In a Share Purchase Agreement, warranties (collectively referred to as “statements”) and indemnification for warranty breaches (a warranty is broken if any statement is false or inaccurate) cover representations and warranties. In Indian law, a representation or warranty should be referred to as a statement; however, representations and warranties are frequently utilized in legal systems governed by common law.
The seller’s statements aim to provide information about the target company and its components at a specific time, according to the categories and timing of the representations and warranties.
In this regard, they are divided into two groups: (business, operational, or non-core statements (such as information regarding material contracts, employees, taxes, or accounting) and fundamental or core statements (such as those pertaining to share ownership or whether there are encumbrances on shares and legal capacity).
In addition, as far as is pertinent, the statements of the seller describe the (potential) guarantor of its obligations. Accordingly, the purchaser is sensibly trying to get a precise image of the objective organization regarding its lawful position (i.e., claims, encumbrances), funds, resources (i.e., protected innovation, land, and so on.),things like employment, group structure, and business operations.
The primary goals of the above “screening” method are prevention and treatment.
The buyer should be informed of the seller’s detailed analysis of the company’s assets and financial situation to prevent this from happening. Consequently, it encourages diligent fact-finding and helps the seller manage risk. As a result, the buyer can make an educated decision regarding whether to accept the risk without reservation, demand an adjustment, or even withdraw from the transaction.
Compensation for the buyer is part of remediation if the relevant sale document contains a statement that is inaccurate, incomplete, or misleading in some way.
- Depending on a seller’s business activity, the content of statements in a given transaction can vary greatly. For instance, statements made by a telecommuting company may differ from those made by a pharmaceutical company. Examples of statements that are not exhaustive include:
- It is critical to confirm that the shares were legitimately issued, that they represent the entire share capital, that the seller is the legal and beneficial owner, that the seller has the authority to transfer the shares, and that there are no encumbrances on the shares.
- obligations and powers of the seller;
- The general structure, constitution, and organization of the company;
- compliance with legal requirements, such as approvals from regulators;
- The company’s possible significant transactions since the accounts were created;
- the company’s financial and accounting records, including whether or not they are complete, consistent, and in accordance with all applicable regulations and laws;
- the company’s contractual obligations, like major supply agreements;
- property that the company occupies or owns;
- a list of the employees of the business, along with their salaries and number;
- Establishing pension plans, making timely contributions, and reporting complaints, mediations, and claims (if any) are all included.
- the cost of the company’s insurance policies’ premiums;
- compliance with data protection regulations and the company’s non-infringement of IT and intellectual property rights;
- Whether or not there have been any bankruptcy or liquidation proceedings;
The seller may go into more or less detail on each point, depending on the buyer’s expectations. By dividing the statement into “core” and “operational” statements, this can be accomplished.
The majority of statements are provided upon signing the agreement and repeated at closing via a bring-down clause (if a time lapse exists between signing and closing), in accordance with applicable market practice. Special cases for this standard are articulations in regard of records, which are given as of the “accounts date” (characterized in the deal report).