476 16 Key Provisions of the Acquisition Agreement
mally, the target company is not party to the agreement and may not rely on it, and
the acquirer will only become a shareholder of the target company.
If it is the intention of the parties that the vendor shall reimburse either the ven-
dor or the target company in full for any difference between the agreed specifica-
tions (in German: Soll-Beschaffenheit) of the target and its actual specifications
(Ist-Beschaffenheit), the parties should ensure that there is an express term to this
effect.
An obligation to put the target company in the condition in which it would have
been if the representations and warranties had been true in every respect can cost
the vendor much more than an obligation to put the acquirer in the position in
which it would have been if the representations had been true in every respect.
The condition of the target company influences the position of the acquirer only
indirectly, if at all.
The need to agree on indemnities in detail can be illustrated by a clause in the agreement
between MAN Nutzfahrzeuge AG and Western Star Trucks Holdings Limited for the pur-
chase of the whole of the issued share capital of ERF (Holdings) plc:^58 “12.1 Indemnifica-
tion in Favour of MAN. Subject to Section 12.3, Section 12.4 and Section 12.5, WS Hold-
ings shall indemnify and hold each of MAN AG, its Affiliates, the ERF Companies and the
Other ERF Subsidiaries (collectively, ‘MAN Indemnified Persons’) harmless of and from
any Damages suffered by, imposed or asserted against any of the MAN Indemnified Per-
sons as a result of, in respect of, connected with, or arising out of, under or pursuant to: (a)
any failure of WS Holdings ... to perform or fulfil any of their respective covenants under
this agreement; (b) any breach or inaccuracy of any representation or warranty given by
WS Holdings ... contained in this Agreement ...”
MAN Nutzfahrzeuge AG claimed damages from Western Star’s successor in title,
Freightliner Limited, and from Ernst & Young. It turned out that the wording of the con-
tract was not sufficiently clear. One of the main areas of dispute in the case concerned the
amount that MAN Nutzfahrzeuge AG was entitled to recover if it were successful in its
claim. The defendants argued, for example, that the right of recovery was limited to the in-
demnity provided by section 12.1 which was intended to put MAN Nutzfahrzeuge AG in
the position in which it would have been if the representations had been true in every re-
spect.^59
Sometimes the vendor may indeed have agreed to pay the value of missing assets
to the acquirer in full. If the acquisition was structured as a share deal, this is
clearly overcompensation, and even more so when the acquirer did not buy all
shares in the company.
Acquirer’s credit risk exposure (escrow account). If the acquirer already has
paid the purchase price, the potential liability of the vendor for misrepresentations
and other breaches of contract means that the acquirer is exposed to a credit risk.
The acquirer typically mitigates this risk in three main ways. First, some of the
purchase price may be payable only after a certain short period of time, or the pur-
chase price can depend on the future profitability of the company and be payable
(^58) Man Nutzfahrzeuge AG and another v Freightliner Ltd and another [2007] EWCA Civ
910.
(^59) MAN Nutzfahrzeuge AG and others v Freightliner Ltd [2005] EWHC 2347 (Comm).