Buyer: “Why can’t we just rely on warranties given by the seller in the SPA? Why should we conduct due diligence on the target?”

Here’s why:

1.    Due diligence allows the buyer to:

·      identify any consents from authorities or other third parties that are required for the acquisition pursuant to the conditions of licences or terms of contracts. Failure to get the necessary consents may result in revocation of licences or termination of contracts.

·      identify issues that may influence the purchase price, the buyer’s decision on whether to acquire the target, and whether extensive indemnity and warranty is required to address the issues.

·      gain better understanding of the target, which helps in the integration of the target into the buyer’s existing business.

2.    Bringing an action in court against the seller for breach of warranty may be costly. The court may order the buyer to contribute towards the seller’s legal fees if the buyer’s claim is unsuccessful.

3.    To succeed in a warranty claim, the buyer will have to show that the relevant warranty was not true. Further, the buyer will have to show that the breach of warranty has caused the buyer to suffer a loss i.e. the target company or asset is worth less than it would have been if the warranty had been true. The buyer may not be able to prove the causation.

4.    A warranty claim is not ideal when the buyer and seller intend to continue to work together after completion of the sale and purchase of the target.

5.    A warranty claim may be time consuming, depending on the complexity of the claim.

There may be situation where a buyer does not have the opportunity to conduct the usual due diligence such as pre-pack sales of business in distress. To the extent the buyer is able to conduct due diligence, the buyer should do so instead of merely relying on warranties.

#malaysiancorporatelawyer
#mergersandacquisitions

This post was first posted on Linkedin on 30 March 2023.