Warranties in a Share Sale Agreement

When you buy a new laptop, a microwave, or a car, you might expect for that product to last for more than a single day of use. Sellers or manufacturers may even give you a 'guarantee', likely to the effect that the manufacturer will replace or repair the product if it breaks down for a reason that's not the end user's fault. 

In this context, such a 'guarantee' is widely known by another name – a 'warranty'. One of the simplest ways to explain the technical definition of a warranty in law is that a warranty is a seller or a manufacturer's assurance to the purchaser as to the facts (e.g. the build quality of the product), along with a commitment to indemnify the purchaser if that fact turns out to be false.

Similarly, in most agreements involving the sale and purchase of shares in a company, the seller is likely to give the purchaser some form of warranty, as a purchaser is unlikely to have complete knowledge of a company’s actual state of affairs, even if he has had the opportunity to conduct some form of due diligence (for example, being allowed access to the company's books, documents, and a visit to the company's premises).

We now look at some common warranties in the sale and purchase of shares in a company:

Warranties as to Title

A warranty as to title assures the purchaser that the seller owns the shares to be sold and has full legal right to sell the shares to the seller. Such a warranty normally declares that there are no encumbrances (such as a charge) over the shares and that the shares are not being held on trust for another person who may seek to recover the shares from the purchaser after the sale. 

Warranties as to Licences

This seeks to assure the purchaser that the company has validly obtained all the necessary licences required for its operations. The most common licence required for a company to operate on physical premises is known as a 'business premise licence', but each business may have specifically applicable licences which the purchaser may not know about. 

Warranties as to Litigation

A warranty as to litigation assures the purchaser that the company is not being sued, and is therefore not exposed to further liability which would consequently affect the purchase price of the Company. Purchasers would have to rely on Sellers for suchinformation, in the absence of a central or public registry of litigation. In doing so, it would be prudent for Purchasers to seek to extend such a warranty to also cover threats of litigation (e.g. when a letter of demand has been sent, but no legal proceedings have been filed).

Warranties as to Taxation

Such warranties are important, especially for companies that are very profitable or that have been in existence for a long time. When the company has not complied with tax requirements, the financial implications to a new owner (i.e. the purchaser) are serious. 

However, very large companies sometimes overlook some less substantial matters. A good compromise to safeguard the purchaser without imposing overly onerous burdens is to qualify such warranties with a 'de minimis' threshold, which means that the purchaser may only sue for a breach of the warranty if the damage suffered by the purchaser exceeds a certain threshold – e.g. RM50,000.00. 

Conclusion

Warranties are often one of the most hotly negotiated parts of a share sale transaction. Depending on the value of the transaction, the seller may even consider purchasing warranty insurance to cover a potential claim by the purchaser on the warranties provided. When considering selling a company, it is always the best course of action to consult your lawyer beforehand.