What are Legal Proceedings and Governmental Orders? In this section, the Seller provides information regarding legal proceedings and Governmental Orders that may impact the Business moving forward. 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 first part of this representation states that, other than the legal proceedings listed in the Disclosure Schedules, there are no legal actions, pending or threatened, relating to the Business, the Seller, or any of the Business’s assets. It also states that no events have occurred that would give rise to any such legal actions. The second part states that there are no outstanding Governmental Orders or judgments against the Business or its assets other than those listed in the Disclosure Schedules. If one or more Governmental Orders are listed in the Disclosure Schedules, there is typically an additional representation that the Business is in compliance with the order and nothing has happened that would constitute or result in a violation of it.

Purpose: Any legal proceedings against the Business, or any events that could lead to such proceedings, have the potential to seriously damage the health of the Business. Some buyers will shy away if there is even the prospect of a significant legal claim against the Business. Similarly, Governmental Orders can lead to future liability or restrictions that most buyers will not want to contend with, or they may even be directed at preventing the proposed transaction. This provision is intended to alert the Buyer to those circumstances so that it can take measures to manage its risk, which may include abandoning the transaction altogether.

Buyer Preference: The Buyer may want to add a provision stating that nothing has occurred that would give rise to a company obligation to indemnify any current or former directors or employees.

Seller Preference: The Seller wants to add a materiality or a Material Adverse Effect qualifier to the Legal Proceedings representation. Some sort of materiality requirement is especially important if the Business operates in an industry where immaterial claims are common. However, if the Buyer’s indemnification rights are limited by a Basket, a materiality qualifier is not as vital. The Seller also wants a knowledge qualifier to apply to the part of the representation that asserts no events have occurred that would result in legal proceedings against the Business or the Purchased Assets.

Differences in a Stock Sale Transaction Structure: None.