Representations and Warranties
Representations and warranties in M&A agreements are factual statements made by the seller (and sometimes the buyer) about the condition of the business at signing and closing, which, if inaccurate, give the other party the right to seek indemnification or, in serious cases, terminate the deal.
Representations and warranties (reps and warranties) are the factual backbone of any M&A purchase agreement. The seller makes extensive statements covering virtually every material aspect of the business: financial statements are accurate and prepared in accordance with GAAP; there is no undisclosed litigation; the company has good title to its assets; all material contracts are valid; employment obligations are properly reflected; intellectual property is owned or licensed; environmental liabilities are disclosed; and tax returns have been filed accurately.
The buyer relies on these reps to confirm its due diligence findings and to allocate risk for undisclosed problems. If a rep turns out to be false, the buyer has a contractual claim for indemnification — damages to make it whole for losses arising from the breach. The scope, duration, and monetary limitations of indemnification obligations are separately negotiated (see Indemnification).
Reps are qualified by disclosure schedules — exhibits to the purchase agreement where the seller identifies known exceptions to its representations. A rep that a company has no pending litigation, for example, would be qualified by a schedule listing known lawsuits. The process of preparing disclosure schedules is a major component of deal execution and is a mechanism by which sellers limit their indemnification exposure.
Reps are further qualified by materiality and knowledge qualifiers. A seller may only represent that contracts are valid to its knowledge, or that there are no material breaches — limiting exposure to unknown or immaterial issues. Buyers push back on knowledge and materiality qualifiers because they narrow the circumstances under which the buyer can make a valid claim.
The standard of survival — how long after closing the buyer can bring a rep claim — is typically 12 to 24 months for general reps, with longer or indefinite survival for fundamental reps (title, authority, capitalization) and tax reps. Representations and warranties insurance has transformed the market by allowing buyers to claim against an insurer rather than the seller for most rep breaches, enabling cleaner seller exits.