Reps & Warranties: Absence of Certain Changes, Events & COnditions
Essential Question:
Has anything happened since the last balance sheet that we should know about?
In Brief:
The things about a business and its operations that can’t materially change after the last balance sheet is provided.
A standard for identifying and compensating any losses the Buyer incurs because of these changes.
Category: Continued Diligence & Fact-Finding; Risk Allocation
What is it?
A representation 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. 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.
When does it matter?
Here, the Buyer wants to be sure that the business is running the same way it had been up to the last documentation. That means that you, as Seller, haven’t changed the org docs, issued additional equity, made material changes to the financial management or accounting practices, written off a bunch of AR, sold off assets, licensed all the IP, given all of your employees a 10-20% raise, been sued, made changes to your tax elections…material elements that, if they have occurred, could potentially result in some level of loss for the buyer.
What to look out for?
Be on the lookout for the list of prohibited changes, events, and circumstances, and when and what they’d be likely to affect. Specifically, be sure to understand what constitutes a Material Adverse Effect, which is generally the standard by which liability is assigned. Note, too, that the Buyer could be asking for that standard to instead be a dollar threshold, which are easier for the Buyer to enforce.
