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
