Tuesday, July 2, 2013

Interpreting Reps and Warranties in M&A Deals

Although clauses such as representations and warranties have become quite ubiquitous in M&A transactions involving sale and purchase of assets, business or shares, there has hardly been any litigation in India involving the technicalities of such representations and warranties. The reps and warranties also constitute some of the major sticking points in negotiations that take up a substantial part of time and cost in getting a deal done. In the absence of any judicial guidance available from Indian courts, the negotiations are often premised on the textual interpretation of the clauses and some possible guidance available from other jurisdictions in the form of precedents.

In this context, the availability of guidance from other jurisdictions is always welcome. In that vein, a recent decision of the UK Court of Appeal in Belfairs Management Limited v Sutherland & Anor discussed on the Harvard Corporate Governance Forum assumes importance. The case involved the interpretation of a specific warranty on whether the target company was subject to obligations under a particular contract it entered into after the share purchase agreement was executed. The High Court held that the buyer was unable to rely on the warranty. It did so upon a literal and technical interpretation of the warranty clause.

However, the Court of Appeal held that the warranty clause must be subjected to a commercially sensible interpretation rather than a literal interpretation, and that the warranty stood attracted in the present case and was available to be relied upon by the buyer. The authors of the post elegantly summarise the key takeaways from the case from a contract drafting perspective, which is extracted below:

  • "The willingness of the courts to potentially adopt a more purposive approach and consider the parties’ commercial intentions when entering into a contract has potentially important implications. Sellers, as well as buyers, should carefully consider whether the warranties adequately cover the key commercial imperatives for the transaction and their approach to disclosure if it is felt that the warranties do not expressly do so (in addition to the more normal disclosure exercise). The inclusion of language such that any disclosures will not extend the scope of any warranty should offer sellers comfort that there is no need to omit what is considered to be a relevant disclosure where they are seeking to avoid liability as a consequence of a warranty being interpreted purposively. Buyers should continue to ensure that warranties are carefully drafted so as to explicitly cover their key commercial imperatives for the transaction, as well as any specific issues which are particularly important to them in the context of the transaction as a whole. As always clarity is the key."

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