In a corporate transaction, the Share Purchase Agreement (SPA) stands as a cornerstone document. It sets out the terms and conditions under which shares in a company are bought and sold.

The significance of meticulous drafting in an SPA cannot be overstated, as it ensures clarity, mitigates potential disputes and safeguards the interests of both parties involved. Two critical elements that demand particular attention are indemnities and warranties.

Understanding Indemnities and Warranties

Indemnities and warranties serve as essential protective mechanisms within an SPA, each with distinct functions:

  • Warranties: These are assertions (or ‘promises’) made by the seller regarding the state of the business at the time of the sale. They cover various aspects such as financial health, legal compliance, and operational conditions. If a warranty is found to be false, the buyer may have grounds for a claim for breach of warranty (actioned through a breach of contract claim).
  • Indemnities: These are commitments by the seller to compensate the buyer for specific losses or liabilities that may arise after the transaction is completed. Indemnities are often used to address known risks or potential issues that could impact the value of the business.

The Role of Good Drafting in Share Purchase Agreements

  1. Clarity and Precision: Effective drafting ensures that the language used in the SPA is clear and precise. Ambiguities can lead to misunderstandings and disputes. For example, clearly defining what constitutes a breach of warranty or the scope of an indemnity can prevent future conflicts.
  2. Risk Allocation: Through careful drafting, the Share Purchase Agreements can allocate risks appropriately between the buyer and the seller. Indemnities can be tailored to cover specific risks identified during due diligence, while warranties can be crafted to provide the buyer with a comprehensive understanding of the business and be safe in the knowledge that the business projected is a true reflection of it.
  3. Protection of Interests: Both parties have interests that need protection. For the buyer, warranties provide assurance about the business’s condition, while indemnities offer a safety net against unforeseen liabilities. For the seller, well-drafted limitations on warranties and indemnities can cap their liability and provide certainty.
  4. Legal Compliance: Ensuring that the SPA complies with relevant laws and regulations is crucial. Good drafting involves incorporating legal requirements and industry standards, which can prevent legal challenges and ensure the enforceability of the agreement.
  5. Dispute Resolution: In the event of a dispute, a well-drafted SPA can provide clear mechanisms for resolution. This includes specifying the governing law, jurisdiction, and methods for dispute resolution, such as arbitration or mediation, which can help protect against costly legal battles.

How a Solicitor can help when drafting the Warranties and Indemnities:

  • Be Specific: Avoid vague language. Clearly define the scope and limitations of warranties and indemnities.
  • Tailor to the Transaction: Customise the indemnities and warranties to reflect the specific risks and circumstances of the transaction.
  • Include Time Limits: Specify the duration for which warranties and indemnities will remain in effect.
  • Cap Liability: include caps on the seller’s liability to provide certainty and manage risk.

Good drafting in Share Purchase Agreements is essential for protecting the interests of both buyers and sellers. By paying particular attention to indemnities and warranties, parties can allocate risks effectively, ensure legal compliance, and minimise the potential for disputes. Ultimately, a well-drafted SPA provides a solid foundation for a successful transaction and fosters trust between the parties involved.

Please contact the Corporate and Commercial team at Fisher Jones Greenwood LLP on 08082 587 319 or fill out our contact form.