Typical Share Sale Warranties

Introduction

Warranties are a key feature of any share purchase agreement (SPA). They are statements of fact made by the seller about various aspects of the company being sold. These warranties provide the buyer with protection, ensuring that the company they are acquiring is in the state represented by the seller. If any warranty is later found to be untrue, the buyer may have the right to claim damages.

This guide outlines the main types of warranties typically included in an SPA and explains their significance.

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1. Title Warranties

These warranties ensure that the seller has full ownership of the shares being sold and that the shares are free from any encumbrances or third-party claims. They are crucial as they confirm that the seller has the legal right to sell the shares, and the buyer will acquire full ownership of the company.

Typical clauses include:

• The seller is the legal owner of the shares.

• The shares are free from any liens, charges, or other third-party interests.

• The seller has the power and authority to sell the shares.

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2. Accounts Warranties

Accounts warranties provide assurances regarding the financial position of the company as represented in its financial statements. These warranties typically cover the accuracy of the company’s balance sheet, profit and loss account, and cash flow statement. The warranties ensure that the accounts present a true and fair view of the company's financial position.

Key examples include:

• The accounts have been prepared in accordance with applicable accounting standards.

• The accounts give a true and fair view of the company’s financial affairs.

• There are no undisclosed liabilities.

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3. Tax Warranties

Tax warranties cover the company’s tax affairs, ensuring that the company has paid all taxes due and has complied with relevant tax laws. They protect the buyer from hidden tax liabilities that could emerge after the purchase.

Examples of common tax warranties:

• All taxes due have been paid, and there are no outstanding tax liabilities.

• The company has made all necessary tax filings and returns.

• There are no ongoing tax disputes or investigations by tax authorities.

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4. Litigation and Dispute Warranties

Litigation warranties protect the buyer by confirming that there are no current or pending legal disputes involving the company. These warranties ensure that the buyer is not unknowingly acquiring a company facing costly or reputationally damaging litigation.

Key clauses include:

• The company is not involved in any ongoing legal disputes.

• There are no claims or proceedings threatened or pending against the company.

• The company is not in breach of any laws or regulations.

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5. Commercial Contracts Warranties

These warranties provide assurances that the company's commercial contracts with customers, suppliers, and other third parties are valid and enforceable. They also confirm that no material contracts are at risk of being terminated due to the share sale.

Typical warranties in this area might include:

• All material contracts are in full force and effect.

• The company is not in breach of any major contracts.

• No customer or supplier has indicated an intention to terminate or materially alter their contract with the company.

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6. Employment Warranties

Employment warranties provide assurance regarding the company’s workforce, confirming that the company complies with employment laws and has no disputes with its employees. This is especially important if the business has a large workforce or key employees critical to the company’s success.

Key employment warranties may include:

• All employees are employed on legally compliant terms.

• There are no ongoing or pending employment disputes.

• The company has met all obligations concerning pensions, redundancy payments, and other employee benefits.

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7. Intellectual Property (IP) Warranties

These warranties address the ownership and protection of the company’s intellectual property, which may be vital for companies reliant on trademarks, patents, software, or other proprietary rights. IP warranties are designed to ensure the buyer will continue to benefit from the company's IP assets after the purchase.

Examples of IP warranties include:

• The company owns or has valid licences for all necessary intellectual property.

• No IP rights of the company are being infringed, and no third parties are infringing the company’s IP rights.

• The company is not involved in any IP disputes or claims.

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8. Property Warranties

If the company owns or leases real property, property warranties ensure that the company has valid title or leasehold rights over its properties. These warranties also confirm that the properties comply with planning regulations, building codes, and other legal requirements.

Examples of property warranties include:

• The company owns or leases the properties identified in the agreement.

• There are no disputes regarding the company’s ownership or occupation of the properties.

• All properties comply with applicable building regulations and have the necessary planning permissions.

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9. Environmental Warranties

These warranties provide protection against environmental liabilities, such as pollution or non-compliance with environmental laws. Environmental risks can be particularly significant in industries like manufacturing or real estate, and the buyer will want to ensure there are no hidden risks that could lead to fines or remediation costs.

Typical environmental warranties include:

• The company complies with all relevant environmental laws and regulations.

• The company holds all necessary environmental permits.

• There are no known environmental issues, such as contamination, that could give rise to liability.

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10. Compliance Warranties

Compliance warranties confirm that the company has adhered to all applicable laws and regulations, including data protection laws, anti-corruption laws, and competition laws. These warranties protect the buyer from acquiring a company that is in breach of critical legal obligations.

Examples include:

• The company has complied with all applicable laws and regulations.

• The company has not engaged in any unlawful or unethical practices.

• The company holds all necessary licences and permits for its operations.

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Conclusion

Warranties play a vital role in protecting the buyer in a share purchase transaction, offering recourse if the company's condition is not as represented. While this guide covers the main types of warranties typically found in an SPA, each transaction is unique, and warranties can be tailored to the specific circumstances of the deal. Sellers should be aware that giving warranties can expose them to liability, while buyers should ensure that warranties are comprehensive enough to cover all key risks.

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It is easy to fall foul of technical aspects of operator licencing. Whether of goods vehicles or passenger service vehicles. One commonly seen relates to disc loaning or licence lending.

An operator is generally not permitted to allow other businesses to ‘use’ the O Licence. And to deliberately do so would likely lead to revocation of the licence, and possible disqualification (perhaps indefinitely) of the legal entity or person behind the licence from holding or even applying for a licence.

Some operators, while not acting with deliberate intent, inadvertently blur the lines of who is ‘using’ or operating the vehicles. One such case was an operator (a limited company) in the North-East traffic area that we represented at the Leeds OTC public inquiry (PI) room.

Our client successfully ran ( and continues to do so) a niche business with highly bespoke heavy goods vehicles. It used several legal entities, including limited companies, to conduct its well-established business. It’s not unfair to say the business model was unusual and complex. (Although the Traffic Commissioner (TC) is not a regulator of businesses, to the extent that matters touch on O Licencing, he/she has regulatory powers to exercise against operators. ) An additional factor was that it involved a restricted licence, meaning that the vehicles could only carry the goods of the entity with the licence.

Without going into all the detail, the operator was using vehicles in such a way that raised the question of whether other legal entities were using the licence, or otherwise unlawfully benefitting from it, and carrying the goods of another entity (Who is the ‘user’ of the vehicle and the true operator can be very complex, and is determined by multiple factors).

We gave our comprehensive legal opinion on all matters that would foreseeably be raised at the hearing. This included urgent advice on an immediate change to how the company was using its vehicles; the company’s maintenance and compliance documentation; and how a different approach would be needed, particularly in respect of brake testing, daily walkarounds and defect reporting/remedying. The company was keen to learn and was receptive to our advice. This involved a site visit, email correspondence, and video-conference/telephone meetings.

All requested maintenance documentation and a business model was submitted in advance to the OTC.

At the hearing the company was able to demonstrate that it was operating vehicles within the authorised parameters. It had learned much in the build-up to the PI and was willing to implement advice - even as late as the day of the PI. The TC conducted a balancing exercise. He concluded there had been a falling-short of O Licence standards in respect of vehicle use and maintenance, and that the company was late to take on professional advice. On the other hand, new systems were in place and dramatic improvements made. OLAT courses had either been booked or completed and the services of a transport consultant were engaged. The almost inevitable regulatory action in this case was limited to a short curtailment involving some vehicles, and undertakings added to the licence. The client considered this a significantly good result considering the consequences of losing the licence or other kinds of regulatory action – which potentially had been on the cards based on the TCs public inquiry brief.

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As with many applications or ‘regulatory’ public inquiries, the Traffic Commissioner (TC) has before her or him a set of papers prepared by their case worker. The fact a public inquiry has been convened means there are concerns. The papers alone cannot determine the TCs decision—one way or the other. It is imperative therefore that applicants or licence holders prepare their case thoroughly. If prepared properly, it will help assist the TC to make a favourable decision. If not, the TC may conclude that the case is as it appears on the papers – or even worse.

We recently represented a company that applied for an O Licence (the applicant). The matter was brought to public inquiry because of serious concerns that the new company was either a front for a company that had gone into administration, and/or a phoenix arrangement was taking place; transport manager (TM) considerations; and the application form had not been completed correctly—causing an appreciable misrepresentation of the facts (The simple filling out of the application form is the first opportunity the TC has to see anything about the applicant, including whether they are trustworthy!)

After taking instructions, we could see there was plenty of scope to prepare a strong case for the grant of the application. The applicant’s connection to a company that had gone into administration: any links were tenuous and superficial. There was no phoenix arrangement because there were no substantive connections between the two entities, or relevant individuals. The incorrectly filled-out application form was a genuine error (even though it appeared otherwise).

On the professional competence issue, we advised that a replacement TM was necessary. The originally nominated TM was, in our opinion, not suitable in this case. A TM may have the qualification, but depending on the facts, more is required, including experience, actual knowledge and other capabilities. Our client accepted our advice and contracted another TM, contingent on the grant of the licence.

Most, if not all, of the TCs case directions were fully adhered to. Documentary evidence and representations were submitted two weeks in advance.

Most of the work for the inquiry was completed beforehand. That just left the hearing. We advised on what the hearing would entail and how best to present first-person evidence. Hearings can be particularly stressful, especially if things are left last minute, or not addressed properly. In the end, this hearing was fairly straightforward and relatively short. The TC was satisfied that the evidence submitted adequately addressed concerns. Further evidence and submissions were presented at the hearing. Assurances were given, including a willingness to have conducted an independent audit. As at the date of the hearing, it was clear that the applicant had a good knowledge of O Licence compliance requirements and of their specific kind of haulage work. The application was granted with immediate effect with authorisation for several HGVs.

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We were instructed by a business primarily involved in farming and authorised to operate six large goods vehicles

The public inquiry was called before the Traffic Commissioner to consider the operator’s repute. Revocation, suspension, curtailment of the licence, and possible disqualification, were also under consideration (under sections 26(1)(b), 26(c)(iii), 26(e) and 26(f) and 35 of the Goods Vehicles (Licensing of Operators) Act 1995.

Background: the operator (like many operators) had not understood the consequences of changing its legal entity. In this case from a sole trader to limited company. And that, generally, in such circumstances, a licence must be applied for in the name of the new legal entity.

Over the period of some months, the operator had started to run some of the business through the limited company; some thought the sole tradership. Meanwhile, one of its HGVs was stopped by DVSA at a roadside encounter. The vehicle was unfortunately given an ‘S’ marked prohibition for significant failings in its braking system. After questioning the operator, the DVSA concluded that there had been an outright change of legal entity. There were also some other less-significant shortcomings, relating to finances, daily walkaround checks, and paperwork issues .

Together, these were serious failings to overcome at PI. Much would depend on how responsive to our advice the operator and transport manager would be.

We were instructed in good time, and promptly advised on all relevant matters. DVSA had concluded there had been a categoric legal entity change, but we were able to give our opinion on this somewhat nuanced area of law. We advised that this could easily lead to the revocation of the licence, but not necessarily. A robust response would be needed in all areas and any shortcomings remedied as soon as practicably possible.

After several meetings, our client and the TM were clear on what needed to be done before the PI. We also advised on what to expect at the PI itself, including what questions might be asked. The client was responsive and we managed to adhere to the OTC deadlines. During our instructions, other matters emerged—ones not raised in the TCs PI Brief papers. We advised on these also to pre-empt further potential questioning.

The hearing went as near-to-plan as could be expected. The operator and TM were well prepared for the hearing. They were able to fully satisfy the TC on most matters raised. The TC accepted our final submissions that there had never been any attempt to deceive or gain an unfair commercial advantage (there had been no such advantage ) and that any mistakes were inadvertent. We’d submitted supporting evidence in advance.

The simple decision was that the TC curtailed the margin on the licence for two weeks. This resulted in no material disadvantage to the operator. On a balance of probabilities, the TC was satisfied that the business would be compliant as the holder of a goods vehicle operator licence. The effect was that the operator was now in a position to continue using its O’licence without interruption, and run its well-established and successful farming business.

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Typical Share Sale Warranties

Introduction

1. Title Warranties

2. Accounts Warranties

3. Tax Warranties

4. Litigation and Dispute Warranties

5. Commercial Contracts Warranties

6. Employment Warranties

7. Intellectual Property (IP) Warranties

8. Property Warranties

9. Environmental Warranties

10. Compliance Warranties

Conclusion

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Simon Newman

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