M&A: Limitation of liability

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In M&A transactions, whenever the issue of limitation of liability is raised, I know I would be in for a lengthy negotiation.

A seller would typically want to limit the seller’s liability under the sale and purchase agreement.

However, the parties may decide not to include limitation of liability clause in the SPA if the consideration for the transaction is relatively small, the parties are friendly or it is unlikely for any material issue to arise from the transaction.

Some points to consider in relation to limitation of liability clause in the SPA include the following:

1. Minimum liability The seller may want to avoid having to deal with claims for trivial breaches. Instead, the parties may agree that claims could only be brought against the seller if the amount claimed exceeds an agreed amount. Whether a single claim has to exceed the minimum threshold or whether multiple claims could be aggregated in determining whether the amount claimed exceeds the minimum threshold is another point for negotiation.

2. Maximum liability The seller would usually want to cap the seller’s liability. Typically, the cap is not more than the price paid to the seller under the SPA. The buyer may want the seller’s maximum liability to exceed the purchase price to take into account all costs and expenses incurred by the buyer.

3. Scope of limitation Whether limitation of liability applies to tax claims, warranty claims or other claims under the SPA against the seller and if so, whether the same or different limitation applies.

4. Mitigation The seller may want the buyer to take certain action to mitigate the buyer’s loss before the seller is liable towards the buyer. For example, if the seller has warranted to the buyer that goods supplied by the target company are free from defects and subsequently a customer complains of defective goods, the seller may want the buyer to contest the customer’s claim if it is reasonable to do so instead of simply claiming against the seller for breach of warranty.

5. Insurers and third parties The seller may want the buyer to claim against insurers or third parties if there is such recourse prior to the buyer claiming against the seller.

For example, if there is a product liability insurance policy to cover customers’ claims for defective products, the seller may want the buyer to claim from the insurer prior to claiming from the seller.

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This post was first posted on Linkedin on 8 October 2021.

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