Warranties of the selling stockholders: Overview, definition, and example
What are warranties of the selling stockholders?
Warranties of the selling stockholders refer to the promises or assurances made by the stockholders who are selling their shares in a company. These warranties typically outline certain facts or conditions about the shares, the stockholders' ownership, and the company itself, which are guaranteed to be true by the selling stockholders. These warranties are intended to protect the buyer by ensuring that the shares being sold are free of issues like legal disputes, unpaid liabilities, or undisclosed obligations. If any of the warranties turn out to be false or inaccurate, the selling stockholders may be required to compensate the buyer for any resulting damages.
For example, a selling stockholder might warrant that they legally own the shares being sold and that the shares are free from any encumbrances or claims.
Why are warranties of the selling stockholders important?
Warranties of the selling stockholders are important because they provide the buyer with confidence that the transaction is legitimate and that the shares being purchased are free from hidden liabilities or risks. They are a key part of the due diligence process, allowing the buyer to rely on the seller’s assurances to make an informed decision. If any of the warranties are breached, the buyer has the right to seek compensation or other remedies as outlined in the agreement.
For sellers, offering warranties helps make the sale process smoother by setting clear expectations and providing assurances that can facilitate the deal. For buyers, these warranties are crucial for mitigating the risks associated with purchasing shares, particularly in private companies where there may be less transparency.
Understanding warranties of the selling stockholders through an example
Imagine that a company is being sold, and the selling stockholders provide warranties regarding the ownership and condition of their shares. One of the warranties might state that the selling stockholders have full legal ownership of the shares and that the shares are free from any liens or encumbrances. The buyer relies on this warranty when purchasing the shares, as it ensures there are no hidden claims on the stock. If it later turns out that the shares were subject to a lien that was not disclosed, the buyer may seek compensation from the selling stockholders for the breach of warranty.
In another example, the warranties could include assurances that the company has no outstanding tax liabilities or legal disputes. If any issues arise post-sale, the selling stockholders would be held responsible for resolving them or compensating the buyer.
An example of a warranties of the selling stockholders clause
Here’s how a warranties of the selling stockholders clause might appear in a stock purchase agreement:
“The Selling Stockholders hereby warrant and represent that they are the legal and beneficial owners of the Shares being sold, free and clear of any liens, claims, or encumbrances. The Selling Stockholders further warrant that there are no pending legal actions, disputes, or liabilities related to the Shares or the Company, except as disclosed in the Agreement.”
Conclusion
Warranties of the selling stockholders play a crucial role in protecting the interests of the buyer in a stock transaction. By providing assurances about the ownership, condition, and liabilities of the shares, these warranties help prevent disputes and ensure that the sale is completed without unforeseen risks. For both buyers and sellers, clearly defined warranties create transparency and trust, making the transaction process smoother and reducing the potential for legal conflicts after the sale.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.