“Fundamental” representations and warranties in M&A

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Today’s post is on creating a category of ‘fundamental representations and warranties’ given by sellers in sale and purchase agreements (SPAs) for M&A transactions.

It is common for sellers to give representations and warranties for the benefit of buyers in M&A transactions.

Instead of negotiating heavily on the representations and warranties, it is common for the sellers to set out exceptions and qualifications to the sellers’ representations and warranties in disclosure letters. The final disclosure letters are delivered to the buyers before or on execution of the SPAs.

In practice, draft disclosure letters would have been made available to the buyers before the SPAs are executed. The buyers may decide whether to accept the contents of the disclosure letters and proceed with the execution of the SPAs.

The sellers and buyers may agree on a set of fundamental representations and warranties given by the sellers which should not be qualified in the disclosure letters. The rationale is that any breach of these representations and warranties would affect the subject matter of the transactions. They are considered so important or fundamental that they should not be qualified.

What goes into this category of ‘fundamental representations and warranties’ is a matter of negotiation between the parties.

Typically, fundamental sellers’ representations and warranties include:

1. The sellers’ title to the shares or assets, which is the subject matter of the transactions.

2. The shares or assets are free from encumbrances.

3. The sellers’ capacity to enter into the SPAs and be bound by the terms of the SPAs.

4. The companies and sellers are solvent.

5. Due incorporation of the companies and some “basic” representations and warranties covering constitution and statutory records of the companies being up to date.

6. Shares of the companies are validly allotted and fully paid.

What would you add to the list?

#malaysiancorporatelawyer

#mergersandacquisitions

First posted on Linkedin on 8 December 2021.

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