Warranties and indemnities play a crucial role in share sale agreements. They are mechanisms that ensure trust between contracting parties. This article provides an overview of warranties and indemnities in the context of share sale agreements in South Africa.
Warranties
A warranty is a factual statement which, if untrue, may cause the provider to be in breach of contract or become liable to the party for whose benefit the warranty is provided. Warranties are predominantly aimed at eliciting disclosure. They are made either at the time the agreement is entered into or at such dates as defined in the applicable agreement. The onus is on the party for whose benefit the warranty is provided to show that a warranty is untrue, a breach of contract occurred, and to prove quantifiable loss.
Common warranties in share sale agreements include:
- Tax warranties
- Audited financial statements
- The valid issue of unencumbered shares
- All legal documents and frameworks
- All registers of the shares and securities of the company
- A warranty disclosure that provides for any liabilities that have not yet been disclosed
Indemnities
Indemnities are aimed at apportioning risk and liability between the contracting parties. The party that provided the warranty further undertakes as an independent obligation to “make good” any losses or damages suffered by the counterparty. Indemnities provide the counterparty with certainty around being compensated in defined circumstances in which a breach of warranty may not necessarily give rise to a claim.
Warranty and Indemnity Insurance
Warranty and indemnity (W&I) insurance has gained traction in the South African M&A market due to increased understanding and appreciation of its benefits. It supports a clean exit for sellers and alleviates concerns for buyers regarding warranty or indemnity claims after a transaction is closed. W&I insurance can reduce execution risk, as claims can be made against the insurer instead of the parties involved.
Warranties and indemnities are key components of share sale agreements in South Africa. They provide a mechanism for managing risk and ensuring trust between the contracting parties. It’s always recommended to seek legal advice when drafting or entering into a share sale agreement.
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