SPA warranty catalogue: contractual warranties alongside statutory warranty in a company acquisition

Statutory warranty under ABGB and UGB applies where the object of purchase is defective. It fits a company acquisition only partly, because the target company is not a simple thing but bundles a multitude of assets, contracts and risks. Balance sheet risks, additional tax claims or disputes often cannot be captured satisfactorily through warranty.

For this reason company purchase contracts work with independent contractual warranties, called representations and warranties. The seller thereby stands in for certain features of the company independently of statutory warranty. The parties can freely agree the content, scope and legal consequences and largely exclude the statutory law of warranty.

This freedom of drafting is the actual value of the warranty catalogue. It allows a precise allocation of the risks between seller and buyer. How important this catalogue is precisely in a share purchase is shown in the post on share deal and asset deal.

A complete warranty catalogue follows a proven structure. At the top stand the warranties on title to the shares: the seller assures that the shares belong to it and are free from third-party rights. This warranty is the foundation of the entire purchase and is usually given its own, unlimited liability.

There follow the operational warranties: on the correctness of the annual accounts and the balance sheet, on taxes, on employment law, on intellectual property, on the material contracts, on disputes, on compliance and on environmental matters. Each of these warranties captures a typical risk area of the company and should be tailored to the specific target company.

Which warranties are especially important results from due diligence. If the review shows focal points or anomalies, the warranties are deepened there. How this review proceeds is explained in the post on the due diligence checklist. The concept of the warranty we explain in the glossary.

A warranty catalogue only works with a considered liability regime. The liability cap limits the sum up to which the seller is liable for breaches of warranty. Often the cap for the operational warranties lies below the purchase price, while fundamental warranties such as those on title to the shares are often liable up to the full amount of the purchase price.

The de minimis threshold excludes trivial cases: individual claims below a certain amount are disregarded. The basket determines that claims can only be asserted once their sum exceeds an agreed threshold. In this way seller and buyer are relieved of small-scale dispute and the liability is concentrated on material cases.

The limitation periods play a central role. They are frequently graduated by warranty area: tax warranties orient themselves to the tax law periods, operational warranties usually apply for a shorter time, fundamental warranties for longer. A deeper look at limiting warranty liability is offered by the post on warranty and indemnity insurance.

The warranty catalogue does not work on its own but in interplay with the data room. What the seller has disclosed in the course of due diligence can limit the reach of a warranty. An effective disclosure as a rule excludes a breach of warranty for the disclosed risk, because the buyer knew the risk and included it in its decision.

For this reason the clean documentation of the data room is so important. A structured data room and a clear disclosure list determine the line between what the seller warrants and what counts as known. Dispute often arises at precisely this line, when it is unclear whether a risk was disclosed or not.

For known and specifically identified risks an indemnity is often the appropriate instrument instead of a warranty. With an indemnity the seller takes on a certain loss independently of a breach of warranty. An initial assessment of the risks of your transaction is provided by our M&A transaction risk profile.