View from 30,000 feet: Issue 3

When advising new US clients on their investment and divestment transactions, we often encounter points of English law and practice that our clients find surprising.

While such issues are always surmountable, we find that prior familiarity with the key points can allow for superior transaction planning, outcomes and a reduction in timelines and costs.

The purpose of the “View from 30,000 feet” series is to provide a brief, high-level introduction to the key issues our US clients encounter on a regular basis with a view to reducing the number of surprises. The first notes will focus on some key UK purchase agreement points and subsequent editions will branch out into other areas relevant to institutional US clients.

These notes are not exhaustive (nor are they intended to be) as each transaction will turn on its facts. We are always available to discuss and engage with any follow up questions and we hope you the series useful.

Issue 3: Warranties, representations, indemnities and disclosure in a UK purchase agreement

Set out below is a brief note on warranties, representations, indemnities and disclosure in a UK purchase agreement that may be unfamiliar to a US buyer or seller of a UK private company.

Buyer Protections & Disclosure: Most who have had some exposure to M&A on either side of the Atlantic will be familiar with the terms warranty, indemnity, representation and disclosure in the context of the purchase agreement. Key points to bear in mind are below:

a. Warranties & Indemnities: there are key differences between the two but the most fundamental is that warranties are qualified by disclosures whereas indemnities are not. The principal goal of warranties is to elicit disclosure while providing contractual recourse in certain circumstances. Indemnities are a risk allocation mechanism. If a specified liability arises the indemnifier must pay, regardless of buyer’s knowledge or whether the target has diminished in value.

b. Indemnity basis of claims: in the US warranties are given on an indemnity basis. This is not the case in the UK so it is important for US acquirers to consider this early and to dedicate time to identifying areas where indemnity cover is specifically needed.

c. Disclosures: disclosures against warranties in the US are specific and included in a schedule to the purchase agreement. In the UK you will typically see disclosure given on a specific basis and a general basis (i.e. including matters which can reasonably or fairly be identified in a VDR / on a specified registry). Such disclosures are typically set out in a document ancillary to the purchase agreement often referred to as the “Disclosure Letter”.

d. Representations: representations have a distinct meaning under English law and importantly breach of representation allows different remedies than breach of warranty (including termination). For this reason, care is taken in the UK to ensure that warranties are not also given as representations (as they are in the US).

Previous issues

Issue 1: “Locked Box” purchase price adjustment mechanics

Issue 2: Conditionality provisions in a UK purchase agreement