Warranties cover four broad areas: (1) Title warranties (seller owns the shares free of encumbrances, shares have been validly issued); (2) Financial warranties (accounts fairly presented, no material adverse change since accounts date, working capital adequate); (3) Business warranties (no material litigation, no key contract defaults, IP ownership, no undisclosed material liabilities); (4) Tax warranties (all tax returns filed, no open disputes, no known exposure). Each warranty carries the risk that a breach will be discovered post-closing and trigger a claim.
The seller's liability under warranties is limited by: a cap (maximum total liability — typically set at 100% of equity value for fundamental warranties, 20–30% for general warranties); baskets (aggregate deductible below which claims are not payable); de minimis thresholds (single claim floors); and time limits (fundamental warranties: typically unlimited or statutory; general warranties: 18–36 months; tax warranties: running to the applicable tax statute of limitations).
W&I insurance (garantie d'actif et de passif — assurance GAP) is increasingly used in European mid-market M&A to transfer warranty risk to an insurer. The seller provides standard warranties; any claims go to the insurer first rather than back to the seller. This allows founders to receive full cash at closing, reduces escrow requirements, and shortens negotiations. The premium (1–2% of insured amount) is typically shared between buyer and seller.
Warranty limitation structure
Equity value: €12m. Cap (general warranties): 25% = €3m. De minimis per claim: €50k. Basket: 1.5% = €180k. Cap (fundamental warranties/title/tax): 100% = €12m. Time limit: general 18 months; tax 36 months. Effect: buyer cannot recover anything unless aggregate claims exceed €180k; individual claims below €50k are ignored; total general warranty exposure capped at €3m.
Frequently asked questions
What is the difference between French GAP and Anglo-Saxon R&W?
Functionally similar — both are post-closing liability regimes for the seller's representations. The GAP is the standard French law instrument, typically contained in the cession agreement (acte de cession) or a separate warranty deed. Anglo-Saxon R&W is the standard common-law structure used in cross-border transactions. The key practical difference: French GAP often has more prescriptive statutory interpretation rules (notably on fraud, dol, and the seller's knowledge); Anglo-Saxon R&W relies more heavily on contractual definitions.
Can a seller negotiate a 'clean exit' with no post-closing warranty liability?
Rarely in practice — buyers require some warranty coverage as a condition of completing. However, W&I insurance significantly reduces the practical liability: with full insurance, the seller's residual exposure is typically limited to the fraud carve-out and a small retention (1–2% of deal value). For sophisticated sellers using W&I insurance in competitive processes, a near-clean exit is achievable.
What warranties should sellers be most careful about?
Tax warranties carry the longest exposure period and the least controllable risk (tax audits can surface years after closing). Financial warranties on working capital and EBITDA must be cross-referenced with QoE findings — inconsistencies create claim exposure. IP warranties are critical for technology businesses. Customer contract representations must be accurate including any side-letter arrangements not in the formal contract.