At a asset deal as a buyer, you get several guarantees from the seller to cover risks. These guarantees protect against hidden debts, legal issues and misinformation about the acquired assets. The guarantees range from ownership confirmations to financial securities and have different terms depending on the type of risk they cover.
What is an asset deal and why are guarantees important?
An asset deal means you buy specific business units, assets or activities instead of shares in a company. In a share deal, you buy the entire company including all liabilities, while in an asset deal you selectively take over assets. Guarantees are crucial because the buyer has no automatic protection against unknown risks.
The seller has more information about the actual state of the assets than the buyer. This information asymmetry creates risks that guarantees must cover. Without warranties, the buyer bears all risks of hidden defects, legal claims or inaccurate financial information.
At M&A-transactions, warranties act as insurance against unforeseen problems. They give the buyer recourse if it turns out that reality differs from what was presented during negotiations.
What types of guarantees do you get as standard with an asset deal?
Standard guarantees in asset deals include ownership guarantees, financial guarantees, operational guarantees and legal guarantees. Ownership guarantees confirm that the seller legally owns the assets and may transfer them. Financial guarantees cover the accuracy of figures and the absence of hidden debts.
Property guarantees confirm that assets are free from encumbrances, liens or other claims. The seller guarantees full ownership and transferability of all assets.
Operational guarantees concern business operations and include guarantees on contracts, suppliers, customers and staff. These guarantees ensure that important business relationships remain intact after the acquisition.
Legal guarantees cover compliance with laws and regulations, the absence of litigation and the validity of licences and contracts. These protect against regulatory risks and legal proceedings.
How long do guarantees apply in an asset deal?
Guarantee periods vary between 12 months and 7 years, depending on the type of guarantee and underlying risk. Fundamental guarantees such as ownership and authority often last 5-7 years, while operational guarantees usually last 12-24 months. Fiscal guarantees can last up to 7 years due to statutory limitation periods.
The duration depends on the nature of the risk. Property guarantees last a long time because ownership issues can arise years later. Financial guarantees have shorter terms because these risks become apparent sooner.
Factors influencing the warranty period are the complexity of the assets, the quality of due diligence and the bargaining power of the parties. In case of incomplete due diligence, buyers often demand longer warranty periods as compensation.
Some guarantees have different terms for different aspects. A financial guarantee may be valid for 18 months for operational matters but 3 years for tax matters.
What happens if a guarantee is breached in an asset deal?
In case of warranty breach, the buyer must inform the seller in writing within the warranty period and provide evidence of the breach. The seller is given an opportunity to remedy the breach or pay damages. The claim process requires concrete documentation of the damage and causal relationship to the breached warranty.
The buyer must prove that the actual situation differs from the given guarantee and that damage results from this. This often requires external expertise for valuation of the damage.
Practical steps in warranty breach include gathering evidence, assessing damages and negotiating compensation. Many disputes are resolved through negotiation before legal proceedings are necessary.
The seller can dispute the claim by showing that there is no breach, that the buyer was aware of the problem, or that the damage is not related to the breached warranty.
As a buyer, how can you get extra protection in an asset deal?
Buyers can obtain additional protection by negotiating additional warranties, setting up escrow arrangements, taking out insurance and requiring specific indemnities. Escrow accounts hold part of the purchase price as security for potential claims. Warranty & indemnity insurance provides additional cover over and above warranties.
Escrow arrangements block 10-20% of the purchase price for 12-36 months as security for warranty claims. This gives buyers immediate recourse without lengthy proceedings.
Specific indemnities cover known risks not covered by standard guarantees. These may relate to ongoing litigation, regulatory investigations or specific contractual obligations.
Warranty breach insurance is becoming increasingly popular in complex transactions. These policies cover damages above certain thresholds and provide protection if the seller cannot pay.
What guarantees can sellers limit or exclude in an asset deal?
Sellers can limit warranties by including exclusions, liability caps, minimum thresholds and adding knowledge reservations. Typical exclusions cover matters disclosed in due diligence, commonly known circumstances or matters beyond the seller's control.
Liability caps limit total damages to a percentage of the purchase price, often 10-30%. This protects sellers from disproportionate claims that exceed the sale proceeds.
Minimum thresholds prevent small claims by setting a lower limit, e.g. €25,000 per claim or €100,000 cumulatively. Only above these thresholds can buyers file claims.
Knowledge reservations limit warranties to matters of which the seller had no knowledge. This protects against claims about problems that could not reasonably have been known at signing.
A successful takeover requires careful consideration of guarantees and protection mechanisms. Professional guidance helps structure appropriate guarantee arrangements that adequately cover risks without blocking the transaction. For specific questions on guarantees in your transaction, please contact with us.
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