In any UK company sale and purchase transaction, warranties are a significant element of the share purchase agreement (SPA). This blog explains how SPA warranties work, the types typically used in UK transactions and how sellers commonly protect themselves through limitation clauses. It also covers the differences between UK and US practice – helpful if your deal has a cross-border element.
What are warranties and why do they matter?
Warranties are promises made by the seller about the company being sold. They’re designed to:
- allocate risk: the seller takes responsibility if certain facts turn out to be untrue
- encourage disclosure: the seller should flag any known issues
- support due diligence: warranties help confirm the accuracy of what the buyer has reviewed
- protect the deal value: they give the buyer comfort that the business is as described
If a warranty turns out to be false and the buyer suffers a loss, they may be able to claim damages.
Common types of warranties in a UK share sale
Warranties follow well-established categories. The exact wording depends on the size, structure and risk profile of the business but typically cover:
Corporate structure
- the company exists and is properly incorporated
- shares are correctly issued and fully owned by the seller(s)
- absence of share options or other rights to acquire shares
- statutory books and Companies House filings are accurate and up-to-date
Accounts and financial position
- recent annual statutory accounts are true and fair
- accuracy of management accounts
- absence of undisclosed liabilities
- consistency of accounting practices used in accounting information
Contracts and commitments
- key contracts exist and are valid
- absence of unusual agreements or commitments
- no change of control provisions
- no known breaches or early terminations
Legal disputes and compliance
- no ongoing or expected litigation
- the company is operating within the law (e.g. data protection, health & safety)
Employees and pensions
- accurate employee data and contracts
- compliance with employment law
- pension schemes disclosed, especially defined benefit arrangements
Intellectual property and IT
- the company owns key IP and systems
- no known IP infringement claims
Property and leases
- ownership or leasehold interests properly documented
- no property disputes or third-party rights
Tax
- tax returns submitted
- no outstanding tax liabilities or disputes
Environment
- no breaches of environmental laws
- no liability for contamination or clean-up
Additional warranties may apply to regulated sectors (e.g. financial services, life sciences).
Warranties, due diligence and the disclosure letter
The role of due diligence
Buyers carry out due diligence to investigate the company’s legal, financial and commercial position. But due diligence isn’t perfect – it may not uncover every risk. Warranties provide a safety net, confirming key facts and encouraging full transparency from the seller.
Using the disclosure letter
Sellers can protect themselves by disclosing known issues. These are set out in a disclosure letter, which qualifies the warranties. If something has been properly disclosed, the buyer usually can’t bring a warranty claim for it. This helps manage expectations and reduce the risk of post-completion disputes.
Clauses that limit the seller’s liability
Sellers will nearly always negotiate limits to their liability for warranty breaches. The aim is to avoid open-ended risk. Common limitation clauses include:
Time limits
Warranties usually only apply for a fixed period:
- general warranties: 12–24 months
- tax warranties: 4–7 years (to match HMRC time limits)
Once the time period ends, the buyer can’t bring a claim.
Financial thresholds
To avoid small or nuisance claims, two limits are often used:
- de minimis: individual claims below a threshold (e.g. £10,000) are ignored
- basket: claims only become payable when they exceed a total threshold (e.g. £100,000)
Liability cap
The seller’s total liability is usually capped – often at 20% to 50% of the purchase price. However, some warranties (such as title and capacity) are often uncapped.
Knowledge qualifiers
Some warranties are limited to what the seller actually knows – or ought reasonably to know – often based on enquiries made of specific people within the business.
Buyer’s duty to mitigate
The buyer must take reasonable steps to reduce their loss before claiming.
No double recovery
The buyer can’t claim the same loss under both a warranty and an indemnity or other remedy.
Claim procedures
The SPA often includes steps for notifying and handling warranty claims. The seller may have a right to take over the defence of third-party claims.
Exclusions for known matters
Issues flagged in the disclosure letter are usually excluded from warranty claims – on the basis that the buyer knew about them and proceeded regardless.
Escrow and holdbacks
In some deals, part of the purchase price is held back – either in escrow or by the buyer = for 12–24 months. This fund can be used to cover any warranty claims that arise. Escrow terms cover how the funds are released, what happens if a claim is made and how disputes are resolved.
Multiple sellers and joint liability
Where several sellers give warranties – for example, multiple founders or investors – liability can be shared in different ways.
- joint and several liability: each seller is fully liable for the entire claim
- several liability only: each seller is liable only in proportion to their shareholding
Buyers often push for joint and several liability to avoid chasing multiple sellers. But minority or passive shareholders may negotiate reduced risk – for example, by giving no warranties or appointing a seller representative to handle claims. The SPA may also include a liability waterfall or other mechanisms to manage this risk.
Warranties vs indemnities – what’s the difference?
Warranties offer a right to claim damages if something turns out to be untrue. Indemnities go further – they provide direct compensation for specific losses, usually without the need to prove loss.
Warranties cover general risks; indemnities are used for known or high-risk issues such as tax, litigation or environmental matters.
Tax covenants in UK transactions
In UK deals, tax liabilities are usually covered by a tax covenant – a separate indemnity where the seller agrees to cover certain tax liabilities that arise from events before completion. These typically include corporation tax, VAT, PAYE and NICs. The covenant is often set out as a schedule to the SPA and includes detailed rules about how claims should be notified and how tax filings are handled post-completion.
Tax covenants are standard in UK share sales, especially when the target company has trading history. They give buyers cleaner protection than a tax warranty alone because there is no need to prove losses as recoverable damages.
In US deals, tax is usually covered by general indemnities in the body of the SPA. There’s less use of standalone tax covenants, which reflects a different market approach to allocating tax risk.
Key differences between UK and US practice
If your buyer or seller is based in the US, it’s worth noting the following differences:
Use of indemnities
US deals often rely more heavily on indemnities, including for breaches of warranty. UK deals tend to use warranties with tailored caps and limits and only include indemnities for specific risks.
Disclosure methods
UK sellers provide a formal disclosure letter. In the US, disclosures are usually made in a schedule attached to the SPA. UK disclosures tend to be more technical; US schedules are often more detailed and narrative in tone.
Limitation clauses and recourse
Escrow and holdbacks are common in US deals and often backed by warranty insurance. In UK mid-market deals, these protections are less routine though increasingly seen in private equity and cross-border transactions.
Warranty insurance (RWI)
Representation and warranty insurance is widely used in US M&A. It gives the buyer recourse against an insurer, not the seller. In the UK, it’s still more common in larger transactions but adoption is growing.
Drafting style
UK SPAs are generally shorter and more principles-based. US SPAs tend to be longer, more prescriptive and drafted with future litigation in mind.
Conclusion: a careful balance of risk
Warranties are an essential part of any company sale. For buyers, they provide comfort that the company is in good shape. For sellers, limitation clauses offer a fair way to protect against unexpected future claims.
Every transaction is different. The right warranty package – supported by sensible limits and full disclosure – helps both parties complete the deal with a fair allocation of risk.
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