Seller’s representations and warranties in M&A: Three things to avoid

Mergers and acquisitions
Article

In an agreement for sale and purchase of business or shares of a company, a seller typically represents and warrants that the business or the company is of certain calibre. A breach of the seller’s representations and warranties amounts to a breach of contract which may entitle the purchaser to claim for damages or even terminate the SPA, depending on the provisions in the SPA. From the seller’s perspective, the seller would not want to represent and warrant on certain matters which may turn out to be false. The following are three types of representations and warranties which a seller should avoid:

1. Representation and warranties about things not within control

The seller should not represent and warrant on matters which are not within the seller’s control. For example, the seller is unlikely to know with certainty how customers and suppliers of the target company would react to the sale and purchase of the target company or whether the counterparty to an agreement which the target company has entered into, would fulfil its obligations. As such, the seller would want to avoid representations and warranties of the following nature.

Example 1:

The Seller’s entry into or performance of its obligations under this Agreement, will not cause or is not likely to cause the attitudes or actions of customers, suppliers, and other persons with regard to the Company to be prejudiced.

Example 2:

No other party to any contract to which the Company is a party is unlikely or unwilling or unable to fulfil its contractual obligations.

2. Representations and warranties about the future

The seller should avoid providing representations and warranties in respect of future events due to uncertainty about the future. Further, after the seller disposes of the seller’s shares, the seller may no longer be in control of the target company and hence, not in a position to ensure the representations and warranties continue to be true.

Example:

The Company has not supplied services which are, or were, or will become, in any material respect, faulty or defective, or which do not comply in any material respect with any representations or warranties expressly or impliedly made by the Company, or with all applicable laws, guidelines and requirements.

3. Widely drafted representations and warranties

Without definitive parameters, the seller would not know the extent of the representations and warranties and may be caught off guard by breach of representations and warranties which the seller has not contemplated.

Example:

The statutory books and books of account and other records of whatsoever kind of the Company are up-to-date and maintained in accordance with all applicable legal requirements and contain complete and accurate records of all matters required to be dealt with in such books and all such books and records.

 

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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