February 26, 2015 English Law Sale and Purchase Agreements Issues to Consider Almaty, Kazakhstan
Background English law has become the governing law of choice for a wide variety of international transactions English language / British Empire Connection to the USA Independent and sophisticated courts Common law versus civil law: common law is more flexible in allowing the parties to agree their own terms Basic English law principle caveat emptor let the buyer beware Agreements tend to be long and heavily negotiated Warranties, representations and indemnities Disclosure letters and limitations on Seller s liability 2
Sale and Purchase Agreement ( SPA ) The SPA completes or closes the transaction Typically the buyer produces the first draft of the SPA (but the seller usually produces in an auction sale) Share Sale vs. Asset Sale On a share sale, the buyer steps into the seller s shoes and assumes the historic exposures of the target company, subject to allocation of risk in the share sale and purchase agreement. On an asset sale, the buyer acquires assets only, leading (sometimes) to less warranties and negotiations but more complex transfer mechanics and multiple tax events in some jurisdictions. Conflicting interests among buyer and seller: seller certainty of deal closing and receiving consideration; buyer identification and allocation of risk. 3
What are Representations, Warranties and Indemnities for? To protect the buyer via allocation of risk English law principle of caveat emptor Let the buyer (or lender, investor, etc.) beware! Warranties, representations and indemnities are given by the seller (sometimes management or trustees (liability is limited to trust assets)) 4
Warranties A warranty is a statement of fact by the warrantor (i.e., not a promise or an obligation to do something) that the warrantor claims is true and for which the warrantor agrees to pay damages if it is not true. e.g. There are no environmental liabilities relating to the property. Warranties are like answers to questions designed to obtain information about the target. Disclosure against warranties / representations: obtain information; renegotiation of purchase price or specific indemnity cover; corrective action (condition precedent to closing). 5
Warranties If a warranty is breached (untrue), the aggrieved party can claim contractual damages to the extent that it can prove loss resulting from the breach no right to terminate the SPA Damages are such as to restore the aggrieved party to the position that it would have enjoyed if the warranty had been true. Remoteness of loss applies, and failure to mitigate is prejudicial. 6
Representations A representation is a statement of fact or law made by (or on behalf of) the seller to the buyer which induces the buyer to enter into a contract. Same concept as a warranty, but there are key differences between a breach of warranty and a breach of representation. 7
Representations Misrepresentation: untrue statement by the seller that induces the buyer to enter into a contract causing the buyer loss; fraudulent (knowingly without truth), negligent (carelessly or without reasonable grounds for believing it is true) or innocent (without fault); termination and/or damages (only damages if innocent), but failure to mitigate is prejudicial. Misrepresentation may be proven by showing a false statement of fact to the buyer that was material (i.e., would have induced a reasonable party to contract) and that was relied on by the buyer in entering into the contract. The buyer may rescind the contract and/or claim damages in tort for any resulting loss such as to restore it to the position that it would have enjoyed had the misrepresentation never been made. 8
Representations and Warranties Practical implications: seller should warrant only; buyer wants the seller to give representations and warranties. Drafting point: The Seller represents and warrants : if counselling the seller, change this to: The Seller warrants Drafting point for the benefit of the seller: The Buyer s sole remedy for a breach by Seller of a representation and/or warranty hereunder will be limited to damages to be assessed in accordance with this Agreement. 9
Representations and Warranties Warranties (and representations) are often given at signing and again ( brought down ) at closing: if closing happens after signing, then SPA should contain warranties (representations) that are given at signing and AGAIN at closing; same concept as regards the seller s obligation to run the business in the ordinary course, and obtain the buyer s consent for certain material actions, between signing and closing. Seller will disclose against warranties (and representations) via a Disclosure Letter and should request the right to update the Disclosure Letter for events occurring between signing and closing. 10
Indemnities An indemnity is a promise by the seller to reimburse the buyer in respect of a particular type of liability should it arise. An indemnity is forward-looking and designed to compensate for a future liability if it arises: The Seller will indemnify the Buyer for any and all environmental liabilities relating to the property. The Seller shall be liable for and pay, indemnify and hold harmless the Buyer and its direct and indirect subsidiaries (including the Target) from and against any Tax Liability of the [Target] for any Pre-completion Tax Periods. The purpose of an indemnity is to provide a guarantee remedy on a dollar-for-dollar basis for the buyer in circumstances where a warranty is inapplicable. 11
Indemnities Indemnity based damages are different from contractual (warranty) based damages: seller agrees to pay directly for loss or expense ($ for $); generally for identified risks; can be used for tax liabilities and other specific issues identified in due diligence, such as environmental liabilities or litigation; disclosures usually do not limit indemnities; If indemnity is structured as a debt claim, then, unless otherwise expressly agreed, there is no duty on the buyer to mitigate and no issue as to remoteness of loss. 12
Indemnity based damages If representing the Seller, beware of indemnified warranties which provide the best of both: "...in the event of a breach of Warranty by the Seller, the Seller shall pay the Buyer on demand an amount equal to the greater of: the reduction in value of the relevant asset or, as the case may be, the amount of the relevant liability; and the reduction in the value of the Shares. The Seller should seek to delete this provision, or otherwise modify it in a way that tracks the common law:... The Seller shall be liable to the Buyer for the reduction in the value of the [Shares] [as well as all documented third party out-of-pocket costs and expenses (excluding for the avoidance of doubt management time) reasonably incurred by the Buyer and the Target in relation to remedying any Warranty breach of the Seller]. Alternatively the seller should at a minimum require that the SPA impose on the buyer an overarching duty to mitigate all losses. 13
What is the difference between a Representation, a Warranty and an Indemnity? Warranty: statement of fact relating to the past or present that warrantor says is true and agrees to pay damages if it is not true; remoteness of loss applies and failure to mitigate is prejudicial. Representation: essentially the same as a warranty but grants additional right of termination to aggrieved party and different damages calculation (tort); failure to mitigate is prejudicial. 14
What is the difference between a Representation, a Warranty and an Indemnity? Indemnity: forward-looking; agreement to bear the costs of a known risk materialising ($ for $); duty to mitigate and remoteness of loss do not apply if indemnity is structured as a debt claim. 15
Disclosures Disclosure via Disclosure Letter or Disclosure Schedules Discloses exceptions to the seller s warranties (and representations) existing liabilities existing breaches Generally, no liability for breach of a warranty (representation) if such breach is fairly disclosed. 16
Disclosures A fair disclosure must contain sufficient detail to identify the nature and scope of the matter being disclosed fairly disclosed with sufficient detail to identify the nature and scope of the matter disclosed in the Disclosure Letter Fair disclosure standard can be modified by agreement fairly, fully, specifically, clearly and accurately disclosed, with sufficient detail to identify the nature and scope of the matter disclosed, in the Disclosure Letter 17
Disclosures General Disclosures: Matters of which the buyer arguably ought to be aware: Disclose public records and all publicly available information; disclose the data room; disclose all information, including emails, provided by the seller to the buyer or its advisers. Specific Disclosures: disclosures against specific warranties. Buyer should always insist that disclosures, whether general or specific, contain sufficient detail to identify the nature and scope of the matter being disclosed (fair disclosure). 18
Disclosure Provisions Disclosed or Disclosure means any matter, event or circumstance that is fairly [, fully, specifically, clearly and accurately] disclosed (with sufficient details to identify the nature and scope of the matter disclosed) in the Disclosure Letter [or any of the Disclosure Documents]. Disclosure Letter means the letter of even data herewith [in the agreed form] from the Seller to the Buyer that states that it is the disclosure letter in relation to this Agreement. Disclosure Documents means the documents listed in Schedule 1 to the Disclosure Letter or contained in the Seller s Merrill DataSite virtual data room or the Seller s physical data room located in [ ], including without limitation the bundle of documents marked by the Parties for identification on the date hereof. Except as Disclosed, the Seller warrants that: The Seller s Warranties are deemed for all purposes to be qualified by the Disclosures, and the Seller shall have no liability under this Agreement for any breach of Warranty to the extent that the matter giving rise to such breach is Disclosed in the Disclosure Letter. 19
Disclosure Process for the Seller Seller should invest management time in disclosure and try to specifically disclose as much as possible. The Seller should insist on a ordinary course fair disclosure standard only without additions such as specifically, fully, clearly and accurately. Seller should try to include general disclosures. Seller should try to disclose all information given to or arguably known by the buyer: data-room, information memorandum, management presentations, verbal discussions, public records, information given to advisers. 20
Disclosure Process for the Seller Seller will try to make all disclosures apply to all warranties. Whilst we have attempted in this disclosure letter, for ease of reference, to make disclosure by specific reference to particular Warranties, each general and specific disclosure in this disclosure letter is to be treated as a disclosure against each and every Warranty to which it may reasonably be regarded as being relevant. Seller will attempt to limit the fair disclosure standard: Where brief particulars only of a matter are set out or referred to in this disclosure letter, or a document is referred to but not attached, or a reference is made to a particular part only of such a document, full particulars of the matter and the full contents of the document are deemed to be disclosed and it is assumed that the Buyer does not require any further particulars. 21
Buyer Issues with Disclosure If buyer accepts wide general disclosures this could include all information and documents supplied to buyer and buyer s advisers (written, electronic or verbal). This means that buyer may have deemed knowledge of all matters disclosed to its advisers or all matters described in all documents: Risk that buyer is deemed to know everything. Buyer should require that disclosures be limited to specific issues described in Disclosure Letter. Buyer should require that disclosures be specific and cross-referenced against certain warranties as described in Disclosure Letter. Buyer should require that all disclosed documents be expressly identified and provided. 22
Liability Limitations for the Seller The Seller s liability for the warranties, representations and indemnities is usually limited in the SPA: financial limits: maximum cap on monetary liability small claims threshold bundling of claims threshold time limits: statute of limitations or unlimited for title, capacity and authority 1-3 years for non-tax statute of limitations for tax Fraud (dishonesty, wilful concealment) can be an exception. 23
Liability Limitations for the Seller In addition to seller s disclosures against the warranties/representations and SPA financial and time limits, the seller s liability is often limited in the SPA by making the warranty and representation (and sometimes indemnity) remedies subject to: seller s knowledge qualifiers and materiality qualifiers; seller s right to handle disputes (conduct of claims) / cure period; buyer s duty to promptly provide notice of any potential claim; no double recovery (e.g. insurance or third party payments); liability being provided for in the accounts (if accounts have been disclosed to buyer); buyer s acts after completion or retrospective changes in law; buyer s duty to mitigate loss; buyer s knowledge. 24
Practical implications for the Seller Try to warrant only, or ensure that SPA provides that a breach of warranty or representation will only trigger a damages claim. Limit losses by time and monetary caps and other limitations such as an express duty on buyer to mitigate. Disclose as much as possible against warranties / representations: disclosures may lead to reduction in purchase price or indemnities being sought. Indemnity obligations should be expressly tailored and negotiated. 25
Practical implications for the Buyer Conduct fulsome due diligence. Obtain a complete set of warranties, to be given at signing and repeated at closing. Require completion accounts and obligations on seller s conduct between signing and closing. Understand and negotiate disclosures, and attempt to allow only specific disclosures that fairly disclose liabilities. Seek indemnities, or reduction in purchase price, for certain identified risks. Parent company guarantee Holdback or Escrow Amount Right to set off claims against deferred consideration 26
Practical implications for the Buyer Make sure that monetary caps on seller liabilities allow sufficient compensation in the event of a breach. Make sure that time caps on seller liabilities allow sufficient time for completion of audit: minimum of time necessary to allow an audit cycle plus a few additional months to prepare a claim (preferably 18 months) from closing date: statute of limitations for tax; for title, authority and capacity, no time limit or statute of limitations (English law is six years; local law may differ). Make sure that SPA contains a governing law and dispute resolution provision fair and competent forum that will issue an enforceable award. 27
February 26, 2015 Adopting English Law Documents in the Kazakhstan Context Almaty, Kazakhstan 2014 Dechert LLP
Choice of law What drives the parties when choosing the governing law? Knowledge Prevalent practice Statutory requirements 2
Choice of law Foreign element (Art. 1084 of the Civil Code) Foreign individuals and legal entities Other foreign element? Transfer of equity interest (Art. 1114 of the Civil Code) The relations governed by this Article shall include relations associated with transfer of a participatory interest in a legal entity and other relations between participants of a legal entity Consequences of a breach(art. 1088 of the Civil Code) Invalidation of the clause and application of the Kazakhstan law 3
Choice of law Kazakhstan or foreign mutually exclusive choice? Complex M&A transactions Sale and purchase of shares Issue of new shares, acceptance of new participants Assignment of debt Financing Framework (umbrella) agreements Consequences of a breach Preemptive purchase right 4
Governing law of a SPA Sale and purchase agreement (SPA) is governed by Kazakhstan law SPA is governed by foreign law Entirely With a carve out that provisions relating to the transfer of title are governed by Kazakhstan law The SPA is divided into a Kazakhstan law SPA and an English law Deed of Warranty and Indemnity. 5
Warranties and representations Freedom of contract Parties can enter into any contract, whether contemplated by law or not (Art. 380 of the Civil Code) Terms and conditions of a contract are determined by the parties, except for the terms and conditions mandated by law (Art. 382 of the Civil Code) Warranty or representation? 6
Warranties and representations Representations (warranties) regarding parties and the contact Invalidity of a transaction Breach of warranty is treated as a material mistake (Art. 159.8 of the Civil Code) Breach of warranty is treated as fraud (Art. 159.9 of the Civil Code) 7
Warranties and representations Guarantee of goods quality Seller s warranties are treated as description of the buyer s requirements in relation to the shares, the target, its business etc. (Art. 422 of the Civil Code) If there is a breach of warranty, the seller can apply remedies provided by Art. 428 of the Civil Code Disclosure Proportional reduction of the purchase price, remediation of the breach, compensation of the remediation expenses Contract rescission and return of the purchase price 8
Warranties and representations Indemnity Limitation of liability Contract rescission or termination Material breach of contract (Art. 401 of the Civil Code) Contract rescission in the instances set forth the in the contract (Art. 404 of the Civil Code) 9
February 26, 2015 Dispute Resolution Issues Arising in the M&A Context Almaty, Kazakhstan 2014 Dechert LLP
Dispute Resolution Clause Importance of the dispute resolution clause Entire transaction result may be affected by this clause. Often left for later stage of negotiations. Psychologically uncomfortable to discuss. Use experts! Court or arbitration? 2
Dispute Resolution Does the contract provide for a competent and neutral forum? Is the dispute resolution clause enforceable, and will you be able to enforce a judgment? Consolidate dispute resolution provisions across transaction documents. 3
Governing Law and choice of forum issues Options for choice of forum(court in RK; foreign court; arbitration in RK; foreign arbitration). Choice of governing law does it automatically determines the choice of forum? Choice of foreign law differing views. End result enforcement of the decision! Risks in choosing foreign law and Kazakhstan court. Article 1086 of the Civil Code and Articles 242 and 243 of the Civil Procedure Code. 4
Combinations of governing law and forum Choice of forum in a transaction between residents Court in RK: enforceable in the RK, unenforceable almost elsewhere in the rest of the world; Foreign court: depends on the country of the court; Arbitration in RK: enforceable almost everywhere; Foreign arbitration: enforceable almost everywhere, but questionable in the RK. Choice of forum in a transaction with at least one non-resident limitations related to resident status are not applicable. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention 1958) 154 countries of 193 UN Member States. 5
New York Convention 1958 6
Corporate Disputes Definition of a corporate dispute First introduced into Article 24 of the Civil Procedure Code in 2008 by a package of legislative amendments concerning corporate disputes. Since 2015 is gone from there, and can be found only in the Normative Ruling of the Supreme Court. Are corporate disputes arbitrable? «A dispute originating from civil law relationships upon agreement of the parties may be resolved by mediation or referred to arbitration tribunal unless it is prohibited by Kazakhstan legislation» Rules concerning producing evidence introduced into the Civil Procedure Code in 2008. 7
M&A Transactions Seminar Dechert LLP WALTER DANIEL 26 February 2015
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