You may be aware of the term \u201ccaveat emptor\u201d, which commonly translates to \u201cbuyer beware\u201d. When buying shares or assets in a commercial transaction, English law operates on the premise that the buyer must ask the questions, obtain the answers, and negotiate terms favourable to their position. While the seller of the target company cannot lie, mislead, or refuse to answer questions the buyer puts to them, the buyer rarely has recourse if a deficiency in the business later emerges that was not accounted for in the negotiation process. However, buyers can better protect themselves by securing warranties and indemnities in the purchase agreement. This article will explain the purpose of negotiating warranties and indemnities in purchase agreements.<\/p>\n\n\n\n
Warranties and indemnities generally exist to mitigate the buyer\u2019s liability in an acquisition<\/a>. You can think of warranties as legally enforceable promises. That is to say, a warranty is where the seller promises the buyer that a particular aspect of the business is as the seller says it is.<\/p>\n\n\n\n Say a sellers know that some of the company\u2019s employees intend to claim against the company. Despite this, the seller warrants in your purchase agreement that the business is not a party to any ongoing legal dispute. If the employees pursue their claim in court, you could sue the sellers for breach of warranty where you have suffered a loss due to the breach.<\/p>\n<\/div>\n\n\n\n While an indemnity<\/a> is also a legally enforceable promise, it is a promise that the seller will reimburse the buyer if something adverse happens. A seller may want to instil confidence in the buyer by inserting an indemnity clause in the purchase agreement. For example, they could indemnify the buyer against any loss resulting from a dispute.<\/p>\n\n\n\n Indemnities are helpful where warranties may not provide any relief. For example, the seller commonly warrants that the business\u2019 accounts are in good shape. If it later turns out that they are a mess, the buyer may have to spend money to organise the accounts. Had this been an indemnity, the buyer could indemnify themselves for the cost of hiring an accountant to sort out the books.<\/p>\n<\/div>\n\n\n\n Most investors acquire businesses because they want to benefit from the business\u2019 assets and ultimately extract a profit from the company. However, when acquiring shares in a business, the buyer also inherits all the business\u2019 liabilities and obligations, such as any contractual obligations and debt liabilities. <\/p>\n\n\n\n Because the default position under the law is that the buyer inherits all the liabilities not expressly excluded, you will want to know the full extent of a business’s liabilities before buying a business. This way, you can either exclude the liabilities or revalue the business accordingly. <\/p>\n\n\n\n Many companies can have a substantial number of liabilities. Some common ones include:<\/p>\n \n <\/p>\n<\/div>\n\n\n\n Any potential legal dispute could create new liabilities (like court judgments). Hence, before you purchase a company, you should inspect its records as thoroughly as possible to ensure you know exactly what you\u2019re getting into. This is the purpose of the due diligence process<\/a>. <\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nWhat is the Purpose of Warranties and Indemnities? <\/h2>\n\n\n\n
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