Share Sales, Warranties And The Importance Of Disclosure

One of the most important parts of the share sale process is that of disclosure against the warranties contained in the share purchase agreement. This note provides a brief summary of the reasons we undertake a disclosure exercise as part of the share sale process and why it’s so important for a seller.

Further reading: Corporate Spotlight – A guide to the Share Purchase Agreement

What are warranties?

Warranties are statements of fact given as at completion by a seller about the business and the shares being sold which will be contained in the negotiated share purchase agreement. They offer protection to the buyer (in the form of a warranty claim) in relation to a wide range of issues which underpin the business and asset being sold (the shares), including employees, consents and compliance, the seller’s ownership of the shares, ongoing disputes and the company’s accounts. The warranties given by the seller will often be negotiated closely and may reflect the commercial position of the parties and certain deal specific factors (for example, if the buyer already has full knowledge of the underlying business).

Examples of some commonly used warranties are:

“The Seller has the requisite power and authority to enter into and perform this Agreement and the documents referred to in it to which he is a party, and they constitute valid, legal and binding obligations on the Seller in accordance with their respective terms.”

“The Company holds all licences, consents, permits and authorities necessary to carry on the Business in the places and in the manner in which it is carried on at Completion.”

What is disclosure?

If a warranty isn’t true because of a certain fact or set of circumstances, the seller should disclose those facts in a disclosure letter. The seller must provide sufficient information and detail for the buyer to understand the nature of the issue and also to meet the definition of disclosed contained in the share purchase agreement, otherwise the disclosure may not be effective. In reality what this means is that the seller must fully explain how the warranty has been qualified in the disclosure letter and provide supporting documentation, if necessary. It isn’t sufficient to simply point the buyer in the right direction.

The reason why disclosure is so important for a seller is that, once a disclosure has properly been made, it has the effect of providing a defence to any warranty claim arising from those particular facts/circumstances.

A seller should seek to include everything that is relevant to the warranties in the disclosure letter to ensure this constitutes a valid disclosure. This approach also promotes engagement with the sale process and ensures the parties are open about the issues faced by the business prior to sale.

If you would like to discuss any aspect of buying or selling a business then please contact Cameron Connolly by email at Cameron.Connolly@bhwsolicitors.com or by phone on 0116 402 7255.