Legal Proceedings (Buyer)
What are Legal Proceedings? In this section, the Buyer provides information regarding its involvement in legal proceedings that could interfere with or prevent the transaction. 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: The Buyer represents that, other than those disclosed in the Disclosure Schedules, there are no legal actions, pending or threatened, that would prevent or delay the transaction. It also represents that no events have occurred and no circumstances exist that could lead to such an action delaying or preventing the deal.
Purpose: Even when a Buyer and Seller are in complete agreement on terms and want to move forward, a legal action can dismantle the entire acquisition. Including this representation shifts the risk associated with a legal challenge to the party that is most likely to have knowledge of it, which in this case is the Buyer.
Buyer Preference: Other than the representation regarding pending legal actions, the Buyer wants its representations in this section to include knowledge qualifiers. If part of the Purchase Price includes a transfer of the Buyer’s stock or a seller note, the Buyer may also have to include a statement regarding its property or assets, as the Seller did in its Legal Proceedings representation. If not, the Buyer will want to avoid making any extraneous representations that do not directly relate to the acquisition.
Seller Preference: The Seller wants to avoid including knowledge qualifiers as a way to encourage the Buyer to investigate whether any potential claims could be made that would stop the transaction. If the future success of the Buyer’s company is relevant to the Seller’s payout, either in terms of the payout level or the Buyer’s ability to make the payments, the Seller may also seek a representation relating to the assets and property of the Buyer.
Differences in a Stock Sale Transaction Structure: None.
Sufficiency of Funds
What is Sufficiency of Funds? In this section, the Buyer provides information regarding its ability to fund the acquisition. 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: Here, the Buyer represents that it has enough cash on hand, or immediate access to funds from other sources, to be able to pay the Purchase Price and take the other necessary steps to complete the transaction. If the Buyer is financing the acquisition instead of paying the Purchase Price out of its available cash, this representation should be revised accordingly.
Purpose: The portion of the Purchase Price to be paid at Closing is typically a substantial share of the overall Purchase Price, and it is often the most anticipated payment from the Seller’s perspective. By obtaining this representation, the Seller is provided some assurance that the Buyer has the capacity to follow through on its most important commitment. Furthermore, it’s essential that the Buyer is able to make the payment as a way to build trust if the parties will continue to work together after the Closing. In short, few things, if any, will cause the Seller to abandon the transaction quicker than the Buyer failing to make the Closing Payment.
Buyer Preference: The Buyer will likely be satisfied with this representation as written if no financing is required. However, if the Buyer is utilizing acquisition financing it will want the representation to reflect those terms, and it may want additional covenants such as a requirement for the Seller to take any reasonable actions necessary to assist the Buyer in obtaining such financing. It may also want to add, as a condition to Closing, that a failure to obtain financing allows it to walk away from the deal. Most sellers will strongly resist that sort of condition, but may agree to a “reverse break-up fee” that allows the Buyer to pay a specified amount and abandon the transaction if it’s not able to find financing. If the Buyer is required to make a solvency representation (which it generally wants to avoid doing), it will want to explicitly include certain assumptions to minimize its potential liability for a breach, such as that the Seller’s representations and warranties are true, the target company has not suffered a Material Adverse Effect, and that any financial projections regarding the Business are still reasonable at the time of Closing.
Seller Preference: If the Buyer is using acquisition financing, the Seller will want assurances that the Buyer has satisfied all the conditions to obtaining the financing and is not in breach of its agreement with the lender. If the Buyer is using the Purchased Assets as collateral for the financing, the Seller will want to include a solvency representation so that it is protected if the Buyer is unable to repay its creditor(s). The Seller may also want to consider a covenant requiring the Buyer to use reasonable best efforts (or some other effort standard) to find alternative financing if the arrangement with the initial lender falls through.
Differences in a Stock Sale Transaction Structure: None.
Brokers (Buyer)
What are Brokers? In this section, the Buyer provides information regarding relationships it has with business brokers and other third-party transaction advisors. 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: The Buyer represents that no intermediaries are entitled to any brokerage fee or commission in connection with the acquisition, except for the intermediaries listed in the Agreement.
Purpose: Just like the Seller’s “Brokers” representation, this representation is used to manage risk, albeit a small and remote risk. The reciprocal nature of this representation, as well as its relatively minor status within the context of the Agreement, means that it is often included in its standard form and is not the subject of explicit negotiation between the parties.
Buyer Preference: None.
Seller Preference: None.
Differences in a Stock Sale Transaction Structure: None.
No Conflicts; Consents (Buyer)
Significance: Deal Driver
Section: Representations and Warranties of Buyer
Negotiation Time: Minimal
Transaction Costs: Insignificant to Intermediate
Major Impact: Risk Management and Transaction Completion
What is the No Conflicts; Consents section? In this section, the Buyer provides information regarding its ability to complete the transaction without third-party interference. 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: Much like the Seller’s reciprocal representation, here the Buyer represents that performance of its obligations under the Agreement does not conflict with its organizational documents or any law or Governmental Order. It states that execution of the Agreement does not require notice to or consent from any party that has a contract with the Buyer, other than the parties listed in the Disclosure Schedules. It also represents that no consents, approvals, permits, or Governmental Orders are required from the government, and no notice or filings are required to be provided to the government, to consummate the transaction (other than those required by the HSR Act, if applicable).
Purpose: The rationale for classifying this representation as a Deal Driver mirrors that of the Seller’s “No Conflicts; Consents” representation. Both indicate there are no legal roadblocks to completing the deal, which, if true, makes it much more likely that the transaction will be finalized. This representation also has a substantial effect on the allocation of risk between the parties because the Buyer is assuming responsibility if the transaction doesn’t go through based on a failure to obtain necessary consents.
Buyer Preference: Depending on the situation, the Buyer may want to include a materiality qualifier regarding the consents, approvals, and notices contemplated by this section. It may even want a Material Adverse Effect standard to limit its required disclosures. However, the Buyer must keep in mind that any qualifiers it insists upon will almost always be mirrored in the Seller’s representation. So, the Buyer wants to weigh its desire to limit its own disclosures against its need for full disclosure from the Seller. Most buyers will opt for full disclosure in this section since anything short of that has the potential to reduce the value of the deal or put the entire acquisition at risk.
Seller Preference: The Seller wants the Buyer to disclose any conflicts, consents, Governmental Orders, etc. that could interfere with the transaction. Although this is a reciprocal representation, the Buyer’s representation may be somewhat more limited than that of the Seller since the Seller is not concerned with the post-Closing operation of the Buyer’s business. The Seller should find a more limited representation acceptable, so long as the concerns it does have regarding conflicts, consents, and Governmental Orders are addressed.
Differences in a Stock Sale Transaction Structure: None.
Authority of Buyer
What is Authority of Buyer? In this section, the Buyer provides information regarding its legal ability to enter into the Agreement. 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 representation, the Buyer states that it has the power and authority to enter into the Agreement, and that it has taken the necessary corporate action to authorize the transaction.
Purpose: In order for the Seller to be paid the agreed upon amount of cash at Closing, the Buyer must have the power and authority, and take the requisite corporate procedural steps, to transfer the payment. This representation provides the Seller with assurance that the Buyer will make the Closing payment in a legally valid way, ensuring that it will not be recalled later on the grounds that it was never properly approved.
Buyer Preference: If the Seller’s “Authority” representation was changed in any way from the middle ground term, the Buyer wants the same change(s) made to this representation.
Seller Preference: The Seller is likely content with the middle ground term for this representation, but it does want any changes that were made to the Seller’s own Authority representation to also be made here.
Differences in a Stock Sale Transaction Structure: None.
Organization of Buyer
What is This? In this section, the Buyer provides information regarding its current legal status. 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: The Buyer represents that its entity was legally organized and is in good standing under the laws of its state of organization.
Purpose: As a practical matter, the main concern of most sellers involved in a transaction is whether they will receive their payment in accordance with the terms of the Agreement. Whether the Buyer’s company was correctly organized and maintains good standing is only of consequence to the Seller if the deal is structured as a merger or a stock for stock acquisition, or if the Seller plans on continuing to work for the Business after the transaction. If the Buyer is setting up a new entity as an investment vehicle to complete the transaction or is paying the entire Purchase Price in cash at Closing, the most pragmatic of sellers will not give a second thought to whether the Buyer’s company was created properly. However, if the Seller’s payment depends in part on the success of the Buyer’s business, the Seller will want to ensure that the entity validly exists and is not in jeopardy of losing its “good standing” status.
Buyer Preference: None, this is a standard representation.
Seller Preference: None, this is a standard representation.
Differences in a Stock Sale Transaction Structure: The content of the representation will not change based on the transaction structure, but its importance will vary based on the payment structure of the transaction.