Not all warranties are equal, and the policy inherits that hierarchy from the sale agreement without arguing about it. On one side the business warranties, on accounts, contracts, employees and tax, which form the ordinary category to which everything above applied. On the other a small group treated apart: title to the shares sold, the seller's capacity, the regularity of corporate authorizations, the absence of insolvency proceedings. They are called fundamental, and that word is not a commercial superlative: they carry longer survival periods and far higher caps, often the whole price.
The reason for that gap deserves setting out, because it explains the rest of the regime. A breach of a business warranty means the buyer paid too much for something it does own. A breach of a title warranty means it does not own it. The difference is not one of degree but of kind, and no partial indemnity makes sense when the very object of the sale did not belong to the seller. Hence the cap set at the entire price: the loss can genuinely be everything paid, which no accounting breach ever produces.
The policy follows that logic and it is the one place where its usual mechanics reverse. Wordings grant fundamental warranties a much longer period, seven years where business warranties get two or three, and they remove or sharply reduce the retention. That last feature is coherent and worth understanding: a retention exists to screen out the frequency of small breaches, yet a title defect is not a frequency risk. It is rare, and when it occurs it is massive. Applying to it a deductible designed to filter noise would make no sense.
What actually happens in this category almost never looks like fraud, and that should be said in order to direct the search. Title defects are problems of archaeology: an old transfer never entered in the register, a pre-emption right sitting in forgotten articles and never released, a share issue tainted by a defect in corporate approvals, a nominee arrangement never documented between a founder and a relative. Such defects are not found by examining the business but by walking back the chain of title, year by year, which is entirely different work from a business review.
From this follows a property this category alone possesses, and which ought to decide the review budget. Title review is finite and documentary: there is a determinate number of capital transactions since incorporation, and all of them can be examined. Unlike environmental matters or tax, where one samples and stops for want of time, title can be completed. It is therefore the only area where the phrase 'we looked at everything and found nothing' creates full cover rather than the appearance of cover, and its cost is low relative to what it secures.
That leaves the limit this module must teach, because it surprises even experienced buyers. A title defect cannot always be repaired with money. If a third party holds a valid pre-emption right, or if an old transfer is set aside, the buyer may lose the shares themselves, or find itself facing a hostile minority it did not choose. The policy pays value; it does not deliver the company. For a trade buyer whose strategic reason was control of a specific asset, a plant, a permit, a market position, the fundamental warranty compensates the price and not the purpose, and no cap, even at one hundred percent, changes that.
Practical conduct therefore comes down to three checks that take less than an hour. Read the survival period and the cap for the fundamental warranties separately from those for the business warranties, because they sit in different clauses and people rarely read both. Complete the title review rather than sampling it, walking back to incorporation rather than to a conventional depth of ten years, since this is the one area where completing is possible. And where control of a specific asset is the very reason for the deal, write down before signing that this risk is not transferable and must be handled in the structure or knowingly accepted.
A trade buyer acquires a family company for 55 million euros. The strategic reason for the deal is control of a production site holding an operating permit that is hard to obtain. The title review went back ten years, the firm's usual depth, whereas the company was incorporated thirty-four years ago. The policy grants the fundamental warranties a seven-year period, a cap equal to one hundred percent of the price and no retention. Two years after completion, a cousin of the founder claims 12% of the share capital, relying on a 1997 transfer never entered in the register and, he says, never perfected. Litigation begins. What can the buyer expect?
In money terms it is well covered, and that is the easy part. The breach, if established, falls under a fundamental warranty: the seven-year period is still running, the cap is the whole price, no retention applies, and the value attributable to the disputed 12% is far below the limit. The buyer will probably recover that value. The problem is that this is not what it bought. If the claim succeeds, it will hold 88% of a company 12% of which belongs to a hostile minority it did not choose, holding the rights such a minority derives from statute and from the articles. The policy pays the value of the shares lost; it does not make the cousin disappear. Yet the strategic reason for the deal was control of the site and its permit, and a hostile minority can obstruct precisely what the deal was done for. The fundamental warranty compensates the price and not the purpose: that is the limit to have known before signing, and no cap corrects it. Two points follow, and the first is an avoidable fault. The title review stopped at ten years on a company that is thirty-four years old, when title is the one area where an examination can be completed, the history of the capital being finite and documentary. The 1997 defect sat exactly in the window not looked at, and completing it would have cost a few thousand euros. Finally, it must be checked at once whether the costs of defending the litigation come out of the limit or sit on top of it, because two years of proceedings over title are expensive, and that answer lies in a clause nobody read at placement.
- 01A business breach means you paid too much for something you own; a title breach means you do not own it. The difference is of kind, not degree.
- 02It is the one place where the mechanics reverse: a far longer period, a cap at the whole price, and no retention, because a title defect is not a frequency risk.
- 03Title defects are archaeology: an old unregistered transfer, an unreleased pre-emption right, an undocumented nominee. They are found by walking back the chain, not by examining the business.
- 04Title is the only area where a review can be COMPLETED, the history of the capital being finite: stopping at a conventional depth is a decision, not a constraint.
- 05The fundamental warranty compensates the price and not the purpose: the policy pays the value of the shares, it does not deliver the company nor remove a hostile minority.