Navigating Representations and Warranties in Share Purchase Agreements in India: A Themis Lexsol Guide

Representations are statements of fact made by one party to another, which are intended to induce the other party to enter into the SPA. Warranties, on the other hand, are promises that a certain state of facts is true, and if they turn out to be untrue, the warranting party will be liable for breach of warranty.

In the context of an Indian SPA, R&Ws typically cover a broad spectrum of information about the target company and its business. These include:

• Corporate Existence and Authority: Confirming the company's legal existence, good standing, and the authority of the parties to enter into the SPA.
• Capitalization: Details about the shareholding pattern, issued and paid-up capital, and any outstanding options or warrants.
• Financial Statements: Assertions that the financial statements provided are true, fair, and accurate, prepared in accordance with Indian Accounting Standards (Ind AS) or relevant accounting principles.
• Assets and Liabilities: Representations regarding ownership of assets, absence of undisclosed liabilities, and compliance with contractual obligations.
• Intellectual Property: Warranties concerning the ownership, validity, and non-infringement of the company's intellectual property rights.
• Compliance with Laws: Assurances that the company has complied with all applicable Indian laws, including the Companies Act, 2013, SEBI regulations (if applicable), and FEMA provisions.
• Litigation: Disclosure of any pending or threatened litigation against the company.
• Taxation: Representations about the accuracy of tax filings and the absence of outstanding tax liabilities.
• Employees and Benefits: Information on employment contracts, employee benefits, and compliance with labor laws.
• Material Contracts: Disclosure of significant agreements the company is party to.

R&Ws are intrinsically linked to the due diligence process. Buyers conduct extensive due diligence to verify the accuracy of the seller's representations. If discrepancies are found, the buyer may seek to:

• Negotiate for specific R&Ws to be added or modified.
• Seek indemnification for potential losses arising from breaches.
• Adjust the purchase price.
• Walk away from the deal.

Negotiation of R&Ws is a critical phase. Sellers aim to limit their exposure by making representations more general, while buyers strive for specific and comprehensive assurances. Key negotiation points include the scope of R&Ws, the duration of their survival post-completion, and the caps and baskets for liability.

Indemnification clauses are crucial for providing recourse to the buyer in case of a breach of R&Ws. An indemnification clause typically obligates the seller to compensate the buyer for any loss, damage, or liability incurred as a result of a breach of a representation or warranty. In India, the enforceability of such clauses is generally well-established under contract law, governed by the Indian Contract Act, 1872.

Key elements of an indemnification provision include:

• Scope of Indemnity: What losses are covered?
• Limitations on Liability: Caps (maximum liability), baskets (minimum threshold before a claim can be made), and deductibles.
• Survival Period: How long do the R&Ws and the indemnity survive post-completion? This is often a point of contention, with buyers seeking longer periods and sellers shorter ones.
• Claim Procedure: How should a claim be notified and managed?

Remedies for breach can range from damages to specific performance, depending on the nature of the breach and the terms of the SPA. For breaches of fundamental warranties (e.g., title to shares), buyers may have stronger remedies.

When drafting or reviewing R&Ws in an Indian SPA, several specific legal considerations come into play:

• Companies Act, 2013: This Act governs corporate governance, share transfers, and disclosure requirements. R&Ws must align with the provisions of this Act.
• SEBI Regulations: For listed companies or transactions involving securities, SEBI regulations, such as the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, may impose additional disclosure obligations and impact the R&Ws.
• FEMA Provisions: For cross-border transactions or investments by non-residents, the Foreign Exchange Management Act, 1999 (FEMA) and its associated rules and regulations are critical. R&Ws must address compliance with FEMA, including obtaining necessary approvals from the Reserve Bank of India (RBI) or the Government of India, as applicable. For instance, representations regarding foreign direct investment (FDI) limits and sectoral caps are essential.
• Tax Laws: Representations concerning tax compliance, including direct and indirect taxes (e.g., Income Tax Act, 1961, GST laws), are vital to avoid future tax liabilities for the buyer.
• Insolvency and Bankruptcy Code, 2016 (IBC): R&Ws should also consider potential liabilities or proceedings under the IBC, especially if the target company has faced or is facing insolvency proceedings.