The following parts must be configured for the indemnity block within the context of Share Subscription Agreements:

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The Indemnified Event and Indemnified Claims

Indemnity claims arise on the happening of a specified event. For example, when there’s a breach of warranty provisions or undertakings provided by the Company in the Share Subscription Agreement. The Share Subscription Agreement needs to clearly provide for which type of events and claims the indemnity is provided for.

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Type of Losses recoverable

Indemnities in Share Subscription Agreements usually cover direct losses and, depending on the negotiation, can also cover consequential losses. Be clear on exactly which types of losses and damages can be claimed in terms of the indemnity.

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Limitations

Often, there are de minimis thresholds below which claims won’t be entertained to avoid trivial disputes.

The indemnified party might be required to notify the indemnifying party within a specific timeframe or provide detailed documentation for a claim to be valid.

There could be a set duration post the completion of the transaction within which claims should be made.

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Mitigation and reduction

The Company may require the Subscriber to mitigate their losses on the happening of an Indemnified Event. Make sure the Share Subscription Agreement addresses this issue.

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Tax treatment

Depending on the jurisdiction, indemnity payments can have tax implications. It’s crucial to understand whether such payments are treated as compensatory (and potentially not taxable) or as additional subscription price (which might have capital gains implications).

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Exclusive remedy

The indemnity can be set as the exclusive remedy available to the Subscriber on the happening of an Indemnified Event. In other words, if an Indemnified Event occurs, the Subscriber will not be able to institute action based on any other remedy.

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Interplay between the indemnity and limitation of liability provisions

While indemnities provide a remedy for Indemnified Losses, the limitation of liability clause can cap the amount recoverable. It’s essential for Parties to be clear about how these clauses interact. For instance, if there’s a cap on the aggregate liability under the Share Subscription Agreement, it’s crucial to ascertain whether indemnity claims are counted towards this cap or are treated separately.

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In conclusion, indemnities in Share Subscription Agreements play a pivotal role in safeguarding the interests of the Subscriber against identified risks or breaches by the Company. Given their significance, these provisions are often negotiated meticulously, and both Parties should be clear about their rights and obligations under such clauses.

Undertakings or covenants are promises made by parties in a Share Subscription Agreement to act (or refrain from acting) in a certain way.

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Conduct of business (Interim Period Undertakings)

With these undertakings, the Company promise to operate the business “in the ordinary course,” ensuring that there aren’t any drastic changes that might affect its value or operations. For example, the Company may need to obtain the Subscriber’s consent before taking significant actions, like acquiring assets, taking on large debts, or making substantial operational changes. Also, the Company must ensure that relationships with suppliers, customers, and employees remain intact and that assets aren’t sold off or encumbered.

In the context of Share Subscription Agreements, limitation of liability is a fundamental element. It demarcates the extent to which a Company can be held accountable for claims stemming from or related to the Agreement. The following aspects need to be addressed in the limitation of liability provisions.

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Types of Claims that will be limited

More often, the Company will endeavor to limit all types of claims directly or indirectly relating to the Agreement. From the Subscriber’s perspective, an attempt should be made to only limit claims associated with breach of contract excluding any breach which pertains to the Warranties, Indemnities or Undertakings.

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Calculation of limitation

The computation of the limitation is also crucial. Most Share Purchase Agreements, the total liability is restricted to a designated percentage of the total Subscription Price. This furnishes a definite and quantifiable maximum liability for both Parties to contemplate.

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Qualifications

The Company may contemplate making certain disclosures relating to the Warranties. In this case, claims regarding breach of a Warranty may be qualified. In other words, if a fact has been accurately disclosed in the Disclosure Schedule of the Share Subscription Agreement, it may limit a Claim under the Agreement despite a Warranty indicating the contrary.

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Excluded Claims

Most Share Subscription Claims will unequivocally state that any limitation of liability does not apply in instances of fraud, willful misrepresentation, or dishonesty on the part of the Company. This ensures that deceitful actions are not shielded by contractual terms. A Subscriber may also argue that any indemnity claims must not be constrained by the limitation of liability provisions.

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Other aspects

Share Subscription Agreements may incorporate a threshold below which claims cannot be brought, to avert trivial claims.

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There might be stipulated time frames within which claims can be made post-completion.

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Subscribers may be obligated to take reasonable steps to mitigate any loss before making a claim.

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Clauses may be included to prevent a Subscriber from recovering the same loss under multiple provisions of the Share Subscription Agreement (e.g., under both warranty and indemnity clauses).

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In summary, limitation of liability in Share Subscription Agreements affords a balance of protection for subscribers while providing a Company with a clear framework of their potential exposure.

Confidentiality provisions in Share Subscription Agreements are vital elements engineered to safeguard the sensitive information of the parties, primarily the Company, during and subsequent to the subscription process.

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Given the nature of investment activities, a plethora of proprietary, financial, operational, and at times undisclosed information is exchanged, which can be adverse if disclosed. Here’s what needs to be addressed in the confidentiality provisions in your Share Subscription Agreement.

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Purpose

The cardinal aim of confidentiality provisions is to shield non-public, sensitive data from unauthorised dissemination or usage. It is important to precisely delineate the Purpose for which Confidential Information may be utilized. In an investment context, the Purpose is typically confined to appraising the transaction. Any alternative use of the Confidential Information will constitute a transgression of the confidentiality provisions.

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Scope of Confidential Information

The Share Subscription Agreement should furnish a clear explication of what constitutes “confidential information.” This can span from financial data, business stratagems, customer rosters, intellectual property, to specific transaction terms. Not every piece of shared information is confidential. Common exclusions encompass information already in the public domain, previously known to the receiving party, or independently devised without reference to the confidential information.

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Obligations

Parties must agree not to divulge confidential information to unauthorized third parties. Obligations may also be added requiring Parties to adopt reasonable precautions to safeguard the confidential information, such as housing in secure locations or encrypted digital formats.

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Restrictions

Parties generally restrict access to the confidential information to individuals on a “need-to-know” basis and may require that any other person who may require access to the confidential information may be required to agree to certain confidentiality undertakings before the confidential information is made to them.

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Duration

 The duration, commonly spanning from 2-5 years post-finalization of the transaction, should be stipulated. However, certain types of information, like trade secrets, might be protected for an indefinite period.

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Permitted Disclosures

There might be instances where the receiving party is obligated to disclose, like due to regulatory mandates, court orders, or legal obligations. The provision should determine such exemptions, usually with the stipulation that the disclosing party provides prior notice and takes measures to ensure confidential treatment of the information.

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Return of confidential information

Upon conclusion of the transaction or if the deal capitulates, there’s usually an obligation to either return or obliterate all confidential materials. Some provisions might permit parties to retain copies for compliance or archival purposes.

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Breach

The provision should outline repercussions for breaches, which can encompass immediate court orders to halt further breaches, compensation for any loss endured due to the breach, indemnity covering costs, including legal fees, resulting from the breach.

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The aforementioned facets ensure a structured approach to managing confidentiality, which is indispensable in maintaining the integrity and trust between the parties in a Share Subscription Agreement.

While court litigation is one pathway to resolution, it can be protracted, costly, and potentially detrimental to reputations of the Parties. This has fostered the inclusion of alternative dispute resolution (ADR) clauses in Share Subscription Agreements. One specific method, particularly relevant to any calculation or valuations, is Expert Determination.

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Expert Determination is a mechanism where disputing parties consent to appoint a neutral third-party expert to adjudicate specific issues. The process is typically swifter and less formal than court or arbitration proceedings.

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Disputes over, for example how a breach of a Warranty impacts on the value of the Company often center around accounting principles, valuations, and adjustments. Given the specialized essence of these topics, an accounting or financial expert’s opinion can be more precise and efficient than a drawn-out legal struggle.

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Why opt for Expert Determination?

• Expert determination is generally faster than other modes of dispute resolution, with some determinations rendered within weeks or even days.
• Evading court or arbitration can conserve substantial amounts in legal fees and associated expenditures.
• The determiner boasts specialized knowledge, ensuring the decision is technically sound.
• Proceedings and outcomes are generally maintained in confidentiality, safeguarding sensitive business data and reputations.

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Process

The parties might pre-select an expert or concur on one when a dispute emerges. If they can’t agree, they might resort to a professional body (e.g., an accountancy institution) within South Africa to appoint an expert.

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Each party tenders their arguments and pertinent documents to the expert.

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The expert scrutinizes the submissions and may pose questions or solicit further information. Once satisfied, they make their determination.

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The Share Subscription Agreement should stipulate whether the expert’s determination is binding. If binding, it’s typically final, with limited grounds for appeal or challenge.

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It’s imperative to clearly demarcate the scope of the expert’s mandate. They should solely be resolving the specific technical issue and not broader contractual disputes.

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The chosen expert should be neutral and not have any prior engagements or conflicts of interest with either party.

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Who bears the cost?

Generally the cost issue is left to the expert to determine and parties may be require to contribute equally to costs before the expert determination begins.

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Conclusion

Incorporating expert determination clauses in Share Subscription Agreement, especially for technical accounting or financial disputes offers an efficient, cost-effective, and technically sound resolution mechanism. Parties should, however, clearly define its scope, process, and implications in their agreement to ensure clarity and fairness.