LESSONS TO BE LEARNED ON SPA DRAFTING AND ARBITRATION
Drafting a sale and purchase agreement (SPA) in an M&A transaction can be a tedious process. Each party to the SPA strives to draft a contract most favourable to them, with as little risk exposure as possible. Even when parties finally agree on a contract that aligns with their interests, disputes about various issues, such as the actual content and scope of warranties, may arise after the transaction has closed.
This article aims to present those contractual aspects that are virtually always prone to disputes, or that otherwise play a significant role when resolving corporate disputes.
SPA clauses prone to disputes
Scope of warranties. One key aspect of every M&A transaction is the negotiation of representations and warranties to be included in the SPA. These contractual provisions affect not only the final purchase price, but also play an important role in any post-M&A dispute.
Although there is a market standard for types of warranties, in practice the actual scope of warranties – e.g., the number of warranties, strict statements versus knowledge qualifiers, time periods covered by the warranties and materiality thresholds, etc. – primarily depends on the parties’ relative bargaining power and the overall commercial deal terms. Notwithstanding detailed negotiations and careful contract drafting, a certain degree of litigation risk from ambiguous warranty provisions can barely be avoided. This risk is illustrated in the following example.
The seller is not willing to grant any warranties with respect to the condition of real estate buildings owned by the target company, which the buyer duly accepts. Consequently, no corresponding warranty is included in the SPA. However, the seller generally warrants that – to the best of its knowledge – all information relevant for the buyer’s assessment of the transaction was provided to the buyer.
Apr-Jun 2020 issue
Freshfields Bruckhaus Deringer LLP