A more recent version of these Risk Allocation Crib Sheet notes – written by Cambridge And Oxilp And College Of Law students – is available here.
The following is a more accessble plain text extract of the PDF sample above, taken from our Private Acquisitions Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:
Risk Allocation: Warranties, Indemnities & Representations 1) What does buyer want and why?
a. Reassurances about the nature & state of the company/business it is acquiring and some possibility of recompense if the acquisition turns out to be other than expected b. Protections are not implied into a contract and therefore the general law affords very limited protection to a buyer b.i. Share Purchase b.i.1. Principle of caveat emptor applies (Buyer Beware) b.i.2. Buyer will be inheriting indirectly all the liabilities of the target company, whether it knows about them or not b.i.3. In the absence of express provisions, an aggrieved buyer has very little comeback on the seller unless a misrepresentation can be established b.ii. Asset Purchase b.ii.1. Buyer may get the benefit of some limited warranties under SOGA 1979 b.ii.2. Buyer cherry picks the liabilities he inherits b.ii.3. Still will want additional express safeguards in the SPA 2) Warranties a. Contractual statements about what is to be acquired b. Helps elicit information about the business from the seller c. Imposes a legal liability upon the sellers and provides the purchaser with a remedy if statements prove to be incorrect and the value of the company is reduced d. Damages d.i. Put the buyer in the position it would have been in had the contract been properly performed (contractual damages), subject to the duty to mitigate d.i.1. Buyer's loss will be the difference in value of the shares if the warranty had been true & their actual value d.ii. Hadley v Baxendale loss will be recoverable if it is not too remote d.ii.1. Loss which flows naturally from the breach d.ii.2. Loss which was fairly & reasonably in the contemplation of both parties, at the time they entered into the contract, as the probable result of the breach e. Tax e.i. If liability crystallises, an adjustment will be made to the price of the target for capital gains purposes e.i.1. Consideration the seller received on completion will be reduced by the amount paid under the warranty claim f. Who may be unwilling to give warranties f.i. Minor shareholders f.i.1. May not want to be exposed to risk of joint & several liability f.ii. Trustees f.ii.1. Will not want to be exposed to personal liability f.ii.2. Often limit trustees' liability to net value for the time being of the trust capital f.ii.3. On completion, when the capital is distributed to the beneficiaries, have the beneficiaries give the warranties f.iii. Large shareholders with no management in target company f.iii.1. Cannot be expected to give promises in relation to matters about which they know nothing 3) Representations a. Replies to a range of questions affecting the target & its business
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