In the category funny phrases, I will discuss the warranty qualifier “to the best of Seller’s knowledge“. It is often used in (representations and) warranties in M&A- or financing transactions. The phrase is triggered by a purchaser that wants more ‘substance’ as to what it buys whilst the seller is unable to provide absolute certainty.
In this blog, I will give examples, in the parallel blog (klik dan hier) some more solution driven remarks.
Sometimes, it is impossible to make a fully fledged warranty in relation to (i) a fact or circumstance being absent, (ii) the non-occurrence of an event, which is by its very nature unknown or uncertain, or (iii) external events that can be influenced but not entirely.
Example 1: (no) technology infringment. It is often impossible to confirm that certain licensed technology does not infringe upon third party intellectual property rights. (In fact, it is often more realistic to acknowledge that a particular technology already existed on the moment that a particular application for it was developed.) This is impossible for two reasons: first, establishing whether an applied technology is already protected by a third party requires very extensive research into several registers of intellectual property rights (whilst it is not readily clear how such search should be conducted in order to be exhaustive and whilst the registries are abundant). Second, the third party that may claim infringement will often await the success of the infringing party before making such claim is worth the efforts. If it does, the licensee could have chosen for a technology and considerable related investments, whereas the use of such technology can be stopped by the third party. For that reason, the licensee would seek protection against loss of its investments and all that relates to it. So:
To the Knowledge of Licensor, the Licensed Technology does not infringe or make unauthorised use of the Intellectual Property Rights of any third party.
Example 2: (no) defective product claims. Almost every supplier of products will continuously deal with customer complaints, a need to handle defects in its products or damages caused by transportation or otherwise. A warranty in an M&A-transaction that there is no litigation and that no litigation is threatened against the company, could (depending on the type of business) be incorrect. So, for example:
No written notification involving a claim against any of the Acquired Companies in excess of EUR 500,000 has been received by or, to the Seller’s Knowledge, threatened against the Acquired Companies or Seller in relation to any products sold or services provided by any of the Acquired Companies.
No court, arbitration, mediation or government proceedings involving a claim against any of the Acquired Companies in excess of EUR 500,000 are pending against any of the Acquired Companies. To Seller’s Knowledge, there are no facts or events that can give rise to any such litigation or proceedings.
Example 3: (no) violations of laws or regulations. In an M&A-transaction, a purchaser of a business will likely require that the business is in full compliance with all applicable laws and regulations, but in any event that it does not violate regulatory prohibitions. This may well be impossible for competition law issues even though it is understandable:
- the scope of competition laws has changed and extended over time (e.g., historically acceptable business arrangements are currently unacceptable);
- over the past decade, competition laws are being enforced much more actively and have therefore become increasingly important (e.g., inhouse lawyers fail to have been educated adequately);
- the acquired business has become a dominant market party (e.g., initially permitted exclusivity or minimum-purchase arrangements are now troublesome as a consequence of the success of the business);
- remedying incompliance is impossible because the number and types of contracts are too abundant and non-compliance is not recognised as a priority (i.e., the logistics required to correct any incompliance is absent).
What the purchaser of the business would probably want to ascertain is that there are no gross violations of laws and regulations: that there is a minimum of awareness of antitrust implications and that price arrangements between competitors are absent. Despite its complexity and the understandability of a violation, no seller really wants to discuss this issue to the bare detail. At the same time, a purchaser will not accept generic and broadly described carve-outs. In this case, it makes sense to be more specific about the scope of the warranty and distinguish for the particular elements.