Representations & Warranties in Purchase Agreements

In M&A transactions the purchase agreement will almost certainly contain representations & warranties (R&Ws) made by both parties regardless of the type of purchase agreement utilized, asset purchase agreement, stock purchase agreement or merger agreement. This post by no means represents a complete list of all “typical” seller R&Ws found in most purchase agreements. R&Ws will usually be contained in separate sections. Seller R&Ws

• Authority: R&Ws concerning each of the sellers wherein they R&W that they have the authority to enter into and execute the purchase agreement and all required exhibits, schedules, etc.
• Title to Equity: in the case of a stock sale / equity purchase the seller will R&W that they are the owner of the free and clear equity that they are selling.
• No Conflicts or Consents: the seller will R&W that the contemplated action will not violate the law or conflict with a legal order or trigger the consent of a third party and that there are no encumbrances on the equity that will be triggered.

Buyer R&Ws

• Authority: similar to the seller’s authority the buyer, if a legal entity will R&W that they have the legal authority to execute the contemplated docs;
• Organization: again, if a legal entity the buyer R&Ws that entity is duly organized and in good standing in the particular country / state where it exists;
• Performance: the buyer will R&W that they have the financial capability and desire to fund and close the transaction per the stated terms and conditions.

Company R&Ws

• Organization: the company R&W that it is dully organized and in good standing within its domicile.
• Authority: the company will R&W that it has the corporate power and authority to own, operate and or lease the assets owned in the day-to-day operations and the transact such business.
• Capitalization: the company will R&W the authorized type of equity securities, the number of said securities and identify all other rights, encumbrances or agreements related to the equity.
• Undisclosed Liabilities: the company will R&W if there are any liabilities other than those disclosed or reflected on the balance sheets.
• Material Contracts: the company will R&W that other than those disclosed there are no other legal contractual agreements that are binding upon the company.

There will be many more representations and warranties that may be desired by one party or the other and must be negotiated as to whether it will be included in the definitive purchase agreement. Such R&Ws will cover inventory matters, supplier matters, intellectual property, privacy / data processing, any pending or past legal matters and much more. Discuss with your advisor which representations and warranties you will likely have to deal with and what limits to expect for each.