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Memorandum of agreement concerning limitation of liability in private equity transactions

Published February 1998
Definitions of the purposes of this Memorandum of Understanding

Venture Capital
Means the same as private equity.

Private Equity Transaction
Means a transaction in connection with which an accounting firm is engaged:

  1. Which is to be financed wholly or partly by private equity provided by: 
    • unlisted and/or private companies or entities and/or 
    •  listed companies or investment trusts specialising in private equity financing, and/or 
    •  banks or other debt providers, whether listed or not 
    •  whether or not also financed by debt provided by such parties. 
  2. Where such finance is provided in the form of instruments, agreements or investments which are neither listed nor immediately capable of being publicly traded (as opposed to syndicated or sub-participated to other similar finance providers).

For the avoidance of doubt, the above definition shall only include transactions involving subscriptions, acquisitions or disposals, including related restructurings or refinancings (other than troubled or rescue reconstructions) which involve financing by parties outside the group of companies of which the company to which the transaction relates is a member.

Shall also include preference shares and other fixed income shares, warrants, options and other rights to subscribe for shares and debt which by its terms is convertible into shares.

Means one of the Big Six accounting firms.

Transaction Value
The aggregate (or a best estimate of the aggregate) of the new equity/debt subscribed or advanced or committed and subsequently subscribed or advanced pursuant to the transaction to which the engagement relates.

Smaller Transactions
Transactions in which the Transaction Value is £10,000,000 or less.

Mid-market Transactions
Transactions in which the Transaction Value is between £10,000,000 and £55,000,000.

Larger Transactions
Transactions in which the Transaction Value exceeds £55,000,000.


In October 1996, the Big Six accounting firms (Arthur Andersen & Co, Coopers & Lybrand, Deloitte & Touche, Ernst & Young, KPMG and Price Waterhouse) signed a Memorandum of Agreement concerning limitation of liability in Private Equity Transactions. That Agreement was filed with the Office of Fair Trading (“OFT”). In response, the British Venture Capital Association (“BVCA”) lodged a submission with the OFT raising points of principle and practical application in objection to the Big Six Agreement. In addition, these arrangements have created difficulties between venture capital firms and senior lenders and mezzanine providers in allocation of liability limitations.

Since that date, a number of productive discussions have been held between the BVCA and the Big Six resulting in a new basis of approaching limitation of liability as set out in this document. The principal aim of the Big Six was to reinforce the fairness of contracting using concepts of proportionality together with a cap on maximum liability. The BVCA’s principal objective was to avoid a standard approach across the diversity of Private Equity Transactions, which include smaller-sized, lower risk deals as well as high value, complex transactions.

Accordingly, it was important to develop a framework which recognises both viewpoints, assists the process of completion of deals and avoids lengthy negotiations.

Adoption of this new framework allows the Big Six Agreement to be withdrawn and thus avoids a drawn out process with the OFT. Given that this Memorandum of Understanding has been mutually agreed, it is expected to gain widespread acceptance in the private equity market. Specific engagement terms can still be contracted between the parties on each transaction.

Liability terms on transactions will have to include senior lenders and mezzanine providers. Following discussions, representatives for the banking institutions have stated that this framework is likely to be acceptable to such providers.

Memorandum of Understanding


This Memorandum represents the understanding reached among Big Six accounting firms and representatives of the BVCA relating to limitation of liability and proportionality provisions in due diligence engagement terms for Private Equity Transactions. Whilst this Memorandum is not legally binding (and, in particular, the BVCA is unable to bind its member firms to any particular course of action or offer them any advice on the wording of the standard clauses), the intention is that the framework contemplated should be adopted on Private Equity Transactions entered into by members of the BVCA. The framework contemplates an approach which will vary by reference to the total financing to be provided in the relevant transaction.

Limitation of liability/proportionality

This framework will apply to all Private Equity Transactions where the engagements are entered into from the date of adoption of this Memorandum of Understanding but does not change any arrangements which have been made prior to this date on the basis of the original Big Six Agreement filed with the OFT.
Smaller transactions

Limitation of liability:
An amount equal to the Transaction Value.

No specific terms regarding proportionality but normal rights under the law with regard to contributory negligence, contribution and joining in of third parties will remain.
Effectively, under these arrangements the Accountant will limit its liability to the Transaction Value for all deals of less than £10,000,000 and will not include proportionality terms in its engagement terms.

Mid-market transactions

Limitation of liability:
£10,000,000 plus one-third of the amount by which the Transaction Value exceeds £10,000,000 subject to a maximum of £25,000,000.

No specific terms regarding proportionality but normal rights under the law with regard to contributory negligence, contribution and joining in of third parties will remain.

This approach is a compromise between the original Big Six Agreement of a cap fixed at Transaction Value with proportionality wording and the BVCA’s preference for a cap fixed at Transaction Value without proportionality. The original Big Six Agreement brought uncertainty to the issue of how much was actually recoverable. The proposed approach brings certainty to the maximum amount recoverable, by incorporating a simple application of proportionality into the monetary limit of liability.

A simple and certain mechanism for agreeing the lower cap will benefit negotiation and documentation at completion.

Larger transactions

Limitation of liability:
Generally, the amount of the liability cap will be £25,000,000 although, in exceptional circumstances unrelated to the size of the transaction, a limitation of liability of an amount either less than or in excess of £25,000,000 may be agreed.

It is acknowledged that the Accountant will wish to introduce into Larger Transactions express wording in relation to proportionality. Some experience has been gained in drafting proportionality clauses over the past year or so and further guidance on this area will be issued by the BVCA in the next few months.

In this segment of the private equity market the larger exposures on each transaction will be dealt with under negotiated contract between the relevant parties, taking into account the nature of the transaction, related risks and parties to the deal.

Recommended approach

This Memorandum has described the recommended approach to the liability issue. The standard clause in the Appendix reflects the recommended approach, but it is for each member firm to take legal advice on the wording it uses.

Limited scope engagements

Generally, in the event of the Accountant being instructed to perform a limited scope review because of severe limitations in either time or information, the limit of liability agreed in engagement terms is expected to be lower than that set out in this Memorandum of Understanding.

Misrepresentation or concealment

The existing practice whereby the Accountant excludes liability when information is withheld or wrongly represented is expected to continue.

Allocation of liability between addressees

Representatives for the banking institutions and the BVCA have agreed that there will be no pre-agreed allocation of proceeds of any claim under due diligence reports, nor will there be any allocation in any subsequent documentation between the bank and BVCA member. This recognises the complexity of anticipating in advance of any claim how the proceeds should be allocated and the wish of all parties to keep the documentation as straightforward as possible.

Effective date of Memorandum

This Memorandum of Understanding is effective from 18 February 1998.

APPENDIX: Standard clause

Liability cap
The aggregate liability of this firm, its partners, agents and employees or any of them (together referred to in this and subsequent clauses as the “Firm”) for damage shall be limited to £[ ] million.

For the purposes of this engagement letter “damage” shall mean the aggregate of all losses or damages (including interest thereon if any) and costs suffered or incurred, directly or indirectly, by the addressees of this letter (together with such other parties whom the Firm and such original addressees have agreed may have the benefit of and rely upon our work on the terms hereof) (together “Addressees”) under or in connection with this engagement or its subject matter (as the same may be amended or varied) and any report prepared pursuant to it, including as a result of breach of contract, breach of statutory duty, tort (including negligence), or other act or omission by the Firm but excluding any such losses, damages or costs arising from the fraud or dishonesty of the Firm or in respect of liabilities which cannot lawfully be limited or excluded.

Where there is more than one Addressee the limit of liability specified above will have to be allocated between Addressees. It is agreed that such allocation will be entirely a matter for the Addressees, who shall be under no obligation to inform the Firm of it, provided always that if (for whatever reason) no such allocation is agreed, no Addressee shall dispute the validity, enforceability or operation of the limit of liability on the ground that no such allocation was agreed.

Our employees
It is agreed that, having regard to our interest in limiting the personal liability and exposure to litigation of employees, no Addressee will bring any claim in respect of any damage against any of our employees personally but this will not limit or exclude the liability of the Firm or its partners for the acts or omissions of its employees.

Further information


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