We often get asked by clients during the negotiation stages of a share sale about who should bear the risk on certain items following completion. In practice, that question is answered through warranties and indemnities and how well they are negotiated plays a crucial role in minimising any fall out post-completion.

What are Warranties

Warranties are statements of fact given by the seller about the company being sold (the Target Company) and its business. Common examples of warranties include:

  • ownership of shares;
  • employment matters;
  • accuracy of accounts;
  • litigation matters; and
  • tax affairs.

If a warranty is found to be untrue following completion, the buyer will have the basis on which to bring a claim. A buyer must be able to show that by reason of the warranty being untrue it has led to a quantifiable loss.

The seller of a company will have the opportunity to disclose against many of the warranties in its disclosure letter prior to completion of the deal.

For more detailed guidance on warranties and the role of disclosure, this article provides a further look: Share Sales, Warranties And The Importance Of Disclosure

What is an Indemnity

An indemnity is a promise from one party to another party to repay them on a pound for pound basis in the event of certain circumstances arising. In M&A, this set of circumstances should be limited to known issues of the Target Company. These are usually items which have been flagged as part of the due diligence stage. Unlike with a warranty claim, a buyer will typically only need to show that the triggering event has occurred rather than show that it has suffered loss.

A common example is a historic share transfer that was never properly documented. If this historical transfer later caused an issue for the buyer, such as on a future sale or refinancing and an indemnity has been included in the sale and purchase agreement, the buyer could bring an indemnity claim against the seller.

An indemnity claim will usually include the buyer being able to recover for associated costs (such as legal fees) and any indirect loss arising from the transfer not being correctly documented.

Managing the Risk

The buyer of the Target Company is ultimately inheriting the risk in M&A. The buyer will therefore seek to mitigate the risk by including appropriate warranties and indemnities in the sale and purchase agreement.

The seller of the Target Company will not want to be “on the hook” for every possible outcome for an infinite amount of time. The seller will also usually be looking for a clean break from the Target Company on its sale. It’s therefore important that any warranties and indemnities are subject to appropriate:

  • financial limitations. There is an argument that the overall cap of financial liability for the seller should be equal to the consideration being paid to them by the buyer. This argument does not however suit larger transactions. There are deals where the consideration being paid is far greater than any potential financial risk the buyer is taking on with the acquisition; and
  • time limitations. The length of time in which the buyer can bring a claim will need to be suitable to the nature of the business and the nature of any potential claims.

There are other means by which a seller can look to reduce their risk which are points of negotiation during the deal. It’s often suitable for certain warranties to be caveated to the seller’s awareness.

It’s important to remember that warranties and indemnities are not boilerplate protections. They only work as effective risk‑management tools when they reflect the specific business being sold and the commercial realities of the deal.

From a seller’s desire for certainty to a buyer’s need for protection, negotiation supported by a legal team who understand both the legal and practical risks is key to avoiding disputes long after completion.

At BHW, we regularly advise on warranties and indemnities in M&A transactions. Contact BHW’s Corporate and Commercial team for more information on 0116 289 7000 or email info@bhwsolicitors.com.


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