When the buyer issues equity securities to the seller, another guarantee is given. Guarantees and compensation are all forms of contractual protection for the buyer. They are used in both the sale of shares and the sale of assets. Due diligence will aim to resolve all issues of concern to the buyer and to identify appropriate areas that must be covered by guarantees or allowances. These are tailored to the type of target entity or assets sold and the problems identified. Indeed, most of each sales and sales contract is devoted to these provisions, as well as trying to limit their application over time, setting a threshold or limiting the collection amounts to a fixed amount, but how do the terms “guarantee,” “representation” and “compensation” differ and what are the consequences of possible differences? Read on to find out the answers to popular questions about section representations and guarantees. Disclosure plans can take a lot of time and attention to prepare, so it`s important that the seller starts preparing them as soon as possible. Often, the seller`s CFO works with the seller`s lawyers. If the transaction is not completed at the same time as the signing of the sales contract, the disclosure plans must be updated during the transaction. The buyer`s insurance and guarantees are generally limited to the following: the terms “guarantees” “representations” and allowances are often used when selling assets or selling shares.
Compensation is the seller`s commitment to reimburse the buyer for any losses he suffers in connection with any liabilities. Compensation can be used in an asset purchase agreement in which certain areas of risk have been identified, often through the disclosure process. Unlike warranty rights, it is not necessary for the exempt subject to constitute a loss directly arising from the resulting circumstances. Normally, it would be enough to prove that the circumstances led to a loss.