The legal framework governing obligations and contract law in Serbia, as is typical for jurisdictions grounded in the civil law tradition, provides buyers of a company’s shares with a certain baseline level of statutory protection. However, in the context of modern M&A transactions, these default rules are not designed for complex corporate transactions and are often too broad, too slow, or too difficult to apply in the M&A context.
As a result, extensive, bespoke, and transaction-specific contractual protections have become standard practice in Serbian share purchase agreements, regardless of the type of deal. Their primary purpose is to ensure that each party is protected against the possibility that its reasonable expectations regarding the transaction are not met.
These contractual provisions usually comprise representations and warranties, along with indemnification mechanisms that are triggered if any information provided by the seller proves to be inaccurate or if any contractual assurance is breached. From a terminology standpoint, many civil law jurisdictions refer more broadly to “statements,” whereas the expression “representations and warranties” is characteristic of common law systems.
The scope and detail of these provisions are closely linked to the findings and extent of the due diligence process. The breadth of due diligence itself primarily depends on the structure of the transaction:
a. Share deal:
The buyer acquires shares or equity interests in the target company, effectively stepping into all of its assets, rights, liabilities, and obligations. This generally requires a much more comprehensive due diligence review, given the higher level of risk assumed.
b. Asset deal:
The buyer acquires only specific assets selected from the seller’s business. Since liabilities do not automatically transfer (except in certain statutory cases), the due diligence exercise is typically more focused and limited to the assets being purchased.
In every M&A transaction, the buyer wants certainty about what it is acquiring and protection against unexpected liabilities. No matter how thorough the due diligence is, some risks always remain hidden. This is where representations and warranties, together with indemnity provisions, play a crucial role. They are not just boilerplate clauses: they are the central instruments for allocating risk between the buyer and the seller.
In our previous blog, M&A Serbia in 2025 – Zunic Law, we explained the stages of an M&A transaction. In this article, we focus on a niche topic concerning negotiations and the signing of the Share Purchase Agreement.
1. Representations: How the Seller Confirms What the Buyer Needs to Know
Representations are statements about the condition of the company as of a specific moment (usually signing or closing). They confirm the factual status of key aspects of the business. Common examples include:
- the seller’s valid ownership of shares,
- accuracy of financial statements,
- absence of undisclosed litigation,
- compliance with laws and regulations.
If a representation later proves false, the buyer may have a basis for a claim.
2. Warranties: The Seller’s Long-Term Promises
Warranties go a step further. They act as promises by the seller that certain facts are true and that the seller will compensate the buyer if they are not.
Typical warranties cover:
- tax compliance,
- validity of contracts,
- condition of assets,
- absence of undisclosed liabilities.
In practice, representations and warranties are drafted together and serve as a unified set of assurances that the buyer relies on when signing the contract.
3. Indemnity: The Enforcement Mechanism Behind Reps and Warranties
Indemnities provide the concrete financial remedy if a representation or warranty turns out to be incorrect or if a specific risk materializes. While warranties set out what the seller promises about the business, indemnities determine how the seller must compensate the buyer when those promises are breached.
Typical indemnified matters include:
- losses arising from breaches of reps and warranties,
- pre-closing tax liabilities,
- ongoing or threatened litigation,
- regulatory or compliance violations discovered after closing,
- specific risks identified during due diligence.
Indemnities, therefore, serve as the enforcement mechanism behind the representations and warranties. They translate the seller’s assurances into actionable financial protection, ensuring the buyer can recover losses resulting from inaccuracies, omissions, or undisclosed liabilities.
The simplest and most common form of indemnification is an adjustment to the purchase price. The price is reduced by an amount corresponding to the loss incurred by the affected party, effectively reflecting the diminished value of the shares being acquired.
In M&A agreements, indemnities can be grouped into two broad categories:
a. general indemnities and
b. special indemnities.
Although both serve to allocate risk and compensate the buyer for losses, they operate in different ways and cover different types of risks.
As mentioned previously, a general indemnity covers losses arising from breaches of representations and warranties. In other words, if a statement made by the seller turns out to be inaccurate, general indemnity is the mechanism through which the buyer seeks compensation.
General indemnity is therefore directly tied to the warranty package. Its scope is defined by the representations and warranties themselves, and claims usually must satisfy agreed limitations, such as:
- materiality thresholds,
- liability caps,
- deductibles or baskets,
- time limits for bringing claims.
General indemnity protects the buyer against unknown or undisclosed risks that contradict what the seller has warranted about the business.
A special indemnity is different. It applies to specific, identified risks that have been discovered during due diligence or disclosed by the seller. These are issues that both parties are aware of, but which the buyer does not want to assume after closing.
Examples often covered by special indemnities include:
- an ongoing tax audit,
- a labor dispute involving a particular employee,
- an unresolved environmental issue at one facility,
- a known regulatory non-compliance risk,
- liabilities arising from discontinued business lines.
Special indemnities operate independently of representations and warranties. They typically:
- are not subject to general caps or baskets,
- have separate time limitations,
- often provide euro-for-euro compensation,
- may require the seller to bear the full risk without thresholds.
They serve as a targeted risk allocation tool, ensuring that the seller remains responsible for issues already identified, while the buyer is protected from the financial impact of those known risks.
4. Purpose of Reps, Warranties & Indemnity
Every M&A deal assigns risks between the parties. Reps, warranties, and indemnity provisions are the tools that achieve this.
This is how the risk in the Share Purchase Agreement is usually allocated:
- Seller assumes the risk of past events and conditions that existed before closing (e.g., tax exposures, disputes, regulatory breaches).
- Buyer assumes the risk of how the business performs after closing.
- Indemnity clauses clarify how the seller compensates the buyer if a breach occurs.
The purpose of representations and warranties can be summarised as follows:
a. Ensuring Full Disclosure
Representations and warranties require the seller to disclose all material information about the business. They create a structured framework for addressing information asymmetry and help surface issues that may not be identified through due diligence alone.
b. Aligning Expectations
They confirm that the condition of the business corresponds to what the buyer understands and expects to acquire. In other words, they bridge the gap between the buyer’s assumptions and the actual state of the company.
c. Providing Clear Remedies
If information proves inaccurate or incomplete, representations and warranties give the buyer a defined contractual basis to seek recourse, including:
- indemnification for losses,
- purchase price adjustments,
- claims against escrow or holdback amounts,
- and, in severe cases, termination or rescission rights.
5. Limitations to Reps, Warranties & Indemnity
Representations and warranties are rarely given without limitations. Parties typically qualify them in several ways, with disclosures being the most common.
Disclosures serve two main functions:
a. The first is to define the scope of a warranty, for example, by stating that a particular annex contains all outstanding loan agreements of the target.
b. The second is to list specific facts that contradict or qualify a warranty, for instance, by noting that although the seller warrants compliance with environmental regulations, one production facility is currently undergoing a regulatory inspection.
Another frequently used limitation is the knowledge qualifier, which ties the accuracy of warranties to what the seller or sometimes the buyer actually knows or is deemed to know. Drafting this qualifier requires several decisions:
a. One must decide whether the reference is to actual knowledge or constructive knowledge.
b. It is also necessary to determine whose knowledge is relevant, for example, members of the supervisory board, key employees of the target, or the seller’s transaction team. A seller’s lack of knowledge should limit warranties only where the information is genuinely difficult to identify, such as breaches of data protection rules committed by an external service provider.
Otherwise, the qualifier may become so broad that it undermines the purpose of the warranties. Similar considerations arise when determining how the buyer’s pre-existing knowledge affects its ability to bring a warranty claim.
Warranties can also be limited by materiality thresholds, liability caps, and deductibles. Materiality standards and caps are generally straightforward, while deductibles may include items such as compensation received under a supplier guarantee or an indemnity paid by a former shareholder.
6. Reps & Warranties under Serbian Law (and why contractual protection is essential)
Serbia, like most civil law jurisdictions, provides general protections through the Law on Contracts and Torts. These include rules on:
- liability for material defects,
- liability for errors in substance,
- invalidity of contracts due to fraud or mistake,
- general damages claims.
However, statutory protections are not designed for complex corporate transactions. For example:
- the statutory concept of “defects” is poorly suited for evaluating hidden tax liabilities or non-compliance issues in a company,
- remedies may be limited or require proving subjective elements such as fault.
Because of these limitations, Serbian M&A practice, especially in cross-border transactions, relies heavily on contractual representations, warranties, and indemnities. These clauses allow parties to:
- define precisely what is being guaranteed,
- set clear liability limits,
- establish claim procedures,
- create tailored risk-sharing mechanisms, and
- bypass the uncertainties of general civil law rules.
If the parties do not agree on a tailored system of representations, warranties, and indemnities, Serbian law still provides certain statutory remedies that the buyer may rely on, assuming the agreement is governed by Serbian law. The relevant rules are found primarily in the Law on Contracts and Torts, which provides remedies in cases such as fraud, duress, error, and material defects.
In addition, Serbian contract law recognizes liability for legal defects, meaning the seller must ensure the buyer’s undisturbed legal possession of what has been acquired, as well as liability for hidden defects, which may apply when the object of sale has deficiencies that were not visible at the time of contracting.
In practice, however, except in situations involving fraud, buyers rarely succeed by relying solely on these statutory grounds. Moreover, the remedies available under default rules are often unsuited to the dynamics of M&A transactions. Serbian law typically leads either to the rescission of the contract or to remedies that require proving fault or meeting strict procedural standards. Since buyers usually prefer a price reduction or financial compensation rather than a complete unwinding of the transaction, the statutory framework often fails to provide a commercially practical solution.
