A Familiar Scenario
A buyer acquires a share in a going concern. The parties agree on a price, sign the agreement, and the deal closes. Some time later, the tax authority audits periods before the sale and presents claims for substantial amounts — back taxes, penalties, and interest.
The buyer is left in an uncomfortable position: they bought a business believing it was “clean,” and now they’re paying for someone else’s transgressions.
The Supreme Court of the Russian Federation has formulated a position that substantially shifts the balance of power in this situation.
What Are “Representations and Warranties”
Article 431.2 of the Civil Code allows the parties to a contract to include representations and warranties (заверения об обстоятельствах) — one party’s assertions about the factual state of affairs that the other party accepts as a guarantee.
In a share purchase agreement, the seller can represent that:
- at closing, the company has no tax obligations beyond those reflected in the balance sheet,
- the company is not subject to any ongoing tax audits,
- all tax returns have been filed accurately and on time,
- there are no undisclosed liabilities known to the seller.
The Supreme Court’s Position
If the seller included such representations in the agreement and they subsequently proved false or inaccurate, the buyer is entitled to:
- Demand a reduction in the contract price by an amount corresponding to the claims discovered.
- Recover losses — the costs of settling tax debts, penalties, and interest, as well as legal fees for the tax dispute.
- Rescind the agreement — if the breach of representations is material.
The Supreme Court’s key finding: the value of the share is subject to revision upon discovery of concealed tax claims, provided the agreement contained appropriate representations.
What This Means for Business Transactions
For the buyer:
Include the most specific representations possible about the absence of tax claims, litigation, and undisclosed liabilities. The more specific the representations, the easier it is to prove a breach.
Even with representations in place, conduct a tax due diligence before closing: request a tax clearance certificate, review VAT audit system data, and examine returns for the past three years.
For the seller:
False or inaccurate representations give rise to financial liability after the deal closes. If there are doubts about the company’s cleanliness, it is better to disclose them to the buyer upfront and adjust the price than to face a damages claim two years later.
For both parties:
The representations and warranties mechanism is a tool for the fair allocation of risk. If the seller is honest, representations create no problems. If not — they protect the buyer from the consequences of someone else’s dishonesty.
Read Also
- The 50/50 Business Deadlock: Three Mechanisms for Breaking the Impasse
- Director Subsidiary Liability: 3 Mechanisms the Tax Authority Uses to Reach Personal Assets
Planning to buy or sell a business share? Contact us for legal transaction support. We will review the company’s documents, structure the representations and warranties, and prepare an agreement that protects you after closing.