Undisclosed liabilities are the risk that turns a well-priced acquisition into a long-running financial problem. In a Vietnamese target they are rarely hidden deliberately; they accumulate in social insurance shortfalls, unrecorded overtime, informal supplier arrangements, tax positions taken without documentation, environmental obligations attached to a site, and guarantees given by a former legal representative.
Protection is layered rather than single. Diligence finds what it can, warranties and the disclosure standard allocate what it cannot, specific indemnities cover what is known, and escrow, retention or insurance make recovery real. A buyer that relies on only one of those layers usually discovers the gap after completion, when the undisclosed liabilities have already crystallised.
Most exposures are found in payroll, tax and site records. Photo: Pexels.
Undisclosed liabilities can turn a commercially attractive acquisition into a long-running financial problem. In a Vietnam M&A transaction, the buyer may inherit risks through the target company even if the underlying conduct occurred before closing. Protection therefore requires more than a broad warranty: due diligence, disclosure, price mechanics, indemnities, closing conditions and recovery security must work together.
Map where undisclosed liabilities accumulate
The first step is to identify which entities, branches, projects, assets and historic activities sit inside the transaction perimeter. Corporate records should be reconciled with accounting ledgers, tax filings, contracts, licences and operational interviews. Buyers should investigate inactive branches, predecessor businesses, nominee arrangements and obligations that do not appear on the balance sheet.
Focus due diligence on off-balance-sheet exposure
Undisclosed liabilities often arise from guarantees, side letters, related-party dealings, informal employee commitments, unpaid social insurance, tax positions, administrative violations or customer disputes. Review should also cover contingent claims, pending inspections, data incidents, environmental remediation and intellectual property ownership.
Material findings should be converted into price and contract protection, following the approach in turning due diligence findings into price and contract protection.
In Vietnamese targets the recurring sources of undisclosed liabilities are predictable enough to be scoped in advance: social insurance and personal income tax calculated on a declared salary lower than actual pay; unused annual leave and severance accruals; overtime beyond statutory caps; fixed-term contracts that have converted into indefinite ones by operation of the Labour Code; VAT and corporate income tax positions supported by invoices that do not meet the deduction requirements; site obligations under an environmental permit; and personal guarantees or side letters signed by the legal representative and never recorded in the accounts.
Use targeted representations and warranties
Generic warranty schedules miss the exposures that matter locally. The schedule should include express statements that all social insurance, health insurance, unemployment insurance and personal income tax have been declared and paid on actual remuneration; that all employment contracts comply with the Labour Code and no employee has an unrecorded entitlement; that the target has no guarantees, security or side letters other than those disclosed; and that all invoices supporting deducted input VAT and expenses meet the statutory requirements. Warranties drafted to the target’s real risk profile convert vague concern about undisclosed liabilities into specific, provable claims.
The seller should give warranties covering accounts, indebtedness, tax, employees, material contracts, litigation, licences, compliance and related-party transactions. A no-undisclosed-liabilities warranty can provide additional coverage, but its effectiveness depends on definitions, knowledge qualifiers, materiality thresholds and the disclosure regime.
The warranty schedule should reflect the target’s industry. A technology company requires detailed software, data and intellectual property warranties, while a manufacturer requires stronger land, environment, labour and licensing coverage.
Control the disclosure standard
Two drafting choices carry most of the weight. First, define disclosure so that only matters fairly disclosed in the disclosure letter, in sufficient detail to identify the nature and scope of the issue, qualify the warranties; a bare reference to a data room folder should not be enough to convert undisclosed liabilities into disclosed ones. Second, deal expressly with the buyer’s knowledge: state whether awareness gained in diligence bars a claim, and if the seller insists that it does, carve out the specific indemnities so that known undisclosed liabilities remain recoverable.
A seller should disclose exceptions with sufficient detail for the buyer to understand their nature and likely effect. General disclosure of an entire data room may undermine protection if every uploaded document is deemed known to the buyer. The SPA should state what constitutes fair disclosure, which data-room index applies and whether late uploads require express acceptance.
Buyer knowledge provisions should be limited to named individuals and actual knowledge where appropriate. Constructive knowledge based on information that the buyer could have discovered may shift too much risk back to the buyer.
Require specific indemnities
A known or strongly suspected exposure should be addressed by a specific indemnity rather than left under a general warranty. The clause should describe the risk, recoverable loss, survival period, claims process and applicable cap. Tax, social insurance, litigation, land and regulatory matters frequently require bespoke treatment.
The structure should be coordinated with indemnification clauses on scope, duration and liability limits.
Diligence scope decides what the warranties have to carry. Photo: Pexels.
Adjust the purchase price
Price is the cleanest protection where undisclosed liabilities can be quantified. A completion accounts mechanism captures the target’s actual net debt and working capital on the day, so accrued but unrecorded obligations reduce the price automatically, provided the accounting policies expressly require them to be provided for. A locked-box structure gives no such adjustment, which is why locked-box deals in Vietnam are normally paired with a wider indemnity package.
Some liabilities should reduce value at closing instead of becoming post-closing claims. Completion accounts can capture debt, debt-like items and working-capital shortfalls. A locked-box structure should define leakage broadly enough to include value transfers, waived receivables and benefits provided to sellers or related parties.
For uncertain exposures, the parties may agree a retention, escrow, deferred payment or contingent price adjustment. The payment mechanism must be workable under Vietnamese banking and foreign-exchange requirements.
Use conditions precedent and pre-closing covenants
Some undisclosed liabilities can be removed rather than allocated. Where diligence identifies an unpaid social insurance shortfall, an unregistered lease, an expired sub-licence or a related-party loan, the cleanest outcome is a condition precedent requiring the seller to settle or regularise the matter before completion, evidenced by a receipt or an updated registration. What cannot be cleared in time should move to a specific indemnity supported by a retention.
The buyer may require identified liabilities to be paid, released, settled or restructured before closing. Evidence can include tax receipts, termination agreements, creditor releases, licence amendments and board or shareholder approvals.
Between signing and closing, the seller should operate the target in the ordinary course and avoid new debt, guarantees, related-party transactions, material settlements or unusual commitments without buyer consent.
Secure a practical source of recovery
A contractual claim is only valuable if the seller can pay. Buyers should assess seller creditworthiness and consider escrow, retention, parent guarantees or set-off against deferred consideration. Where warranty-and-indemnity insurance is used, exclusions, retention and claims procedures should be reviewed against the due diligence record.
A warranty is only worth the counterparty behind it. Where the seller is an individual, a family holding vehicle or an offshore company with no assets, the buyer needs a real recovery route: an escrow or retention of part of the price for the survival period, a bank guarantee, a set-off right against deferred consideration or an earn-out, or warranty and indemnity insurance. Sizing that mechanism against the realistic exposure identified in diligence, rather than against a market percentage, is what converts a contractual promise about undisclosed liabilities into money.
Set workable claim procedures
Claim mechanics decide whether a warranty is usable. The agreement should require written notice within a defined period of the buyer becoming aware of a claim, not of the underlying facts, and should give the buyer a reasonable window, commonly six to nine months, to issue proceedings after notice. Third-party claim conduct needs its own wording: for tax and social insurance assessments arising from undisclosed liabilities, the buyer should retain conduct where the target’s ongoing relationship with the authority is at stake, with an obligation to consult the seller and not to settle unreasonably.
Notice clauses should not require information that is impossible to provide before an investigation is complete. A timely notice should preserve the claim while the buyer quantifies loss. Third-party claims provisions must balance the seller’s defence rights with the target’s operational, regulatory and reputational interests.
De minimis amounts, baskets and caps should not unintentionally restrict specific indemnities. Their combined operation is explained in basket, threshold, cap and de minimis provisions.
Buyer checklist for undisclosed liabilities
Run the checklist as a single page. Has diligence covered every area where undisclosed liabilities typically sit in this sector? Is each identified exposure priced, indemnified or warranted, and is the choice recorded? Is the disclosure standard limited to fair disclosure in a signed letter? Are the tax and social insurance warranties running to the end of the statutory assessment period? Is there a funded recovery route sized to the realistic exposure? And is claim conduct for third-party assessments arising from undisclosed liabilities allocated to the party that will have to live with the authority afterwards?
- Reconcile legal, financial, tax and operational information.
- Investigate contingent and off-balance-sheet obligations.
- Draft warranties around the target’s actual risk profile.
- Require specific and fair disclosure.
- Use specific indemnities for identified exposures.
- Adjust price or create escrow for quantifiable risks.
- Require pre-closing remediation where possible.
- Confirm a realistic post-closing recovery source.
Conclusion
Protecting a buyer against undisclosed liabilities is an integrated process. Due diligence identifies the risk, disclosure tests the seller’s information, the SPA allocates responsibility and payment security makes the remedy real. Consistency across these elements is more effective than relying on a single broad warranty after closing.
Frequently asked questions about undisclosed liabilities
What are undisclosed liabilities in an acquisition?
They are obligations of the target that exist at completion but are not recorded in the accounts or revealed in the disclosure process: unpaid social insurance and tax, employment entitlements, contingent obligations under guarantees or litigation, environmental or licensing obligations, and related-party debts. Because a share purchase transfers the company with its entire history, these undisclosed liabilities pass to the buyer automatically unless the agreement shifts them back.
How do warranties and disclosure interact?
Warranties are statements of fact by the seller; disclosure qualifies them. A general disclosure of everything in the data room converts diligence material into a defence and can leave the buyer with no claim, so the agreement should require specific, fairly disclosed information in a signed disclosure letter, with enough detail for a reasonable buyer to assess the risk. Controlling the disclosure standard is the single most effective drafting protection against undisclosed liabilities.
When should a buyer insist on a specific indemnity?
Whenever a risk has been identified but cannot be quantified or removed before completion: an ongoing tax audit, a known payroll shortfall, contaminated land, unlicensed activity, or pending litigation. A specific indemnity should be paid on a dong-for-dong basis, sit outside the general warranty caps and time limits, and not be reduced by disclosure, since its whole purpose is to cover a matter the parties already know about.
Is an asset purchase safer than a share purchase?
Often, because the buyer can choose which contracts and assets to take. It is not a complete answer in Vietnam: employees transferring with a business retain their accrued entitlements, land use rights and licences generally cannot simply be assigned without approval, and some tax obligations follow the assets. An asset deal also takes longer to implement, so the reduction in exposure to undisclosed liabilities has to be weighed against execution risk.
How long should the buyer’s protection last?
General warranties commonly survive twelve to twenty-four months, long enough to cover one full audit cycle. Tax and social insurance warranties should run to the end of the statutory assessment period, and fundamental warranties on title and capacity are usually unlimited in time. Escrow or retention should be released in tranches that match those periods rather than all at the first anniversary.
Next step
Before signing, list the exposures diligence actually found, decide for each whether it is priced, indemnified or warranted, and confirm there is a funded source of recovery behind the answer. Check the corporate records, resolutions and representative authority required under the Law on Enterprises, since unauthorised commitments by a former legal representative are a frequent source of surprise.
IVLF Lawyer scopes diligence, drafts warranty and indemnity packages and negotiates escrow and price protection for buyers of Vietnamese companies. An experienced Vietnam M&A lawyer will size the protection to the exposures actually found rather than to a market template. See our legal services or contact IVLF Lawyer.
Related reading: Representations and warranties in Vietnam M&A, Vietnam tax due diligence, and Warranty and indemnity insurance in Vietnam M&A.
This article is provided for general information only and does not constitute legal advice for any specific case. Regulations may change – please consult a qualified professional before acting. Should further analysis be required, please contact one of our lawyers below.
