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When it comes to selling a business, it is common for warranties to be given by the seller in relation to the business or assets that are being sold. Warranties are contractual statements which often relate to the assets being sold. For example, warranties may be given about the seller’s ownership and ability to sell the assets, or about the financial or employee information that has been provided to a buyer. From a buyer’s point of view, they are intended to provide assurance that a certain state of affairs exist.
However, these warranties are only effective if they are true and accurate or, if they are not, if the seller makes sufficient disclosures against them. Disclosures are usually made by way of a disclosure letter addressed to the buyer. Often, a number of the warranties contained in the share or asset purchase agreement will not be true, and the seller should use the disclosure letter to disclose information in respect of the warranties that are inaccurate or untrue. The seller should provide an explanation as to why they are inaccurate or untrue so that the buyer can properly understand why this is the case.
As well as protecting the seller from breach of warranty claims, the information disclosed helps the buyer to make an informed decision about the purchase. It may be that certain information disclosed results in the buyer seeking a price reduction or indemnities from the seller whereby the seller effectively agrees to pay the buyer on a £1 for £1 basis in respect of a particular liability, whether actual, prospective or contingent. That will largely depend on the buyer’s appetite for risk and the bargaining power of the parties.
It is important to make adequate disclosure for the following reasons:
1. Legal Protection: Disclosure helps to protect both the buyer and the seller from potential legal liabilities. If the buyer relies on the warranties and discovers any undisclosed liabilities or issues with the company or assets after the transaction is completed, the seller may be liable for losses suffered by the buyer. This can lead to a breach of warranty claim against the seller, which can result in significant legal costs. Adequate disclosure can help to ensure that the transaction is conducted fairly and transparently.
2. Time and Cost Savings: Adequate disclosure can also help to save time and costs associated with the transaction. By providing the buyer with accurate and relevant information, potential legal issues can be addressed before the transaction is completed. This can help avoid unnecessary litigation and uncertainty.
3. Clarity and Understanding: Disclosure helps to ensure that the buyer has a clear understanding of the company or assets being sold, and which warranties are accurate and consistent with the state of the company or assets. The buyer may request further information from a seller in respect of any disclosure against a particular warranty so the buyer can make an informed decision about what to do if the disclosure identifies any material liability or concerns. This clarity and understanding is essential for the buyer to make an informed decision about the purchase.
In conclusion, adequate disclosure in share or asset purchase agreements is a critical component of most transactions and helps to protect both the buyer and the seller from potential legal liabilities, saves time and costs, and ensures clarity and understanding. Failing to make adequate disclosure can result in a breach of warranty claim, which can have significant legal and financial consequences. If you are involved in a business sale, it is essential to understand the importance of warranty cover and the disclosure process and to seek legal advice to ensure that the matter is handled correctly.