Quick Update – Tax Indemnities in Share Purchase Agreements

Context: Tax-related representations, warranties, and indemnities are of course common in any share purchase agreement (SPA).  These contractual provisions are generally designed to ensure that the purchaser of a target corporation is protected against any taxes payable by the target for a pre-closing period, the responsibility for which is generally assigned to the seller under the SPA.  In some cases, these provisions can surprisingly extend to cover taxes payable for a post-closing period as well.  The decision in Boliden Mineral AB v. FQM Kevitsa Sweden Holdings AB, 2023 ONCA 105, is one such example.

Ontario Court upholds indemnity for target’s post-closing period tax liability: The target in Boliden was an indirectly held Finish subsidiary of a Canadian parent corporation.  The target had undertaken a complex restructuring in 2010, which generated large interest deductions and foreign exchange losses.  The parent later caused the target to be sold on June 1, 2016, at a time when the target still had substantial unused losses from the 2010 restructuring.  Under Finish tax law, these unused losses did not automatically carry forward in the target following the sale, but the target/purchaser successfully filed an application immediately after the closing for a permit to use those losses.  These loss carryforwards were then in fact used shelter the target’s income for 2017 and 2018.

Unfortunately, in 2018 the Finish tax authorities reassessed the target to deny all the deductions and losses arising from the 2010 restructuring, which reassessment was later upheld on appeal.  This reassessment had the effect of generating €16 million of tax liabilities in the target for its 2012 to 2016 (pre-closing) years and €14,398,435 of tax liabilities for its 2017 and 2018 (post-closing) years.  The purchaser then sued the seller in Ontario (the agreed jurisdiction under the SPA) to recover all these amounts under the tax-related representations, warranties, and indemnities in the SPA.

There was ultimately no dispute that the indemnity provisions in the SPA covered the reassessed taxes for the pre-closing period (i.e., before the sale on June 1, 2016).  The debate centered on whether the indemnity provisions in the SPA also covered the reassessed taxes for the post-closing period (i.e., for 2017 and 2018).  The Court of Appeal for Ontario found that the trial judge had committed no reversible error when he held that, yes, the general indemnity provisions in the SPA covered these latter reassessed taxes as well (see para. 21).  More specifically:

• The seller breached the “absolute and unconditional” representation and warranty in the SPA stating that “there are no grounds for the reassessment” of the target’s taxes.  This representation/warranty was in fact untrue as at the time of closing – even if the prospect of a subsequent reassessment was neither known to nor reasonably expected by the seller at that time (see paras. 26 and 29).

• This breach of the representation/warranty engaged the general indemnification provision in the SPA, which required the seller to indemnify the purchaser/target for any “Losses” arising from such a breach.  “Losses” were defined in the SPA to include any loss, damage, penalty, tax, or interest.  The SPA further said that any “consequential or indirect loss” was also an indemnifiable loss to the extent it is “a reasonably foreseeable consequence” of the breach of a representation/warrantee.

• In this respect, the reassessed taxes for both the pre-closing period (2012-2016) and the post-closing period (2017-2018) were “a reasonably foreseeable consequence” of the breach of the seller’s representation/warrantee as at the closing that there existed no grounds for reassessment of the target’s taxes (see paras. 35-37).

• Given that this general indemnity in the SPA was engaged, there was no need for the Court to consider whether the “tax-specific indemnity” in the SPA also applied (see para. 21).  The tax-specific indemnity in the SPA covered any taxes required to be paid by the target “with respect to” any pre-closing period.

The takeaway: A SPA is a “bespoke commercial agreement” (see para. 22) carefully negotiated by “sophisticated commercial parties” (see para. 26).  Such parties will be held to the precise terms of their bargain.