Warranties And Representations: An Essential Element of M&A Agreements
Robert M. Mendell has substantial experience resulting from more than 40 years of legal experience in the mergers and acquisitions field. He provides legal acumen to clients who require assistance with a variety of complex business and tax law concerns. Thus, sellers and buyers of various businesses have relied on his guidance in handling the sale or purchase of their business enterprise, most transaction documents containing sophisticated “warranties and representations” provisions.
Serving M&A Clients Throughout Texas
A buyer of a business is usually placed in the very risky position of paying substantial amounts for a business enterprise that the buyer cannot become totally familiar with prior to closing. A seller of a business is usually relying on the receipt of the entire purchase price that was negotiated with the buyer in order to entice the seller to sell the business. A compromise position developed over a many year period is the amelioration of the buyer’s risk through the provision by the seller of numerous warranties and representations, the breach of which would entitle the buyer to a recovery of damages, in order to provide the buyer with a comfort level sufficient to induce the buyer to close the business acquisition despite the outlay of substantial purchase money funds.
Over the years, the “warranties and representations” of the seller contained in mergers and acquisitions documents have been extensively crafted and require careful consideration on the part of both the buyer and the seller, usually through their respective legal counsel. Some of these may include:
- Material Adverse Effect: The definition of this term or a similar term, often found in modern M&A documents, is important in determining, among other things, whether the seller can be held accountable for devaluation of the business with respect to post-closing operations of the buyer.
- Financial Statement Representation/Accounting Standard: The wording of this representation can be important in determining, among other things, whether the seller’s financial statements must be materially accurate and, in addition, whether such financials must also be in conformity with a certain accounting standard, such as GAAP, tax basis accounting or some other set of accounting principles.
- Undisclosed Liabilities: The wording of this warranty is important in determining, among other things, whether the seller is responsible for warranting liabilities under this provision that have otherwise been disclosed to the buyer, such as lease obligations, because the warranty wording may entail warranty of non-balance sheet items.
- Compliance with Laws: Whether, among other things, a seller’s warranty regarding the seller’s compliance with laws prior to closing should be considered as being extended to the buyer’s operation of the business after closing, if the buyer operates in the same manner as the seller prior to closing.
- Full Disclosure Representation: A “full disclosure” representation is a pro-buyer representation that, among other things, the seller has disclosed any and all information that may negatively impact the business, even if the agreement did not otherwise address it. Conversely, sellers want disclosure representations limited to the information specifically attached to the agreement often in the form of “disclosure schedules”.
- Due Diligence Materials Warranted: Many “full disclosure” representations are worded broadly enough to encompass a warranty of all information provided to the buyer at any time, including in connection with the buyer’s “due diligence” review of the seller, whether or not referenced or attached to the agreement. Sellers may wish to avoid warranty of such materials as being incomplete or in a “draft” stage.
- Nonreliance Provision: Accordingly, sellers promote this pro-seller provision, which stipulates that the buyer cannot rely on any warranties or representations except for those in the agreement. Sellers often advance such warranty disclaimer language to limit their liability should the buyer claim to have relied on express or implied representations or warranties.
- Knowledge of Seller: Oftentimes, a specific warranty of the seller is limited by a knowledge qualifier. There are several definitions of “knowledge” as it refers to a seller. It could refer to the knowledge of one or more groups associated with the seller, including the owners, key managers, department heads or all employees. “Knowledge” can be further modified to include constructive knowledge and “knowledge” that could have been known after reasonable inquiry of other seller personnel.
More detailed information relating to warranties and representations can be found in this seminar handout prepared by Mr. Mendell: Business Acquisitions Seminar Handout.
Mr. Mendell handles all aspects of his clients’ cases himself, ensuring that they receive his personal skill and attention. He is Board Certified in Tax Law by The Texas Board of Legal Specialization and is also licensed as a Certified Public Accountant (CPA).