M&A: What representations and warranties to get from seller?

Article

In an agreement for sale and purchase of business or shares of a company (“SPA”), it is typical for the seller to represent and warrant to the purchaser that the target business or target company is of certain calibre. Typically, there would be fundamental representations and warranties in the SPA such as the seller has the legal and beneficial title to the shares, the company does not have any pending litigation, the company is in good financial health and so on.

Beyond the fundamental representations and warranties, there should be representations and warranties in the SPA which are specific to the sector or industry which the target business or target company is in. For example, if the target company is in the food and beverage business, the purchaser may want to request for the seller to represent and warrant in the SPA that there are no ingredients or substances beyond the legally permissible level in the target company’s products and there has been no investigation or fine imposed by the health authorities or any other relevant authorities. For online media business which does not have physical assets, the most prized assets of the business may be its social media accounts and passwords. Having relevant representations and warranties in the SPA that the seller has delivered all the passwords for such social media accounts and no one other than specified personnel of the seller had access, prior to completion of the SPA, to the social media accounts would be crucial. Where a target company which provides education services represents to the public that all its courses are accredited, it would be appropriate to request for the seller to provide similar representations and warranties in the SPA.

Practical tips (pro-purchaser)

  • The purchaser may have specific concerns about the target business or target company arising from operational, legal, financial or other due diligence conducted or from the purchaser’s experience if the purchaser is in the same industry as the target company. Such concerns may be addressed by having the relevant representations and warranties from the seller in the SPA to protect the purchaser’s interest. It is always helpful to ask the purchaser whether there are any specific representations and warranties which the purchaser wants to include in the SPA or whether the purchaser is undertaking the purchase of the target business or target company based on certain assumptions which can be turned into representations and warranties in the SPA.
  • If there are gaps in the due diligence of the target company, for example, the agreements and written documents provided for due diligence do not reflect what the seller claims is the target company’s business practice, one way to address the gap in the due diligence is to request for the seller to provide relevant representations and warranties in the SPA.

The information in this article is intended only to provide general information and does not constitute any legal opinion or professional advice.

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