"Joint and several" warranties in our investment agreement

The term "joint and several" basis means that any of the parties involved could be sued for the full amount if a warranty claim arises.

Management teams often come under pressure from equity investors to give warranties under an investment agreement on such a basis. Whether the team accepts it really depends on the bargaining position of the parties.

1st December 2005

The term "joint and several" basis means that any of the parties involved could be sued for the full amount if a warranty claim arises.

Management teams often come under pressure from equity investors to give warranties under an investment agreement on such a basis. Whether the team accepts it really depends on the bargaining position of the parties.

But where the team agrees to give the warranties on a joint and several basis and a claim arises, if a particular manager is sued, that manager would then have a right to make a claim against each of the other managers for a pro rata share of the liability.

From a third party investor's point of view, this is clearly preferable to pursuing a number of individuals for a proportionate amount of the claim.

If the management team are unable to negotiate the granting of warranties other than on a joint and several basis, there are a number of other ways they can protect themselves.

Firstly, they should ensure that the investment agreement contains financial and time limitations on their liability. Each manager should also request a cap on his own personal liability.

The management team may also enter into a contribution agreement among themselves to regulate their liability and ensure that if one of them is sued, then the remaining managers are required to reimburse him a proportionate amount. This is particularly important where the liabilities are unequal.

Although management teams are often prepared to accept a higher degree of business risk when acquiring a business than other prospective buyers, separate quality legal advice for the management team is essential to minimise the team's exposure to the pitfalls involved in the process.

Malcolm Gillies is a partner specialising in corporate finance with commercial law firm Shepherd and Wedderburn. 0141 566 7224