An acquisition is agreed on price and completed on risk allocation, and the risk allocation lives in the warranties and indemnities. These provisions decide who bears the cost when something the buyer assumed turns out not to be true, and they are negotiated hardest precisely because they determine what the price actually bought. A buyer who focuses on the headline figure and leaves the warranties to the lawyers has misunderstood which part of the deal protects them.
Dutch law supplies a default before the parties write a word. Article 7:47 of the Burgerlijk Wetboek provides that a sale may also concern a vermogensrecht, in which case the rules on sale apply so far as this accords with the nature of the right, which draws a share purchase into the conformity regime of article 7:17. That regime is thin cover for a company: it asks whether what was delivered answers to the contract, and shares answer to themselves. The agreement exists to replace that default with promises specific enough to be worth suing on.
Warranties and indemnities are not the same thing
A warranty is a statement of fact about the target, that the accounts are accurate, that there is no undisclosed litigation, that the company owns its assets. If it proves false, the buyer claims damages, and must prove the loss and that the warranty was breached. An indemnity is a promise to reimburse a specified cost if it arises, pound for pound, without the buyer having to prove breach or quantify loss in the same way. Indemnities are used for identified, specific risks; warranties cover the general landscape.
The split matters most in how each is measured and when it bites. A warranty claim runs through the ordinary law of damages, so the buyer must show what the company would have been worth had the statement been true. An indemnity fixes the measure in advance at the amount of the identified cost, and it can be drafted to pay once the liability is assessed rather than once it is finally settled.
Disclosure defeats warranties
The most important thing a buyer must understand is that a warranty is qualified by what the seller discloses. If the seller discloses a problem, the buyer cannot later claim under a warranty for that very problem, an effect produced by the disclosure clause the parties negotiated and not by any rule of law, because an express warranty is a freestanding contractual promise. This is why the disclosure exercise is as important as the warranties themselves: a broad warranty against a disclosed risk is worth nothing, and the protection the buyer actually has is the warranties minus everything the seller put in the disclosure letter.
A warranty tells you what the seller promises. The disclosure letter tells you what the seller has quietly taken back. Read the second as carefully as the first.
Article 7:17 of the Burgerlijk Wetboek denies the buyer a conformity claim over what was known to it, or could reasonably have been known to it, when the contract was concluded, while article 6:228 makes a contract annullable where the seller should have informed a counterparty it knew was mistaken. A data room sits on that fault line. Whether a late upload of nine hundred documents amounts to disclosure at all is the argument every warranty dispute reaches, which is why the agreement should say what counts: the disclosure letter alone, or an indexed data room delivered by an agreed date.
Specific risks need specific indemnities
When due diligence uncovers a known problem, a tax position that may be challenged, a piece of litigation, an environmental exposure, the answer is a specific indemnity, not reliance on a general warranty. The indemnity should name the risk, and provide that the seller bears its cost if it materializes, outside the general caps and time limits. A known risk left to a general warranty is a known risk the buyer has effectively agreed to bear, since disclosure will have removed the warranty protection.
Tax is where this bites hardest. Article 39 of the Invorderingswet 1990 makes each subsidiary that formed part of a Dutch fiscal unity, and each member company of a central company under article 15a of the Wet op de vennootschapsbelasting 1969, hoofdelijk aansprakelijk, jointly and severally liable rather than liable for a share, for the corporate income tax levied on that fiscal unity over the period it belonged to it. Article 6:7 of the Burgerlijk Wetboek states the consequence: the creditor may demand performance in full from any one of them. A target bought out of a fiscal unity therefore carries the old group tax exposure into the buyer’s hands, and that belongs in an indemnity.
Caps, baskets and time limits
Sellers limit their exposure through caps, an overall ceiling on liability, and through thresholds below which claims cannot be brought, and through time limits after which warranties expire. These are all negotiable and all consequential. A cap set too low relative to the price leaves the buyer exposed on a large loss; a time limit that expires before tax authorities can reasonably assess leaves the buyer carrying the tax risk. The buyer’s protection is only as good as these limits allow.
The limits work in sequence, and each affects the next. A de minimis excludes individual claims below a floor, so they never reach the aggregate. The basket then requires the surviving claims to add up to a threshold before any are payable, and the decisive question is whether, once that threshold is crossed, the seller pays the whole amount or only the excess above it. On a mid-sized claim the first is worth considerably more to the buyer, and the difference turns on a single word.
The cap is then expressed as a percentage of the price, and what sits outside it decides how real it is. Title, capacity and authority are normally warranted up to the full consideration, because a buyer that did not acquire the shares did not buy anything. Tax and specific indemnities are frequently carved out as well, or given a separate cap. A cap quoted without its carve-outs says almost nothing about the exposure retained.
Tax claims run on a longer clock
General warranties are commonly limited to twelve, eighteen or twenty-four months. Tax cannot follow that clock. Under article 16 of the Algemene wet inzake rijksbelastingen the Dutch inspector may raise an additional assessment up to five years after the tax debt arose, and up to twelve years where the item was held or arose abroad, with article 11 allowing three years for the primary assessment. A tax warranty expiring at eighteen months leaves years of assessable exposure with the buyer.
The seller’s position outlives completion in places too. Article 40 of the Invorderingswet 1990 makes a shareholder of at least one third of the placed capital who disposes of those shares liable for part of the corporate income tax of a company whose assets consisted to an important extent of investments, covering the tax owed at the end of the year of disposal and over the three years after it in connection with reserves present on that date, where the company’s net assets were reduced other than through normal business operations in the five years before that year, in it, or in the three that follow. That liability falls away so far as security for the tax has been provided. Sellers who assume the deed ends the matter find this out late.
Contractual periods are not the only clock either. Article 7:23 of the Burgerlijk Wetboek requires the buyer to notify the seller within a reasonable time of discovering that what was delivered does not answer to the contract, and actions founded on those facts then lapse two years after that notice, while article 3:307 gives five years for performance of a contractual obligation and article 3:310 five years from knowledge of the loss and of the person liable. Agreements usually displace these, but they run behind every claim that is notified late.
Escrow, retention and the notarial account
A covenant to pay is worth what the payer is worth on the day it falls due, so the buyer needs money it can reach. A retention holds back an agreed slice of the price for a fixed period and releases it when the warranty periods expire, less anything properly notified. An escrow places the same money with a third party under instructions that neither side can override alone.
In the Netherlands the architecture already exists. Article 2:196 of the Burgerlijk Wetboek requires a deed before a notary established in the Netherlands to transfer shares in a BV, and article 25 of the Wet op het notarisambt obliges that notary to hold funds received in his professional capacity on a separate account in his own name, designated as such. Completion money passes through it as a matter of routine, which is part of why the Dutch notary asks for everything before he will execute the deed.
Warranty and indemnity insurance
Increasingly, an insurer stands behind the warranties, allowing the seller to exit cleanly while the buyer claims against the policy rather than against a distributed shareholder. This is particularly valuable where the seller is a fund distributing proceeds, or an individual who will not be worth pursuing years later. The policy has its own exclusions and its own diligence requirements, and it does not cover known risks, which still belong in specific indemnities. It changes who pays, not what was agreed.
Underwriting is therefore a review of the buyer’s own diligence. The insurer reads the reports, the disclosure letter and the data room index and asks what was scoped out and why, because a warranty nobody investigated is one the policy will exclude. It also asks what the buyer knows. Article 7:928 of the Burgerlijk Wetboek obliges a policyholder to disclose before contracting every fact it knows or ought to know on which the insurer’s decision may depend, while article 7:930 reduces or withholds the payout where that duty was not met.
The link to diligence
Warranties and indemnities only work when informed by thorough diligence, because the buyer cannot protect against a risk it has not found, and the seller cannot disclose one it has not identified. The two exercises are one, which is why we treat them together with our note on legal due diligence before you buy. A buyer who does light diligence and then relies on warranties has the protection precisely backwards.
What characterises a failed due diligence is rarely that the problem was invisible, but that the finding never reached the agreement.
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This article is informational and does not constitute legal advice. The law differs by jurisdiction and the treatment of any matter depends on its facts. Each engagement is subject to scope and applicable regulation.