Buyer beware: How to address issues on assets or company

Article

Let the buyer beware  

Under the law, there is a principle known as “let the buyer beware” or “caveat emptor” which generally means that buyer purchases at the buyer’s own risk. The principle places the onus on the buyer to conduct due diligence before making a purchase. 

A prudent buyer typically carries out due diligence on the assets or the company in respect of the shares which the buyer intends to acquire, prior to the acquisition. The scope of due diligence may depend on the buyer’s budget, risk tolerance, value of the transaction and nature of the industry in which the target asset or target company is in. 

A buyer may discover in the course of due diligence that there are issues with the assets or shares which the buyer intends to acquire, such as regulatory approvals required to carry out the business are not in order, non-compliance of conditions of licences or breach of terms of contracts. 

Some possible solutions 

The buyer may consider the following to rectify the issues or mitigate the risk: 

  1. The sale and purchase agreement (SPA) to provide for the issues to be rectified before the SPA becomes unconditional. 
  2. The SPA to provide for the issues to be rectified before the transaction is completed i.e. before the assets or shares are transferred to the buyer and consideration paid to the seller. 
  3. The seller to agree in the SPA to indemnify the buyer if the risk materialises such as fines imposed by regulator for non-compliance.
  4. The buyer to retain part of the consideration after completion of the transaction and pay the retained sum only after the issues are rectified within an agreed period. 

The nature and severity of the issues and the time required for rectification are factors to be considered in deciding how to rectify the issues or mitigate the risk. 

The information in this article is intended only to provide general information and does not constitute legal opinion or professional advice.  

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