What is the Compliance with Laws; Permits section? In this section, the Seller provides information regarding the Business’s compliance with legal requirements. It is part of the Representations and Warranties of the Seller section.

The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.

The Middle Ground: The Seller represents that it is currently in compliance with all laws applicable to the Business and that it has previously complied with all such laws for a specified period (e.g. the previous three years). The Seller also represents that it has all permits necessary to conduct the Business, all fees related to those permits are paid, the permits are in full force and effect, and nothing has occurred that would result in their limitation or revocation.

Purpose: The Seller’s current and past compliance with laws applicable to the Business is obviously a significant issue; the Buyer will not want to purchase a business operating outside the confines of the law or be stuck with liabilities created by the Seller. However, whether the parties will spend a substantial amount of time during due diligence and negotiations to cover legal compliance depends largely on the industry in which the Business operates. In a highly regulated industry, the Buyer will find it worth the time to inquire about specific laws and negotiate over the extent of the Seller’s compliance representations. On the other hand, if any potential penalties are minuscule and/or the chances of enforcement are remote, the parties may insert this clause into the Agreement and leave it at that.

Buyer Preference: The Buyer wants a clause that does not limit the Seller’s representation regarding past compliance. Regardless of when the bad act occurred, the Buyer does not want to be liable for someone else’s misconduct. The Buyer also wants to avoid materiality qualifiers for both sets of representations included here.

Seller Preference: The Seller wants to limit this representation to current compliance only, especially if past violations have already been cured. It can also limit its risk by inserting some sort of materiality qualifier (e.g. requiring a violation or lack of a permit to have a Material Adverse Effect on the Business before indemnification applies). Finally, the Seller may seek to exclude entire areas of law from these representations because they are dealt with elsewhere in the Agreement (e.g. environmental laws and permits).

Differences in a Stock Sale Transaction Structure: None.