Warranties and indemnities—share purchase
Warranties and indemnities—share purchase

The following Corporate guidance note provides comprehensive and up to date legal information covering:

  • Warranties and indemnities—share purchase
  • Why warranties and indemnities are needed
  • Characteristics of warranties
  • Remedies for breach of warranty
  • Measure of damages for breach of warranty
  • Hurdles to bringing a warranty claim
  • Indemnities
  • Advantages of an indemnity over a contractual warranty
  • Representations
  • Seller liability issues
  • more

A share purchase agreement (SPA) will typically include warranties and indemnities given by the seller in favour of the buyer.

Why warranties and indemnities are needed

The starting point for the buyer in any share purchase transaction is the maxim caveat emptor (let the buyer beware). The buyer will not be in a position to know exactly what they are buying when they buy a company and therefore must seek protection from the common law position of caveat emptor by negotiating appropriate contractual provisions into the SPA in the form of warranties and indemnities. The buyer will also conduct due diligence on the target company (or target group) so as to learn as much as possible about it before entering into the transaction. For further information on the due diligence process, see Practice Note: Due diligence—share and asset purchases.

Without warranties or indemnities, unless the seller has made a misrepresentation in the course of the negotiations, the buyer will have no recourse against the seller should matters concerning the target company prove not to be as they thought.

Warranties aim to allocate risk and liability between the seller and the buyer. Specifically, they:

  1. encourage the seller to make disclosures against the warranties

  2. allow the buyer to elicit information about the target company (or any target group) through disclosure that will enable them