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.”

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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