In order to best protect against existing or past tax arrears of the acquired business that have been accumulated prior to the acquisition, the buyer will generally endeavor to obtain from the seller certain guarantees and/or indemnities in tax matters. From the buyer`s point of view, the purpose of both documents is to examine the situation in which the business is purchased and then it turns out that its tax treatment before the transactions was wrong. In this case, the company may be held liable for taxes that are overpaid, interest (which can be high, especially when a tax audit reveals tax treatment errors made a few years ago), or even additional penalties. For example, if an environmental problem is known for which the purpose could be held liable before its completion, the buyer can negotiate compensation to be paid by the seller. If the liability is actually known at the end of the purchase, the seller should reimburse the buyer for that liability. The court calculated that the probable damage caused by the error was more than £2.8M, but the seller`s liability under the SPA limited the damage to the final discounted selling price. The court correctly accepted the purchase price and allowed Cardamon to recover the £2.4 million they paid for Motorplus. The purpose of the guarantees given and the assurances provided by the seller is to ensure that the company has generally complied with its tax obligations in accordance with the rules in force. Theoretically, it may seem sufficient for a claim against the seller if the buyer proves that the seller violates the general warranty that the company has calculated and paid taxes in accordance with tax regulations. This warranty confirms that the seller has no interest in a company that is competing or likely to become competitive with the target company.
This is further protected in the share purchase agreement through the use of restrictive covenants. The purchase agreement will almost always limit the seller`s liability in the event of a breach of warranty in any way. .