Mergers and Acquisitions: Safeguarding the rights of buyers even after the conclusion of an acquisition.

M&A

Mergers and Acquisitions (“M & As”) have been on the rise in Zimbabwe. Most of the transactions are motivated by the need for survival. The business landscape of Zimbabwe is not friendly to start-ups thus the weak dish themselves up for the strong.

The main thrust of having your trusted lawyers by your side as a buyer of a target company during such transaction is mainly “Due Diligence”. The lawyer must ensure that what the buyer is purchasing is what the buyer contemplates to buy. A lawyer is expected to do a Due Diligence report on the target company for the buyer and reveal to the buyer as much information to the buyer as they can and the significance of such. Suffice to say, these can have an enormous effect on the progression and even the conclusion of the transaction.

Whilst it is prudent to undertake the mammoth task of digging into the history and reducing the target company to a bare minimum in the Due Diligence report, it may not be enough. The fatal flaw suffered by the buyer is that, even the lawyer is not part of the company and so as an outsider, the lawyer is inherently limited in level of detail that can be availed in the Due Diligence report. Either the information is furnished to the lawyer by the target company or it is publicly available be it in Government offices or, in the case of public companies, the financial reports which are publicly available.

How then do you safeguard the buyer from liabilities incurred by the seller which are unknown to the buyer nor the Lawyer who conducted Due Diligence?

Representations and warranties

A representation is an assertion as to a fact, true on the date the representation is made, that is given to induce another party to enter into a contract or take some other action. A warranty is a promise of indemnity if the assertion is false. The terms “representation” and “warranty” are often used together in practice. If a representation is not true it is “inaccurate.” If a warranty is not true it is “breached.”

In M & A transactions, representations and warranties are given by both parties to disclose material information. The seller’s representations and warranties tend to be more extensive because they include information about the target company or business and the stock or assets and liabilities being transferred.

A purchaser of a target company can have representations and warranties such as-:

  1. That the purchaser made efforts to do a due diligence on the target company.
  2. The purchaser does have the required authority to purchase the target company.

The seller can include Representations and Warranties such as-:

  1. There is no litigation against it or undisclosed liabilities.
  2. If it is an Asset sale deal, the condition and serviceability of the assets sold.

These representations are important become they form the basis upon which the purchaser or seller may claim to be indemnified.

Representation and warranties apportion risk with respect to target  company or the assets of the target company. Even though the purchaser may be in possession of either the target company or the assets, the Representations and warranties given can indemnify the purchaser from liabilities to the extent of the representation and/or warranty.

 

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Mergers and Acquisitions

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