SPAIN Law and Practice Contributed by: Ignacio Sanjurjo, Ignacio Echenagusia, Alejandro Espín and Román Cantín, Deloitte Abogados y Asesores Tributarios, S.L.U.
• Fundamental R&W cover the existence and valid incorporation of the target company, its registration with the Commercial Registry, ownership, transfer - ability and absence of liens or encumbrances over the shares, the capacity of the parties, absence of conflict and lack of insolvency. The standard mar - ket practice is not to limit fundamental R&W or cap them to the amount of the purchase price. In case of several sellers, the most common liability regime is individual rather than joint liability. • Business R&W cover a wide range of matters con - cerning the target company (including the financial statements; agreements to which the target is a party; compliance with tax, labour and regulatory obligations; litigation; employees; and the conduct - ing of business). PE funds are generally reluctant to grant business R&W when they are on the sell side, although they are sometimes granted by the man - agement team even if the team’s liability is capped at a symbolic quantity in the management warranty deed (or replaced by W&I insurance). Given that the granting of business R&W is a non- negotiable requirement for the purchaser to enter into a SPA, the use of W&I insurance has increased in recent years. Limitation Provisions Sellers’ liability under SPAs is usually limited both quantitatively and temporally. These limitations vary depending on whether there is an investment or an exit, and on whether W&I insurance is taken out. When a PE fund is the purchaser, the following prin - ciples are generally followed. • Fundamental R&W, in almost all cases, are limited to the purchase price or are not limited at all. • Business R&W are normally subject to time and quantitative limitations. (a) Time limitations usually range from 12 to 24 months following closing, with 18 months being standard market practice. Tax, employment or environmental warranties are usually limited to the statutory limitation period plus one month. (b) Quantitative limitations generally include the following.
(i) A cap: The seller’s maximum aggregate liability to the purchaser may not exceed a certain amount (a specific amount or a percentage of the purchase price). (ii) A de minimis value: The purchaser can only claim damages that, when individu - ally considered, exceed a certain amount. Usually, a series of claims arising from facts or circumstances that are substan - tially the same can be accumulated. (iii) Basket/deductible: The seller’s obligation to compensate the purchaser is not en - forceable until the sum of all the damages exceeding the de minimis value is above a certain amount. Once this agreed amount is exceeded, the seller should be liable for the excess (a deductible), or for the entire amount from the first euro (a basket). In competitive transactions, it is common to exclude the seller’s liability for risks identified during due dili - gence, and sellers typically disclose the entire VDR, which is commonly accepted as a general qualifi - cation to the R&W. Specific indemnities are usually included in the SPA, or in a side letter signed by the parties to ensure specific protection regarding rele - vant known issues, to exclude them from the standard liability regime or give them higher quantitative and time limits. 6.10 Other Protections in Acquisition Documentation Payment through an escrow account or deferring part of the price is particularly common in transactions where the purchaser is a PE fund. When the parties to an SPA agree to defer payment of part of the pur - chase price, or agree on price retention, sellers tend to require a guarantee to secure the payment. These remedies are most often used to cover risks with a clearly defined statute of limitations (the date on which the relevant contingency/risk disappears) under appli - cable law, such as labour or tax liabilities, whereas when the PE fund acts as seller, there tends to be reluctance to accept any form of price retention or escrow agreement as this conflicts with the objective of achieving a clean exit.
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