How buyers could secure claims in M&A transactions

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Today’s post is on how a buyer may “secure” warranty and indemnity claims in M&A transactions.

If the buyer is unable to recover damages from the seller for any warranty or indemnity claim due to the seller’s financial position, well-drafted clauses would not be much use to the buyer.

If the buyer is concerned that the seller may not have the financial means to pay for claims brought by the buyer under any warranty or indemnity clauses, the buyer may consider the following:

1. Guarantee from holding company/shareholder

Where the seller is a company, the buyer may request for a guarantee from the seller’s shareholders, who may be a holding company or individuals.

2. Retention

The parties may agree for a portion of the purchase price to be retained in an escrow account for an agreed period to satisfy any warranty or indemnity claims which may arise during that period. The escrow account may be in the joint names of the seller’s solicitors and buyer’s solicitors or in the name of either one of the parties’ solicitors. The amount in the escrow account would be paid to the seller at the end of the agreed period if there is no claim brought by the buyer.

3. Deferred payment

The parties may agree for the buyer to pay the bulk of the purchase price on completion of the sale and purchase agreement. The buyer would then pay the remaining part of the purchase price post completion. The buyer would make the deferred payment to the seller at the end of the agreed period during which the buyer may claim under the warranty or indemnity clauses.

4. Bank guarantee

The buyer may request for the seller to provide a bank guarantee to guarantee the seller’s performance in the event of warranty or indemnity claims. However, the seller may be reluctant to do so as there is cost involved in providing a bank guarantee.

Whether the seller would agree to any of the above would depend partly on the parties’ bargaining power. The seller may also be concerned that the buyer put forward claims without merit to try to set off the purchase price against the warranty or indemnity claims, if the SPA allows for setting off.



Originally posted on Linkedin on 5 November 2021.

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