When disposing of shares in the share capital of a private company, the Sale of Shares Agreement (the “Agreement”) will often contain commercial warranties provided by the seller to the purchaser. Warranties are contractual statements of fact or promises about the condition of the company, its business and / or shares.
The wo main reasons for the insertion of warranties from a purchaser’s point of view are:
- to mitigate risk for the purchaser when acquiring the shares of a company; and
- to elicit information about the company’s business and any encumbrances which may exist over the issued share capital of the company or its assets.
Referring to point one above, a company will be liable for its liabilities should any occur, whether it be claims for arrear taxes, claims for damages, etc. (which includes contingent liabilities). Should such a claim be brought against the company, it will have adverse consequences on the current shareholders of the company and not on the shareholders who have sold their shares (“Sellers”). However, should a warranty have been provided regarding the aforementioned, which proves to be untrue, the company will be able to bring a claim for the breach of warranty and claim back from the Sellers part, or potentially more than the overall purchaser consideration paid for the shares. As such, the purchaser is in effect indemnified against any negative inferences resulting from the breach of warranty by the Seller/s.
Referring to point two above, should the Sellers not be willing to provide a warranty on a specific aspect of the company, its business or shares it should be concerning from a purchaser’s perspective as same may be indicative of a problem with that aspect of the company, its business or shares.
Therefore, warranties are a very important aspect of a sale of shares transaction (and also applicable to a sale of business) which provides protection to the purchaser specifically. Therefore, it is of the utmost importance for the Sellers to be acutely aware and certain of each and every warranty provided during the course of such sale.