Reps & Warranties of Seller
Essential Question:
What can you certify about the state of the business and any potential issues or liabilities?
In Brief:
The attestations a Seller makes about the business regarding everything from their ownership and ability to sell to financial statements to employment and environmental matters.
They allow buyers and sellers to explore the contours of various issues, as well as the potential impact to allocate risk appropriately.
There’s also room for qualifications and exceptions based on what’s known, disclosed, and reasonable.
Category: Continued Diligence & Fact-Finding; Risk Allocation
What is it?
In a transaction, both sellers and buyers make certain representations and warranties about the state of the business, the ability to proceed with the transaction, and any other potential issues or liabilities – these are the representations the Seller makes.
When does it matter?
While these representations often reflect what was discussed in diligence, regardless of what you’ve disclosed or was discovered in diligence, these representations serve as the ultimate risk allocation tool. “You’ve made these representations about your business. Whether you knew or should have known, this will become a liability.”
Anything discovered in due diligence will generate representations to ensure that what you think you know is accurate and to explore the contours of that issue and what else it indicates or impacts. And, there may (probably will) be exceptions scheduled to various representations – these are things whose existence is known and therefore doesn’t count as a breach.
Also important is the fact that all of these reps are subject to qualifications that put boundaries around the reasonableness of expectations. These qualifications pertain to 1. Time, 2. Knowledge, and 3. materiality (e.g., dollar amount, material adverse effects, etc.). Sellers should proactively consider what qualifications may be appropriate.
What to look out for?
From the seller side: Err on the side of over-disclosure when possible. When something comes as a surprise, it amplifies the real or perceived importance of that matter.
Organization, Qualification, and Authority of Seller
No Conflicts; Consents
Financial Statements
Undisclosed Liabilities
Absence of Certain Changes, Events, and Conditions
Material Contracts
Title to Purchased Assets
Condition and Sufficiency of Assets
Real Property
Intellectual Property
Inventory
Accounts Receivable
Customers and Suppliers
Insurance
Legal Proceedings; Governmental Orders
Compliance with Laws; Permits
Environmental Matters
Employee Benefit Matters
Employment Matters
Taxes
Brokers
Full Disclosure
