Limiting liabilities

20 March 2008

In Simple Terms, There Are two ways in which a business can be acquired – either by buying the company that owns the target business (a share purchase) or by purchasing the assets that make up the business (an asset purchase). There are a number of factors that may influence that choice.

Under a share purchase the buyer acquires all of the assets and liabilities of the business. The seller may prefer this as it means a clean break and limits any ongoing liabilities such as warranties and indemnities.

By the same argument, a buyer may prefer an asset purchase to protect it against unknown and/or unquantifiable liabilities. This is particularly relevant for construction businesses where there may be concerns about potential contractual claims, compliance with laws, environmental liabilities and so on.

Where the target business is a division of the seller's business, it may be more practical to structure the transaction as an asset purchase.

Where third party consents are required to transfer assets – from customers, suppliers, landlords and regualtors etc – a share purchase may be a more practical way of acquiring the target business.

However, even with an asset purchase there are ways of structuring a transaction to address these issues, so such consents are not usually an overriding concern in the choice of structure.

Sale and Purchase Agreement

This is the principal document dealing with the acquisition. The key contractual terms include:

Conditions Precedent (e.g. shareholder consent or competition clearance).

Assets – for asset purchases, the agreement will need to identify the particular assets of the business being sold.

Price – this may be a fixed amount or be determined by reference to a formula or accounts drawn up after completion.

Contracts – for asset purchases, the agreement will need to specify how contracts are treated (this will not be an issue on a share purchase since the contracts will be held by the target company).

Insurance – given the potentially large sums involved on construction contracts, each side's brokers will need to work closely to ensure that adequate protection is in place to deal with any issues that come to light following completion. Relevant to this exercise will be whether the policies have been underwritten on an “occurrence” basis or a “claims made” basis.

Employees – on a share purchase, the employees of the business will usually be employed by the target company, so there will usually be no specific provisions. On an asset purchase, special employment laws such as TUPE in the UK may apply and the agreement may need to deal in detail with both parties' responsibilities to employees.

Protective covenants – these are undertakings given by the seller to protect the goodwill of the business. These need to be reasonable in nature and scope to be enforceable under competition rules.

Indemnities – if the due diligence process uncovers potential liabilities, the purchaser may want to address these in the form of specific indemnities.

Pensions – the agreement may deal with how pensions are to be treated. This is more likely to be a concern where a final salary pension scheme has been operated historically.

Limitations – ways by which the seller limits its liability for warranty and other claims under the agreement.

Warranties – these are a set of assurances given by the seller as to the state of affairs of the business. The warranties are designed to protect the buyer against unknown risks of the target business and to prompt disclosure of relevant information by the seller.

The issue of warranties is an area of particular importance when acquiring construction businesses, and there are several important areas where these may be used.

The buyer will want comfort that all material contracts have been disclosed together with details of any problems with those contracts such as disputes.

On construction projects, large unapproved change orders may be indicative of problems with a particular project and a buyer may seek a warranty for this to flush out any potential issues.

When it comes to employees, areas of focus will include the use of subcontractors, compliance with immigration legislation and in compliance with any sector-specific tax law such as the UK's Construction Industry Scheme (CIS).

In view of the ongoing competition law investigations into the construction sector across Europe by national and pan-European regulators, a buyer may seek warranty cover on any infringement of competition law.

Warranties may be sought in relation to property on issues such as title, compliance with lease terms and the absence of any disputes/investigations. Warranties and/or indemnities may also be sought in relation to potential environmental liabilities.


Buying a construction company can carry its own set of particular risks. However, careful due diligence and focussed negotiation of the purchase documentation can significantly help manage those risks and increase the chances of making a successful purchase.

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