M&A: Categorising Seller’s Representations and Warranties

(particularly if you don’t have Representation & Warranty Insurance)

The representations and warranties (R&W) given by a seller in an M&A sale and purchase agreement (“Seller’s Warranties”), if breached, may affect the M&A transaction to varying degrees. It is worthwhile categorising the Seller’s Warranties and deal with the breaches differently for each category.

The buyer and seller would usually agree on a set of fundamental Seller’s Warranties. These, if breached, would affect the subject matter of the transaction. Typically, these relate to matters such as ownership of shares and due incorporation and valid existence of the target company. The seller is usually expected to give these R&W without qualification.

Another categorisation typically used is tax R&W given that the tax position of a company may adversely affect it.

The seller may also be expected to give R&W in respect of the business operations of the company. Depending on how involved the seller may be and how much control the seller may have in the day-to-day operation of the company, the seller and purchaser may agree to varying degrees of limitation of such R&W. The limitation may include limiting the R&W to the best of the seller’s knowledge.

Having various categories of Seller’s Warranties allow the parties to negotiate the buyer’s remedies for breaches of the R&W more effectively, such as whether the breach is fundamental enough to warrant termination of the SPA or whether the buyer should have other remedies.

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This post was first posted on LinkedIn on 18 April 2024.