15/01/2024
In the realm of mergers and acquisitions (M&A), Representations and Warranties play a pivotal role, constituting a crucial aspect of the transactional landscape. Representations are factual statements, while warranties encompass promises or guarantees made by Sellers concerning the business. Jointly, they furnish Buyers with assurances regarding the condition of the business under consideration, forming the foundation upon which Buyers rely to proceed with the transaction.
In the event of a misrepresented fact, Buyers may have grounds to pursue claims for misrepresentation, potentially leading to the rescission or annulment of the entire contract. Similarly, false warranties empower Buyers to seek damages for breach of contract and may authorize termination of the agreement.
Given the profound implications, negotiations surrounding representations and warranties are often rigorous, serving as a mechanism for both Buyers and Sellers to identify and allocate potential risks effectively. Recent years have witnessed an escalation in the significance of representations and warranties within M&A transactions. In contemporary agreements, these clauses extend across a substantial portion of definitive agreements, with Buyers seeking increasingly detailed assurances to ensure comprehensive and accurate information about the business, thereby facilitating more informed decision-making.
This heightened focus has led to a trend of categorizing representations and warranties into distinct levels, such as "fundamental," "intermediate," and "non-fundamental." Fundamental representations and warranties typically encompass critical aspects, including organizational standing, capital structure, power and authority, title to shares or assets, and accounting, financial statements, and taxes. These fundamental representations often have extended survivability and severe consequences.
To augment the representations and warranties, Sellers are expected to furnish a disclosure schedule, outlining exceptions and qualifications. To safeguard Sellers' interests, tools like scope, qualifiers, caps, and baskets are strategically employed to allocate risk effectively. Scoping delineates the extent of the statements, while qualifiers, such as knowledge, disclosure, and materiality thresholds, limit liability under specific circumstances.
Caps and baskets further define the financial exposure of Sellers, setting limitations on liability amounts and thresholds of losses before Buyers can seek damages. Common qualifiers include phrases like "to the best of the Seller's knowledge," "materially," "to the extent required by law," and "except as otherwise disclosed."
Concerning knowledge qualifiers, pegging the standard to "actual knowledge" rather than "constructive knowledge" provides additional protection to Sellers. Constructive knowledge is broader, encompassing information that an individual "should have been aware of" in their capacity.
On caps, Sellers may consider imposing a limitation on maximum liability, either overall or for specific claims. Baskets offer various options, such as deductible concepts or return-to-first-dollar concepts, with the former being more favorable to Sellers.
Exclusive remedy clauses may also be included to limit potential liability, confining it to indemnification provisions specified in the agreement. This ensures a predefined quantum, preventing damages from exceeding the agreed-upon amount.