Liability and diligence in M&A transactions

In Finnish project M&A, the allocation of liability and the diligence obligations of both buyer and seller are central to risk management and deal certainty. While Finnish law supports contractual freedom, it also imposes substantive expectations on the conduct of parties, particularly in relation to disclosure and investigation of material facts.

Seller liability and disclosure

The seller’s liability is typically governed by representations and warranties included in the sale and purchase agreement (SPA). These provisions define the scope of the seller’s assurances regarding the condition of the target, its assets, operations, and legal compliance.

However, Finnish courts and arbitral tribunals may look beyond the literal wording of the contract. If the facts suggest that the seller withheld material information or misrepresented the state of the project, liability limitations may be disregarded. This reflects a broader principle in Finnish law: contractual clauses cannot shield a party from the consequences of bad faith or gross negligence.

To mitigate this risk, sellers should conduct a seller-side due diligence to identify and disclose all material facts. This process should be documented and reflected in the SPA. Sellers should also ensure that any warranties given are factually accurate and supported by internal records.

Common seller warranties in Finnish project transactions include:

Ownership and title to shares or assets

Compliance with permits and regulatory obligations

Absence of undisclosed liabilities or litigation

Validity of key contracts and absence of termination notices

Tax compliance and payment history

Buyer diligence and risk allocation

Buyers are expected to conduct their own buyer-side due diligence before entering into the transaction. This includes legal, financial, technical, and environmental reviews, depending on the nature of the project. Finnish law does not protect buyers who fail to investigate obvious risks or ignore red flags.

The scope of diligence required depends on several factors such as transaction value (higher-value deals demand more thorough scrutiny), complexity of the target, and availability of documentation.

If a buyer fails to exercise adequate diligence, courts may reduce or deny claims for breach of warranty. This reinforces the importance of a well-documented diligence process and a clear record of inquiries made and responses received.

Liability and risk in the SPA

Finnish SPAs often include detailed provisions to manage liability, such as:

Caps and baskets: Limiting the seller’s total liability and excluding minor claims.

Time limits: Setting deadlines for bringing claims, typically 12–24 months post-closing.

Knowledge qualifiers: Defining the buyer’s actual or constructive knowledge to limit claims.

Indemnities: Providing specific remedies for known risks, such as tax liabilities or environmental issues.

Both parties should engage experienced legal, financial, and technical advisors to support the diligence process and contract drafting.

In project transactions, technical due diligence is particularly important to assess the viability of the project, the condition of assets, and compliance with operational standards.

Legal advisors play a key role in identifying regulatory risks, reviewing permits and licenses, assessing enforceability of key contracts, structuring warranties and indemnities, and advising on tax and financing implications.

Buyers should also consider warranty and indemnity (W&I) insurance, which is increasingly used in Finnish transactions to cover gaps in liability or reduce reliance on seller covenants.