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.
Full Disclosure
Significance: Moderately Material
Section: Representations and Warranties of Seller
Negotiation Time: Minimal to Moderate
Transaction Costs: Insignificant
Major Impact: Risk Management
What is Full Disclosure? In this section, the Seller affirms that the information it has provided throughout the Transaction Documents is accurate and complete. 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: Here, the Seller represents that nothing in the Agreement, the Disclosure Schedules, or any other Transaction Documents misstate or omit a material fact that would make any statements made in those documents misleading.
Purpose: This representation is included to ensure that the disclosures and representations made by the Seller are not misleading, even if they are technically accurate. Thus, this section is yet another risk management tool being used by the Buyer to avoid bearing the brunt of any unwelcome surprises that arise after the purchase.
Buyer Preference: In addition to this representation, the Buyer may seek an additional representation from the Seller stating that, to the Seller’s knowledge, no undisclosed event or circumstance exists which could reasonably be expected to have a Material Adverse Effect on the Business.
Seller Preference: The Seller will want to exclude this representation in its entirety on the basis that the other representations included in the Agreement adequately address the Buyer’s transaction risk. If successful, the Seller may also want to include a provision stating that it makes no representations or warranties other than those in the Agreement. An alternative option for the Seller is to have the Buyer represent that it conducted its own independent investigation of the Business and that it is relying solely on that investigation and the express representations and warranties of the Buyer in agreeing to the transaction. Both of those additional clauses are aimed at precluding the Buyer from being able to assert non-contract claims based on the Seller representations and warranties (such as a tortious fraud claim), thereby limiting the Seller’s risk.
Differences in a Stock Sale Transaction Structure: This representation tracks the language in Rule 10b-5 of the Exchange Act, and since that rule is applicable in a stock sale the Buyer does not have as strong a need to include the representation in the actual Agreement. However, the Buyer may still try to include it since the substantive and procedural requirements for succeeding on a 10b-5 claim are more onerous than what is required to receive indemnification.
Brokers (Seller)
What are Brokers? In this section, the Seller provides information regarding relationships it has with business brokers and other third-party transaction advisors. 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 no intermediaries are entitled to any brokerage fee or commission in connection with the acquisition, except for the intermediaries listed in the Agreement.
Purpose: This provision serves a small risk management function by assuring the Buyer that if a third party claims a right to some portion of the Purchase Price based on an agreement with the Seller, it will be the Seller’s responsibility to resolve the claim. The Buyer makes a reciprocal representation, meaning both sides bear some of the risk of third-party claims.
Buyer Preference: Even with this representation included, if the broker’s fee is not paid by the Seller such nonpayment can result in a lien on the Business, which will undoubtedly cause headaches for the Buyer. To avoid such a situation, in addition to including this representation, the Buyer will require a post-Closing statement from the broker indicating that its fee has been paid in full.
Seller Preference: None.
Differences in a Stock Sale Transaction Structure: None.
Taxes
What are Taxes? In this section, the Seller provides information regarding tax-related matters of the Business. 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 content in this section is based on the assumption that the Business is organized as a stand-alone C Corp that does not operate outside the United States. With that in mind, the typical tax representations include:
(1) All the Seller’s Tax Returns for any pre-Closing period are true and complete, have been, or will be, timely filed, and all related payments have been, or will be, paid by their respective due dates;
(2) Seller has withheld and paid each Tax required to be withheld in connection with its employees, independent contractors, customers, or any other party and has complied with reporting and backup withholding provisions of applicable law;
(3) No extensions or waivers of statutes of limitations have been requested or provided in connection with the Taxes payable by Seller;
(4) Seller has fully paid all deficiencies asserted and/or assessments made against it by any taxing authority;
(5) Seller is not a party to any Action by any taxing authority and there are no pending or threatened Actions of that nature in connection with the Business;
(6) There are no Tax-related Encumbrances upon any of the Purchased Assets nor, to Seller’s knowledge, is any taxing authority in the process of imposing such Encumbrances;
(7) Seller is not a “foreign person” as defined in Treasury Regulation §1.1445-2; and
(8) Seller is not, and has never been, party to or a promoter of a “reportable transaction” within the meaning of Code §6707A(c)(1) and Treasury Regulations §1.6011 4(b).
Additional tax-related representations may be required depending on the nature of the Business (e.g. if the Business engages in “safe harbor lease” transactions), so both parties should consult a tax expert to determine which representations should be included in the Agreement.
Purpose: Tax-related liabilities are generally part of the Excluded Liabilities in an asset purchase, so the purpose of this section is to ensure that all such liabilities, including those that may be imposed in the future based on the Seller’s pre-Closing actions or inaction, stay with the Seller. Including specific tax-related representations also gives the Buyer a better understanding of the Seller’s past behavior in terms of its desire and ability to comply with legal requirements. That information can be a valuable source of risk assessment for the Buyer, and it becomes especially important if the Seller will remain actively involved in the Business following the sale.
Buyer Preference: The Buyer wants these representations to survive for 60 days after expiration of the applicable statute of limitations for enforcement of tax deficiencies. It also wants the representations to remain as broad as possible to cover all taxes owed or paid by the Seller, although, for the sake of clarity, it may want to specifically list as examples the tax categories it is most concerned about (e.g. sales tax for an e-commerce business). The representation regarding withholding tax is not a necessity in this section, but is generally preferred by the Buyer because it provides specific information about withholding taxes that may not otherwise be disclosed (because the “Withholding Tax” provision is not typically accompanied by related Disclosure Schedules). The Buyer also wants to exclude knowledge qualifiers in representations (5) and (6) if it can do so without giving up something of greater significance. Lastly, the Buyer may want to consult a tax expert who is familiar with the Business to determine whether additional representations should be included.
Seller Preference: The Seller can narrow these representations by limiting them to “Taxes (and Tax Returns) with respect to the Business” rather than referencing the Taxes (and Tax Returns) of the Seller. The Seller may also seek knowledge and/or materiality qualifiers where it would make sense to do so. A more aggressive approach would be to limit the Tax Returns to Income Tax Returns, but most Buyers will resist this since income taxes are not the only source of tax liability for businesses. If the representations would not be completely accurate as written, the Seller will want to include a corresponding section in the Disclosure Schedules rather than risk breaching its representations. Much like the Buyer, the Seller may want to consult with a tax expert regarding the scope of the representations to ensure that it is not taking responsibility for any liability that should be taken on by the Buyer.
Differences in a Stock Sale Transaction Structure: These representations are more critical for the Buyer if the transaction is structured as a stock sale because, in that context, the Buyer inherits the Seller’s tax liabilities. That means the Buyer would be managing much more risk and, consequently, would need to include more extensive representations than those listed here.
Employment Matters
What are Employment Matters? In this section, the Seller provides information regarding its responsibilities to employees and compliance with various employment-related laws. 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: In the Employment Matters representation and the related Disclosure Schedules, the Seller provides the name and other employment-related information for all employees, independent contractors, and consultants of the Business. The Seller then represents that:
(1) All compensation has been paid to those employees, contractors, and consultants, and there are no related ongoing financial commitments except for those listed in the Disclosure Schedules;
(2) It is not bound by any collective bargaining agreement or other contract with a labor union and that no such union or group of employees has sought to organize for the purpose of collective bargaining (again, exceptions are provided via the Disclosure Schedules);
(3) It has no duty to bargain with any union, and its employees have not been involved in any concerted refusals to work;
(4) The Business complies with all applicable employment laws and no employment-related claims are pending or, to the Seller’s knowledge, have been threatened or filed against the Business;
(5) It has complied with the WARN Act and has no plans to undertake any action that would trigger the WARN Act provisions (if the WARN Act is applicable to the Business); and
(6) It complies with all regulations required of government contractors and it has not been the subject of an investigation, audit, or enforcement action by any Governmental Authority in connection with a Government Contract.
Purpose: These representations and disclosures give the Buyer a good sense of its employment-related risk and allow it to shift some of its risk to the Seller (namely, the risk stemming from one of the situations outlined above). This information also helps set the Buyer’s expectations in terms of overall employee-related costs and the level of formality required when addressing compensation issues with employees.
Buyer Preference: The Buyer wants this section to be expansive, with no knowledge qualifiers or time restrictions for the disclosures and representations. Additionally, if the Seller is in fact a government contractor, the Buyer will want to include representations that speak to the Business’s compliance with government-mandated employment requirements.
Seller Preference: It’s quite likely that not every representation listed here will apply to the Business (e.g. it is not a government contractor or the WARN Act does not apply). At a minimum, the Seller wants to exclude those inapplicable representations. The Seller also wants to cap the time periods to make certain disclosures, such as the disclosures relating to union organizing activity, as a way to keep transaction costs under control and limit the risk from an immaterial misrepresentation. The Seller can also limit its risk by including materiality or knowledge qualifiers when appropriate.
Differences in a Stock Sale Transaction Structure: None.
Employee Benefit Matters
What are Employee Benefit Matters? In this section, the Seller provides information regarding employee benefits. 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 disclosures and representations made by the Seller in this section include:
(1) The disclosure of all Benefit Plans, written or unwritten, to which the Seller has contributed or under which the Seller or Buyer may have (or reasonably expect to have) any liability;
(2) That the Seller has provided to the Buyer, for each Benefit Plan, accurate and complete copies of the following: (i) the plan documents and amendments for plans that are in writing; (ii) for unwritten plans, a written summary of the material plan terms; (iii) copies of trust agreements or other funding arrangements, insurance contracts, administration agreements, investment agreements, and custodial agreements that are currently in effect or required in the future; (iv) written communications relating to any Benefit Plan, including summaries of plan descriptions and any material modifications to the plan; (v) correspondence from the IRS regarding any Benefit Plan that is intended to be qualified under Internal Revenue Code (the “Code”) §401(a); (vi) a copy of the two most recently filed Form 5500s (if applicable), with attached schedules and financial statements; (vii) recent actuarial valuations for applicable Benefit Plans; (viii) the most recent nondiscrimination tests performed under the Code; and (x) copies of material notices and correspondence from any Governmental Authority relating to the Seller’s Benefit Plans;
(3) Each Benefit Plan (and any related trusts) has been established and maintained in compliance with all applicable laws; nothing has occurred that has subjected or reasonably could subject the Seller or any of its ERISA Affiliates, or the Buyer or its Affiliates, to a penalty or tax under ERISA or the Code; all benefits, contributions, and premiums have been timely paid; and all benefits accrued under any unfunded Benefit Plan have been paid or accrued and reserved for in accordance with GAAP, if the Business follows GAAP;
(4) Neither the Seller nor any of its ERISA Affiliates has (i) incurred any material liability with respect to Title I or Title IV of ERISA or any related Code provisions or local laws; (ii) failed to timely pay premiums to the Pension Benefit Guaranty Corporation; (iii) withdrawn from a Benefit Plan; or (iv) engaged in any transaction that would give rise to liability under §4069 or 4212(c) of ERISA;
(5) With respect to each Benefit Plan: (i) any Multiemployer Plans in which the Seller participates have been disclosed, all premiums have been timely paid, and no withdrawal liability is outstanding or will be incurred upon a future withdrawal from the plan; (ii) no plan is considered a “multiple employer plan” under §413(c) of the Code or a “multiple employer welfare arrangement” under ERISA; or (iii) the Pension Benefit Guaranty Corporation has not taken any action to terminate or appoint a trustee to any such plan; (iv) no such plan is subject to the minimum funding standards or ERISA and none of the Purchased Assets are, or may reasonably be expected to become, subject to a lien arising under ERISA or the Code; and (v) no “reportable event” as defined in ERISA §4043 has occurred with respect to any such plan;
(6) Except as disclosed, no Benefit Plan or other arrangement involving the Seller requires it to provide post-termination or retiree welfare benefits to any individual;
(7) Except as disclosed, there is no pending or, to Seller’s knowledge, threatened Action relating to a Benefit Plan (other than routine benefits claims), and no Benefit Plan has been the subject of an examination or audit by a Governmental Authority or is involved in an amnesty or similar compliance program sponsored by any Governmental Authority;
(8) There has been no change in relation to any Benefit Plan, and Seller has not agreed to make any change in the future with respect to any such plans, that would increase the annual expense of maintaining such plan in comparison to the most recently completed fiscal year. Furthermore, neither Seller nor its Affiliates have committed to adopt, modify, or terminate any Benefit Plan currently in effect;
(9) Each Benefit Plan that is subject to §409A of the Code has been administered in accordance with that section of the Code and Seller does not have any monetary obligations to any third party in relation to §409A;
(10) Except as disclosed, execution of the Agreement or any transactions pursuant to the Agreement will not materially alter the Business’s obligations arising out of any Benefit Plan.
Purpose: By making these representations, the Seller is accepting the risk of any outstanding liabilities under its benefit plans, including the risk of non-compliance with ERISA or the Code. However, the representations do not relieve the Buyer from potential liability for ongoing violations that persist after the sale, so it should pay special attention to the disclosures made in this section of the Disclosure Schedules if it is adopting the Seller’s plan(s). In terms of deal value, the transaction costs of both parties will increase based on this section because it requires review by a benefits plan expert (or, more accurately, an expert review is highly recommended). However, the experts’ review will limit the risk associated with the Benefit Plan(s), making it a sound investment for both sides.
Buyer Preference: The Buyer may want to retain an employee benefits specialist to determine which of these representations need to be included for each specific situation. In general, the Buyer wants robust disclosure requirements and comprehensive representations that do not include knowledge or materiality qualifiers.
Seller Preference: The Seller may want to retain an employee benefits specialist to assess whether the Seller has been compliant with its plans and to advise as to which representations should and should not be included in the Agreement. In most situations, its interests will be the opposite of the Buyer’s; the Seller will want limited representations that ignore immaterial issues and that are based on the Seller’s knowledge.
Differences in a Stock Sale Transaction Structure: The Buyer will typically want more comprehensive disclosures and representations in a stock sale because the Buyer is assuming the Seller’s liabilities. In an asset acquisition, liabilities relating to any Benefit Plan of the Seller are usually expressly excluded from the transaction.
Environmental Matters
What are Environmental Matters? In this section, the Seller provides information regarding environmental issues relating to the Business. 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: Here, the Seller makes comprehensive representations regarding its compliance with Environmental Laws. Those representations include:
(1) The Business is and always has been in compliance with applicable environmental laws and the Seller has not received notice of an Environmental Violation or Claim, or a request for information pursuant to Environmental Law that remains unresolved;
(2) The Seller has obtained all Environmental Permits necessary to conduct the Business or use the Purchased Assets as currently conducted or used and all such Environmental Permits are in full force and effect. Nothing has occurred, to the Seller’s knowledge, that would interfere with the validity of the Environmental Permits after the Closing Date, and the Seller has undertaken all measures necessary to transfer the Environmental Permits on the Closing Date;
(3) None of the Purchased Assets or any real property used or formerly used (whether owned or leased) by the Business have been listed on, or proposed for listing on, the National Priorities List under CERCLA or any similar state list;
(4) There has been no Release of Hazardous Materials in violation of Environmental Law with respect to the Business or the Purchased Assets, including on any real property currently or formerly used by the Business. Furthermore, the Seller has not received any notice that it violated an Environmental Law or the terms of an Environmental permit, or that could reasonably be expected to result in an Environmental Claim against the Seller, the Business, or the Purchased Assets;
(5) The Disclosure Schedules contain a complete and accurate list of all active or abandoned storage tanks owned or operated by Seller in connection with the Business or the Purchased Assets;
(6) The Disclosure Schedules contain a complete and accurate list of all off-site facilities or locations for the treatment, storage, or disposal of Hazardous Materials used by the Seller, and any predecessor to the extent the Seller may retain liability, in connection with the Business or Purchased Assets. No such facilities or locations have been placed on or proposed for placement on the National Priorities List under CERCLA, or any similar state list, and the Seller has not received any Environmental Notice of potential liability with respect to any such facilities or locations;
(7) The Seller has not retained or assumed any liabilities or obligations from third parties with respect to Environmental Laws (whether by contract or operation of law);
(8) The Seller has provided Buyer with (i) all material documents in Seller’s possession or control relating to compliance with Environmental Laws, Claims, or Notices in connection with the Business or Purchased Assets, or any real property used by the Business at any time, and (ii) all material documents relating to actual or potential capital expenditures made to ensure current or future compliance with Environmental Laws; and
(9) The Seller is not aware of and does not reasonably anticipate, as of the Closing Date, any condition or event relating to Hazardous Materials that may, after the Closing Date, prevent, impede, or materially increase the costs associated with performance of the Business or use of the Purchased Assets as currently conducted or used.
Purpose: The importance of this section depends largely on the Business and the industry in which it operates, as well as the location of the properties utilized by the Business. If the Business uses Hazardous Materials as part of its normal operations, this section is essential for the Buyer. Likewise, if the Business’s real property is adjacent to another business that uses Hazardous Materials, these representations lessen the risk that the Buyer will have to pay for the environmental violations of others. However, if the Business itself does not use any materials that are subject to environmental regulation and there is no similar threat posed by neighboring landowners, the scope of representations contained here may not be necessary. In the event that the Seller only used Hazardous Materials at a specific point in time or at one specific location, the parties can agree to limit the Seller’s representations to address those situations without including the entire set of representations listed above.
Buyer Preference: Due to the potential magnitude of penalties related to environmental violations, the Buyer wants to include the most comprehensive set of environmental representations that will be acceptable to the Seller and may also want to exclude environmental matters from any limits on its indemnification rights. If there are identifiable environmental issues and the Seller wants to limit the representations to those situations, the Buyer has a number of options. It may insist on the Seller correcting those issues prior to the sale or require a portion of the Purchase Price to be placed in escrow until the problems are remedied. A more conservative Buyer might seek to exclude the property from the transaction or lower the Purchase Price based on projected remediation costs. Another option would be to purchase environmental insurance. Still, the Buyer will want representations that apply to the entire Business and all properties utilized by the Seller. The Buyer prefers specific, material exceptions to the representations listed in the Disclosure Schedules, but nothing more, since it wants the representations to be as widely applicable as possible. Lastly, if the Business operates in an industry that interacts with climate change regulation (e.g. the energy, utility, and manufacturing industries), the Buyer may want to include a representation that speaks to the validity and transferability of “Environmental Attributes” (e.g. emissions allowances or renewable energy credits).
Seller Preference: If real property is not involved in the purchase and/or the Business does not utilize Hazardous Materials, the Seller may want this section to be excluded in its entirety. If that is not the case and these representations are included, the Seller can try to limit the environmental representations to this section by including a statement to that effect. As for the representations themselves, the Seller will want them to be qualified using a materiality or Material Adverse Effect standard, and/or with knowledge qualifiers. It may also want to limit them to cover specific properties or time frames if it can identify specific situations that are more likely to result in environmental-related costs for the Buyer. If the Seller agrees to deal with the Buyer’s environmental concerns prior to the sale, it can include those terms in a separate agreement and limit the representations to exclude the subject matter of the separate agreement. Because the Seller is most likely to provide an incomplete or misleading representation when instances or exceptions are listed with specificity in the Disclosure Schedules, it will want to make broad disclosures to avoid unintentionally breaching a representation.
Differences in a Stock Sale Transaction Structure: Since the Buyer inherits all the liabilities of the Business in a stock sale, the environmental representations are likely to be more comprehensive under that structure than in an asset sale.
Compliance with Laws; Permits
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.
Legal Proceedings; Governmental Orders
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.
Insurance
What is Insurance? In this section, the Seller provides information regarding the insurance held by the Business. 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: In this representation, the Seller provides copies of all current insurance policies relating to the Business, all historical and pending claims relating to those policies, and a description of how those claims were resolved. Additionally, the Seller represents that: (1) the Business carries all policies required by law and/or customarily carried by others in its industry, and those policies are in full force and effect; (2) the policy providers are financially solvent; (3) all past due premiums have been paid and there have been no lapses in coverage; (4) the policies are not subject to cancellation or a premium increase; and (5) the Seller is not otherwise in default pursuant to any of the policies. In the event that Seller is self-insured, the representation should describe the self-insurance arrangement.
Purpose: The information provided here allows the Buyer to assess the risks inherent in operating the Business, as well as the Seller’s response to those risks. More specifically, the disclosures indicate the extent to which risks to the Business materialize, while the representations help the Buyer understand industry risk management standards. In combination, the disclosures and representations allow the Buyer to determine how risk-averse the Seller is, and that is useful information for the Buyer to know if the Seller will remain involved with the Business after the sale.
Buyer Preference: The Buyer wants to include this representation even if it does not plan on continuing the insurance policies purchased by the Seller, because the information is useful for determining the appropriate level of insurance protection. The Buyer may agree to limit the time period for which past and pending claims must be disclosed, but it will want that period to be long enough to get a good sense of the insurance needs of the Business and include at least one business cycle if the Business is cyclical in nature.
Seller Preference: The Seller may try to exclude this representation if the Buyer will not be utilizing the insurance policies purchased by the Seller. If the Seller does agree to provide the representation, it will want to exclude subjective language such as whether the insurance coverage used in the past is “sufficient.” Furthermore, it will not want to include representations that rely on the actions of third parties to be accurate, such as attesting to the financial solvency of the insurance carriers. If those representations are included, the Seller wants to include knowledge qualifiers to limit the risk posed by unknown circumstances or information.
Differences in a Stock Sale Transaction Structure: None.
Customers and Suppliers
What are Customers and Suppliers? In this section, the Seller provides information regarding the Business’s customers and suppliers. 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: In this portion of the Agreement, the Seller discloses certain details relating to its material customers and suppliers. Specifically, the Seller lists the identity of customers and suppliers who have reached a set monetary threshold (e.g. customers that have spent more than $1 million annually for both of the prior two years), as well as the amounts spent annually for each customer or supplier. The Seller also represents that the customers and suppliers listed have not indicated an intent to end or significantly alter their relationship with the Business.
Purpose: The Buyer wants to know the identity and financial details for the Seller’s top customers and suppliers, and while most will obtain that information during exploratory due diligence, including the information in the Agreement serves two important functions. First, it creates distinct penalties for misrepresentations and, additionally, it provides some assurance that the top customers and suppliers do not plan to jump ship. This representation is always useful, but it is most important when (1) a few customers and/or suppliers make up a major portion of the company’s revenue and/or supply streams, or (2) there is a lack of trust between the Buyer and Seller.
Buyer Preference: Regardless of the level of trust between Buyer and Seller, the Buyer wants to include this section if the Business has a small number customers or suppliers that make up a hefty portion of its sales or supply. The Buyer also wants as much assurance as the Seller can give regarding future plans of major customers and suppliers, but as a practical matter any such assurances will usually be qualified based on the Seller’s knowledge. Rather than qualifying the lists based on a monetary threshold, the Buyer may prefer to see a list of the top ten or twenty customers or suppliers depending on the level of customer or supplier concentration.
Seller Preference: The Seller will likely try to exclude this provision altogether, especially when customer and/or supplier relationships are solidified by contractual agreements. If there is significant customer or supplier concentration in the Business, the Seller may include the disclosures but try to exclude the representations regarding the future relationship between the parties. In any event, the Seller will not want to make representations about what third parties will or will not do in the future unless those representations are qualified based on the Seller’s knowledge.
Differences in a Stock Sale Transaction Structure: This section does not need to be altered based on the structure of the transaction. However, in situations where customers or suppliers have contracts with the Business and the sale is structured as an asset acquisition, the Buyer will want to make a point early on in the negotiation process to ensure that those contracts will be assigned to the Buyer.
Accounts Receivable
What are Accounts Receivable? In this section, the Seller provides information regarding the Business’s Accounts Receivable. 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 typical representations in this section include: (1) Accounts Receivable figures are based on legitimate transactions that are consistent with past practice; (2) the amounts are not disputed by the person or business on the other side of the transaction; and (3) the amounts will be collectible within some standard time frame, taking into consideration the company’s “bad debt allowance” that has been computed based on prior experience.
Purpose: The Accounts Receivable portion of the balance sheet indicates the strength of a company’s incoming cash flow and provides the Business with some assurance that it will be able to pay future debts. It is an essential component of the working capital calculation, which is often directly tied to the valuation of the Business. Therefore, it has a significant impact on the final Purchase Price. Additionally, if a company has sold its Accounts Receivable to another company (called a “factoring relationship”), that can have a substantial negative effect on a company’s value.
Buyer Preference: The Buyer wants to include the middle ground term as a baseline representation and may want to include additional receivables accounts if they make up a significant portion of the business.
Seller Preference: Since Accounts Receivable is an item on the Balance Sheet, the Seller wants to exclude this representation on the grounds that it is covered by the Financial Statements representation. In lieu of complete removal, the Seller may try to remove the language referencing collectability of Accounts Receivable since the ability to collect payment within a set time frame relies largely on the actions of third parties over which the Seller has little or no control.
Differences in a Stock Sale Transaction Structure: None.
Inventory
What is Inventory? In this section, the Seller provides information regarding the inventory of the Business. 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 the inventory held by the Business is consistent with the Business’s past practices, in terms of both quality and quantity. The Seller also represents that the inventory does not have any Encumbrances that would prevent its sale.
Purpose: Inventory is another area that drives some companies but is utterly irrelevant for others. If inventory is a necessity it will receive significant attention during the due diligence process. Buyers want to know everything about it: how much there is, how often it comes in and goes out, how is it accounted for, etc. On the other end of the spectrum, inventory is a non-issue on which neither side will spend much time or money.
Buyer Preference: The Buyer wants this representation included if inventory is an essential part of the Business, and it wants to be specific about the representation to ensure that the inventory referred to is sufficient to satisfy customer needs and expectations.
Seller Preference: The Seller likely wants to exclude this representation entirely. Since inventory is an item listed on the balance sheet, the Seller may argue that the issue is adequately covered by the financial statement representations contained elsewhere in the Agreement.
Differences in a Stock Sale Transaction Structure: None.
Intellectual Property
What is Intellectual Property? In this section, the Seller provides information regarding the intellectual property used by the Business. 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: This section requires the Seller to make a number of disclosures and representations relating to the Intellectual Property (“IP”) used in the Business. Specifically, the Seller will be asked to provide lists in the Disclosure Schedules of:
Registered IP;
Unregistered IP Assets;
All IP Agreements; and
All joint owners of IP Registrations and/or IP Assets;
The Seller will be asked to represent that:
All required filing fees and administrative tasks relating to the Registered IP have been taken care of;
It has provided all documentation relating to the Registered IP to the Buyer;
Each IP Agreement is valid, binding, and is currently in full force and effect;
It is not in breach or default of any IP Agreement and, to its knowledge, neither is any other party to those agreements;
No party to the Seller’s IP Agreements have indicated a desire to terminate those agreements;
No events have occurred that would cause default of, result in termination of, or otherwise alter the rights of any party to any of the Seller’s IP Agreements;
It is the sole owner of all IP Registrations and IP Assets used in the Business, other than those disclosed in the Disclosure Schedules;
It has the right to use the IP disclosed in the Disclosure Schedules in the Business, free and clear of Encumbrances other than Permitted Encumbrances;
It has entered into written agreements with every current and former employee and independent contractor to (i) assign to the Seller any rights related to IP used in the Business, and (ii) acknowledge the Seller’s exclusive ownership in any such IP;
The IP Assets and the IP licensed under the IP Agreements, taken together, constitute all the IP necessary to conduct the Business as previously conducted;
The transaction does not create additional requirements for the Buyer to use the IP as it is currently used to conduct the Business;
Its rights in the IP Assets are valid and enforceable, and it has taken all reasonable steps to protect the confidentiality of all IP Assets, including requiring all Persons with access to trade secrets to sign written non-disclosure agreements;
The Business’s use of IP does not violate the IP rights of any Person, and no Person has violated the Business’s IP rights;
There are no settled, pending, or threatened Actions (i) alleging infringement by the Seller of third party IP, (ii) challenging the validity or enforceability of the IP Assets or the Seller’s rights to the IP Assets, or (iii) brought by the Seller alleging infringement or any other violation of the IP Assets; and
There is no outstanding or prospective Governmental Order restricting the Seller’s use of the IP Assets in any way.
Purpose: Much like real property, intellectual property can drive the value of a business or it can be next to irrelevant. Without its famous trade secret protections, Coca-Cola would have lost its main competitive advantage (its distinctive taste) long ago. Disney relies heavily on copyright protection to maximize the profits from its most famous characters, which is why they have repeatedly sought to extend the term for copyright protection. Any company that relies on its brand name or logo as a source of competitive advantage is enjoying the protections of trademark law, even if their trademark is not registered. On the other hand, some businesses rely almost entirely on product or service quality to succeed. If their quality drops for any significant period of time, their competitors will simply eat up their share of the market. Therefore, in some transactions the parties will rightly spend extensive time and money to make sure the Seller’s IP is protected and properly transferred. In others, the topic will be an afterthought.
Buyer Preference: The Buyer wants these representations to be as broad as possible to encompass all IP used by the company. On the whole, and particularly with respect to infringement, the Buyer also wants to exclude knowledge or materiality qualifiers. If the Seller’s statements and disclosures are qualified, the Buyer either has to expend extra resources to verify ownership and/or non-infringement, or it has to live with a significant amount of additional risk. From the Buyer’s perspective, the risk of IP infringement or non-ownership should rest with the one who created and/or has controlled the IP.
Seller Preference: The Seller wants to include a materiality qualifier for these disclosures, and it may also want its representations in this section to include a knowledge qualifier. Both approaches help the Seller limit its costs, while providing the Buyer with the information necessary to operate the business. As a minimum precaution, the Seller wants to limit the third-party infringement representation using a knowledge qualifier, as conclusively verifying that no third-party infringement has occurred may be practically impossible.
Differences in a Stock Sale Transaction Structure: The representations relating to intellectual property will not be as extensive in a stock sale as in an asset acquisition. For example, the Seller’s ability to assign the IP it uses is not an issue in a stock sale because there is no need to transfer the IP to a new entity.
Real Property
What is Real Property? In this section, the Seller provides information regarding the real property used by the Business. 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: In the Real Property representation and the corresponding Disclosure Schedules, the Seller discloses the Owned Real Property and Leased Real Property used by the Business and represents that: (1) it has not received notice of any building code violations, zoning ordinance violations, or violations of any other laws or governmental restrictions; (2) there are no existing, pending, or threatened condemnation proceedings affecting Real Property used by the Business; (3) the disclosed Real Property is sufficient to conduct the Business as conducted prior to the Closing; and, (4) no other real property is necessary to conduct the Business as conducted prior to the Closing.
With respect to the Owned Real Property, the Seller represents that it has marketable fee simple title free of any Encumbrances other than those listed in the Disclosure Schedules and the Permitted Encumbrances, that it has not leased the property or given anyone permission to use it (other than as disclosed in the Disclosure Schedules), and that no one holds any option rights on the property (e.g. rights of first refusal or rights of first offer).
With respect to the Leased Real Property and each individual lease, the Seller represents that the lease is valid and possession of the property is undisturbed, all rent due has been paid and nothing has occurred that would result in breach or default, there has been no notice given regarding termination of the lease, and the Seller has not created an Encumbrance on its interest in the property.
Purpose: For some businesses, real property such as office space is merely a necessary but fungible tool. With a little planning, the business could easily move down the street or to another part of town without breaking stride. For other companies, the real property they own or lease is itself the business, and the company would not be nearly as valuable if that specific property was not included in the transaction. The result is that some acquisition negotiations will focus heavily on real property and will require the input of real property experts, while others will deal with real property issues quickly and move on.
Buyer Preference: If the Real Property held by the Business is an important aspect of the deal, the Buyer will want to consult a real property attorney regarding the content of the Seller’s representations, the mechanics of transfer, and necessary due diligence procedures. Generally, as the importance of property to the Business increases, the Seller’s representations and Buyer’s property-focused due diligence will increase as well.
Seller Preference: The Seller wants to limit its representations as much as possible. For example, the representation regarding notice of building code or zoning ordinance violations is arguably covered by the more general “Compliance with Laws” representation, so the Seller may try to exclude the more specific representation contained in this section. The Seller can also constrain its representations by adding materiality or knowledge qualifiers, and by limiting its title representation to “valid” or “insurable” title rather than “marketable” title.
Differences in a Stock Sale Transaction Structure: Because a transfer of property is not necessary in a stock sale, representations regarding Owned and Leased Real Property are included with the Title to Purchased Assets representation (i.e. the property is treated, for the most part, as just another asset). There are a few representations that pertain only to the Seller’s Owned Real Property, but they are more focused on providing the administrative information necessary to operate the Business rather than focusing on the transferability of the property.