We take care when drafting presentations and warranties in M&A deals. Depending on whether the client is the one who wants to acquire stocks or sell the stocks, the contents of the presentations and warranties are different. We try to ensure the best of the client.
Below is an example of how important it is to define the contents of the representations and warranties.
Example
The shareholder of Company A is X.
Y wants to purchase the shares of Company A from X in order to acquire Company A.
In this case, X usually writes a document called representations and warranties.
The representations and warranties includes the following information.
- How much is company A's debt, what is its monthly sales, and what is its financial position?
- Company A has no contingent liabilities.
- Company A currently has no concerns about violating administrative laws and regulations or being subject to administrative sanctions, and there are no civil or criminal lawsuits going on, and there is no concern about a lawsuit going on.
- If Y suffers damages due to the discovery of a violation of the above representations and warranties after the share transfer, X compensates for the damages.
Company A had a violation of administrative laws and regulations, and if this fact was discovered, a fine of 100 million won was expected to be imposed. However, X hid this fact and did not record this fact in the representations and warranties as above, and stated that there was no problem with Company A.
Y acquires shares in Company A from X. However, right after the stock acquisition, company A was found to have violated administrative laws and was punished with a fine of 100 million won.
Does X have liability even if X does not have intention or negligence?
If X intentionally or negligently failed to inform Y that company A had violated administrative regulations, X should be liable for damages to Y.
However, if X is not involved in management at all, and the circumstances of company A are not known, so X is not even acknowledged to be at fault, should X be responsible to Y?
The Supreme Court ruled that whether X is liable for no intention or negligence should be examined in the contents of the representations and warranties, and if the representations and warranties does not specifically mention liability without fault, it should be regarded as liability with fault in accordance with the general principle of compensation for damages (Supreme Court 2018 10. 12. Sentencing 2017da6108).
Therefore, it is important to state whether or not you are going to make liability without fault statement when drafting representations and warranties. From Y's point of view, it would be advantageous to state that X has liability without fault, and from X's point of view, it would be advantageous to state that X has liability with fault.
What if Y knew that company A had violated administrative laws?
Y knew that company A had violated administrative regulations, but thought that it would be good to receive compensation for damages from X if it was later punished with a penalty of 100 million won, so X said in the representations and warranties that "company A violated administrative laws and regulations". There is no fact, and there is no risk of administrative disposition."
After Y acquired stocks from X, company A was punished with a fine of KRW 100 million, and Y filed a lawsuit against X for damages. In the course of the lawsuit, X said, “Y knew that company A violated administrative regulations and that if company A violated laws and regulations, company A would be punished with a fine of 100 million won, so X does not have the obligation to compensate for damages. ."
The Supreme Court has ruled that, unless there are special circumstances, X must compensate Y for damages regardless of whether Y knew of A's violation at the time of signing the contract (Supreme Court 2018. 10. 12. Decision 2017da6108)
Supreme Court held as follows.
- Restrictions on the rights of Y must be taken cautiously and exceptionally.
- There was no statement that liability for damages was exempted if Y was aware of the violation of the representations and warranties.
- The provision of the representations and warranties between X and Y seems to have the purpose of distributing economic risks through compensation for damages and adjusting the price for stock transfer taking into account the actualized damages afterward.
- Regardless of whether or not Y knew of A's breach at the time of conclusion of the agreement, it is reasonable to assume that X has entered into an agreement to compensate Y for damages reasonably related to the breach.
K&P Law Firm
Attorney Taejin Kim
Incheon Songdo, South Korea
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We provide English legal services in English.
We communicate in English directly with clients.
Tel. +82 32 864 8300
Email: info@kimnpark.com
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