Asset and liability warranties: an essential part of any transaction
When acquiring a company, risk management is of paramount importance. One of the key elements in this respect is the implementation of an asset and liability guarantee. This protects the acquirer against potential errors or omissions in the company’s balance sheet, as well as against any unfavorable post-sale balance sheet variations that could be attributed to previous management. AKCEAN can help you negotiate this essential guarantee, which should be included in the initial discussions between the seller and the buyer. This guarantee has important implications for the seller, who may be obliged to block part of the sale price to cover any compensation. What is an asset and liability guarantee? An asset and liability guarantee is a commitment made by the seller to certify the accuracy of the assets sold and existing liabilities. It may take the form of a specific clause in the sale contract, or be included in an agreement appended to the contract. In the event of a discrepancy between the financial information provided and reality, or if events prior to the sale adversely affect the balance sheet, the purchaser may request financial compensation from the seller under the guarantee. Asset warranties : The purpose of the asset guarantee is to confirm the veracity of the assets presented in the balance sheet. These include intellectual property rights, real estate, equipment, fixed assets, inventories, trade receivables, other receivables and cash. The aim is to protect the acquirer against any inaccuracies concerning these assets, as well as against any reduction in their post-transaction value due to events occurring prior to the sale. Typical examples might be lower-than-declared inventories, missing equipment or uncollectible trade receivables. Liabilities guarantee : The liabilities guarantee guarantees the accuracy of balance sheet liabilities. These may include provisions, financial debts, supplier debts, as well as tax and social security debts. This guarantee offers protection to the purchaser against errors or omissions concerning liabilities, and against any increase in post-transaction liabilities due to pre-sale events. This may include the discovery of undisclosed debts, tax reassessments for periods prior to the transaction, employee disputes and litigation with customers or suppliers for pre-sale events. Content of the asset and liability guarantee To ensure the effectiveness and clarity of an asset and liability warranty clause, it is crucial to include key elements that define its operation and terms, agreed and accepted by both the acquirer and the seller: Identifying the guarantor : Clearly identify the parties responsible for the guarantee. When several sellers are involved, their commitment is not necessarily joint. Definition of beneficiary : Specify the beneficiary of the guarantee, which may be the acquirer or the acquired company. Scope: Specify the assets and liabilities covered by the guarantee, with reference to the relevant accounts. Duration of the guarantee : Limit the duration of the guarantee, generally to a period of 3 to 5 years, and align it with tax and social security statutes of limitation. Guarantee amount: Set a ceiling, often representing between 10% and 30% of the sale price, depending on the risk assessed by the buyer during the acquisition audits. The amount of the guarantee may be subject to degression over time. Trigger threshold : Establish a minimum threshold enabling the guarantee to be activated only for significant amounts. A fixed amount (deductible) to be borne by the purchaser can also be set. Activation procedures : Specify the steps the purchaser must take to activate the warranty, including the form, deadlines and justifications required. Guarantee of the guarantee: Consider measures against the insolvency of the guarantor. Additional measures are usually provided for, such as a first-demand guarantee, bank guarantee, mortgage or pledge. Although this list is fundamental, it is not exhaustive. The drafting of a guarantee of assets and liabilities should be entrusted to a legal professional to ensure its accuracy and effectiveness. In practice, an assignment contract lists a series of declarations made by the assignor concerning the company’s situation. This includes its management, ownership of shares, accuracy of accounts, details of assets and liabilities, off-balance sheet commitments, current or potential disputes, personnel, contracts, tax obligations and compliance with regulations. It is agreed that any loss resulting from an omission or inaccuracy in these statements shall give rise to compensation. Acquisition audits play a crucial role in providing an in-depth analysis of the risks associated with the business and the transaction. These audits help to establish specific representations and warranties, thereby reinforcing the buyer’s protection. Last update: January 2024
