When negotiating a share purchase agreement ("SPA"), the parties typically spend a lot of time discussing the representations and warranties.
One technique used by sellers to limit the scope of their warranties is the insertion of qualifications such as "to the best of the seller's knowledge ". Indeed, if a warranty is limited by the seller's knowledge, the purchaser bears a heightened burden of proof and can make a claim against the seller only if it can prove that (i) the warranty was inaccurate and (ii) the seller was aware of this fact at the time of signing of the SPA (and/or at closing) and failed to inform the purchaser accordingly.
However, references to the seller's knowledge leave ample room for interpretation, which could lead to disputes between the parties.
Whose knowledge is relevant?
The answer to this question is straightforward if the seller is a natural person.
However, if the seller is a legal entity, by definition it cannot have personal knowledge of an issue triggering its liability under the SPA. In this context, the question arises as to whether the knowledge of the seller's managing director, individual directors, employees or auditors can be imputed to the legal entity (seller) itself.
Under Belgian law, it is generally considered that a legal entity can only act through its authorised representatives and, therefore, the knowledge of such persons must be examined. In other words, unless a person was authorised to represent the legal entity in the framework of the negotiation and execution of an SPA, his or her knowledge of the inaccuracy of a warranty will not trigger the seller's liability.
For the sake of clarity, it is advisable to specify in the SPA the persons or entities whose knowledge will be considered knowledge by the legal entity itself (i.e. managing director, board of directors, specific individuals, groups of employees, auditors, advisors, lawyers, etc.).
It should be noted that an issue arises when reference is made to the knowledge of the board of directors. Indeed, the board of directors is a collective body and, therefore, unless an issue was discussed at a specific meeting and enacted in the minutes, knowledge by certain directors does not necessarily imply knowledge of the board as a whole. In this case, it is generally accepted that the board is aware of an issue if it can be proven that a majority of its members had knowledge of it.
Can the seller be held liable if it wasn't aware of an issue?
It should be noted that, under Belgian law, a person that should have had knowledge of an issue is not necessarily treated the same as a person with actual knowledge. Therefore, the purchaser must prove that the seller actually knew that the warranty was inaccurate or misleading.
However, the seller can be held liable if its ignorance of an issue was wilful, i.e. it can be proven that a reasonable person in the same circumstances would have been aware of the issue. Wilful ignorance can be due, for example, to defects in the reporting system or inadequate organisation or supervision by the seller.
A reference to "the seller's knowledge after due enquiry" appears to indicate that the seller should have proceeded with certain verifications before making a warranty. In this case, it could be argued that the seller must prove that it personally checked the accuracy of the warranty with the competent persons within the company and did not receive any information contradicting the warranty.
It should be noted that since there is no Belgian case law on the interpretation of these types of provisions , it is difficult to assess their efficiency. Therefore, if the parties intend for the seller to be held liable for not making the necessary enquiries before granting a warranty, it is preferable to expressly state as much in the SPA.
In general, a reference to the seller's knowledge should be used only for warranties relating to risks or information which cannot be, or are very difficult, for the seller to evaluate or verify (i.e. threats of litigation, breaches of contracts by third parties, activities of foreign or indirect subsidiaries). The seller's knowledge should not be used to qualify warranties relating to issues that should obviously be known to the seller (e.g. a summons received by the company, breaches of contract by the company, activities of wholly owned subsidiaries). This distinction will help to avoid lengthy and often unnecessary discussions.
If the seller's knowledge is used to qualify a particular warranty, a number of additional specifications will be necessary. For example, if the seller is a legal entity, it is advisable to specify the persons or entities whose knowledge is imputed to the company. In addition, it may be useful to state expressly the level of enquiry expected of the seller beforehand.