The warranties and indemnities that the seller provides to the buyer about the business, the corporation that owns the firm, or the shares being sold are some of the most essential clauses in a sale of business agreement or a sale of shares agreement.
Unless the purchaser knows the company and its business extremely well (for instance, if the purchaser has been an executive director of the company for many years) or if the purchaser is only purchasing a minority percentage of the company’s issued shares, it is common for the purchaser to request extensive warranties and indemnities from the seller.
The authorized and issued shares in the company; the legal status, financial accounts and statements, and tax compliance of the company; the operations of the company, such as: what litigation is threatened or pending (with customers, suppliers, or employees); whether the company is in default of any payment obligations; whether the company is in any material dispute with governmental bodies; that the company has all licenses a required to conduct its business.
Recording specific rules for how the firm and business will be managed between the date the sale agreement is signed and the date the transaction is finalized.
The guarantees can also pertain to matters that are particular to the firm or its business, such as: any mobile property, immovable property, intellectual property, and essential customer or supplier contracts or licenses owned by the organization.
It is crucial for the seller to ensure that all guarantees are accurate and, if they are not, to disclose the extent to which they are inaccurate in the agreement. This is accomplished by a disclosure schedule appended to the agreement. Carefully concluding the disclosure schedule will ensure that the seller cannot be held liable for a warranty violation if it falls inside a disclosure.
Also see: Valid and Enforceable: Contracting Basics in South Africa
The following terms regarding warranties and indemnities are frequently subject to intense negotiation between the parties:
How many years after the sale’s effective date are the warranties valid? For example, is the duration of the warranty 3 or 5 years, or perhaps varied for different categories?
Exists a minimum rand amount for the purchaser’s claim for the seller to be liable in the event of a breach of warranty?
Is there a maximum rand amount for which the buyer can hold the seller accountable (for instance, a maximum of 50% of the total purchase price)?
Can the buyer delay payments it still owes the seller under the agreement (for example, if the purchase price was being paid in installments) until the breach is repaired or the indemnification is paid to the buyer?
Does the fact that the purchaser completed due diligence on the company and its business diminish or limit the seller’s warranties or indemnities?
If a guarantee is breached, may the buyer cancel the entire contract, or does the buyer simply have a right to monetary compensation?
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