Sellers usually make R&W in sale and purchase agreements (SPA) with respect to the target business/company being sold.

The R&W serve as assurances to buyers and allocate risks between buyers and sellers.

Sellers typically limit their liabilities in respect of the R&W in the following manner:

1. Use of knowledge qualifier

𝘌𝘹𝘢𝘮𝘱𝘭𝘦: 𝘛𝘰 𝘵𝘩𝘦 𝘣𝘦𝘴𝘵 𝘰𝘧 𝘵𝘩𝘦 𝘬𝘯𝘰𝘸𝘭𝘦𝘥𝘨𝘦 𝘰𝘧 𝘵𝘩𝘦 𝘴𝘦𝘭𝘭𝘦𝘳𝘴, 𝘵𝘩𝘦𝘳𝘦 𝘢𝘳𝘦 𝘯𝘰 𝘧𝘢𝘤𝘵𝘴 𝘰𝘳 𝘤𝘪𝘳𝘤𝘶𝘮𝘴𝘵𝘢𝘯𝘤𝘦𝘴 𝘭𝘪𝘬𝘦𝘭𝘺 𝘵𝘰 𝘭𝘦𝘢𝘥 𝘵𝘰 𝘢𝘯𝘺 𝘤𝘭𝘢𝘪𝘮, 𝘱𝘳𝘰𝘤𝘦𝘦𝘥𝘪𝘯𝘨, 𝘭𝘪𝘵𝘪𝘨𝘢𝘵𝘪𝘰𝘯, 𝘪𝘯𝘷𝘦𝘴𝘵𝘪𝘨𝘢𝘵𝘪𝘰𝘯 𝘰𝘳 𝘱𝘳𝘰𝘴𝘦𝘤𝘶𝘵𝘪𝘰𝘯 𝘢𝘨𝘢𝘪𝘯𝘴𝘵 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺.

The knowledge qualifier limits sellers’ liability to only what the sellers know. The sellers’ knowledge may be actual knowledge and may also include constructive knowledge, depending on the parties’ negotiation on this point.

I once encountered a buyer who agreed to the seller’s request to qualify every seller’s R&W in the SPA to the best of the seller’s knowledge. I thought this was a wrong move by the buyer because some R&W were fundamental to the transaction such as the seller’s title to the sale shares. It’s in the buyer’s interest not to agree to such fundamental R&W being qualified.

2. Use of materiality threshold

𝘌𝘹𝘢𝘮𝘱𝘭𝘦: 𝘛𝘩𝘦 𝘊𝘰𝘮𝘱𝘢𝘯𝘺 𝘩𝘢𝘴 𝘯𝘰𝘵 𝘦𝘯𝘵𝘦𝘳𝘦𝘥 𝘪𝘯𝘵𝘰 𝘢𝘯 𝘢𝘨𝘳𝘦𝘦𝘮𝘦𝘯𝘵, 𝘢𝘳𝘳𝘢𝘯𝘨𝘦𝘮𝘦𝘯𝘵 𝘰𝘳 𝘰𝘣𝘭𝘪𝘨𝘢𝘵𝘪𝘰𝘯 𝘪𝘯 𝘦𝘢𝘤𝘩 𝘤𝘢𝘴𝘦, 𝘪𝘯𝘷𝘰𝘭𝘷𝘪𝘯𝘨 𝘤𝘰𝘯𝘴𝘪𝘥𝘦𝘳𝘢𝘵𝘪𝘰𝘯, 𝘦𝘹𝘱𝘦𝘯𝘥𝘪𝘵𝘶𝘳𝘦 𝘰𝘳 𝘭𝘪𝘢𝘣𝘪𝘭𝘪𝘵𝘪𝘦𝘴 𝘪𝘯 𝘦𝘹𝘤𝘦𝘴𝘴 𝘰𝘧 [𝘜𝘚𝘋100,000].

Sellers may use a materiality threshold in the R&W in SPA so that sellers are responsible only if the breaches of the R&W surpass the threshold.

A materiality threshold helps the parties to distinguish between minor issues that do not significantly affect the business from more significant issues that could have adverse effects. For this to work, the parties need to agree on the materiality and avoid becoming entangled in negotiation over what is material.

3. Use of disclosure letter

A disclosure letter sets out the known issues which amount to inaccuracies or exceptions to the seller’s R&W.

Sellers provide draft disclosure letters for buyers’ review before execution of the SPA. When sellers and buyers are satisfied with the content of the disclosure letters, they will execute the disclosure letters together with the SPA.

By disclosing the exceptions to the R&W in the disclosure letters (which are subject to the buyers’ acceptance), sellers will not be liable for breach of R&W in respect of matters already disclosed in the disclosure letters. It is in the sellers’ interest to disclose the exceptions to the R&W in the disclosure letters with sufficient details for the buyers to assess the issues.

#malaysiancorporatelawyer

#mergersandacquisitions

This post was posted on LinkedIn on 5 January 2024.