Warranties and indemnities are crucial to a successful sale

By Nick Pickup, corporate team solicitor at Forbes.

Negotiating warranties and indemnities is a key aspect of a successful transaction and great care must be taken when preparing the share purchase agreement containing these provisions.

Buyers often request warranties and potentially indemnities from the seller. Put simply, warranties are declarations by the seller that facts relating to the business are true, while indemnities are promises to cover the buyer’s losses if certain issues or events arise that are covered by the indemnity.

Identifying the differences between the two is key as the compensation for each can vary greatly.

Damages for a breach of warranty aim to restore buyers to the position they would have been in if the warranties had been correct; indemnity claims are a more specific calculation on all losses based on a particular event or occurrence.

Indemnities should only be given where absolutely necessary – for example if the company would be devalued as a  result of the liability – and the terms of the indemnity should be drafted by a specialist lawyer.

Providing full disclosure against any warranties which are factually inaccurate will restrict the buyer from bringing a breach of warranty claim post-completion.

There are many other seller limitation provisions that a legal adviser will want to see in a share purchase agreement, such as limitation periods for bringing claims for a breach of warranties and value limits for the claims themselves, all of which will protect the seller.

Failing to negotiate reasonable warranties, indemnities, and seller limitation provisions, can greatly hinder a successful sale, and any issues identified by a buyer after completion may mean the seller paying compensation. Negotiating warranties and indemnities is a highly technical and complex undertaking and expert advice should be taken at the outset.