Seller’s Representations and Warranties
Likely the most important section in the document is the seller’s reps and warranties. It is in this section of the agreement that most disagreements and litigation emanate from.
A representation is a statement of the facts as they currently exist. The seller may represent that a truck is of a certain make, model, year, and is in good working condition. The seller’s counsel will focus more on the reps because they prefer not to warrant things.
A warranty is a promise that certain facts are now true or will be true at some future point. It is a guarantee or an obligation of the seller.
In an acquisition, a seller’s reps and warranties provide assurances to the buyer about the nature, scope, and condition of the seller’s business and assets. You may be asking, “why does due diligence not replace these?” The reps and warranties must be truthful and materially accurate and should not be viewed as something that can be disregarded just because the purchaser has the right to conduct due diligence. There are some things that only the seller will know.
Reps and warranties are often used as a basis for determining liability and even damages in future litigation. If they are misleading, materially false, or inaccurate, then the purchaser can sue for damages or rescind the contract.
For a small company being purchased, or a shortlist of assets being purchased, the reps and warranties may not be lengthy. Still, they are important and serve as something that the purchaser will rely on.
As counsel, we need to either draft or review the reps and warranties carefully. The reps and warranties section generally gives the purchaser the assurance that all crucial information about the company, its business, and financial affairs has been disclosed and is accurate. The same goes for if one is purchasing the assets—that all assets are represented truthfully.
Sometimes the agreement will provide that only certain reps and warranties being inaccurate will trigger the ability to back out of the deal. Therefore, it is important to note this when reviewing a draft. From the purchaser’s side, having the ability to back out of the deal is usually pretty important.