The sale of shares in a limited liability company (sp. z o.o.) is a complex transaction, and adequate contractual safeguards for the buyer are essential. A well-drafted share purchase agreement (SPA) should include mechanisms that reduce legal, financial, and operational risk both before and after closing. The most important protections are outlined below.
Representations and warranties
Representations and warranties are the primary instruments used to protect the buyer, as they provide a contractual basis for verifying the company’s legal and financial status. The buyer should require the seller to make representations concerning, in particular:
- title to the shares,
- the absence of tax arrears, and
- the company’s compliance with applicable law.
Precisely drafted representations and warranties reduce transactional risk. If they prove inaccurate, the buyer may pursue contractual remedies and hold the seller liable in accordance with the agreement.
Indemnity clauses
Indemnity clauses protect the buyer against losses arising from specific risks or events, including those identified before signing or discovered after closing. Where damage results from inaccurate representations or other breaches by the seller, the buyer may seek compensation under the indemnity mechanism.
Such clauses may cover, for example:
- errors in financial documentation,
- losses resulting from improper management of the company, and
- claims brought by third parties.
For indemnity clauses to be effective, the agreement should clearly define the scope of liability, the procedure for making claims, and any financial caps or limitations on compensation.
Conditions precedent
Conditions precedent are contractual requirements that must be satisfied before the transaction can be completed (or before the agreement becomes fully effective, depending on the structure adopted by the parties). They protect the buyer against adverse developments occurring between signing and closing.
Typical conditions precedent include:
- obtaining the required corporate approvals,
- no material adverse change in the company’s assets or business, and
- obtaining approvals from the relevant regulatory authorities (if required).
Including such provisions helps minimize the risk of unforeseen complications that could prevent or materially affect completion of the transaction.
Material Adverse Change (MAC) clause
A Material Adverse Change (MAC) clause gives the buyer the right to withdraw from the transaction (or refuse to close, depending on the drafting) if significant negative changes occur in the company’s financial, legal, or operational situation after signing and before closing.
Examples may include:
- substantial financial losses,
- loss of key contracts, or
- significant changes in the management board or management structure.
A properly drafted MAC clause increases the buyer’s flexibility and control by allowing the buyer to reassess the transaction if the company’s value or prospects materially deteriorate.
