Warranty and indemnity (garantie d’actif et de passif)

The garantie d’actif et de passif, or GAP, is the French equivalent of a warranty and indemnity package. The vendor of a company’s shares undertakes to compensate the buyer, or the company itself, if a liability originating before the sale comes to light afterwards, or if an asset turns out to be worth less than presented. It is specific to the share deal: when buying shares, the buyer takes over the company with its history, including tax and employment matters.

In a transaction

The GAP is negotiated in the sale and purchase agreement. Its main parameters:

• scope: tax, employment, disputes, compliance, or targeted warranties only
• the cap, the maximum amount of compensation
• the de minimis or threshold below which no claim can be made
• the duration, often linked to the limitation periods of the matters covered
• the security (bank guarantee, escrow of part of the price) that ensures payment is actually made

French practice distinguishes a value guarantee, which compensates the buyer through a price reduction, from a liability guarantee, which compensates the company. Their extent depends on due diligence: the more risks have been identified and disclosed, the more targeted the guarantee can be.

In the hotel sector

The sensitive points in a hotel company are well known: tax audits, employment disputes, fire-safety and accessibility compliance, change-of-control clauses in franchise or management agreements. Where the company owns the property, a guarantee covering tax is standard.

Not to be confused with

• The financial guarantee that French law requires of property intermediaries under the loi Hoguet, which has nothing to do with the sale.
• The price mechanism (locked box or completion accounts), which sets the share price but guarantees nothing.

The choice between property, business and shares, which determines the need for a guarantee, is made at the sale strategy stage.