The situation
A Bengaluru private equity fund is investing in a specialty chemicals company. Diligence finds a pending GST demand, a factory consent that was renewed late, and two customers whose contracts expired and were never renewed in writing. The fund still wants to invest. The question is who bears the cost if any of these turns into a real loss.
Warranties
Warranties, often called representations and warranties, are statements of fact the seller makes about the business in the share purchase agreement. For example: the accounts give a true and fair view; the company has all licences it needs; there are no disputes other than those disclosed. If a warranty is untrue and the buyer suffers a loss, the buyer can claim.
Disclosure
The seller can protect itself by disclosing exceptions in a disclosure letter. If the GST demand is fairly disclosed, the buyer usually cannot later claim under the general tax warranty for it. Disclosure therefore moves known issues out of warranty claims and into the negotiation.
Indemnities
An indemnity is a promise to make good a specific loss, usually for a known issue. If diligence finds the GST demand, the buyer will often ask for a specific indemnity: if the demand is confirmed, the seller pays it. Indemnities are more direct than warranty claims and are often backed by an escrow or a holdback.
Usual limits
Both sides usually agree limits on claims:
- Time limits. General warranty claims within a set period, often longer for tax and title.
- Minimum claim size. Small claims below a threshold are ignored, so the parties do not argue over trivial amounts.
- Cap. The total the seller can be asked to pay, often a share of the price for general warranties, with higher caps for title and specific indemnities.
- Security. An escrow, a holdback or a deferred payment, so the buyer is not left chasing the seller.
The right numbers depend on the size and sector of the deal.
Turning findings into protection
Each material diligence finding usually goes one of four ways:
- Fixed before signing, such as renewing a consent.
- A condition before closing, such as getting a customer contract signed.
- A price adjustment, where the cost is clear.
- A specific indemnity, where the cost is uncertain.
Writing each finding into an issues list with its chosen route keeps the negotiation clear.
A short checklist
- Issues list with each finding, its evidence and its route
- Disclosure letter prepared carefully, with documents referenced
- Limits on time, size and cap agreed in heads of terms
- Security for specific indemnities agreed
- Your lawyer drafts and reviews; your CA checks tax items
Where Synerger fits
In Synerger, every finding in due diligence links to the document behind it, and the issues list feeds the negotiation. The templates library describes the SPA and MAC clauses.
General information; your lawyer advises on your own deal.