Warranties in Share Purchase Agreement
Warranties in a Share Purchase Agreement in Malaysia
When you buy or sell shares in a company, your lawyer will almost always bring up “warranties” in the Share Purchase Agreement (SPA). They might sound like standard legal jargon, but they are anything but harmless. Warranties are promises written into the deal that can cost you money years after the agreement is signed if they turn out to be untrue.
This guide explains what warranties are, how Malaysian law treats them under the Contracts Act 1950, the risks they create for buyers and sellers, and what you should watch for when negotiating them. It also draws on examples used by Thomas Philip Advocates and Solicitors, adapted into straightforward language.
What Are Warranties in a Share Purchase Agreement?
A warranty is a promise by the seller about a certain fact or situation relating to the company being sold. It is similar to a guarantee where the seller is saying, “This statement is true, and if it is not, I will be responsible for the consequences.”
For example, warranties can cover things such as the seller actually owning the shares being sold and having the right to sell them, the company’s accounts being accurate, the company having no undisclosed debts or liabilities, all required licences and permits being in place, and the company not being involved in any lawsuits.
If one of these promises turns out to be false, the buyer can claim damages. However, under Malaysian law, a warranty breach normally means the buyer can claim money (damages) but not cancel the whole agreement unless the warranty is also a “condition” or it amounts to misrepresentation.
Why Warranties Matter to Buyers and Sellers
For buyers, warranties act as a safety net. They give you the right to claim if the company you bought turns out to be different from what was promised. Without warranties, you take the company as it is and accept all risks, even hidden ones.
For sellers, warranties can create long-term obligations. You may think you have walked away from the business, but if something you promised in the SPA turns out to be wrong, you could face a claim years later. Every warranty is a potential future debt.
How Malaysian Law Looks at Warranties
The Contracts Act 1950, specifically Section 74, sets the rules for claiming damages. You can only claim losses that happen naturally as a result of the breach or that both parties knew could happen when they signed the contract. You cannot claim for speculative or unrelated losses. You also have to show that the breach directly caused the loss, and you must be able to calculate that loss.
Indemnities are different. With an indemnity, the seller agrees to pay for a specific issue if it arises, without the buyer having to prove that the loss was foreseeable. This makes indemnities much easier for buyers to enforce, which is why sellers are more reluctant to agree to them.
Key Types of Warranties in Malaysia
Some of the most common warranties in Malaysian SPAs include title warranties, licence warranties, litigation warranties, and tax warranties.
A title warranty promises that the seller owns the shares outright and can legally sell them.
A licence warranty promises that the company has all the licences and permits it needs to operate, which is crucial in regulated industries such as finance, healthcare, or manufacturing.
A litigation warranty promises that the company is not involved in, or threatened with, any lawsuits.
A tax warranty promises that the company’s taxes have been properly filed and paid, and that there are no outstanding tax disputes or hidden tax liabilities.
Lawyers sometimes recommend including a “de minimis” rule so that minor issues, for example anything under RM50,000, do not lead to a claim. This helps avoid wasting time and money over trivial matters.
Avoiding Common Warranty Mistakes
The biggest mistake business owners make is treating warranties as fine print that cannot be changed. In reality, warranties are negotiable and should reflect the actual state of the business. Sellers should avoid giving promises they cannot back up with evidence and should use the disclosure letter to list exceptions. Anything properly disclosed is no longer a breach.
Both buyers and sellers should also agree on clear limits to liability, such as a maximum claim amount, a minimum claim size, and a deadline for bringing claims. These limits are enforceable under the Contracts Act if drafted clearly.
Negotiating Warranties in a Share Purchase Agreement
If you are a buyer, do not assume warranties replace due diligence. They are there to protect you, but you still need to investigate the company thoroughly.
If you are a seller, remember that warranties are financial promises. Use the disclosure letter to protect yourself, and negotiate caps and time limits so you are not exposed indefinitely.
For both sides, it is important to adapt warranty clauses to Malaysian law. Many agreements are based on foreign templates that do not reflect Malaysian licensing, tax, and regulatory realities, which can leave gaps or cause unnecessary disputes.
Final Thoughts
Warranties in a Share Purchase Agreement decide who carries the post-deal risk. In Malaysia, their power lies in careful drafting, disclosure, and negotiation. Not just legal formality. If you are about to buy or sell company shares, the warranties you agree to can either protect you from hidden liabilities or expose you to years of unexpected claims.
Legal That Works works with business leaders who are ready to act, ensuring their warranties are negotiated, drafted, and disclosed to provide maximum protection under Malaysian law. If you are ready for this level of legal precision, click the Contact Us button to begin the conversation.
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Author
AKMAL SAUFI MOHAMED KHALED
Managing Partner & Founder
Practice Area
Corporate