Representations and Warranties (Garanties d'actif et de passif)

Guarantees are therefore an important and often delicate topic of negotiation. They constitute a crucial chapter of the purchase agreement, sometimes even forming a separate agreement altogether. The representations and warranties of assets and liabilities generally cover the following points:

• The shares or units represent the entire equity. They are not encumbered by any pledge or lien and can therefore be sold freely by the seller;

• The annexed annual accounts were prepared in accordance with accounting principles and provide a true and fair view of the economic reality;

• Trade receivables are valid and will be collected within a normal payment timeframe;

• There are no ongoing disputes that have not been provisioned;

• The company has complied with all norms, obligations, and regulations incumbent upon it. It holds the necessary permits and certificates (to be specified);

• There has been no distribution of profits subsequent to the date of the last annexed balance sheet.

Certain risks can be excluded from the guarantee if they are specified and accepted by the buyer. The seller therefore has every interest in detailing any element that could prejudice the buyer.

The agreement must also specify how potential calls on the guarantee and conflict resolutions will be handled:

• Procedure and timeframes. Each claim must be made upon becoming aware of the damage (timeframe to be specified). The seller will be able to defend themselves using an advisor of their choice and at their own expense. They will thus retain "the control of the proceedings," since they are the one who will have to bear the consequences;

• Guarantee cap. Generally, a maximum amount is fixed, even if the final damage ultimately proves to be higher;

• Guarantee for the guarantee. To secure payment in the event of a claim, it is possible to negotiate holding an amount on an escrow account or a bank guarantee. This amount is usually lower than the cap;

• Threshold for intervention. To avoid claims for trivial amounts, a minimum threshold or a deductible can be put in place;

• Duration. Social and tax risks are in principle covered for the duration of the statutory limitation period (five years, except in cases of proven fraud: seven years). For other risks, the duration is open to discussion (usually two to three years).

As part of a sale negotiation, it is essential that the seller does not conceal important information regarding their company. Indeed, such information will likely be uncovered during the acquisition audit, resulting in the breakdown of the climate of trust necessary to reach an agreement. Even if these elements surface after the sale, the guarantee mechanism allows the buyer to seek recourse against the seller, within the limited framework of the share purchase agreement.

Illustration: Clou