Absence of Certain Changes, Events, and Conditions
What is This? In this section, the Seller provides information regarding the current state of the Business. It is part of the Representations and Warranties of Buyer section.
The Representations and Warranties of Buyer portion of the Agreement is used to save the Seller time and money. Rather than require the Seller to go through third parties to find certain information, the Buyer provides the information and must reimburse the Seller for any Losses it suffers if the information is false or misleading.
The Middle Ground: In this provision, the Seller represents that certain aspects of the Business (e.g. accounting practices) have not changed, or certain events or conditions have not occurred, since the Balance Sheet Date. The most important inclusion in this section is the representation that nothing has occurred since that date that could reasonably have a Material Adverse Effect on the Business. The representation excludes changes, events, and conditions that occur in the ordinary course of business and are consistent with the Seller’s past practices.
Purpose: A Buyer’s decision to invest in a business involves the consideration of dozens of different factors, and sometimes it is just one of them that tips the balance from a “pass” to a “buy.” If the Business undergoes a significant change after the investment decision is made, the Buyer may want to reassess its calculation. This clause allows the Buyer to identify the changes it is most concerned about, and in doing so, it requires the Seller to disclose such changes or represent that they have not occurred.
Buyer Preference: The Buyer wants the list of prohibited changes, events, and circumstances to be comprehensive. It may also want to prevent changes to the Seller’s cash management and accounting practices, especially if the deal involves a Purchase Price adjustment that could be manipulated by varying such practices. In defining Material Adverse Effect, the Buyer wants to strike a balance between a broad definition that encompasses the Buyer’s major concerns and a definition that is relatively easy to measure and enforce. Many buyers are uncomfortable with the vague nature of the materiality standards used, and instead use dollar amount thresholds to qualify certain aspects of the list.
Seller Preference: The Seller wants a short list of prohibited changes, events, and circumstances, especially if they are not likely to affect the Buyer or the Purchased Assets after Closing. The Seller is typically more comfortable with the Material Adverse Effect standard than is the Buyer because it is difficult to enforce, and the same can be said for the other materiality standards in this section. However, if the Buyer insists on dollar thresholds, the Seller will want those thresholds to be as high as possible.
Differences in a Stock Sale Transaction Structure: The list of prohibited changes is likely to be longer in a stock sale because the Buyer is purchasing the entire business instead of certain assets.
