Warranties and Disclosure

11.1What warranties actually do

A warranty is a contractual statement of fact about the target, given by the seller in the SPA. “The Accounts give a true and fair view.” “No Group Company is engaged in litigation.” If a warranty is untrue, the buyer can sue for breach of contract and recover damages. In the Sunrise SPA the whole machine starts with one sentence:

Remember from Chapter 1 that English law starts from caveat emptor: a share seller has no general duty to volunteer bad news. Warranties are the contractual answer, and they do two jobs at once:

• Retrospective risk allocation. If a warranted statement turns out to be false, the loss lands on the seller (as damages) rather than the buyer. The warranty catalogue is, in effect, a map of which risks the seller has agreed to stand behind.
• Information-forcing. A seller asked to warrant that “no litigation is pending” must go and check. Where the statement is not quite true, it must disclose the exception (see section 11.7) rather than sign a false promise. Simply asking for the warranty smokes problems out into the open before signing.

11.2Warranty or representation? A genuinely English distinction

The Sunrise SPA never says the Seller “represents” anything — only that it warrants. That single word choice is deliberate, and the reason is a real piece of English law. Breach of a warranty is a breach of contract: the remedy is damages on the contractual (expectation) basis, and the contract survives. An actionable misrepresentation is different. It is a false statement that induced the buyer to enter the contract. It can entitle the buyer to rescission, which unwinds the contract entirely, as if it had never been made. It can also entitle the buyer to damages assessed on the more generous tortious basis under the Misrepresentation Act 1967.

For a seller, that is a nightmare scenario: months after completion, with the business integrated and the money distributed, the buyer tries to hand the company back. So sellers strike the word “represents” wherever it appears, and their lawyers build machinery into the SPA to shut the misrepresentation door properly:

Unpack it and you find three moves. A non-reliance acknowledgement: each party agrees it relied only on what is written in the Transaction Documents — so a stray optimistic remark in a management presentation cannot found a misrepresentation claim. A damages-only clause: the buyer’s sole remedy for a false warranty is contractual damages. And a bar on rescission or termination after Completion — the deal, once done, stays done. It sits alongside the entire agreement clause, which supersedes everything said in negotiations. One thing no drafting can exclude is fraud: clause 14.3 preserves it here, and clause 9.9 makes the same carve-out from the limitations.

One orienting note for cross-border work: US practice happily speaks of “reps and warranties” as a single phrase, because the distinction carries much less freight there. When an American colleague asks where the reps are, they mean Schedule 3.

11.3What do you actually recover? The measure of damages

Contractual damages aim to put the buyer where it would have been if the warranty had been true. For a share purchase, the conventional measure is the difference between the value of the shares as warranted and their true value given the breach. It is emphatically not an automatic refund of the overpayment, and not automatically the cost of the problem itself.

Work through the arithmetic on Sunrise numbers. Atlas is paying €42 million, built from a multiple of Solaris’s warranted EBITDA of €6 million — call it 7 × for round numbers, with the enterprise-to-equity bridge (Chapter 8) landing at that figure.

• A one-off hole. Suppose an undisclosed €2 million liability surfaces — an old, settled dispute that says nothing about future earnings. Does that make the shares worth €2 million less? Perhaps — a buyer valuing the company would knock the cash cost off. But it may be less: if the liability was already time-barred, or covered by insurance, share value may barely move. The buyer must prove the diminution in value; it does not simply present a receipt.
• A hole in the earnings. Now suppose the accounts warranty (Schedule 3, paragraph 3) is false because true EBITDA was €5.5 million, not €6 million. If the market prices this business at 7 × EBITDA, the shares as warranted were worth €42 million and are truly worth about €38.5 million. That is damages of €3.5 million, seven times the €0.5 million shortfall. A false earnings warranty multiplies.

This is why buyers fight hardest for warranties that underpin the valuation model, and why sellers fear accounts warranties more than almost anything else in Schedule 3. It is also, as you will see in Chapter 12, why known problems are handled by indemnities instead: an indemnity pays euro-for-euro on the loss, with no valuation debate.

11.4A tour of Schedule 3 — the warranty catalogue

The warranties themselves live in Schedule 3, grouped by topic. Walk it once now; you will spend real deal time inside it later.

1 · Capacity and title and 2 · The Group — the Fundamental Warranties. The Seller owns the Shares free of encumbrances and has power to sell; Schedule 1 is accurate and the Target owns its subsidiaries. These two sections are defined as the Fundamental Warranties, and the SPA treats them far more strictly than the rest. They are not qualified by disclosure (clause 8.3). They sit outside the de minimis, basket and business cap. They run for seven years. And they are the only warranties repeated at Completion under clause 8.2. The logic: if the seller doesn’t actually own what it is selling, every other protection is beside the point.

3 · Accounts. The audited accounts give a true and fair view as at the Locked Box Date. As section 11.3 showed, this is the warranty that stands behind the price itself.

4 · Position since the Locked Box Date. Ordinary course of business, no material adverse change, no dividends, no unusual borrowing since 31 December 2025. In a locked box deal (Chapter 9) the buyer takes economic risk from that date, so the seller warrants the ground the buyer now stands on.

5 · Regulatory and compliance. For a MiCA-authorised CASP, this is where the deal’s real risk lives. The authorisation is in force and sufficient; the business has complied with MiCA, anti-money-laundering law and sanctions for three years; capital and client-asset safeguarding are in order; and no bribery offences have been committed. Look closely at paragraph 5.3: it warrants there are no regulatory investigations “except for the Legacy AML Matter”. The known CBI issue is expressly carved out of the warranty because it is Disclosed and dealt with by a specific indemnity (clause 10.2). That is a textbook example of known risks leaving the warranty system and entering the indemnity system.

6 · Contracts. Material contracts (over €250,000 a year, plus the top ten clients) are in the Data Room, in force, not breached — and no counterparty has given notice to terminate, including because of the deal itself.

7 · IT and intellectual property. The Group owns or validly licenses what it needs; the Helia platform is confirmed as owned by the Polish subsidiary; no material outages or security breaches in three years.

8 · Data protection — material compliance, no regulator complaints, no notified personal data breaches. For a business holding customer identity files, this sits close to the AML warranties in importance.

9 · Employees. Accurate remuneration data in the Data Room, Senior Employee contracts provided, no resignations triggered by the deal, no defined benefit pension scheme (the kind of legacy liability that can dwarf a purchase price).

10 · Litigation and 11 · Insolvency. No disputes beyond small-debt collection, none threatened so far as the Seller is aware; and neither the Seller nor any Group Company is insolvent or heading that way.

12 · Tax. Returns filed and accurate, tax paid, no disputes, residence where expected. These overlap with the tax covenant — Chapter 12 explains how the two fit together.

11.5Warranting standards — the qualifier toolkit

Two warranties on the same subject can allocate risk completely differently depending on how they are qualified. Every qualifier is a small tug-of-war between buyer and seller:

Knowledge qualifiers deserve special care, because “awareness” of a company is a slippery idea. The Sunrise SPA pins it down: Seller’s Knowledge means “the actual knowledge of Daniel Okoye, Elena Marsh, Tomás Brennan and Agnieszka Zielińska, in each case having made reasonable enquiry”. Two buyer-side wins are hidden in that definition. Named individuals: Meridian is a holding company that knows little first-hand, so the definition reaches into the Target and names the CEO, CFO and Head of Compliance — the people who actually know things. Due enquiry: “having made reasonable enquiry” stops the seller passively not knowing; the named people must go and ask.

11.6Repetition at Completion

Warranties in the Sunrise SPA speak as at the date of this agreement — signing day. But Sunrise has a gap of months between signing and Completion while the CBI considers its approval. What if something goes wrong in between? Buyers would like every warranty to be repeated at Completion — given afresh, by reference to the facts then existing — so the promises are true at the moment the money actually moves. Sellers push back hard: repeating the business warranties would make the seller an insurer of events outside its control. If Solaris’s largest client resigns during the gap because of the deal itself, the seller has done nothing wrong. Why should it hand the buyer a damages claim (or, worse, a walk-away right) for it?

Sunrise lands where mainstream English practice lands. Under clause 8.2, only the Fundamental Warranties are “deemed to be repeated immediately before Completion by reference to the facts and circumstances then existing”. The seller can fairly be asked to keep owning the shares it is about to sell. The business warranties speak once, at signing. The buyer’s protection during the gap comes instead from the conduct covenants in clause 6 and from clause 6.5. Clause 6.5 obliges the Seller to notify the Buyer promptly of any matter constituting a material breach of the Warranties or endangering a Condition. Note what notification gives the buyer: information and time to react — not, in this SPA, a right to refuse to complete. Chapter 13 covers the gap period in full, including the more buyer-friendly variants (full repetition plus a “bring-down” condition, familiar from US practice).

11.7Disclosure — the seller’s shield

Now the other half of the system. A seller asked to warrant “no regulatory investigations” cannot sign that statement — the CBI inspection letter exists. Deleting the warranty would be a red flag; instead, the seller gives the warranty and discloses against it. Under clause 8.3, the Warranties (other than the Fundamental Warranties) “are qualified by all matters Disclosed” — a disclosed matter cannot found a warranty claim, because the buyer took the risk with its eyes open.

Disclosure happens in the Disclosure Letter — a letter from the Seller to the Buyer, dated the same day as the SPA, making disclosures against the Warranties. By convention it contains general disclosures and specific disclosures. General disclosures are matters treated as disclosed wholesale: everything on public registers such as Companies House, the contents of the Accounts. Specific disclosures are numbered, warranty-by-warranty: “Warranty 5.3 — the Legacy AML Matter, being the CBI inspection letter dated 6 March 2026 at Data Room document 7.4.1…”. On top of the letter, the whole Data Room is disclosed. That is why its index is annexed to the Disclosure Letter and its contents archived onto USB drives at signing. If a claim comes later, the parties can then prove exactly what was in the room.

Everything then turns on the standard of disclosure. The Sunrise SPA defines Disclosed as “fairly disclosed in the Disclosure Letter or the Data Room, in each case with sufficient detail to enable a reasonable buyer to identify the nature and scope of the matter disclosed”. Those words are the buyer’s protection against disclosure by burial: a needle hidden in a 10,000-document haystack is not fair disclosure. A CBI inspection letter filed without comment in a folder called “General correspondence” tells a reasonable buyer nothing about the nature and scope of the problem. The same letter specifically disclosed against the regulatory warranties, with a summary and a document reference, plainly does.

For the junior lawyer, disclosure is not theory — it is your workstream. On the sell side you will often hold the pen on the Disclosure Letter, working through the warranty schedule line by line with the client. The craft:

• Verify every specific disclosure against its source document — never disclose from memory or from what a manager “is pretty sure” is the position.
• Cross-reference precisely: warranty number, document name, exact Data Room reference (“7.4.1”, not “the regulatory folder”).
• Describe nature and scope — what the matter is, and how big it could be. A disclosure that understates scope may not be fair disclosure of the full problem.
• Sweep for consistency: every exception mentioned in DD calls, management interviews or the Q&A log should either be in the letter or consciously left out.
• Freeze the record: agree the Data Room index and archive with the other side before signing.

11.8Buyer’s knowledge and sandbagging

Suppose the buyer’s own due diligence uncovers a problem the seller never disclosed — and the buyer says nothing, signs, completes, and then sues on the warranty it knew to be false. US lawyers call this sandbagging, and American SPAs argue expressly over “pro-sandbagging” clauses (knowledge doesn’t bar claims) versus “anti-sandbagging” clauses (it does). Well-advised English parties do not leave the point to case law either. Sunrise resolves it in the seller’s favour:

Note the careful narrowing — this is the buyer’s side of the tug-of-war. Only the actual knowledge of three named individuals (the Buyer’s Deal Team) counts, not everything buried in an adviser’s report. And the person must have actually appreciated that the matter would be likely to found a claim. But the practical lesson for you is bigger than the drafting: due diligence findings must be dealt with in the SPA, not banked for later. If DD turns something up, the deal team’s choices are a price reduction, a specific indemnity, a condition or pre-completion fix, or a conscious decision to accept the risk. That is exactly the escalation path described in Chapter 7. A known problem left silent is, under clause 9.6, simply the buyer’s problem.

11.9The limitations, in brief

No seller gives warranties unlimited in amount or time. Clause 9 is the seller’s safety architecture; the numbers are among the most negotiated in any deal, and Chapter 14 plays out that negotiation. For now, the Sunrise positions:

Put sections 11.7 to 11.9 together and you can see what a warranty claim must survive before a euro is paid:

11.10W&I insurance — rerouting the whole system

Finally, a modern development you will meet constantly, especially on private equity deals: warranty and indemnity (W&I) insurance (in the US: “reps and warranties insurance”). The idea: an insurer, for a premium, stands behind the warranties instead of the seller. The usual structure is a buy-side policy — the buyer is the insured and claims directly against the insurer — sitting above a nil or nominal (€1) seller cap. The seller exits clean; the buyer keeps meaningful cover; the negotiation over caps and survival periods largely moves from the SPA to the policy.

The insurer is not writing a blank cheque. It prices off the quality of the process: it reviews the DD reports, the Disclosure Letter and the data room, holds an underwriting call with the deal team and its advisers, and excludes anything it considers under-diligenced. A broker runs the market for non-binding indications first. Premium is typically a low single-digit percentage of the policy limit (in Europe, often around 1–2%). There is also an excess (retention) below which the buyer bears the loss. For extra premium, buyers can negotiate enhancements — scraping materiality or knowledge qualifiers from the warranties as read by the policy, or extending survival periods beyond the SPA’s.

One exclusion matters above all: known matters are never covered. Anything disclosed, or identified in the buyer’s own DD, is excluded from the policy — insurance covers the unknown, not the known. So the Legacy AML Matter could never be insured under a standard W&I policy; a known, quantifiable regulatory risk is exactly what specific indemnities (and, in the market, separate “contingent risk” policies) exist for.

You now have the full warranty system: the promises, the remedy, the shield of disclosure and the gauntlet of limitations. Chapter 12 turns to the instrument built for the risks warranties handle badly — the indemnity, and its most important specimen, the tax covenant.