Introduction
A share purchase agreement usually provides for seller warranties whereby the seller undertakes to indemnify the purchaser against the potential loss of value suffered by the target, provided that the triggering event of such loss occurs before completion of the transaction. This mechanism is a key point for the purchaser, but also for possible sub-purchasers, which will undoubtedly be keen to require the assignment of the initial seller's warranties to the extent that such warranties are still valid as at the date of the subsequent transfer.
On October 9 2012 the Supreme Court ruled that the absence of contractual provisions expressly authorising the assignment of the seller's warranties to the sub-purchaser did not necessarily prevent the validity of such assignment in the event of a subsequent transaction. Scholars and practitioners were doubtful as to the decision's scope and significance. In particular, it was unclear whether the court had ruled that, unless otherwise provided, there would be a presumption of acceptance by the initial seller of further assignments of its warranties. On October 20 2015 the Supreme Court ruled on the case for the second time, clarifying its intentions.
The transaction at issue was a share deal in which the seller conventionally undertook to indemnify the purchaser in the event of:
- an increase in the target's liabilities; or
- a decrease in the value of the target's assets.
In the context of a subsequent share transfer of the target, the purchaser undertook to assign to the sub-purchaser the benefit of the seller's warranties, as the initial share purchase agreement remained silent on the possibility of such assignment. When the sub-purchaser called on the warranties, the initial seller argued that such warranties had been granted only to the initial purchaser.
In 2015 the Supreme Court ruled that the Court of Appeals had rightfully, and in accordance with its sovereign power of interpretation, inferred that the initial share purchase agreement which included the seller's warranties had been entered into in consideration of the initial purchaser. Thus, far from establishing a presumption of acceptance by the initial seller of the assignment of its warranties, the Supreme Court simply considered that it was not in its remit to construe the common intention of the parties and to appreciate the personal character of the initial share purchase agreement. As a consequence, such task comes under the sovereign powers of the lower courts, which must decide – based on the transaction, the initial contract or any other element – whether the parties intended to include the option to assign the warranties in the agreement.
From a practical standpoint, it would have been more efficient in terms of legal certainty if the Supreme Court had made a clear choice either in favour of or against a presumption of acceptance of the assignment of the seller's warranties to the sub-purchaser, instead of taking refuge behind the interpretation of the lower courts, as such interpretation is by definition unpredictable and determined on a case-by-case basis.
In order to avoid doubt, the parties to a share purchase agreement should expressly clarify their intentions regarding the possibility or prohibition of the assignment of the seller's warranties to a third party in the event of subsequent transfers of the target's shares.
For further information please contact Alain Levy or Gwenaëlle de Kerviler at AyacheSalama by telephone (+33 1 58 05 38 05) or email ([email protected] or [email protected]). The AyacheSalama website can be accessed at www.ayachesalama.com.
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