA onASSET PURCHASE
¿Who gives the Warranties Representations and Indemnities? P.90	The Seller. But if multiple sellers, some may try to limit or exclude their liability. The B will insist that theliability be Joint and several and includes all sellers (which will be subject to s.1 of Civil Liability (Contribution) Act 1978) P.100Seller will seek to limitits liability for Claims by requesting Maximum Limits (maximum liability for S and below PP regarding Warranties and Indemnities) Minimum Limits (B prevented from making a claim against S unless the aggregate of all claims exceeds an agreed threshold 0.5 to 1% of PP. S will want “De Minimis”) Time Limits Insurance Cover Recovery from 3^rd Parties Assets understated in accounts (S wants to limit its liability if sale was for a reduced PP) S will want to conduct claims by 3^rd P’s against him after having sold the Co. P.102Seller will seek to limitits liability through Disclosure By disclosure letter or Schedule in SPA P.108Seller will seek to limitits liability through Insurance In proceedings under s.1 CLA 1978 the court determines the amount of the contribution recoverable form the other sellers on the basis of what it considers just and equitable having regard to their responsibility for the particular damage. The S’s may agree the how the liability will be borne between them in a “Deed of Contribution” as “between warrantors” Who may be unwilling to give warranties? Small shareholders Trustees Mid-size Shareholders without managing powers in the Co. The Buyer will want to avoid the seller’s responsibility for breach of warranty effectively being shifted back on the directors of the Target Co. In an early resale of the Target Co by the Buyer, the Buyer will want to be able to assign the warranties and indemnities. The seller will resist this.
Buyer’s Security for breach P.92	Although Warranties, Representations and Indemnities are ways to protect the buyer in relation to contingent liabilities of the...

#10216 - Representations V Warranties - Mergers and Acquisitions (Private Acquisitions)

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