How does a buyer ensure the shares that the buyer acquires in a company are free from liabilities which the buyer doesn’t intend to assume?

The first step is conduct due diligence to find out red flags about the company. The scope of due diligence depends on the buyer’s risk appetite and the size of the deal. Due diligence may include legal, financial, operational and tax matters.

Once the issues arising from the due diligence are identified, indemnities are typically included in the sale and purchase agreement to cover specific risks which are of concern to the buyer.

The indemnity is, of course, subject to negotiation with the seller.

Some areas where indemnity may be appropriate in a SPA for shares:

1. Fines for breach of conditions of licences of the company or licences which have expired or are not in order prior to completion.

2. Non-compliance with regulatory requirements prior to completion which may lead to fines or suspension of business.

3. Defects on any goods or services supplied by the company before completion.

4. Claim or dispute on matters prior to completion which may lead to litigation.

5. Liabilities arising from tax matters prior to completion.

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This post was first posted on Linkedin on 27 May 2021.

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