Representations and Warranties

Except in rare instances, an acquisition agreement has representations and warranties. Seller representations and warranties are statements laying out the condition of its business at signing the acquisition agreement and again at closing. They present a snapshot of the business and are a method of risk allocation. 

Typical seller representations and warranties cover such areas as seller's legal compliance, good title to assets, bills paid, seller's authority, undisclosed liabilities, condition of assets, financial information and statements, leases and contracts, employees, truth and correctness of documents, lawsuits, dangerous substances, full disclosure, organization and standing, liabilities, permits, licenses, employee compensation plans, customer list, reports to governmental authorities, tax returns, the effect of the agreement on other obligations, absence of changes and events, authorization of the acquisition agreement, equity holders' approval, and no untrue statements. This is not an exhaustive list but merely a sampling of items.

Unless the purchase price includes seller financing or issuing buyer equity to seller, buyer's representations and warranties are much less comprehensive. Typical buyer representations and warranties relate to buyer's authority to carry out the purchase, and no events, legal proceedings, or contracts prevent buyer's performance of its obligations under the acquisition agreement. If part of the sales price includes seller financing or transferring buyer equity to seller, then buyer's representations and warranties can be more like seller's.

This post is not intended to be an exhaustive treatment of its subject matter but an overview of some of the pertinent elements of the subject discussed. It is not legal advice or a legal opinion and should not be relied on in making legal or business decision