As mentioned in our most recent article a share purchase agreement (“SPA”) will contain a list of statements that provide the buyer of shares in a target company (the “Target”) with certain assurances that the Target is in good health. These “warranties” provide the buyer with protection in the event that any of those statements prove to be untrue and cause the business to suffer a loss post-sale as the buyer may be entitled to bring a claim against the seller for a breach of the warranty concerned.
What are tax warranties?In addition to the general warranties listed in our most recent article the seller is usually required to give further specific assurances in relation to the tax liabilities of the Target that have been incurred prior to the date the deal completes. These tax warranties are no different to the general warranties in that they are promises made by the seller under contract but in relation to the Target’s tax affairs.
What is the aim of tax warranties?Tax warranties aim to encourage the seller to disclose any tax issues that may affect the buyer’s proposal to acquire the Target or pay the agreed purchase price. The tax warranties enable the buyer to adjust the purchase price retrospectively and although the scope of such warranties can vary based on the complexity of the Target’s tax affairs they tend to include:That the Target has paid all its taxes on time and has kept appropriate records relating to tax payments so that the buyer is assured there has been no breach of the Target’s statutory obligations and there are no fines that might become payable post-sale;
- Whether there have been any tax investigations by or disputes with any tax authorities as a result of the Target not complying with its tax obligations;
- Whether the Target has sufficient money to cover future tax and deferred tax payments;
- That the Target has not been involved in any tax avoidance schemes; and
- There are no existing capital assets that are subject to chargeable gains from roll-over relief that was claimed when a previous capital asset was disposed of
What can the seller do about tax warranties?As mentioned in our “Negotiating the SPA” article warranties tend to be heavily negotiated and the seller will look to negotiate certain contractual limitations into the SPA in order to reduce its risk exposure such as:
- Specifying financial limits on claims under the tax warranties and/or excluding liability for small claims;
- Excluding liability if the buyer is aware of circumstances that would lead to a breach of warranty claim at the time the deal completes; and
- Timeframes within which the buyer must notify the seller of and bring a tax warranty claim; and
- An acknowledgment by the buyer that the seller will not be liable for any tax matters of the Target that are formally disclosed prior to completion of the deal which would otherwise lead to the seller breaching the tax warranty concerned
Disclosures against the tax warranties may give the buyer cause for concern and during the negotiation process the buyer may request additional information in relation to the disclosed matter, negotiate the purchase price downwards if the risk justifies it, require a specific indemnity in relation to the liability concerned, increase the financial caps or timeframes for tax warranty claims or create an escrow account under which some of the purchase price is paid until a particular date or outcome is reached.
What are the consequences for breaching tax warranties?In the event the buyer successfully brings a claim against the seller for a breach of a tax warranty, damages are usually calculated as the difference between the value of the shares had the warranty been true against the actual value of the shares on the basis the warranty is not true. However, where the tax warranty relates to the lack of care taken in relation to the preparation of tax affairs, damages may be measured between the price paid for the shares and the price that would have been paid if the tax affairs had been prepared with reasonable care.
Any tips?Knowing your tax affairs and consulting with your legal and tax advisers is crucial to ensure you are not giving away too much protection. Good knowledge and teamwork will enable your legal and tax advisers to stay on the front foot and negotiate pro-actively on your behalf to ensure you are only exposed to appropriate risk.Next up: the inside line on indemnities.
Need more help?If you would like any help and advice on your proposed sale or defining your tax warranties, please contact our specialist corporate team on 0151 305 9650 or email email@example.com
If you wish to pursue or are facing a claim for breach of warranty, please also contact our dispute resolution team by calling 0151 305 9650 or emailing firstname.lastname@example.org
This article is not intended to be interpreted as advice.