Under share purchase agreements (“SPA”), the parties may envisage many different liability mechanisms based on the freedom of contract principle.

One aspect of these mechanisms is the scope of indemnification liability of sellers and indemnification clauses generally include damages arising from breach of representations, warranties and covenants in the SPA. Findings of due diligence process are also taken into consideration when defining the seller’s representations and warranties to cover specific risks of the target company.

The other aspect is the limitation of liability clauses which are always included in SHAs in order to set forth certain limitations of scope, time and money in case an indemnity claim arises. Time limitations for the buyer to bring a claim against the seller for indemnification are set forth separately for each claim type.

In case of material representations and warranties, such as warranties with regards to tax and/or social security, longer periods are regulated in the SPA as per statutory time limit provisions. Claims with regards to ownership of the shares are not generally subject to time limitation since it is a very fundamental representation that could change the buyer’s purchase decision if the buyer had known that such representation was not true.

The monetary liability of the seller can be limited to a percentage of the purchase price under the SPA. In addition, it is also possible to negotiate different liability thresholds depending on the importance of the breach.

For example, seller’s liability can be limited by a minimum amount of loss that must be incurred before the seller can be made liable. Further, a provision for aggregation of claims, in order to direct such claim to the seller, can be negotiated under the SPA in which the buyer assumes the risk of the claims until it reaches to a certain threshold amount. In such a case it will be up to the parties’ negotiations whether the seller will be liable for the entire amount of losses once the threshold is exceeded or only the exceeding part.

Sellers may also ask the buyer for inclusion of provisions; i) requiring the buyer to take steps to mitigate its damages before directing a claim and if the buyer fails to take such step, sellers will not be liable for such damages and/or ii) requiring the buyer to seek indemnification/payment from third parties, if applicable, which would be deducted from the damages that the sellers are obligated to pay and/or iii) preventing the buyer to recover more than once in respect of the same matter upon which the claim is based.

Sellers may also try to limit the cases in which the buyer may bring a claim by adding a provision which prevents the buyer from making a claim for breaches of representations and warranties which the buyer knew before the closing.

Another way for Sellers to limit their liability is to provide these representations and warranties "to the best of their knowledge” but buyers generally resist such provisions since it leaves the risks with the buyers.

In light of the above, it can be said that many different limitation of liability models may be applied during SPA discussions and the extent of such limitations may differ according to each deal and negotiation power of each party.

Beril Çelebi Cem