Buying and Selling a Business



There can be little doubt that the subject of the warranties given under a Share Purchase Agreement occupies a significant part of the negotiations relating to the sale of a company. A purchaser making his or her first acquisition of a private company, might be forgiven for expressing surprise at the length of the Share Purchase Agreement, which, for the most part, is occupied by the warranties and the provisions governing their effect. The question is sometimes asked as to why should it be necessary to deal with the subject at such length. The reason is that the law does not imply any terms in a contract for the sale of shares. Accordingly, in the absence of misrepresentation on the part of the sellers, the purchaser must take the target company as he finds it and cannot rely on his ignorance of any unanticipated liabilities as a legal basis for rescinding the contract or seeking compensation from the seller in respect of any loss suffered by reason of those liabilities. This is compounded by the fact that there is no duty on the seller of a company to make disclosure to an intending purchaser of any information relating to the company, which a purchaser might be expected to want to know. The purchaser's only protection against unforeseen and unanticipated liabilities is contractual protection in the form of warranties and indemnities given under a Share Purchase Agreement and a related taxation Deed of Indemnity. In view of the absence of statutory protection for the purchaser in this area and the prevalence of the maxim "caveat emptor" 22 the law leaves it to the parties to settle in their agreement the respective rights and limitations of the parties concerning the allocation of legal risk. Given that in many cases the bargaining position of the parties is evenly balanced, there has been little demand for statutory intervention in this area and it is left principally to the parties to prescribe by way of contract for their respective rights and obligations in relation to the sale of the company. Agreements under which private companies are purchased are normally therefore the subject of entensive negotiations between the parties and their respective legal advisers, as a result of which the Agreements usually embody an accurate and detailed record of the sale, and the parties' obligations thereunder, with very little scope for ambiguity or uncertainty. Consequently, very few disputes in this area reach the courts.

4.11.2The Purpose of Warranties

The warranties given by the sellers pursuant to a Share Purchase Agreement are regarded as serving a dual function. First, they reverse the "caveat emptor" rule by allocating between the parties the legal risk of the existence of crystallisation liabilities and obligations in the target company. In so far as the warranties cover an area, the sellers assume the risk and the diminution in the target company's value consequent upon the crystallisation of the unanticipated liability or obligation; and, in so far as the warranties do not apply to an area, the legal risk and cost of making good the resulting diminution in the target company's value lies with the purchaser. Accordingly, the warranties will operate so as to retrospectively adjust the purchase price to reflect the purchase price that would have been paid for the company had the purchaser been aware of the liability or obligation at the time of the purchase.

The second function of the warranties is to effectively require the seller to bring to the notice of the purchaser a sufficient amount of material information concerning the target company to enable the purchaser to make an informed evaluation of the company and to decide whether the acquisition represents a commercially sound investment. Many standard warranties fall into this category, such as a warranty that the contracts listed in a schedule to the Agreement represent all material contracts to which the target company is a party. Sellers sometimes make the argument that the purpose of the warranties is restricted to the second function and that once the parties have agreed on the commercial terms of the sale, the disclosure of liabilities and obligations of the target company against the warranties by necessity requires the purchaser to accept the legal risk in relation thereto. Such an argument is misconceived. Unless a particular risk has been disclosed, evaluated and taken into account in the determination of the purchase price, the purchaser is not thereby required to assume the risk. The purchaser is entitled to assume that, other than as set out in the latest audited financial statements, the target company will not be subject to unanticipated liabilities and obligations which would reduce its value or have a detrimental impact on the company or the purchaser. When presented with notice of such unanticipated liabilities and obligations prior to execution of the Share Purchase Agreement, (often through legal due diligence or the Disclosure Letter) the purchaser is justified in reviewing the commercial terms of its acquisition and if, by reason of remoteness or contingency, a purchase price adjustment is regarded as being unwarranted, requiring a specific indemnity in respect thereof.

4.11.3The Distinction between Warranties and Indemnities

A warranty is a statement of fact, which is contained in a contract and treated as a subsidiary term, the breach of which only entitles a purchaser to damages. For the reasons stated in paragraph 4.11.2 most Share Purchase Agreements will contain warranties in relation to the target company, the substantive effect of which will be to create a series of contractually binding promises from the sellers or warrantors concerning various matters relating to the company, breach of which will entitle the purchaser to pursue an action in damages against the sellers/warrantors.

An indemnity is a promise to ensure that another person is protected against the consequences of a specific loss or other liability. In contrast to pursuing an action in damages founded on a breach of warranty, a purchaser faced with a choice between pursuing an indemnity claim or a warranty claim will often pursue the former. There are three principal advantages in pursing an indemnity claim over a warranty claim. First, there is no duty on the person who is indemnified to mitigate his loss. Accordingly, recovery under an indemnity is usually secured in full on a Euro for Euro basis without regard to the principles of remoteness in Hadley v Baxendale 23 , thus enabling the purchaser to recover compensation for its entire loss including related costs and expenses. Secondly, whereas a purchaser may not recover under a warranty claim where he was aware at the time it was given that the warranty was untrue 24 , knowledge of the existence of the relevant liability does not deprive a plaintiff of recovery under an indemnity. Thus, an indemnity can provide a convenient means of securing legal protection in respect of liabilities of the target company of which the purchaser has knowledge. Thirdly, the measure of damages in a breach of contract under a warranty claim is usually determined having regard to the impact which the breach has on the value of the target company. Not all breaches of warranty impact on share value. An indemnity enables recovery to be made whether or not the liability has an impact on the value of the target company.

By reason of the above, in addition to the sellers/warrantors providing a full range of warranties in relation to the target company, it is customary in the acquisition of a private company for indemnities to be given in relation to (a) unanticipated pre-sale taxation liabilities and the claw-back of tax allowances and reliefs which result from precompletion transactions, and (b) any specific liabilities identified in the acquisition process such as in the due diligence or the Disclosure Letter for which the sellers/warrantors' are to have responsibility following completion. The indemnity in relation to taxation liabilities is usually contained in a separate Deed of Indemnity 25 delivered to the purchaser at completion.

4.11.4Damages and Rescission

(a) Damages

The principal remedy available to a purchaser in respect of a breach of any of the warranties contained in a Share Purchase Agreement is compensation by an award of damages against the seller/warrantor. The amount of damages is determined in accordance with established principles of contract law, which provide that the purchaser will be compensated for its loss of bargain. The purpose of damages in a breach of contract case is to place the plaintiff, so far as money can do it, in the same position as if the warranty was correct, i.e. the contract had been duly performed. Thus, if the purchaser purchases a company for €1,000,000 in reliance on warranted financial statements, which incorrectly state that the company is valued at €2,000,000 when in fact, the company's value is €500,000, the award in damages will be €1,500,000. The purchaser will acquire a company having a value of only €500,000, whereas the seller warranted the company as being valued at €1,500,000 more than this. The purchaser is therefore entitled to be put in the position he would have been in had the warranty been correct; the award of €1,500,000, being the difference between the actual value of the company and the value as warranted. By this method the purchaser is compensated for his loss of bargain. Difficulties can arise when the warranty, which has been breached, does not relate to the value of the target company, but nonetheless gives rise to adverse consequences for the target company and the purchaser. As a result, the tortious measure of damages, where the aim is to restore the innocent party to the position he would have been in if the untrue warranty had not been given i.e. as if no contract had been entered into, or an indemnity basis, may be the most appropriate method of effecting full recovery.

An award of damages for breach of warranty will not result in the guilty party being liable to compensate the plaintiff for all consequences of the breach. It is well established that the party in breach should be liable only to the extent that may fairly and reasonably be considered either arising naturally according to the usual course of things from such breach or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach 26 . This can give rise to difficulties in quantifying the extent of the damages, as the parties will be in dispute as to what may fairly and reasonably be considered as arising naturally from the breach of contract. There is a significant body of case law, which is applied in order to measure such remoteness of damage. Similarly, there may be a dispute as to whether there existed special knowledge of the plaintiff's particular requirements. For example if the seller was aware that the purchaser had concluded an agreement to on-sell the company at a higher price the additional loss of profit would become an additional head of damage.

In addition to the principles of remoteness of damage, which may reduce the quantum of an award of damages in a breach of warranty claim, the plaintiff will be subject to a duty to mitigate i.e. to minimise the loss, which results from the breach. There is a considerable body of case law, which defines the obligation of a plaintiff in such circumstances.

In order to ensure that the greatest amount of certainty exists concerning which method can be used to compensate the purchaser in respect of a liability which is covered under the warranties, it would not be uncommon for a purchaser to include in the Share Purchase Agreement a clause that in the event of a breach of warranty claim, the purchaser may elect to be paid an amount in damages equal to (a) the reduction in value of the shares by reason of the breach or (b) the amount of the relevant liability or (c) the amount of the relevant loss including costs and expenses. This approach enables the purchaser to effect full recovery by selecting to be compensated on either a warranty or an indemnity basis.

(b) Repudiatory Breach and Recission

The law categorises contractual obligations as being either "warranties" or "conditions", the former being regarded as being of subsidiary importance to the latter. The determination of whether a contractual obligation is a "condition" or a "warranty" has occupied the courts for the last forty years and a consideration of this subject is beyond the scope of this book 27 . If a contractual obligation constitutes a "condition", breach of the condition will entitle the innocent party to treat the breach as effecting a repudiation of the contract, thus in effect, entitling the innocent party to treat the contract as being discharged or to rescind the contract. The law recognises the right of parties to an agreement to classify the warranties as having the status of "conditions", breach of which would thus entitle the purchaser to effectively rescind the contract by reason of breach of any warranty, irrespective of its importance. This would be unusual in the acquisition of a company. Given the practical, logistical and legal difficulties which would arise if a purchaser were to rescind a Share Purchase Agreement after completion, it would be usual for the Agreement to expressly characterise all of the warranties given under the Agreement as being "warranties" (in the contractual sense) so as to prevent the purchaser from being in a position to rescind the Agreement after completion. The position is nonetheless different if the parties have executed a Share Purchase Agreement subject to the satisfaction of "conditions precedent" or "conditions subsequent" 28 prior to completion. In such a case it would be usual to include a provision to the effect that the warranties are automatically deemed to be repeated at completion and if any of the warranties given upon the execution of the Agreement or at completion prove to be untrue at completion the purchaser may rescind the Agreement at completion, but not thereafter.

4.11.5Substantive Warranty Provisions

The warranties are given substantive legal effect by the inclusion of various clauses in the Share Purchase Agreement which address issues including those referred to below.

(a) An assurance by the sellers/warrantors that each of the warranties is true, complete and accurate in all respects and is not misleading; that the warranties are accepted by the sellers/warrantors as having induced the purchaser to enter into the Share Purchase Agreement and that the purchaser is entering into the Share Purchase Agreement in reliance on the warranties.

(b) The parties' agreement as to the legal basis upon which multiple sellers/warrantors are giving the warranties i.e. on a several and proportionate basis or on a joint and several basis 29 . In the case of the former, the Clause will state the proportionate share, which each of the sellers/warrantors is to accept in respect of liability under the warranties.

(c) An acknowledgment that each of the warranties is separate and independent and that each will continue in force notwithstanding completion.

(d) The parties' agreement that the warranties will continue to have full force and effect irrespective of any investigation or other knowledge of the purchaser and its advisers 30 .

(e) In the case of a conditional contract, a provision whereby the warranties given upon the execution of the Share Purchase Agreement are deemed to have been repeated upon completion, irrespective of any information subsequently acquired by the purchaser in the intervening period. In view of the fact that during the intervening period matters outside of the sellers' control may have occurred which may place the sellers/warrantors in breach of the warranties upon the deemed repetition thereof, the parties may agree that the sellers/warrantors should be entitled to serve a second Disclosure Letter so as to enable the sellers/warrantors to be relieved from any liability in respect of matters disclosed which relate to the intervening period. A purchaser in such circumstances would, not unreasonably, require a right to rescind the Agreement at completion in the event of it being dissatisfied with any information subsequently disclosed in the second Disclosure Letter.

(f) If the parties have agreed a basis upon which the purchaser is to be compensated in the event of a successful claim under the warranties i.e. on a contractual, tortious or indemnity basis, this will be provided for.

(g) A provision whereby the sellers/warrantors waive any right which they may have against the management of the target company in respect of any misrepresentation or omission by them resulting in the sellers or the warrantors being in breach of any of the warranties or indemnities. The purpose of such a provision is to prevent the sellers/warrantors from being able to counter claim against the target company under principles of vicarious liability in the event of the sellers/warrantors being liable in respect of a warranty or indemnity claim.

(h) In the case of a conditional contract, an obligation on the sellers/warrantors to procure that no breach of warranty occurs during the period between execution of the Share Purchase Agreement and completion.

(i) An obligation on the sellers/warrantors to notify the purchaser forthwith in the event of their becoming aware of any breach of warranty or liability under the taxation Deed of Indemnity after completion.

(j) A provision stipulating that any payment by the sellers/warrantors to the purchaser in respect of a claim under the warranties shall be deemed to constitute an adjustment of the purchase price.

(k) A provision giving effect to the Disclosure Letter and providing, for the avoidance of doubt, that matters disclosed in the Disclosure Letter shall not apply in respect of certain warranties such as in relation to title to the shares and a liability under the taxation Deed of Indemnity.

Clause 6 of the specimen Share Purchase Agreement contained in Appendix 1 addresses many of the above issues.

4.11.6The Schedule of Warranties

(a) General Subject Matter

In view of their length, it is customary to set out the warranties in a schedule to the Share Purchase Agreement. The following is a heading list of the general subject matter usually addressed in the warranties: -

  • the accuracy of the information either disclosed to the purchaser or contained in the Disclosure Letter;

  • legal capacity and liabilities of the sellers;

  • constitution of the target company, including share capital, good title to the sale shares and the non-existence of Encumbrances and other adverse rights, directors, subsidiaries, constitutional documents, statutory books;

  • the financial statements of the target company, including audited and management accounts and financial and accounting records;

  • financial matters such as borrowings, liabilities, charges, bank accounts, working capital, banking facilities and grants;

  • business of the company, its liabilities and assets since the date of the latest audited financial statements;

  • ownership and condition of assets of the target company;

  • ownership and other details concerning the intellectual property of the target company;

  • the consequences of the sale relating to third party contracts and other matters;

  • statutory compliance and other matters affecting the target company;

  • insurance;

  • the absence of any existing or threatened litigation;

  • the terms of material or unusual contracts, dependence on suppliers and customers;

  • compliance with competition law and merger control legislation;

  • the absence of insolvency proceedings;

  • the existence of all necessary licences, consents and permits;

  • hardware and software;

  • freehold and leasehold property including planning and environmental matters;

  • employees and other service providers including pension schemes; and

  • Irish and overseas taxation.

The facts and circumstances relating to each sale will be unique. Accordingly, the purchaser and its advisers must ensure that the warranties obtained from the sellers are sufficiently broad in order to encompass the range of activities in which the target company is engaged and the areas of liability which may be of relevance. For example, where the business of the target company is subject to a high degree of statutory intervention, such as in relation to consumer sales and consumer credit, it will be necessary to ensure that the warranties concerning compliance with statutory and regulatory rules and practices are sufficent for the purchaser’s purposes .

Schedule 3 to the specimen Share Purchase Agreement attached in Appendix 1 contains a set of warranties. These are referred to for information purposes only and accordingly should be amended to suit the particular circumstances prevailing in relation to the sale and purchase. Moreover, given the substantial number of legislative references and practice notes referred to therein, the warranties will need to be revised having regard to all changes in law and practice since 1 December 2002.

(b) Certificates of Title to Property / Property Warranties / Title Investigation

There are three principal methods of providing a purchaser with appropriate legal assurance concerning the legal title and planning status of the target company's properties.

The first method is for the solicitors to the target company or, if different, the solicitors to the sellers to produce formal certificates of title relating to the properties on terms agreed with the purchaser's solicitors. This is particularly useful where the solicitors are familiar with the legal title and planning status and acted on behalf of the target company or the sellers in purchasing the properties. If certificates of title are to be provided then less extensive property warranties will be required, due to the fact that the appropriate assurances will be obtained by the purchaser directly from the solicitors. The extent of the property warranties will depend on the form of certificate of title.

The second method is for the purchaser's solicitors to undertake an investigation of title as if it were purchasing the property. In this regard the usual enquiries and requisitions on title would be raised and replied to by the target company's solicitors or the solicitors acting on behalf of the sellers. The title deeds to the properties would also be inspected. If this method were followed then less extensive property warranties would be required.

The third method is for the purchaser to obtain a full set of property warranties, supplemented by limited enquiries and requisitions and inspection of the title deeds.

4.11.7Limiting the Sellers/Warrantors' Liability under the Warranties

The warranties, which, as noted above, are prepared by the purchaser's legal adviser, will be cast in a somewhat absolute form whereby the target company is depicted as being in an ideal or perfect state. The sellers and warrantors will therefore seek to limit their liability in respect of the warranties by three principal methods:-

  • through disclosure by way of a formal Disclosure Letter, which is considered in Chapter 8;

  • by limiting the ability of the purchaser to effect recovery in respect of the warranties by including in the Share Purchase Agreement various substantive and procedural restrictions on the right of recovery pursuant to a sellers/warrantors' protection clause; and

  • by the deletion or amendment of the warranties.

(a) Sellers/Warrantors' Protection Clause

The Share Purchase Agreement will frequently contain a number of limitations on the sellers/warrantors' liability for breach of the warranties. Whether or not the purchaser should include these in the first draft of the Share Purchase Agreement is a matter of choice and negotiation technique. The principal limitations, which may be included in the Share Purchase Agreement, are considered below.

(i) Time Limitations

In the absence of agreement to the contrary the liability of the warrantors under the warranties and indemnities given under a Share Purchase Agreement will be statute barred after a period of six years from the date when the warranties and indemnities were given 31 . If the Share Purchase Agreement were executed under seal the period would be twelve years 32 . Such periods are regarded as imposing unacceptable periods of contingent liability on warrantors. The parties will customarily agree to a shorter period whereby all warranty and indemnity claims, other than those based on fraud or wilful concealment of the warrantors, must be made within a lesser period than that prescribed by the Statute of Limitations. In practice, it is usual to distinguish between claims relating to taxation and other claims. In relation to the former, it is generally accepted that the purchaser should be precluded from making a claim under the taxation warranties after a period of six years from the date of the Share Purchase Agreement. In relation to the latter, a period between two years and three years from the date of the Share Purchase Agreement would be common. This would enable two audits to be undertaken on the target company following completion, which should generally be sufficient to alert the purchasers to the existence of any relevant liabilities.

It is important to emphasise that each acquisition must be determined by reference to its own particular facts and circumstances and it may be necessary, particularly where environmental liabilities are concerned, to provide for a longer period of contingent liability and in this respect a period of 10 years would not be uncommon.

(ii) Maximum Amount of Liability

Given that the sellers/warrantors might be exposed to claims for an amount greater than the purchase price received by them on the sale of the target company, it is customary to impose a limitation on the amount of their total liability under all warranty and indemnity claims. Whilst there are valid arguments against the purchaser agreeing to such a limitation, frequently the parties will agree that the maximum liability should be equivalent to the total purchase consideration paid, including the amount of any indebtedness of the target company discharged by the purchaser on foot of the Share Purchase Agreement.

(iii) De Minimis Claims

In order to avoid the time and costs associated with defending trivial claims it would not be uncommon for the Share Purchase Agreement to provide for a minimum financial threshold which claims are required to exceed before they can be made by the purchaser. Although sellers/warrantors will frequently seek to provide that where a claim exceeds the de minimis threshold they should only be liable for the amount which exceeds the threshold, this is not generally accepted by a purchaser who, in such case, will require the sellers/warrantors to be liable for the entire amount of the claim(s) once the threshold is reached. The amount of the de minimis is a matter for negotiation, but may range between 0.5% and 5% of the consideration.

(iv) Several Basis of Warrantors' Liability

Where there is a multiplicity of warrantors, with each receiving a proportionate part of the consideration, the warrantors may require the Share Purchase Agreement to apportion liability amongst them on a several and proportionate basis so that each will be liable only in respect of a limited percentage of the aggregate liability of the warrantors, usually expressed as being a percentage of the consideration received by them. It is sometimes considered that to achieve a several basis of liability it is sufficient to simply provide that the warrantors' liability shall be several. As a matter of law, the use of such term alone means that each promisor will be liable solely in relation to his own performance of the obligation. In the context of warranties given under a Share Purchase Agreement, this is unsatisfactory since it may be difficult to ascertain the degree to which each warrantor may or may not have responsibility for a breach of warranty, and the use of the term several alone will result in each warrantor being liable for the entire loss arising as a result of the breach. Accordingly, where the warrantors’ liability is agreed to be on a several basis, the percentage portion or maximum amount of the liability, which each warrantor is to assume, should also be expressed in the Agreement. The argument in favour of liability on a several basis is often made where the sellers and warrantors have had different degrees of responsibility for or involvement in the management of the target company. For example, a passive shareholder who had no involvement in the management of the company may consider that it should not be liable for the entire amount of a warranty claim, where it has no knowledge or responsibility relating to the subject matter of the warranty, and in giving the warranty in the first place it relied on assurances from management. From a purchaser's perspective, accepting that the warrantors and sellers are to be liable only on a several basis places on the purchaser the risk of one or more of the warrantors or sellers being unable to discharge its proportionate share of the total liability. Not infrequently purchasers will consider such a risk should rest with the persons providing the warranties and the sellers. The purchaser will normally resist agreeing that the sellers/warrantors' liability be given on a several basis and will seek to impose joint and several liability so that each will be liable for the whole amount of a claim, thereby leaving the warrantor or seller against whom the judgement was obtained the responsibility for seeking reimbursement from the other warrantors and sellers under the Civil Liability Act, 1961.

(v) Knowledge and Awareness Qualification

Generally, the warrantors' state of knowledge and awareness in relation to the accuracy of the warranties ought to be irrelevant to the determination of their liability thereunder. However, an accepted limitation on the liability of the warrantors is to qualify the warranties to the effect that they are given to the best of the warrantors' "knowledge, information and belief" or, "in so far as the warrantors are aware". Whilst it would be highly unusual to qualify all of the warranties in this manner, a purchaser might concede that one or two of the more obscure warranties may be so qualified. Whether such a concession should be made is a matter for negotiation and, from a purchaser's perspective, it is not a recommended method of limiting the warrantors' liability, since it passes the risk of the existence of unknown liabilities to the purchaser. Where a purchaser accepts such a qualification it should be made subject to an overriding qualification or warranty that the warrantors have made all due and appropriate enquiry into the subject matter of the warranty, including the taking of professional advice 33 .

(vi) Disclosure Letter

It is to be expected that the warrantors will limit their liability in respect of matters, which are fully and fairly disclosed in a formal Disclosure Letter setting out various factual matters by way of qualification to the warranties. 34

(vii) Provision or Reserve in Audited Financial Statements

It would not be uncommon for the Share Purchase Agreement to provide that the warrantors will not be liable under the warranties for liabilities in respect of which an express provision or reserve has been made in the target company's latest audited financial statements, provided that such financial statements are warranted under the warranties.

(viii) Rights Concerning Third Parties

The extent to which a Share Purchase Agreement will limit the warrantors' liability where the loss, which gave rise to liability under the warranties, is recoverable from a third party is a matter, which can give rise to considerable debate in the negotiations. Where the purchaser is prepared to make a concession in relation to this issue, and subject to obtaining security, imposing limitations on the extent of the right, and the sellers/warrantors' agreement that the concession would be without prejudice to the purchaser's rights to proceed under the warranties, the purchaser might agree to permit the warrantors to have some degree of control over any decision by the target company to proceed against the third party. However, effecting recovery from a third party is time consuming, may be detrimental to the target company or the purchaser's relationships with third parties and may, in the case of insurers, give rise to cost implications in relation to securing future insurance cover. Accordingly some purchasers may be reluctant to make any concession in relation to this issue.

Where the warrantors' liability under the warranties arises due to a claim made against the target company by a third party, the purchaser may agree that the warrantors are to have some degree of control in order to ensure that unmeritorious claims made against the target company are contested by the target company, that the extent of the target company's liability in respect of the claim is kept to a minimum and that they will have some degree of input into any settlement of the claim.

(ix) Complete Agreement Clause

The warrantors will often seek to include a provision within a Share Purchase Agreement to the effect that the Agreement constitutes the whole agreement between the parties together with an acknowledgement by the purchaser that it has not been induced to enter into the Agreement by any other warranty or representation other than those set out in the Share Purchase Agreement. The purpose here would be to prevent the purchaser from subsequently making a claim against the sellers or the warrantors based on a pre-contract oral or written misrepresentations or some other assurance contained in a collateral or external document. Cases such as the English case of Thomas Witter Limited v T. B. P. Industries 35 demonstrate that the courts will only uphold such an exclusion clause to avoid liability in misrepresentation if, on its construction, the clause clearly and unambiguously achieves this effect.

Some of the above limitations are addressed in Clause 7 of the specimen Share Purchase Agreement contained in Appendix 1.

(b) Deletion and Modification of the Warranties

The sellers/warrantors may seek to delete a warranty on the grounds of its irrelevance to the scope of the activities of the company. As a general rule the purchaser should avoid the deletion of warranties by reason of the sellers or or warrantors’ assertion of their irrelevance. The purchaser, which may have no independent means of verifying the sellers/warrantors' assertion as to a warranty's irrelevance, and, having regard to the risks involved, may quite justifiably be reluctant to permit any deletion of the warranty. Exceptionally however a purchaser who is in a position to verify the irrelevance of a warranty or to take a commercial view in relation to it, may, for commercial purposes, concede the issue in exchange for obtaining some assurance or other favourable term in the negotiation process.

The sellers/warrantors may also seek to modify the effect of the warranties so as to (a) limit the range of their application by making appropriate drafting changes, (b) introduce limitations by reference to the state of the sellers/warrantors' knowledge or awareness, and (c) introduce qualifications based on "materiality". Whilst some of the modifications may be justifiable, many may be properly regarded by the purchaser as introducing a second de minimis threshold below which warranty claims cannot be made. As a general approach, the purchaser should resist the introduction of such qualifications on the basis that the de minimis limitations will have been settled in the sellers/warrantors' protection clause.

Although there can be no substitute for the sellers/warrantors and their advisers reviewing the warranties line by line, and amending them where necessary, it is frequently not feasible to qualify each and every warranty so that collectively they precisely reflect the state of affairs of the target company at the time of the sale. The sellers/warrantors will therefore address many of the contradictions between the warranties and the facts and circumstances relating to the target company by disclosure in the Disclosure Letter 36 .

4.11.8Purchaser's Warranties

It would be unusual to require the purchaser to provide any warranties other than, perhaps, in relation to its capacity to enter into the Share Purchase Agreement. Where however the consideration for the target company is to be satisfied by the issue of shares in the purchaser, the seller should seek appropriate warranties from the purchaser concerning the legal validity of the allotment of the shares.